Sri Lanka’s DFCC Bank assigned ‘B’ rating ahead of bond sale

Sept 20, 2013 (LBO) – Sri Lanka’s DFCC Bank has been given a ‘B’ international rating by Standard and Poor’s ahead of a bond sale. “DFCC’s business position reflects our view of the bank’s satisfactory business stability, diversification, management, and strategy compared with that of peers in emerging markets,” said Standard & Poor’s credit analyst Amit Pandey said in a statement.

Standard & Poor’s said it had based its rating on DFCC’s “adequate” business position, “moderate” capital and earnings, “moderate” risk position,” below average” funding, and “adequate” liquidity, as defined under our criteria.

DFCC is planning a 250 million US dollar bond sale along with Sri Lanka’s NDB Bank. The two listed banks were waiting for state-run NSB to go to market and establish a benchmark rate.

NSB last week raised 750 million US dollars at 8.875 percent.

Bank of America and Citi are expected to be among the lead managers for the DFCC deal.

The full statement is reproduced below:-

DFCC Bank Assigned ‘B/B’ Rating; Outlook Stable

SINGAPORE (Standard & Poor’s) Sept. 19, 2013–Standard & Poor’s Ratings Services said today that it had assigned its ‘B’ long-term and ‘B’ short-term counterparty credit ratings to Sri Lanka-based DFCC Bank. The outlook on the long-term rating is stable. We also assigned our ‘B’ long-term issue rating to the bank’s proposed senior unsecured notes. The rating on the notes is subject to our review of the final issuance documentation.

Standard & Poor’s bases its ratings on DFCC’s “adequate” business position, “moderate” capital and earnings, “moderate” risk position,” below average” funding, and “adequate” liquidity, as defined under our criteria. The bank’s stand-alone credit profile is ‘b’.

DFCC is a licensed specialized bank (LSB) focused on term project lending with consolidated assets of Sri Lanka rupee 151 billion as of March 31, 2013. It has 99.1% stake in a commercial bank DFCC Vardhana Bank PLC with operational synergies.

“DFCC’s business position reflects our view of the bank’s satisfactory business stability, diversification, management, and strategy compared with that of peers in emerging markets,” said Standard & Poor’s credit analyst Amit Pandey.

DFCC’s deposit market share is about 1.7% of the entire banking industry. Like that of most other Sri Lankan banks, the majority of DFCC’s loans emanate from Sri Lanka. DFCC’s revenue base is stable, with net interest income of 72% of operating revenues and fee income of 6% of operating revenues for the past five years. The bank also earns dividends from its 14.8% stake in Commercial Bank of Ceylon.

Our assessment of the bank’s capital and earnings reflects our expectation that the pre-diversification risk-adjusted capital (RAC) ratio will fall to 6%-6.5% and into the moderate category in the next two years. The ratio is 7.4% as of March 31, 2013.

The risk management practices of DFCC are evolving, in our view. The bank’s risk position reflects its higher exposure to small and medium enterprises and project finance, which are susceptible to economic downturns and execution risks.

DFCC’s funding and liquidity profile reflects the bank’s smaller branch network and lower deposit funding profile. DFCC’s status as an LSB prohibits it from raising savings and demand deposits. Nevertheless, the bank benefits from funding support from multilateral and bilateral institutions. DFCC’s sizable holdings of government bonds and securities as well as central bank and interbank balances underpin its liquidity.

We see a “moderate” likelihood that the government of Sri Lanka would provide timely and sufficient extraordinary support to DFCC in the event of financial distress. This is because of the bank’s “moderate systemic importance,” given its size in Sri Lanka and our assessment of the government as “supportive.” However, there is no uplift benefit from this factor on our ratings on DFCC, in line with our criteria.

“The stable outlook reflects our view that DFCC will maintain its financial profile over the next 12 months, despite a slight weakening in its asset quality and capitalization,” said Mr. Pandey.

We could upgrade DFCC if its funding profile or asset quality improves to a level that is in line with the industry or its pre-diversification RAC ratio goes above 10%. We could lower the ratings if the bank’s capitalization deteriorates such that its pre-diversification RAC ratio goes below 5%, which is unlikely in the next 24 months at least.