Bank Rating

Oct 10, 2008 (LBO) – Fitch Ratings Lanka Friday affirmed Sri Lanka’s DFCC Vardhana Bank’s (DVB) National Long-term rating at ‘AA-(lka)’ with a stable outlook. Its gross NPL ratio slipped to 10.7 percent at H108 from 5.9 percent at FYE06 on account of weakened macro conditions, and partially owing to the regulatory change in classification of NPLs in June 2008.

“However, the bank has since stepped up its recovery initiatives and was able to reduce this ratio to 9.9 percent at end-July 2008.”

Fitch said that due to the premium charged by DVB on its products from its relatively riskier client base, net interest margin (NIM) has historically been high in comparison to the sector.

“However, despite a NIM of 6.5 percent at H108, DVB’s profits were affected by significant provisioning for bad debts, rising operating expenditure, and higher effective tax rates.

“Hence, ROA dipped to 0.63 percent at H108 from 1.27 percent at FYE06. Fitch expects DVB’s profitability along with the sector’s to remain constrained by high credit and operating costs.” DVB’s rating is primarily driven by the strong implied support assumed to be available from parent DFCC