Fitch Affirms Sampath Bank at ‘AA-(lka)’; Outlook Stable
Fitch Ratings (Lanka) Limited has affirmed the National Long-Term Rating of Sampath Bank PLC at ‘AA-(lka)’. The Outlook is Stable.
KEY RATING DRIVERS
Sampath’s rating reflects its acceptable capitalisation and moderate domestic franchise, which are partly offset by its deteriorating asset quality. Sampath is Sri Lanka’s fifth-largest commercial bank, with about 7.5% of system assets and 7.8% of system deposits at end-March 2021. The operating environment in Sri Lanka continues to be challenging. Sri Lanka’s real GDP contracted by 3.6% in 2020 as key economic sectors were severely disrupted due to the Covid19 pandemic and the lockdowns that followed.
We expect economic growth to rebound to 3.8% in 2021 and 3.9% in 2022 but this forecast is subject to a high degree of uncertainty as it depends on the path of the pandemic. The outlook on the operating environment remains negative and reflects significant downside risks from the ongoing pandemic and Sri Lankan sovereign credit profile (CCC). Sampath’s impaired loan ratio (Stage 3 loans/ gross loans) rose to 9.0% by end-2020 from 8.0% at end-2019, which is slightly weaker than the 8.8% median for Fitch-rated Sri Lankan large banks. Sampath’s stage 2 loans were equivalent to a significant 22.5% of total loans at end-2020, reflecting stressed tourism- and transportationrelated loans due to the weakened operating environment and the pandemic.
Fitch expects asset quality to continue to deteriorate in 2021 as the impact of extended loan moratoriums taper off amid a slow economic recovery. Impaired loans were only moderately covered by total loan-loss allowances at 58.5% at end- 2020 (2019: 53.5%), comparable with the Fitch-rated Sri Lankan large bank median of 57.2%, reflecting the bank’s reliance on collateral. Fitch expects Sampath’s profitability to improve in 2021 compared with 2020, underpinned by the build-up of provisions in 2020, which should help to ease potential credit cost pressures in 2021. Sampath’s profitability, measured by operating profit/risk-weighted assets, improved to 4.3% by end-1Q21 from 2.0% at end-2020, benefitting from lower credit costs. However, the ratio is likely to be lower than its historical average of 3.4% in 2016-2019, due to potential pressure on yields from new loans as interest rates remain low, while funding costs have already decreased.
Sampath’s capitalisation is acceptable. Its common equity Tier 1 (CET1) capital ratio of 12.9% (excluding profits for 1Q21, which have not been audited) at end-1Q21 (end-2020: 13.4%) compares favorably with the Fitch-rated large bank median of 11.1%. We do not expect a material decline in the bank’s capitalisation ratios in the short term as we expect its loan growth to be moderate and internal capital generation to be adequate. Sampath’s liquidity position is healthy with a loan/deposit ratio of 87.7% at end- 1Q21 (2020: 88.0%, 2019: 102.9%), underpinned by strong deposit inflows and muted loan growth. Sampath’s deposits increase by about 24% in 2020, as it benefitted from the flight to quality during the Covid-19 pandemic.
Nonetheless, we expect Sampath to find accessing foreign-currency (FC) liquidity to be challenging, similar to the sector, due to high costs and limited investor appetite given the sovereign’s weak credit profile and worsening global funding conditions. The FC loan/deposit ratio stood at 90% at end-1Q21, down from 125% at end-2019 (2020: 93%) due to Sampath’s limited appetite for FC lending amid the weak operating environment. Sampath has a high-risk appetite, as it focuses on the retail and SME segments, although the bank has increased its exposure to large corporates in recent years to improve credit quality. Retail and SME (including midsized corporates) customers accounted for around 75% of total loans in 2018-2020 and we expect focus on this segment to resume in the medium term.