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Mar 09, 2010 (LBO) - Sri Lanka's Seylan Bank in which state ownership increased to 28 percent following a 1.1 billion rupee capital injection has retained its 'BBB+(lka)' with a 'stable' outlook, Fitch Ratings said.

The bank was able to reverse the deposit run, and reported a net deposit inflow of over 5 billion rupees in the second half of 2009 compared to a net outflow of 9 billion rupees in the second half.

Seylan's loans to deposits ratio has improved to 76 percent at the end of December 2009 (98 percent in 2008), in line with the banking sector trend where deposit growth outpaces loan growth amid slow credit demand.

Fitch expects the recovery in credit growth for the overall banking sector to remain relatively weak through 2010.

Seylan's gross non-performing loans (NPL) ratio at the group level stood at 29.3 percent at the end of 2009, compared to a median of 6.8 percent for the three largest domestic private commercial banks.

However, the pace of incremental NPL growth reduced in the second quarter of 2009, while gross NPLs reduced in absolute terms by 2.8 percent in the third quarter and 4.5 percent in the fourth quarter.

Over 16 percent of NPLs at the end of 2009 consisted of

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