On six Sri Lankan Regional Development Banks:

Fitch takes rating actions

Fitch Ratings Lanka has taken rating actions on six Sri Lankan Regional Development Banks (RDBs).

Kandurata Development Bank (KDB), upgraded to ‘BBB+(lka)’ from ‘BBB(lka)’; and Outlook revised to Stable; and Sabaragamuwa Development Bank (SDB), upgraded to ‘BBB(lka)’ from ‘BBB-(lka)’, Positive Outlook

KDB’s and SDB’s ratings were upgraded due to sustained improvements in their financial profiles. Both KDB and SDB over the last five years (2005-2009) have progressively reduced their NPL/gross loan figures while having good profitability. As such sustained improvements on asset quality and capitalization reduced Net NPL/Equity ratios to 9.5 percent at FYE09 for KDB (FYE05: 31.4 percent) and to 16.6 percent for SDB (FYE05: 30.6 percent).

Meanwhile the following RDBs’ ratings have been affirmed, as follows:

Rajarata Development Bank (RaDB): affirmed at ‘BBB+(lka)’; Stable Outlook;

Ruhuna Development Bank (RuDB): affirmed at ‘BBB+(lka)’; Stable Outlook;

Wayamba Development Bank (WDB): affirmed at ‘BBB+(lka)’; Stable Outlook; and

Uva Development Bank (UDB): affirmed at ‘BBB(lka)’; Positive Outlook;

In affirming the ratings of RaDB, RuDB and WDB, Fitch recognizes that these RDBs have had consistent profitability ranging between 0.9 percent-1.6 percent in FY09, strong NPL/gross loan ratios ranging between 3 percent-4 percent at FYE09, and low Net NPL/Equity ratios ranging between 4 percent-10 percent). UDB’s rating was affirmed one notch lower than RaDB, RuDB and WDB due to constraints faced by the bank, such as lower levels of automation, higher cost structures, and NPL/Loan ratios above the RDB sector average.

Many of these constraints stem from frequent changes of UDB’s General Managers over the last three years (three GMs in three years) which have impeded strategic direction.

At end-2006 the Sri Lanka Government announced that it would merge the six RDBs to form a combined entity.

The vesting order being gazetted in Parliament will detail the eventual transfer of the assets and liabilities of the RDBs to the merged entity, and the merger process is expected to be completed in the next three months. The Outlooks on the ratings indicate the possible direction of the ratings upon the conclusion of the merger.