ICRA Lanka assigns BBB- rating for Sanasa Development Bank

Sep 01, 2015 (LBO) – ICRA Lanka Limited, a wholly owned subsidiary of ICRA Ltd, a group company of Moody’s Investors Service has assigned the Issuer rating of BBB- with a Positive outlook to Sanasa Development Bank. The full text of the rating release is reproduced below. ICRA Lanka assigns [SL]BBB- rating with Positive outlook to Sanasa Development Bank PLC ICRA Lanka Limited, a wholly owned subsidiary of ICRA Ltd, a group company of Moody’s Investors Service has assigned the Issuer rating of [SL]BBB- (pronounced SL triple B minus) with a Positive outlook to Sanasa Development Bank PLC (SDB or “the Bank”). The rating factors in SDB’s established position, especially in the rural and the semi urban segments, on the back of the SANASA movement and the currently comfortable capitalisation profile (core capital at 12.6% as in June 2015). The positive outlook takes note of the improvement in the asset quality (GNPAs at 3.2% in June 2015 vis a vis 3.8% in December 2014 and 5.1% in December 2013) and the profitability indicators (RoA1 at 1.8% for 6M2015 vis a vis 1.4% for 2014 and 0.9% for 2013) over the recent past. The rating however takes cognisance of SDB’s exposure to customer segments with modest credit profile, limited revenue (non interest income at 0.7% of the average total assets for the year ended December 2014) and funding (deposits accounted for 87% of the total borrowings as in March 2015) diversification, subdued liquidity profile characterised by high asset-liability mismatches (<1 year mismatch at 22% of the total assets as in March 2015) and the steep portfolio growth witnessed during 2014 and H12015. The bank has implemented an integrated risk management system in 2013 and, is currently implementing a loan origination system to improve the overall credit risk assessment. ICRA Lanka however notes that there is scope for improvement in the internal controls, monitoring and information systems of the bank due to the risks inherent with the key target segments of the bank i.e. micro, small and medium enterprises (MSMEs) in the rural/semi urban segments, to assess the risks in the new product categories (personal and pension/ex-military personnel loans) and, as it envisages to grow its total assets at CAGR of about 30% over the next 4 years. SDB’s gross lending portfolio grew at a robust pace of about 45% in 2014 and at about 55% (annualized) in six months ended June 2015. SDB’s portfolio largely consists of loans to micro, small and lower end medium enterprises, and pensioners/ex-military personnel for income generating purposes, which together accounted for close to 45% of the portfolio as in June 2015. The bank also extends agriculture loans (10%) and other retail loans including housing (14%), personal loans (11%) and vehicle loans (9%). The pensioner/ex-military personnel loans and personal loans (to Government and Private sector employees) accounted for about 50% and 60% of the portfolio increase during 2014 and in 6M2015. Going forward, SDB is expected to diversify its exposure by increasing the share of the above mentioned segments while the primary focus would be on the MSME and agriculture segments. The bank’s asset quality has improved over the recent past, with GNPAs moderating to 3.2% in June 2015 as compared to 3.8% in December 2014 and 5.1% in December 2013, supported to a extent by the robust portfolio growth as incremental NPA generation rate in Q12015 was higher at 2.4% (annualised) as compared to 1.6% in 2014 (2.6% in 2013). However, the improvement in the provision cover to about 85% in June 2015 as compared to 54% in December 2014 (40% in December 2013) provides comfort on the overall asset quality. Further, ICRA Lanka notes that more than 80% (as in June 2015) of the total portfolio are secured loans against fixed assets and, the granularity of the loans ( about 60% of the loans below Rs. 500,000 and <5% of the loans are >Rs. 10 million as in December 2014). SDB however is exposed to the risks associated with the key target customer segment; i.e. MSME and agriculture loans due to the modest credit profile of the borrowers and their vulnerability to adverse economic and weather changes. Further, the ability of the bank to grow its portfolio at envisaged pace and control delinquencies in the new product segments would be crucial from a rating perspective. SDB’s capitalization is currently comfortable notwithstanding the moderation due to the robust portfolio growth during 6M2015. The bank secured about Rs.1 billion