Fitch Affirms Sanasa Development Bank's 'BB (lka)' National Rating

Fitch Ratings Lanka today affirmed Sanasa Development Bank Ltd's (SDB) National Long-term rating at 'BB(lka)'. The outlook is stable.

SDB's rating reflects its historically high levels of profitability and moderate asset quality. The rating is constrained by the riskier nature of its client base, which is more susceptible to economic downturns.

SDB's clientele primarily consists of the somewhat riskier microfinance segment (MFI), with an average small loan size of approximately Rs0.2m. Loan growth has historically been high, with a CAGR of 41.9 percent during FYE05-FYE08, although it slowed to 5.6 percent in the five-month period to end-May 2009 (as did the rest of the banking sector), due to the economic slowdown. SDB intends to substantially increase disbursements in H209, although growth would remain below historic levels.

Fitch has some concern on the impact of this on credit quality as the current economic climate is likely to prevail at least through FY09. Growth has been spurred by the housing loan portfolio in the past few years (37 percent of the loan book at FYE08). The remainder consisted of MFI lending primarily for self employment, loans to the Thrift and Credit Cooperative Societies (Sanasa), leasing, pawning, and project loans to SMEs.

Historically SDB has been maintaining better-than-sector asset quality, aided by its presence at the grass roots level where social pressure and strong monitoring acts as an effective deterrent to willful default.

However, Fitch observes that a less conducive economic environment would disproportionately affect SDB's clients who constitute the lower-income segment. While the NPL infection ratio was higher than that for the traditional banking sector, Fitch notes that SDB's gross NPL ratio of 8.2 percent at end-May 2009 (FYE07: 4.2 percent) is still marginally better than the banking sector.

Despite significant interest rate risk owing to mismatches in the duration of its funding and lending, high loan growth enabled new disbursements to be priced at higher rates; SDB maintained high spreads and overall profitability (end-May 2009 ROA: of 1.2 percent; FYE08 sector ROA: 0.9 percent). Profitability should continue to remain high in the near-term given the declining trend in interest rates.

Deposits are SDB's primary source of funding - 73 percent at FYE08. SDB has a strong deposit franchise, aided by its linkage to the Sanasa movement, and its expanding branch network. With an equity base of Rs1.36bn at end-May 2009, SDB is on track to meet the regulatory minimum capital requirement of Rs1.5bn for licensed specialised banks (LSB) by the deadline of end-December 2009. SDB intends to meet the shortfall via equity infusions, primarily from the Sanasa societies.

However, net NPL/equity ratio weakened to 46.2 percent at end-May 2009 (FYE07: 27.0 percent), and is likely to weaken further if SDB continues its high growth trajectory in the current economic climate.

SDB is an LSB established in 1997 as the apex credit institution for the Sanasa movement. Sanasa societies held 73 percent of SDB's equity at FYE08.

A credit analysis will be available shortly on Fitch's websites www.fitchratings.com and www.fitchratings.lk.