Fitch maintains Rating Watch on six Regional Development Banks

Fitch Ratings Lanka is maintaining the National Long-term ratings of six Sri Lankan Regional Development Banks (RDBs) on Rating Watch as follows:

- Rajarata Development Bank (RaDB): ‘BBB+(lka)’, Rating Watch Evolving (RWE); Ruhuna Development Bank (RuDB): ‘BBB+(lka)’, RWE; Wayamba Development Bank (WDB): ‘BBB+(lka)’, RWE; Kandurata Development Bank (KDB): ‘BBB(lka)’, RWE; Uva Development Bank (UDB): ‘BBB(lka)’, RWE; and Sabaragamuwa Development Bank (SDB): ‘BBB-(lka)’ (BBB minus(lka)), Rating Watch Positive.

The maintenance of the Rating Watches, assigned originally in December 2006, follows the announcement by the Government of Sri Lanka (GOSL) to merge these six RDBs into one bank.

As per the national budget proposals presented in 2006, the GOSL proposed to merge the six RDBs with two newly-established state-owned development financial institutions, Lankaputhra Development Bank (LDB) and SME Bank (SMEB), to form one combined entity under LDB.

However, subsequently, the GOSL decided to merge the six RDBs into one bank, whilst SMEB was to be absorbed into LDB. The proposed RDBs’ merger date is now set for the first quarter of 2008.

Rating Watch Evolving indicates that the ratings of the concerned banks may be raised, lowered or maintained, while the Rating Watch Positive indicates that there is a reasonable probability of a positive rating change including the potential for an upgrade.

The six RDBs are currently owned by GOSL either directly or through government-owned or managed entities. The proposed merger will create an entity with a more nationwide presence and exposure, as well as mitigate the regional specific risks faced by individual RDBs, whilst consolidating and centralising administrative functions.

Although a number of challenges exist - such as the rationalisation of human resources, development of a uniform management information system and processes, as well as consolidation of operational functions, Fitch believes that the merger would help to make the combined entity a more sustainable and competitive enterprise.