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Saturday January 28th, 2023

National Savings Bank Sri Lanka rated [Sl] AAA by ICRA

ECONOMYNEXT – ICRA Lanka Limited has given a rating of [SL] AAA with a stable outlook to state-run National Savings Bank backed by government ownership and a lending portfolio with low non-performing loans.

The bank was mandated to invest 60 percent of its deposits in government securities. There were no non-performing assets on loans to the government, state enterprises and corporates, ICRA said.

The full statement is reproduced below:

IC RA Lanka assigns [SL]AAA rating with Stable outlook to National Savings Bank

Rating action

ICRA Lanka Limited, subsidiary of ICRA Limited, a group company of Moody’s Investors Service, has assigned the issuer rating of [SL]AAA (Pronounced SL triple A) with Stable outlook to National Savings Bank (NSB or the Bank).


The rating takes note of the 100% Government of Sri Lanka (GoSL) ownership, which provides a strong likelihood of sovereign support and, the 100% explicit guarantee provided by the Government of Sri Lanka (GoSL) for the moneys deposited with the Bank and the interest thereof through the National Savings Bank Act (NSB Act). The rating factors in the low risk investment portfolio, good quality lending portfolio and the presently adequate capital profile.

The earnings of the Bank moderated as a result of derecognition of LKR 3.6 Bn as net income earned from the government securities transactions from April 01, 2019 as a result of removal of Withholding Tax from government securities transactions.

The Bank’s investment portfolio is characterised by low risk, with NSB mandated to invest a minimum of 60% of the total deposits in government securities; as in March 2019, 62% of the deposits was in government securities. The quality of the lending portfolio is driven by zero NPAs reported on its exposure to GoSL, SOE1 and corporate portfolio which accounted for 41% of the lending portfolio.

The standalone gross NPA ratio (GNPA %) of the retail portfolio (59% of lending portfolio) stood at 2.46% as of Dec-18. NSB’s BASEL III complied total capital adequacy ratio (CAR) stood at 15.43% (Tier-I capital ratio at 12.81%) as compared to 14.00% (Tier-I capital ratio at 10.00%) regulatory requirement as of Mar-19. ICRA Lanka notes that moderation in internal generation will require the Bank to secure commensurate capital from GoSL in the medium term. Going forward, maintenance of adequate buffers (at least 1%) over and above the minimum capitalisation requirements (Tier-I plus CCB and total CAR) would be critical for sustenance of the current rating.

Outlook: Stable

ICRA Lanka believes that NSB will continue to benefit from Government support because of its systemic importance considering its position as the largest licenced specialised bank in Sri Lanka, which also provides vital funding support to GoSL as per the NSB Act. The outlook may be revised to ‘Negative’ in case of a steady shortfall in NSB’s capital buffers over the regulatory requirements as compared to ICRA Lanka’s expectations or in case of further weakening in the profitability and asset quality indicators.

Credit strengths

100% government ownership and explicit guarantee on deposits: NSB is a 100% government owned specialised bank incorporated under the NSB Act in 1972. The main objective of the Bank is to promote savings habit in the country. GoSL provides explicit 100% guarantee through the NSB Act for the depositors’ deposit money and the interest there on. Since the Bank’s inception, NSB has been able to self-fund its capital requirements and has not required any capital support from GoSL. ICRA Lanka expects GoSL’s support, if needed, given the Bank’s position of being a systemically important bank and also being one of the important sources for its financing needs. The Government appointed board comprises of a mix of qualified and experienced professionals, including representative from the treasury and the Post Master General. The senior management of the Bank consists of qualified and experienced banking professionals.

Low risk nature of its investment portfolio: The Bank is mandated to invest a minimum of 60% of the deposits in government securities. As of Mar-19, 62% of the total deposits were invested in government securities, as compared to 61% as of Dec-18 (75% as of Dec-17).

ICRA Lanka noted a gradual reduction in the share of government securities since Dec-17, largely as a result of maturity of its LKR 64 Bn investment in Sri Lanka Development Bonds in Sep-18 and due to diversification to lending portfolio to optimise its overall yields. As of Mar-19, 93% of the investment portfolio consisted of Treasury Bills and Bonds followed by 4% in placement with banks, 2% in Debentures and Trust Certificates, 1% in listed equity and the balance as investment in subsidiaries, unquoted equities and others. As of Dec-18, close to 97% of the government security portfolio was classified as AC2 and balance as FVPL3 and FVOCI4. The Bank’s FVPL equity portfolio reported significant mark to market losses where the market value was LKR 1,879 Mn as compared to the cost of LKR 3,368 Mn as of Dec-18. Since the equity portfolio represents less than 1% of the total investment portfolio, overall impact on the investment portfolio is expected to be minimal.

