RAM Ratings Lanka has assigned respective long- and short-term ratings of AA and P1 to Sampath Bank PLC; the long-term rating has a stable outlook.

The ratings are premised on the bank's healthy asset quality and capital adequacy. The ratings also take into account the management's initiatives to strengthen the Bank's overall risk-management framework and market position, which are reflected in its improving asset quality.

Incorporated in 1986, Sampath is the fifth-largest bank in the Sri Lankan banking industry, accounting for 6.24% of the industry's assets as at end-December 2009. RAM Ratings notes that the two largest State banks made up 40.53% of the industry's asset base as at the same date.

In 2008, Sampath recruited several experienced personnel to fortify its internal systems and market position. The risk-management strategies implemented since then have already begun bearing fruit.
Despite the harsh economic climate in 2009, the Bank managed to rein in its nonperforming loans, which increased at a slower rate of 5.91% in FYE 31 December 2009 (FY Dec 2008: +13.78%) to Rs. 7.47 billion at the end of the period. Moreover, its NPLs had contracted 5.15% by end-June 2010, with a corresponding gross NPL ratio of 6.80% (end-December 2009: 7.63%).

The Bank's healthier loan portfolio also reflects its expanded pawning portfolio, which entails lower default risk and is well collateralised. Moreover, the management's conservative approach is reflected in the Bank's prudent provisioning, i.e. by providing fully for NPLs and disregarding the value of collateral. As a result, the Bank's coverage levels are well above its peers'.

In line with its improving asset quality, Sampath's credit costs as a percentage of total assets eased from 0.60% as at end-FY Dec 2008 to 0.19% as at end-FY Dec 2009. The Bank's pre-tax profit augmented Rs. 1.41 billion to Rs. 3.98 billion in fiscal 2009, on the back of a widening net interest margin and stronger non-interest income. Its NIM had broadened on the back of its expanding pawning portfolio, which yields wider margins. Moreover, other income had jumped Rs. 977.08 million following the disposal of shares in an associate.

Sampath's funding and liquidity levels are considered healthy as its funding base is dominated by customer deposits. In addition, the Bank's loan-to-deposit ratio has historically been more conservative than the industry average. Sampath's Tier-1 and overall risk-weighted capital adequacy ratios clocked in at 10.40% and 13.45%, respectively, as at end-FY Dec 2009, i.e. higher than the corresponding regulatory minimums of 5% and 10%.