RAM reaffirms SDB at BBB/P3 with stable outlook

RAM Ratings Lanka has reaffirmed the respective long- and short-term financial institution ratings of Sanasa Development Bank Limited at BBB and P3; the long-term rating carries a stable outlook.

The ratings are supported by the Bank’s healthy performance, adequate asset quality, funding as well as liquidity levels, along with its strong rural presence, particularly in micro-financing.

However, the ratings are moderated by SDB’s small stature and its relatively risky target clientele.

SDB is a licensed specialised bank (“LSB”) accounting for 3.05% of the LSB industry’s assets as at end-December 2010; the largest player took up the lion’s share of approximately 70%. As the apex financial institution of the Sanasa movement, i.e. the largest cooperative network in Sri Lanka, SDB’s clients are predominantly gained through the branch network of the movement.

The Bank concentrates on small-ticket micro-financing, leasing, project financing and housing loans for the rural masses, which generally lies beyond the risk appetites of most financial institutions. Loans are also extended to non-members as well as small and medium-sized enterprises.

RAM Ratings Lanka deems the Bank’s asset quality to be adequate, supported by its proven ability to maintain credit quality despite its relatively risky client profile.

SDB’s credit assets had charted a modest 18.26% year-on-year growth to Rs 14.14 billion as at the end of FYE 31 December 2010 (“FY Dec 2010”).

At the same time, the Bank’s gross non-performing loans (“NPL”) (classified on a 3-months basis) only inched up 2.79% to Rs 725.29 million; this was supported by SDB’s better recovery procedures on the back of its group lending system and proximity to its clients through the cooperative network.

Given by its enlarged loan base, the Bank’s gross NPL ratio ameliorated to 5.72% as at end-FY Dec 2010 (end-FY Dec 2009: 6.59%). Nevertheless, this ratio was pushed up to 6.14% as at end-1H FY Dec 2011, the result of an influx of NPLs arising from, more stringent NPL classification imposed by the Central Bank of Sri Lanka.

SDB’s focus on the economically underprivileged had enabled the Bank to charge higher interest rates on its loans, thereby allowing it to enjoy better net interest margins (“NIMs”) than its peers, both LSBs and licensed commercial banks. The Bank’s NIM is further supported by its lower funding costs due to the faster repricing of deposits relative to fixed-rate loans and advances in an environment of tapering interest rates.