RAM reaffirms SMIB ratings

RAM Ratings Lanka has reaffirmed the respective long and short-term financial institutions ratings of A and P1 for State Mortgage and Investment Bank (SMIB). The long-term rating has a stable outlook. The ratings are based on the Bank's strong capitalisation and the financial flexibility it derives from its sole shareholder, the Government of Sri Lanka.

However, the ratings are moderated by SMIB's higher than industry level of non-performing loans ("NPLs") and the substantial negative gap in its short-term asset-liability maturity mismatch ("ALMM").

SMIB is a licensed specialised bank created under the State Mortgage and Investment Bank Act No. 13 of 1975.

SMIB comes under the purview of the Finance and Planning Ministry. While the Bank is permitted, as per the Act, to provide loans for housing and agricultural purposes, its main role is as an institution that fulfils the GOSL's social obligations vis-a-vis facilitating home ownership for the masses.

Despite its conservative lending in the recent past, the Bank's NPLs have increased and remain significantly higher than its peers'. SMIB recorded a gross NPL ratio of 37.02 percent as at end-December 2009 (end-December 2008: 27.58 percent); this remained unchanged as at end-September 2010.

The high NPL levels mainly stem from its EPF-backed lending portfolio, which accounted for about 48.75 percent of total its total loans as at end-September 2010.

However, we note that SMIB bears no default risk for these loans as they are backed by the borrowers' EPF funds. Nevertheless, the Bank's NPL ratio on conventional mortgages remained weak at 14.81 percent as at end-September 2010 (industry: 10.14 percent).

Its social obligation of lending to the low and middle-income segments exerts downward pressure on the Bank's credit quality, due to its customers' weaker repayment ability.