RAM Ratings Lanka reaffirms Sampath Bank’s ratings at AA/P1

RAM Ratings Lanka has reaffirmed Sampath Bank PLC’s (“Sampath” or “the Bank”) long- and short-term financial institution ratings at AA and P1 respectively; the long-term rating carries a stable outlook. The ratings are supported by the Bank’s healthy asset quality and good market position. On the other hand, the ratings are tempered by the Bank’s moderate capitalisation.

Although a relatively new bank, with an operating history of approximately 25 years, Sampath has emerged as the country’s third-largest private-licensed commercial bank (“LCB”), accounting for 6.85% of the industry’s total assets as at end-December 2011. It is also the country’s fifth-largest LCB, in an industry dominated by two state banks that accounted for around 41.92% of industry assets as at the same date. Sampath’s market position is supported by its wide network of 209 branches and 262 automated teller machines (“ATM”).

Sampath’s asset quality is deemed healthy owing to its better than industry gross non-performing loans (“NPL”) ratio, good NPL coverage and stringent underwriting and monitoring procedures. Despite an aggressive 37.40% year on - year (“y-o-y”) loan growth during FYE 31 December 2011 (“FY Dec 2011”), the Bank’s gross NPLs declined 8.39% y-o-y to LKR 5.24 billion during the same period, supported by the slower accretion of new NPLs and recoveries.

Consequently, Sampath’s gross NPL ratio improved to 2.65% as at end-FY Dec 2011 (end-FY Dec 2010: 3.89%) and improved further to 2.55% as at end- March 2012 and is among the best in the industry. Meanwhile, the Bank’s gross NPL coverage ratio at 90.60% as at end-FY Dec 2011 remains among the best in the industry. Reflecting the healthy asset quality, the Bank’s credit cost ratio clocked in at 0.09% during FY Dec 2011, comparing better than peers. That said our concerns hinge upon the Bank’s relatively unseasoned lending portfolio given the Bank’s aggressive loan growth in FY Dec 2011.

Meanwhile, Sampath’s performance is considered moderate; its net interest margin (“NIM”) was slightly lower than peers while its cost-to-income ratio compared relatively higher. The Bank’s NIM dipped to 4.20% during FY Dec 2011 (FY Dec 2010: 5.00%) owing to higher funding costs resultant from the tilt in the Bank’s funding composition towards high-cost time deposits and shortterm foreign borrowings. The NIM contracted further to 3.84% during 1Q FY Dec 2012. Although the contraction in the NIM was an industry wide phenomenon, Sampath’s NIM compared lower than peers reflective of its high cost of funding.

Meanwhile, the Bank’s cost-to-income ratio eased to 66.28% during FY Dec 2011 on the back of the aggressive branch expansion, and compares higher than peers. Although the ratio improved to 54.03% in 1Q FY Dec 2012 this was largely due to a foreign exchange gain stemming from the sharp depreciation of the rupee against the dollar. Overall, the Bank’s pre-tax profits grew 23.95% yo- y to LKR 5.58 billion in FY Dec 2011 supported by its loan expansion and low provisioning charges against the backdrop of its healthy asset quality.

Further, Sampath’s funding is considered good. Deposits continued to dominate the Bank’s funding base with a share of 81.69% as at FY Dec 2011 (FY Dec 2010: 84.30%) supported by the Bank’s good franchise. Due to the rapid loan growth, the Bank’s loans to deposit (“LD”) ratio increased to 89.35% in FY Dec 2011 from 82.78% in FY Dec 2010 although it still remains in line with peers.

On a separate note, the Bank’s liquidity position is opined to be adequate.

Sampath’s statutory liquid asset ratio dipped to 24.95% by end FY Dec 2011 from 26.29% as at end FY Dec 2010 and is relatively low when compared to LCB peers. The ratio declined further to 22.03% as at end-March 2012 in light of the aggressive y-o-y loan growth of 33.74% during the same period.

Meanwhile, Sampath’s capitalisation levels compares somewhat lower than industry peers. Its tier 1 and overall risk-weighted capital-adequacy ratios (“RWCARs”) clocked in at 10.24% and 11.45% respectively in FY Dec 2011 (FY Dec 2010: 10.71% and 12.91% respectively) and declined further to 9.83% and 11.04% as at end 1Q FY Dec 2012 due to the rapid credit expansion; however we note that this is excluding the profit generated during the period. We expect RWCAR to strengthen subsequent to the interim audit in June 2012 on recognition of the audited profit for the period. Elsewhere, Sampath’s net NPL to shareholder’s funds ratio rose slightly to 5.62% in FY Dec 2011 from 3.73% in FY Dec 2010 although it continues to be amongst the best in the industry.