Fitch assigns 'BBB+(lka)' rating to Seylan's subordinated debt

RATING: Fitch Ratings Lanka has assigned a National rating of 'BBB+(lka)' to the LKR1 billion 2006/2011 unsecured subordinated redeemable debentures to be issued by Seylan Bank Limited ("Seylan").

At the same time the agency affirmed the 'BBB+(lka)' National rating assigned to the bank's 2001/06, 2002/07, 2003/08, 2004/09, 2005/10 and 2006/11 subordinated debentures as well as Seylan's 'A-(lka)' (A minus(lka)) National Long-term rating. The Outlook on the ratings is stable.

The ratings reflect Seylan's market position as the fifth-largest licensed commercial bank in Sri Lanka, as well as its consequent systemic importance and established customer franchise. However, the rating also factors in the bank's weak asset quality, relatively weak capital position and resulting poor solvency.

Seylan's non-performing loan ("NPL", including foreclosed assets) ratio continued to be comparatively higher than that of its peers at 13.1% at FYE05 despite a decline in this ratio from 15.9% at FYE04.

Fitch notes that fresh NPL accretion remains high at 5.5% of average loans in FY05. The agency views significant improvements to risk management and more stringent credit appraisal as essential for the bank to improve and avoid further deterioration of its asset quality, particularly in light of high loan growth of 27% during FY05 which was above that of its peers.

Seylan's loan loss provision coverage was 37.3% at FYE05. The agency considers this level of coverage to be inadequate in light of Seylan's capital position which is reflected by its weak solvency as indicated by its high net NPL/equity ratio of 102.6% at FYE05.

Reported total capital adequacy ratio ("CAR") at the bank level was 8.11% at FYE05, below the regulatory minimum of 10%, while at the group level this ratio was at 10.27% at FYE05.

Seylan achieved a total CAR of 10.03% at the bank level at Q306, fulfilling the regulatory requirement helped by recent capital infusions through the issuance of non-voting shares (which almost doubled the bank's issued share capital), and the subordinated debt of LKR1.2 billion raised in July 2006.

However, in Fitch's opinion, the bank will need further infusions over the medium term to support current levels of loan growth.