Fitch flags concerns over weaker capital at Sampath Bank despite fresh equity, sub-debt

The proposed capital injections and retained earnings are unlikely to leave Sampath Bank PLC with much headroom due to the gap between the regulatory capital, and the bank’s actual capital remains very thin, a rating report suggests.

Sampath Bank is currently on an aggressive path towards expanding its Rs.522 billion loan book, which could put a damper on the capital.  

Fitch Ratings yesterday said they expected, “further deterioration in the bank’s capitalization as a result of high loan growth” and retained its ‘negative outlook’ on the lender. 

Fitch said this in a note assigning ‘A’ rating to Sampath Bank’s proposed BASEL III compliant subordinated debenture issue announced to raise Rs.6.0 billion.  The instrument is rated one notch below the bank’s national long-term rating of ‘A+’ to reflect the notes’ subordinated status and higher loss-severity risks relative to senior unsecured instruments.

The 5 – year note qualifying under Tier II capital will carry fixed coupons and has the option to convert into equity, “upon the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka”. 

Meanwhile, the bank has also announced a rights issue of Rs.7.6 billion to be raised during the 4Q17. 

Fitch Ratings in 2015 downgraded Sampath Bank’s national long term rating to ‘A+’ from ‘AA-‘ with a ‘Stable’ outlook before the outlook was revised down to ‘Negative’ in expectation of further worsening capitalization beyond previous expectations.

However, the bank’s growing franchise and satisfactory asset quality counterbalance the relatively weak rating of the bank, Fitch added. 

Sampath Bank during the 1H17 grew its loan book by a staggering Rs.56.2 billion or 12 percent but operates with industry’s lowest non-performing loan ratio of 1.77 percent, albeit higher from 1.61 percent at the start of the year.  

By June 30, 2017, Sampath Bank had a Tier I capital adequacy ratio (CAR) of 8.21 percent and Tier II CAR of 12.17 percent.  

But the BASEL III accord, which came into effect from July 1, 2017, requires a licensed commercial bank to have at least 8.875 percent and 12.875 percent CAR by end 2017. 

The two requirements go further up to 10 percent and 14 percent by end-2018.   

Fitch’s outlook over the weaker capitalization of the country’s third largest private lender comes even after taking account of the proposed rights issue and the capitalization of the profits for the year. 
“We expect the rights issue along with retained profits to boost the Tier I ratio to over 9 percent by end-2017 (8.5 percent at bank level at end-June 2017). 

In addition, the proposed Basel III Tier II debt would increase the total capital ratio to over 13 percent by end-2017 (12.2 percent at end-June 2017)”, the rating agency said.

Business magnate Dhammika Perera controls 14.95 percent stake in Sampath Bank through Vallibel One PLC. 

Pan Asia Banking Corporation PLC, in which Perera owns 29.99 percent, also faces an uphill task of meeting the regulatory minimum capital of Rs.10 billion by January 1, 2018.  

For the 1H17, Sampath Bank increased its net profit by 39.1 percent on year to Rs.3.49 billion.