Lanka Rating Agency reaffirms Standard Chartered Bank – Sri Lanka... ratings at AAA/P1

Lanka Rating Agency reaffirms Standard Chartered Bank – Sri Lanka Branch’s
ratings at AAA/P1
Lanka Rating Agency (“LRA”), former RAM Rating Lanka’s,
technical partner is CRISIL India (“CRISIL”). CRISIL is a
global analytical company providing ratings, research, and
risk and policy advisory services. CRISIL is India's leading
ratings agency and is also the foremost provider of high-end
research to the world's largest banks and leading
corporations. CRISIL's majority shareholder is Standard and
Poor's (“S&P”). S&P, a part of McGraw Hill Financial
(formerly The McGraw-Hill Companies) (NYSE:MHFI), is the
world's foremost provider of credit ratings.
Lanka Rating Agency reaffirms the respective long- and
short-term financial institution ratings of Standard Chartered
Bank – Sri Lanka Branch (“SCBSL” or “the Bank”) at AAA
and P1. The long-term rating carries a stable outlook. The
ratings are firmly anchored by the credit profile of Standard
Chartered Bank PLC of the UK (“SCB-UK”) of which the Bank
is a branch.
SCBSL is the second-largest foreign bank in Sri Lanka, with
an asset base of LKR 110.73 billion as at end-December
2013. It operates as a branch of SCB-UK which is the
headquarters of Standard Chartered Bank (“SCB” or “the
Group”). SCB has presence in over 68 markets, with its
main focus in the Asian, Middle Eastern and African markets.
The Group’s pre-tax profit slowed -11.49% year-on-year
(“y-o-y”) to USD 6.06 billion in FYE 31 December 2013 (“FY
Dec 2013”), due to the slowdown in growth in its main
markets. SCB-UK is backed by strong capitalisation, funding
and liquidity levels. On a related note, despite SCBSL’s
miniscule contribution to the Group (pre-tax profit
contribution of less than 1%), past instances attest to the
fact that support will be forthcoming from SCB-UK, should
the need arise. As a branch of SCB-UK, the Bank’s liabilities
are also that of SCB-UK.
The Bank’s asset quality is viewed as healthy owing to its
stringent underwriting and risk a management standard
which is in line with global standards, conservative
investment strategy and healthy coverage levels. SCBSL’s
credit assets slowed to - 7.24% y-o-y in fiscal 2013 while its
gross non-performing loans (“NPLs”) ratio clocked in at
0.71% as at end-December 2013 (end-December 2012:
0.43%). The ratio compared better than that of peers, in
line with its focus on top-tier corporates and a strong riskmanagement framework, anchored by SCB’s global
experience. Notably, the Bank’s credit concentration
continues to be relatively higher than that of its peers owing
to large-ticket loans to top-tier corporates. However, our
concerns in this regard are somewhat mitigated by the
credit profiles of the Bank’s clients. Moreover, SCBSL’s gross
NPL coverage remained strong at 177.94% as at endDecember 2013 (end-December 2012: 254.36%). The Bank
also adopts a prudent investment strategy, with its
investment portfolio comprised almost entirely of low-risk
and highly-liquid government securities.
SCBSL’s performance is deemed to be above average,
reflected in its better-than-peer net interest margin (“NIM”),
cost to income ratio and return on assets (“ROA”). The
Bank’s margins had thinned last year, with the NIM
contracted to 5.93% (FY Dec 2012: 6.26%) in FY Dec 2013
as loans re-priced downwards amid the prevalent low
interest rates. The margin, however, further narrowed in 2Q
FY Dec 2014 to 5.10%, consequent to the Bank investing
funds in low-yielding government securities. SCBSL’s NIMs
have been relatively in line with those of its peers,
underscored by its low funding costs from less expensive
Current Account and Saving Account (“CASA”)s making up
for the lower-than-peer yields of its loan portfolio.
Concurrently, its cost of funding is expected to decrease,
supported by lower interest rates. SCBSL’s cost-to-income
ratio eased to 38.70% y-o-y in FY Dec 2013 (FY Dec 2012:
37.02%), resulting from a slowdown in gross income. The
ratio was however better than peers’, owing primarily to the
Bank’s limited branch network. SCBSL’s pre-tax profit
increased 15.05% y-o-y to LKR 6.05 billion in fiscal 2013,
which translated into an ROA of 5.77% (fiscal 2012:
5.68%). Although the Bank’s performance had moderated in
2Q FY Dec 2014, we expect a gradual improvement as it
seeks to expand its portfolio supported by more conducive
macroeconomic conditions.
Meanwhile, SCBSL’s funding profile remained healthy,
underpinned by its franchise, better-than-peer loans-todeposit (“LD”) ratio and a funding base that has a greater
mix of lower-cost CASA deposits than its peers’. The Bank’s
LD ratio clocked in at a relatively conservative 64.73% as at
end-December 2013 (end-December 2012: 78.14%).
Furthermore, SCBSL’s liquidity compared better than peers’,
reflected in the statutory liquid-asset ratios of its domestic
business and foreign currency business units of 57.06% and
32.79%, respectively as at end-December 2013 (endDecember 2012: 56.92% and 65.29%). Furthermore, the
Bank continued to maintain a positive gap in asset-liability
maturity mismatches across all maturity periods. The gap as
a percentage of interest-earning assets on “under 1 year”
maturities in FY Dec 2013 was 12.18% (LKR 10.97 billion)
(FY Dec 2012: 8.76%).
The Bank’s capitalisation levels are in line with those of its
peers. Its tier-1 and overall Risk Weighted Capital Adequacy
Ratio (“RWCAR”)s reduced to 24.18% and 24.38%,
respectively, as at end- December 2013 (end-December
2012: 16.42% and 16.64%) due to decrease in loan growth.
The ratios remained relatively unchanged at 24.60% and
24.79%, respectively as at end- June 2014.
Media Contact:
Adrian Perera
(9411) 2553089
adrian@lra.com.lk
October 2014
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