Fitch revises Sampath Bank outlook to stable from negative; affirms A+(lka)

Jun 13, 2018 (LBO) – Fitch Ratings has affirmed the National Long-Term Rating of Sampath Bank at A+(lka) and revised the outlook to stable from negative. Fitch has also affirmed Sampath Bank's subordinated debentures at A(lka). KEY RATING DRIVERS The revision in the Outlook reflects Fitch's expectation that the bank would be able to sustain higher capital buffers as it continues to focus on capital management and earnings retention while expanding its market share. Sampath's rating also reflects its higher risk appetite, growing franchise and satisfactory asset quality. Fitch expects the bank to maintain adequate buffers above regulatory requirements even though its Tier 1 ratio could temporarily fall to around 11% by end-2018 due to continued rapid growth. This compares to a minimum required Tier 1 ratio of 10%, which includes an additional end-point 1.5% buffer for domestic systemically important banks (D-SIB) from 1 January 2019. Sampath is now required to maintain minimum Tier 1 ratio of 8.875%, which includes a 1% D-SIB buffer. Fitch estimates Sampath's Tier 1 ratio was 12% in April 2018 after it raised LKR12.5 billion in April 2018 and LKR7.6 billion in December 2017 via rights issuances and retained its 2017 profit of LKR12.7 billion through a scrip dividend. The bank's total capital ratio improved to 14.3% by end-March 2018 (2016: 12.9%) after issuing LKR13.5 billion of Basel III-compliant subordinated debt over the last 12 months. The bank is required to maintain a minimum total capital ratio of 14% from the start of 2019, compared with the current requirement of 12.875%. Loan growth is projected to remain strong in 2018 after a 7.5% expansion in 1Q18 since December 2017 that outpaced the sector's 4.6% growth. Sampath's high risk appetite is evident in its loan book's CAGR of 22% over 2016-2017, exceeding the industry's 16.8% expansion, and the loan book's concentration in the consumer, retail and SME/mid-sized corporate segments. We believe management may slow loan growth to maintain capital buffers in the absence of further capital infusion. In line with rising non-performing loans (NPLs) in Sri Lanka, Sampath's NPL ratio increased to 1.95% by end-1Q18 from 1.64% at end-2017, but the ratio remains low compared with those of its peers. The bank's rapid growth and increased exposure to more-vulnerable segments raises the risk of asset-quality deterioration in the event of a significant economic downturn, although this is not our base case. Fitch expects the overall operating environment to remain challenging. Total allowances rose to 10.5% of pre-provision profit in 2017 from 8.7% in 2016. We believe impairment charges could rise further due to potential asset-quality pressures, as well as the implementation of SLFRS 9. Sampath's ROAA improved to 1.7% in 2017 from 1.6% in 2016 and 1.4% in 2015, aided by higher business volumes. SUBORDINATED DEBT Fitch rates the Tier 2 instrument one notch below the bank's National Long-Term Rating to reflect the notes' subordinated status and higher loss-severity risks relative to senior unsecured instruments. The National Long-Term Rating is used as the anchor rating because the rating reflects the bank's standalone credit profile, which best indicates the risk of becoming non-viable. RATING SENSITIVITIES Failure to sustain the planned capital buffers as a result of insufficient capital generation, rapid loan growth or a sharp decline in asset quality could lead to a rating downgrade. Sampath's ratings might be upgraded if its capitalisation were to significantly strengthen alongside a moderation in risk appetite, while managing asset-quality pressures. SUBORDINATED DEBT The rating of the notes would move in tandem with Sampath's National Long-Term Rating.