Fitch rates Sampath Bank’s Basel III sub debt final A(lka)

Fitch Ratings has assigned Sampath Bank PLC's (A+(lka)/Negative) proposed Basel III compliant subordinated debentures a National Long-Term Rating of 'A(lka) '. The notes will total LKR7.5 billion, mature in five years and carry fixed coupons. The notes include a non-viability clause and will qualify as regulatory Tier II capital for the bank. The bank plans to use the proceeds to strengthen its Tier II capital base and support its loan book expansion. The debentures are to be listed on the Colombo Stock Exchange. The final rating is the same as the expected rating assigned on 11 January 2018, and follows the receipt of documents conforming to information already received. KEY RATING DRIVERS Fitch rates the proposed Tier II instrument one notch below the bank's National Long-Term Rating of 'A+(lka)' to reflect the notes' subordinated status and higher loss-severity risks relative to senior unsecured instruments. The notes would convert to equity upon the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka. Sampath's National Long-Term Rating is used as the anchor rating because the rating reflects the bank's standalone financial strength. Fitch believes that the bank's standalone credit profile best indicates the risk of becoming non-viable. Fitch has not applied additional notching to the notes for non-performance risk, as they have no going-concern loss-absorption features, in line with Fitch's criteria. Sampath's National Long-Term Rating was affirmed on 21 December 2017, factoring in Fitch's expectation that the bank is in the process of shoring up capitalisation to meet the tighter requirements of 10.0% Tier 1 and 14.0% total capital ratios by 1 January 2019. The bank's regulatory Tier 1 and total capital ratios were 10.3% and 14.4%, respectively, at end-2017. In December 2017, Sampath raised LKR7.6 billion and LKR6 billion via a rights issue and Basel III compliant subordinated debenture issuance, respectively. In addition to the proposed subordinated debenture issuance of up to LKR7.5 billion, the bank has announced a further LKR12.5 billion rights issue for 2018 as part of its medium-term capital plan. However, the Negative Outlook reflects Fitch's view that Sampath could find it challenging to improve its capitalisation if it fails to successfully execute its medium-term capital plan while maintaining high loan growth of over 20.0%, which we expect for 2018 to 2020. Sampath's gross loan growth of 18.2% in 9M17 continues to outpace the industry's 11.9% growth (Sampath 2016: 22.1%, industry 2016: 17.5%) and Fitch expects this trend to continue alongside the bank's pursuit of market share. RATING SENSITIVITIES The rating of the notes would move in tandem with Sampath's National Long-Term Rating. Fitch would downgrade Sampath's rating if the bank is unable to maintain capital buffers commensurate with its risk profile and operating environment-related risks over the medium term. We would revise the Outlook to Stable if the bank successfully implements its capital-enhancement plan to improve its capital profile.