Fitch Ratings Lanka has affirmed Sanasa Development Bank PLC’s (SDB) National Long-Term Rating at ‘BB+(lka)’. The Outlook is Stable.
The rating captures SDB’s high exposure to the retail and lower-end SME segments, its weak asset quality, and pressure on capitalisation due to strong loan growth. The rating also reflects its above-average net-interest margins (NIM) stemming from its high-yielding loan book. The rating is constrained by SDB’s high costs, which ultimately limit profitability.
SDB’s loan book expanded by 17 percent in 1Q15, following growth of 44 percent in 2014 and 14 percent in 2013. 
Its Fitch core capital ratio declined to 13.96 percent at end-March 2015 from 14.90 percent at end-2014 and 14.27 percent at end-2013 despite an equity infusion in late 2014. This was primarily due to the rapid expansion of its loan book. Fitch believes that continued high capital consumption could lead to further deterioration in capital ratios, if internal capital generation proves insufficient or if there is no capital injection.
Of the bank’s gross loans at end-2014, 95 percent were to retail and SME customers, which, in Fitch’s view, are riskier in nature due to their greater vulnerability to economic cycles, and could to lead to an increase in the reported NPL ratio, which stood at 3.5 percent at end March 2015 (2014: 3.8 percent, 2013: 5.1 percent), should economic conditions worsen.
SDB’s loan-to-deposit ratio was also a casualty of rapid loan growth, crossing 100 percent in 2014 (2013: 97 percent) and higher than its peers. Deposits remained the primary source of funding, although its share in total funding declined to 87 percent at end-2014 from 93 percent at end-2013. Fitch believes that SDB will rely more on borrowings to fund its above-average growth in the future.
SDB’s return on assets improved to 1.92 percent in 1Q15 (2014: 1.49 percent, 2013: 0.91 percent) mainly due to higher NIM. Profit for 2014 was also supported by capital gains from the sale of stock investments. Fitch believes higher operating costs due to branch expansion and a potential increase in credit costs could hamper profitability.
Aggressive loan growth that could increase capital impairment risks, either through greater unprovided NPLs and/or a continued deterioration in capitalisation without adequate internal or external capital augmentation, could lead to a downgrade of SDB’s ratings.
A rating upgrade is contingent upon fundamental improvements in its asset quality and moderation of its risk appetite while expanding its asset base.