ICRA Lanka issues rating of [SL] AA- with Stable Outlook to DFCC Bank PLC
The rating factors in DFCC Bank’s established track record as the pioneer development bank in Sri Lanka (the Bank became a fully-fledged commercial bank in 2015), healthy asset quality indicators, and the adequate capitalisation profile. The Bank has a strong corporate banking focus, with about 44% of the total portfolio comprising corporate lending as in June 2020.
The rating also takes cognisance of the healthy asset quality indicators of the Bank, with gross NPA (GNPA) of 4.8% as in June 2020, which was lower than the systemic average of 5.3%. DFCC’s portfolio concentration is relatively high with top 20 exposures accounting for about 40% of total exposures as in June 2020.
However, ICRA Lanka notes that most of these top exposures comprise State owned entities and well-established business groups in the country; and these exposure limits are well within the defined internal risk parameters of the Bank. The rating factors in the adequate capitalisation profile of DFCC, with the Tier 1 capital adequacy ratio at 11.1% as in June 2020, above the regulatory requirement of 8.5%.
ICRA Lanka notes that, among the top 20 exposures of the Bank, state-owned entities accounted for about 14%, and the rest comprises some of the well-established business groups in Sri Lanka. In addition, there is a high degree of diversity within the large group exposures, thus somewhat reducing the concentration risk. The rating also takes cognisance of DFCC’s relatively high exposure towards the construction and real estate segments (about 21% as in June 2020), segments which experienced liquidity stress during the recent past.
In terms of the COVID-19 impact, ICRA Lanka notes the Bank has offered debt moratoriums of about LKR 80 billion (about 26% of the gross portfolio as in June 2020) for businesses and individuals affected by the pandemic; moratorium on majority of these facilities expired in September 2020, and the repayments are to resume beginning October 2020. Repayment performance of these affected borrows, post-moratorium, will be monitorable, going forward.
The total capital adequacy ratio stood at 15.3% in June 2020 (15.8% in December 2019) as compared to the regulatory requirement of 12.0%. ICRA Lanka noted that the Bank has been able to maintain a comfortable buffer of about 2.5% over the last three years through internal generation and a capital infusion in FY2019. DFCC Bank raised LKR 2.8 billion in March 2019 through a rights issue and plans to conduct another rights issue of about LKR 5 Bn during CY2021. Going forward, the Bank’s ability to maintain adequate capital buffers over the regulatory requirement will be crucial from a rating point of view.
DFCC bank comfortably meets the minimum core capital requirement set by the CBSL with a reported net worth of about LKR 48 billion as in June 2020, against the regulatory minimum of LKR 20 billion by December 2020. DFCC’s gearing remained relatively low at 7.8 (x) as at June 2020 compared to the industry gearing level of 9.4 (x).
ICRA Lanka notes that it has been challenging for the Bank to grow its retail franchise and improve CASA indicators due to its legacy as a development bank, and as of now, the portfolio remains largely focused on corporate and SME segments. Also, ICRA Lanka notes that the low CASA and overall low deposit dependence of DFCC (deposits accounted for about 73% of the total debt funding, compared to the LCB sector average of about 85% as in June 2020) are due to the Bank’s access to long term funding lines from multilateral and Development Finance Institutions (DFIs). This helps to moderate the assets and liability mismatch stemming from the relatively long-tenured lending profile of the Bank. However, going forward, the management intends to improve its CASA base by increasing its retail footprint through digital banking initiatives and channel developments.
Going forward, the Bank’s ability to improve its overall profitability by expanding lending yields and improving CASA will be crucial from a rating point of view.