The stable rating outlook reflects DFCC's long and sound operating history, good asset quality, strongcapital base but also its greater exposure to riskier project lending and less diversified funding base.
Though embracing commercial banking recently, a large chunck of the development finance institution still comes from project lending.
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Fitch however, recognises the bank's initiatives to diversify income sources.
Besides a 29.76 percent stake in Commercial Bank of Ceylon, DFCC acquired MERC Bank in 2003 to diversify activities.
The small commercial bank has since been renamed DFCC Vardhana Bank and carries a AA-(sri) rating from Fitch.
The acquisition has since helped the group offer a broad range of banking products and services.
Profitability, as measured by ROA (return on assets) is good and is above that of other banks.
The ROA was 2.3 percent (annualised and excluding share of earnings from associate company, Commercial Bank) for the six months toSeptember 2005, a decline from the 2.8 percent and 3.8 percent reported during financial year 2005 and 2004.
The drop was largely due to lower capital gains from equity investments, higher taxes and increased operating costs.
DFCC's asset quality has been steadily improving over the last few years.
While NPLs (non performing loans) grew by two percent during financial year '05, gross NPL ratio fell to nine percent in FY05 (10.
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6 percent in FY '04) on account of loan growth.
Loan loss reserve (LLR) coverage declined to36 percent as at FYE05 from 40 percent in FYE04 on account of increased write-offs.
Nevertheless, solvency is relatively good, with net NPL/Equity of 17.6 percent in FY '05 against 18.6 percent in FY '04.
DFCC is also well capitalised when stacked against peer banks.
Total capital adequacy ratios were 15.2 percent as at September 2005 against 17.5 percent as at FYE ‘05 and 18.6 percent as at FYE ‘04.
DFCC was established in 1955 through an act ofparliament as a long-term project lender.
Two companies, where the Stassens Group has significant influence; namely, Distilleries Company of Sri Lanka (DCSL) and the Hatton National Bank in aggregate own about 19 percent of DFCC's equity.
In addition, the Life and General Funds of DCSL’s subsidiary, Sri Lanka Insurance Corporation, collectively holds 11.8 percent of DFCC’s equity.
DFCC's other major shareholders includes Bank of Ceylon (14.72 percent) and Commercial Bank (13.53 percent).
-LBO Newsdesk: LBOEmail@vanguardlk.com