Fitch affirms NSB at ‘AAA(lka)’

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

The rating reflects NSB’s state ownership, systemic importance, the low risk nature of most of its asset base and explicit guarantee from the Government on its deposits.

NSB is bound by the NSB Act No. 30 of 1971 to invest a minimum of 60 percent of its deposits in government issued/guaranteed securities. At FYE08, exposure to these securities amounted to 75 percent of deposits (FYE07: 76 percent). Total government exposure (tradable securities and direct loans to the state and state owned entities) accounted for 67 percent of assets at FYE08 (FYE07: 67 percent).

The government securities are primarily held to maturity (H109: portfolio bond duration was approximately 1.7). Given the government securities it holds, NSB enjoys strong liquidity (H109 statutory liquidity ratio: 70.4 percent), but will continue to face significant interest rate risks due to maturity mismatches inherent in its asset and deposit structure.

Net interest margins (NIM) (averaging 3.6 percent during FYE03-FYE08) have been narrowing on account of a general rise in cost of funds. Effective tax rates increased to 74.8 percent in FY08 from 35.5 percent in FY04 due to the introduction of a financial VAT in 2003 and the slightly disproportionate effects on NSB from its higher proportion of personnel costs in its cost structure. Consequently, ROA declined to 0.4 percent in FY08 (FY04: 1.7 percent).

ROA increased back to 1.7 percent in H109 largely due to bond gains. NSB’s profitability was lower on account of lower NIMs and high effective tax rates, when compared to the wider commercial banking industry.

Loans grew by 11 percent in H109 (FY08: 7 percent) but accounted for just 23 percent of assets at FYE08, but up from 19 percent of assets at 2006. Housing loans, pawn-broking loans (gold-backed loans), loans backed by fixed deposits and loans to financial institutions accounted for 39 percent, 15 percent, 16 percent and 17 percent of loans at FYE08; the balance is from the personal finance segment.

At FYE08, the relatively low-risk nature of this loan book enabled a low NPLs/Gross loans ratio of 1.6 percent, while the relatively small loan book resulted in a net NPL/equity ratio of 6.5 percent.