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‘EPF Loan’ defaults are entirely paid by the EPF once SMIB makes an annual claim, which is settled by March annually. Borrowers use this loophole to draw on EPF balances to settle loan installments. Willful default of ‘EPF Loans’ is high, as borrowers use the loan schemes to make early withdrawals, which would otherwise become available on reaching 55-years. |
While an 'A (sri)' rating is in the investment grade, indicating a low expectation of credit risk, SMIB is still exposed to economic and market changes.
The downgrade, says Fitch, reflects SMIB's weak and deteriorating competitive position among peers, which has resulted in a steady decline in its core business of housing mortgages since 2001, as well as poor asset quality and relatively high exposure to interest rate risk.
"In addition, SMIB's liquidity is somewhat low aggravated by deposit concentrations amongst a few institutional depositors. However, SMIB's rating takes comfort from its state ownership, strong capital base and high profitability," the statement said.
The bank's weak monitoring and follow up procedures have also led to the overall deterioration in asset quality.
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SMIB has had a poor track record in realizing collateral, for instance over the last 25 years only 52 vested properties have been disposed of. Fitch has concerns regarding asset quality and realisability of collateral. The rating agency believes SMIB’s present provision cover of 11.7 percent of NPL’s (as at June ‘05) is low. |
The gross non-performing loan (NPL) ratio within its mortgage portfolio was high at 21.7 percent as at Nov.'05.
The bank currently leans heavily on business from the Employees Provident Fund (EPF) to grow its loan book.
'EPF loans' are secured by borrowers' provident funds held by the state pension fund.
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SMIB’s net NPL/Equity
ratio was 46.5 percent as at June 05 (52.0 percent as at Dec ‘04) and was
high compared to the sector average and has been on a rising trend since
2003. |
The 'EPF loans' (33 percent of total portfolio as at Dec. '04) have low credit risk due to ease of recovery and can only be offered by state banks.
"Over-reliance on EPF loans will not address the bank's core problem of weak competitiveness and also exposes SMIB to vulnerabilities such as those which would arise if these schemes are discontinued or significantly changed," warns Fitch.
Since mid-2005, SMIB's management has made some headway by launching new products to broaden deposits base and increase mortgage loan portfolio.
"However, results have been modest and it is unclear if these measures alone would remedy the short comings."
SMIB's profitability remained high with healthy net interest margins (8.7 percent in 2004) and high ROA’s (3.7 percent in 2004), thanks to the bank's relatively large equity base (26.6 percent of assets as at Dec. '04).
Fitch says SMIB's rating outlook is stable, as management changes to correct short comings are still in its early days of implementation.
"A downward revision of SMIB's ratings would arise if these afore-mentioned strategic issues are not addressed coupled with a further deterioration in its asset quality and solvency position."
Looking ahead, SMIB's core business of mortgage lending, will continued to be threatening by other banks, who mobilise low costs funds using better technology and wider branch network.
Please click on www.fitchratings.lk to read SMIB's full report
-Mel Gunasekera: mel@vanguardlk.com