Fitch Affirms Seylan Bank at ‘A(lka)’; Outlook Stable
Fitch Ratings (Lanka) Limited has affirmed the National Long-Term Rating of Seylan Bank PLC at ‘A(lka)’. The Outlook is Stable.
KEY RATING DRIVERS
Seylan’s National Long-Term Rating reflects the bank’s modest profitability, acceptable capitalisation and a smaller market share than higher-rated local peers. The rating also captures the decline in Seylan’s asset quality, which is sharper than that of higher-rated peers. Seylan is the seventh-largest commercial bank in Sri Lanka, accounting for around 4.0% of sector assets and 4.2% of sector 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 Covid-19 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 that depends on the path of the pandemic.
The outlook on the operating environment remains negative and reflects significant downside risks from the pandemic and Sri Lanka’s sovereign credit profile (CCC). Seylan’s profitability continues to lag that of its large bank peers due to its narrowing net interest margins and high operating costs. The bank’s operating profit/ risk-weighted assets ratio improved slightly to 1.8% by end-1Q21 from 1.5% at end-2020, underpinned by modest improvement in cost efficiency partly due to cost-reduction measures taken during the pandemic.
However, the ratio was still much lower than the 3.6% median of Fitch-rated larger peers. We expect Seylan’s profitability to continue to improve, albeit moderately, in the medium term with the increase in business volumes, but it is likely to remain lower than prepandemic levels and that of peers due to high credit costs. Seylan’s impaired loans to gross loans ratio (SLFRS stage 3 loans) rose the most among Fitch-rated large bank peers to 8.7% by end-2020 from 6.7% at end-2019, despite regulatory forbearance on loan classifications.
Stage II loans amounted to a further 4.6% of total loans at end-2020. We believe asset quality could deteriorate further, similar to its peers, if the economic recovery is slower than our expectation and puts pressure on the bank’s ability to conduct meaningful loan resolution. Seylan’s loan-loss allowance was only adequate to cover around 44% of its impaired loans at end-2020, reflecting the bank’s reliance on collateral.