Fitch downgrades Seylan Bank’s National Rating; Revises outlook to stable

Fitch Ratings Lanka has downgraded Sri Lanka-based Seylan Bank Plc’s (Seylan) National Long-term rating to ‘BBB+(lka)’ from ‘A-(lka)’ (A minus(lka)).

At the same time, Fitch has downgraded the ratings of the bank’s subordinated debentures to ‘BBB(lka)’ from ‘BBB+(lka)’. The Outlook has been revised to Stable from Negative.

Consequent to the ratings being assigned a Negative Outlook in April 2007, the downgrade reflects the increased challenges faced by the bank in absorbing credit losses in a weakened macroeconomic environment, in the form of its relatively low capital cushion, its relatively low profitability, and challenges in raising fresh equity capital.

The ratings, however, also recognise the support element derived by Seylan as one of the six largest and systemically important banks in Sri Lanka, as defined by the Central Bank of Sri Lanka (CBSL), and its yet strong customer franchise.

Seylan’s gross NPL ratio declined to 12.6% at FYE07 and 13.1% at Q108 from 11.3% at FYE06 despite increased recovery efforts, reflecting the effect of the challenging macro economic environment, and remains considerably weaker than that of its peers.

Both specific and total (including general) provision coverage remained low at 35.2% and 38% at FYE07. Consequently, solvency, as indicated by the net NPLs/equity ratio, deteriorated to 84.4% at FYE07 and 88% at Q108 from 75.5% at FYE06.

Fitch believes that there could be a further deterioration of these ratios on account of a probable decline in asset quality in the face of the challenging macroeconomic environment. Management indicates that the bank already adheres to the more stringent regulatory classification standards imposed by the CBSL effective in FY08.

Seylan’s profitability as measured by ROA remained below that of its peers and Fitch believes that the bank’s core profitability will be further constrained by contracting interest margins, increases in its already high operating costs, and increased credit costs.

Seylan consciously reduced loan growth to 4.1% and dividend payout to 26.8% in FY07 (14.1% and 40.7% respectively in FY06), while loan growth in Q108 was further reduced to an annualised 1.6%.

Consequently, the bank posted a consolidated total capital adequacy ratio (CAR) of 12.72% at FYE07 although this ratio decreased to 11.68% at Q108 under the Basel II framework mainly due to the additional charge for operational risk.