via a rights issue in 2014, which supported the capital profile (core capital at 14.9% in December 2014 vis a vis 14.0% in December 2013) although the portfolio grew by about 45% during the period. The bank’s profit retention is expected to improve going forward as it would provide sizeable scrip dividend, as in 2014, vis a vis cash dividends in the past. Consequently, the profit retention is likely to improve to about 8-10% going forward, as compared to 3-5% in the past. Assuming the above and based on the expected CAGR growth of about 30%, the bank is expected to require about Rs. 2-3 Bn over the next 4 years to maintain core capital over 10% level. The bank is expected to secure capital of about Rs. 1.5-2bn in another round of rights issue in Q1-Q22016. The bank’s funding profile is largely characterized by fixed deposits, which account for about 65-70% of the total debt of the bank, while the proportion of savings deposits remained range-bound at about 19-20% over the last three years; borrowings from other banks accounted for the remaining. SDB’s Credit-Deposit (CD) ratio increased to 106% in December 2014, as compared to 94% in December 2013, as the steep portfolio growth was supported by incremental borrowings while deposit growth was moderate at 28% during the period. The CD ratio remained high at 107% in June 2015 as portfolio growth remained high. While the deposit growth improved in 6MFY2015 to about 52%, ability of the bank to achieve the same in a sustained manner remains to be seen. SDB’s ALM profile is characterized by sizeable mismatches in the <1 year bucket due to the short term nature of the fixed deposits (87% of FDs had maturity of less than a year in December 2014) and while the portfolio generally have a tenure of about 5-7 years. ICRA Lanka takes note of the initiatives to diversify its funding profile by raising long term debentures, which would to an extent moderate the liquidity related risks. SDB enjoys a good yield on its portfolio due to its micro and small credit exposures. The weighted average effective yield was about 16.0% in for 2014, and the same moderated to about 14.8% for Q12015. However, the cost of funds also fell quite steeply from about 11-12% in 2013 to about 8% in 2014 and further to about 7.0% presently, which supported a healthy NIM for the bank that remained largely stable at about 7.0% during the above mentioned period. The bank’s core fee based income has remained moderate at about 0.5-0.6% over the above period, thus there is scope for improving the same. SDB’s operating expenses are higher; however the same has reduced (4.6% annualized for 6M2015 vis a vis 5.3% for 2014) over the last few years due to rationalization on account of the portfolio growth. The higher credit cost, especially in 2013, was due to the pawning exposures that resulted in lower profitability for that period. While the credit losses have moderated in the recent past, higher provisions than in the past, as the bank increased its provision covers kept the overall provisions at elevated levels. The net profitability indicators have improved in 2014 and in H12015, as credit provisions moderated from 2013 levels along with improvement in the operating efficiency, while the NIM remained largely stable. Going forward, SDB’s ability to control operating costs and credit costs as the business expands and due to diversification to newer products would be critical for overall profitability, while the bank is expected to enjoy good NIMs on account of its exposures to high yielding segment. Bank Profile Established in the year 1997, as the key credit institution for the SANASA movement, SANASA Development Bank Plc (SDB/the bank) is a Licensed Specialised Bank. The bank has a primary listing on the Colombo Stock Exchange. Close to about 46% of the total shareholding is with the SANASA affiliate entities, which includes, Co operative Societies, Trusts and other institutions. SDB had a network of 82 branches, about 1004 employees and mobile banking services with 43 field officers as in December 2014. The target market segments include the agriculture, micro, small and medium enterprises and other retail segments. In the year ended 2014, the bank reported a net profit of about Rs. 504 million on a total asset base of about Rs. 41 billion. The total networth of the bank as on December 31, 2014 was about Rs. 4.7 billion. The bank’ Gross NPA stood at 3.8% as on December 2014. In the six months ended June 2015, the bank reported a net profit of Rs. 414 million on a total asset base of Rs. 51 billion.