Fitch affirms DFCC Bank's 'AA(lka)' national rating

Fitch Ratings Lanka has affirmed the 'AA(lka)' National Long-term rating assigned to DFCC Bank (DFCC). At the same time, the agency has affirmed the 'AA(lka)' National Rating assigned to the bank's senior debentures and the 'AA-(lka)' (AA minus(lka)) National Rating assigned to its subordinated debentures. The Outlook on the ratings is Stable.

DFCC's ratings reflect its strong financial performance, good asset quality and strong capital position. The ratings also take into acount the bank's high exposure to riskier long-term project lending and less diversified funding base.

DFCC's profitability as measured by return on assets remained strong at 2.6 per cent in FYE07. The contribution from its 29 per cent owned associate, Commercial Bank of Ceylon Ltd (CB, 'AA+(lka)'), was a substantial 21% of FY07 net profit, compared to the contribution from other group entities, including its 95 per cent owned subsidiary DFCC Vardhana Bank Ltd (DVB, 'AA-(lka)' (AA minus(lka)), which was 7 per cent.

The Central Bank of Sri Lanka (CBSL) issued a directive that requires DFCC to decrease its voting rights in both CB and DVB to 15 per cent by 2008 and 2012, respectively. As per the directive, failure to do so would result in DFCC's voting rights being reduced to 10 per cent. However, Fitch does not foresee a significant impact to the bank's profitability in either event.

The funds channelled through or guaranteed by the Government of Sri Lanka constituted 64 per cent of the bank's borrowings at FYE07. In addition, Fitch believes that DFCC's continuing good performance record has enabled it to source long-term funding from international agencies. Nevertheless, some initiatives have been instituted by the bank to diversify funding away from such traditional sources.

The gross non-performing loans (NPLs)/gross loans ratio held steady at 5 per cent in FYE07 due to a robust loan growth of 30 per cent in FY07. However, Fitch notes that the bank's NPLs tend to swell throughout the year, but recede by the end of the financial year.

This has typically been the trend, as more emphasis is placed on the NPL position at the end of the financial year when staff performance evaluation takes place. However, it is noteworthy that DFCC's NPL classification is more stringent than that prescribed by the CBSL.

DFCC remains one of the more strongly capitalised amongst Sri Lankan banks, reporting an equity/assets ratio of 17.7 per cent, as well as core and total capital adequacy ratios of 17.8 per cent and 15.2 per cent respectively, at FYE07. Solvency as indicated by net NPL/equity ratio remained comfortable, at 12.3 per cent at FYE07.

DFCC is Sri Lanka's premier development finance institution engaged in the provision of long-term project finance. The bank was established in 1955 through an Act of Parliament on the recommendation of the World Bank in order to foster economic growth in Sri Lanka. DFCC is regulated as a Licensed Specialised Bank and accounted for about 3 per cent of banking system assets.

The bank's major shareholders include entities related to the Stassens Group which hold 30.7 per cent of its equity and Bank of Ceylon ('AA(lka)'), which holds 14.7 per cent of its equity. DFCC has a 1.78 per cent shareholding in Fitch Ratings Lanka but is not involved in either the day-to-day operations of or credit rating reviews undertaken by Fitch Ratings Lanka.