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Government Gazette

Fitch affirms National Savings Bank’s ratings

Fitch Ratings Lanka has affirmed National Savings Bank’s (NSB) National Long-term rating at ‘AAA(lka)’. The Outlook is Stable.

NSB’s rating reflects its full State ownership, systemic importance, the low credit risk (on the national rating scale) on a majority of its assets and the explicit government guarantee on deposits.

Government securities accounted for as much as 65 per cent of NSB’s asset base at end-2007 (FYE07), largely owing to the NSB Act, which requires a minimum of 60 per cent of deposits to be invested in government issued or guaranteed securities.

However, this component has been declining over the past few years (FYE05: 76 per cent of assets) with management placing emphasis on increasing its exposure to higher-yielding retail loans.

Housing loans accounted for 8.5 per cent of its asset base at FYE07, with loans to other financial institutions, loans against fixed deposits, and gold-backed lending accounting for a further 3.6 per cent, 3.5 per cent and 2.6 per cent respectively.

The relatively low-risk nature of NSB’s loan portfolio enabled a gross NPL ratio of 1.2 per cent at FYE07, far lower than that of most commercial banks in the country.

Retention and profitability have been declining over the past few years with greater contribution to the Government Treasury via payments to the consolidated fund in lieu of dividends (77.5 per cent of post-tax profit at FYE07) and higher taxation (effective tax rate 63.4 per cent at FYE07 from 51.1 per cent at FYE05).

NSB is also subject to significant market risk, owing to a majority of assets consisting of fixed-rate longer tenure instruments, which are funded by deposits maturing in one year or less.

Although the bank has been able to defend its margins in the last few years as deposits rates were kept more or less stable, margins are likely to decline if rising interest rate trends were to continue.

Fitch is of the view that the bank may be compelled to increase rates to preserve its market share, which has declined to 13.5 per cent of system deposits at FYE07 from 17.1 per cent at FYE04.

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