Citibank Sri Lanka boost margins from dollar bonds

Fitch Ratings Lanka which confirmed the AAA (lka) national rating of Citibank in Sri Lanka branch and its interest margins were boosted by dollar financing of the government.

In the first half of the year net interest margins and forex gains had allowed pretax profits to improve to 2.7 percent on an annualised basis in the first half of 2007.

This was partly because of high yielding Sri Lanka government dollar bonds, which amounted to 8.7 percent of its assets in the first half of 2007. The money was raised from sister branches of the group, Fitch said.

In corporate banking, margins were thin. The bank’s net interest margins were healthy and rose to 4.7 percent in first half from 4.3 percent in 2006 and 3.4 percent in 2005, Fitch said.

Citibank Sri Lanka (CITISL) is a branch of Citibank N.A. Citibank’s foreign currency rating is AA+ with a Stable Outlook which is higher than Sri Lanka’s sovereign rating of BB- with a negative outlook. Fitch said Citi’s Sri Lanka loan book contracted 21.2 percent during 2005/2006 but has grown 39.3 percent by the first half of 2007.

This is an effective increase of 10.4 percent from the financial year 2005. The bank’s loans to corporates was 96.2 percent and to government and State-owned entities and 3.2 percent in the 2006 financial year.

“Due to highly conservative lending standards, CITISL’s loan book growth was low and asset quality was strong,” Fitch said. The gross non-performing loans (NPLs) to gross loans ratio was the lowest among the banks rated by Fitch at 0.6 per cent at the first half of 2007. Solvency - measured by net NPLs to equity - was zero, since the bank had provided for all bad loans.

But Fitch said that CITISL’s loan book concentration in the textile sector of 28.2 per cent at the end of 2006 could hurt asset quality, if there was an economic slowdown in any of the importing countries.

However most of apparel customers were the better borrowers in the country. The bank’s post-tax return on assets (ROA) in 2006 was steady at 1.6 percent, though it was lower than past highs with the effective tax rates rising to 54.1 percent of profits in 2006 from 9.6 per cent in 2002. Its pre-tax ROA, however, had increased to 3.4 percent in 2006 from 2.9 percent in 2005.

At the end of the 2006 financial year, Citibank group borrowings brought 13.4 per cent of funds, equity brought 21.0 per cent and deposits 56.0 percent.

“Its deposit concentration was significant, with the top 20 depositors accounting for 65.2 per cent of deposits.