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Sri Lanka Sampath Bank ‘AA’ rating confirmed by RAM

Aug 08, 2013 (LBO) - An 'AA' rating of Sri Lanka's Sampath Bank has been confirmed by RAM Rating Lanka with a stable outlook. "The ratings are supported by the Bank’s healthy asset quality and good market position," the rating agency said.

"On the other hand, the ratings are temperedby the Bank’s average capitalisation."

RAM said Sampath's gross non performing loan ratio has improved to 2.07 percent by end December 2012 from 2.64 percent a year earlier. In the first quarter of this year it had improved further to 1.97 percent.

RAM said slower bad loan collections pointed to better underwriting, but delinquencies may increase on its gold backed loan portfolio following fast growth in 2012 and falling gold prices.

RAM Ratings Lanka reaffirms Sampath Bank’s ratings at AA/P1

RAM Ratings Lanka has reaffirmed Sampath Bank PLC’s (“Sampath” or “the Bank”) long- and short-term financial institution ratings at AA and P1 respectively. The longterm rating carries a stable outlook. The ratings are supported by the Bank’s healthy asset quality and good market position. On the other hand, the ratings are tempered by the Bank’s average capitalisation.

Incorporated in 1986 as a licensed commercial bank (“LCB”), Sampath accounted for 7.08% of the industry’s asset base as at end-December 2012. The Bank continues to maintain its position as the fifth-largest LCB and third largest private LCB in an industry dominated by two state banks that accounted for around 44.08% of industry assets as at the same date. Sampath’s market position is supported by its wide network of 209 branches and 265 automated teller machines (“ATM”).

Overall, Sampath’s asset quality is viewed as healthy owing to a gross non-performing loans (“NPL”) ratio that compares better to that of its peers, a prudent provisioning policy and stringent underwriting and monitoring procedures. Despite a 21.58% yearon- year (“y-o-y”) expansion in credit assets in FYE 31 December 2012 (“FY Dec 2012”), the Bank’s absolute gross NPLs declined 4.57% y-o-y, supported by a slower accretion of new NPLs coupled with recoveries.

Consequently, Sampath’s gross NPL ratio had improved to 2.07% as at FY Dec 2012 (FY Dec 2011: 2.64%). In 1Q FY Dec 2013, the Bank’s gross NPL ratio improved further to 1.97%, supported by credit growth. While we acknowledge its better underwriting standards as seen in the slower accretion of new NPLs in fiscal 2012, Sampath’s loan portfolio has yet to season while delinquencies may increase on its unseasoned pawning portfolio particularly in view of aggressive growth in fiscal 2012 and the current declining gold price environment.

Elsewhere, the Bank’s provisioning remained prudent and continued to exceed the regulatory requirement, as reflected in its NPL coverage levels.

Overall, Sampath’s performance is deemed average. Its net interest margin (“NIM”) was slightly narrower than peers’ while its cost to income remained high against that of other LCBs. Notwithstanding the rising cost of funding in view of higher interest rates coupled with a tilt in the Bank’s deposit composition towards high-cost time deposits, its NIM broadened to 4.58% in FY Dec 2012 (FY Dec 2011: 4.51%), supported by its focus on high-yielding segments. Sampath’s cost to income ratio stayed relatively high at 68.96% (excluding forex gains) in fiscal 2012 (fiscal 2011: 66.63%) owing to the expansion of its branch network.

However, a 45.49% y-o-y growth in pre-tax profit in fiscal 2012, reflective of top line expansion and forex gains, translated into a return on assets (“ROA”) of 2.61% that was in line with peers’.

In 1Q FY Dec 2013, the Bank’s NIM contracted to 4.39% amid the heightened cost of funding; its cost to income ratio eased to 60.15%. Going forward, despite the anticipated improvement in core performance supported by the anticipated improvement in yields given the reduction in Statutory Reserve Requirement ('SRR')

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