RAM assigns long-term rating of 'A' for SMIB

RAM Ratings Lanka has assigned respective long and short-term financial institutions rating of A and P1 to State Mortgage and Investment Bank ("SMIB" or "the Bank"). The ratings are primarily based on the State ownership of the Bank, tempered by the wide asset-liability maturity mismatch ("ALMM") inherent in its business model.

SMIB is a licensed specialized bank ("LSB") created by the Government of Sri Lanka ("GOSL") under the State Mortgage and Investment Bank Act No. 13 of 1975, following the amalgamation of two State-owned banks.

SMIB comes under the purview of the Ministry of Finance and Planning ("MOF").

The Bank is only permitted to disburse loans for housing, agriculture or for industry. It is a medium-sized bank that accounted for 3.34 percent of the industry's assets as at end-December 2008, and has limited geographic reach; of its 13 branches, six are in the Western province, whereas the market's largest player took up 67.49 percent, with a branch network of over 130.

SMIB has been aggressively expanding its loan portfolio in the past two years, despite the weakening macroeconomic environment. The Bank's loan portfolio consists of housing loans collateralized either by property or by the Employees' Provident Fund ("EPF"). EPF-backed loans took up 42.77 percent of SMIB's total loans as at the end of FYE 31 December 2008 ("FY Dec 2008"); loans backed by property accounted for another 55.24 percent.

Although SMIB's gross non-performing-loan ("NPL") ratio (classified on a three-months-past-due basis) stood at 27.58 percent as at end-FY Dec 2008, it is noted that NPLs from its EPF-backed loan portfolio accounted for 80.31 percent of the Bank's total NPLs. Excluding these NPLs (since they are reimbursed by the Central Bank), SMIB's NPL ratio would stand at a much lower 11.45 percent (end-June 2009: 14.54 percent) - albeit weaker than the industry average of 7.6 percent. RAM Ratings Lanka notes that the high level of NPLs reflects the Bank's social objective vis-a-vis providing housing for the masses. As the arrears (capital and interest) on loans collateralized by the EPF are only settled by the Central Bank once every year, rendering its cash inflow volatile. Nonetheless, SMIB's funding and liquidity position is deemed adequate, underpinned by its deposit franchise (derived from State ownership). Amid waning public confidence in private financial institutions, SMIB's deposit base augmented by LKR 2.01 billion as at end-June 2009, reflecting its deposit franchise.

Concurrently, customer deposits accounted for 92.69 percent of total interest bearing funding as at the same date.

However, the Bank has an inherent negative gap in its ALMM, as it provides long-term housing financing funded by short tenure deposits.

The majority (end-FY Dec 2008: 84.91 percent) of its deposits were within the one year bucket while bulk (end-FY Dec 2008: 67.15 percent) of loans were in the greater than five year bucket, exposing the Bank to both interest rate and liquidity risks.