Healthy overall asset quality supported by zero NPAs on corporate and GoSL & SOE portfolios; NSB reported LKR 444 Bn lending portfolio as of Mar-19 as compared to LKR 424 Bn as of Dec-18 (LKR 376 Bn as of Dec-17). The portfolio reported an annualised growth of 19% in the latest quarter ended Mar-19 as compared to 13% growth in CY2018 (16% in CY2017). The portfolio growth in Q1CY2019 was driven by the retail lending which grew from LKR 250 Bn in Dec-18 to LKR 261 Bn in Mar-19. As of Mar-19, NSB’s portfolio included retail exposure which contributed to 59%, followed by, Government and SOE at 32% and corporate at 9%.

Under the retail segment, personal loans, housing loans, pawning and loans against FDs represented 29%, 15%, 7% and 7% respectively of the total portfolio as of Mar-19. Based on NSB’s Act, all the SOE loans are secured by government guarantees and are routed through the Treasury, which further strengthens the credit profile of the lending portfolio. The Bank reported a gross NPA ratio of 1.44% as of Dec-18 as compared to 1.34% as of Dec-17, it remained at 1.45% as of Mar-19. ICRA Lanka noted that corporate and government & SoE portfolios of the Bank which accounted for 41% (Mar-19) of the total lending portfolio had zero NPAs; ICRA Lanka envisages the same going forward.

The retail portfolio of the Bank reported a GNPA% of 2.46% as of Dec-18 as compared to 2.39% as of Dec-17. At the product level, Auto Loans reported a GNPA% of 8.13% followed by Personal loans at 3.32%, Housing loans at 2.65% and Pawning at 0.77% as of Dec-18. ICRA Lanka expects the Bank to maintain its GNPA% below the systemic averages going forward. The Bank’s IFRS based provision coverage ratio improved to 63% as of Dec-18 from 55% as of Dec-17 with the implementation of IFRS 9 standards.

Granular deposit base; NSB reported a deposit base of LKR 862 Bn as of Mar-19 as compared to LKR 840 Bn reported as of Dec-18 (LKR 737 Bn as of Dec-17). The NSB Act provides explicit government guarantee for the deposits and interest payable thereon. The Bank has a granular deposit base with the top 10 depositors accounting for 0.3% of the total deposits.

The Bank’s short term (less than 1 year) ALM mismatch was negative 71% as of Mar-19 as a result of its shorter tenured deposits as against longer tenured loan portfolio. The Bank’s Liquidity Coverage Ratio stood at 309% as of Mar-19 as compared to the regulatory requirement of 100%. The Bank’s significant investment in government securities provides comfort on the liquidity.

Adequate capital profile; NSB reported a Tier-I Capital Ratio of 12.81% and total capital ratio of 15.43% as of Mar-19 as compared to the regulatory requirement of minimum Tier-I Capital Ratio of 10.00% and total capital ratio of 14.00%. The Bank’s core capital stands at about LKR 30 Bn as compared to the LKR 7.5 Bn regulatory core capital threshold to be achieved by December 31, 2020.

Based on ICRA Lanka’s computation, the Bank will require a Tier-I capital infusion of LKR 1.0-1.2 Bn in next 3 years to maintain a 10-15% growth factoring a 2% capital buffer and 8% internal capital generation. ICRA Lanka believes that as a systemically important bank, the government of Sri Lanka will provide the required funding support to the Bank when needed. Going forward, maintenance of adequate buffers (at least 1%) over and above the minimum capitalisation requirements (Tier-I plus CCB and total CAR) would be critical from a rating perspective.

Credit challenges

Moderating profitability indicators; NSB’s NIM moderated to 2.43% in CY2018 from 2.61% in CY2017 as a result of removal of With Holding Tax on government securities in Apr-18. In Q1CY2019, NIM improved with the repricing of the matured investments in government security portfolio. The Bank reported a trading loss of LKR 707 Mn in CY2018 as compared to LKR 1,206 Mn profit in CY2017.

The trading loss was due to mark to market loss in the equity portfolio. ICRA Lanka noted that, in CY2017, the Bank’s subsidiary NSB Fund Management Company Limited declared LKR 750 Mn dividend which supported the profit reported in the same period. The Bank’s PAT dropped to LKR 4.5 Bn in CY2018 as compared to LKR 9.7 Bn reported in CY2017. The main reason was due to removal of withholding tax from the government securities, which resulted in non-recognition of income of close to LKR 3.6 Bn. The Bank reported a RoA of 0.85% in Q1CY2019 as compared to 0.78% in CY2018 (1.47% in CY2017).

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Sri Lanka utility to continue power cuts, regulator says no

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board has decided to continue power cuts, as the dry season hits the country despite orders to give 24 hours of power.

The utility said its Board “has decided to continue the demand management programme” and it has informed the regulator of this decision on January 27.

The Public Utilities Commission of Sri Lanka said it had not approved the power cuts “as it violate and affect the rights of 331,000 students sitting for the Advanced Level exams.”

Sri Lanka’s CEB has high running costs due to long term scuttling of planned coal plants by activists and lastly President Maithripala Sirisena.

‘CEB’s costs went up as demand went up since the last coal plant opening and steady collapse of the currency from 131 to 182 to the US dollar due to open market operations unleashed to suppress rates and operate a flexible inflation targeting by the central bank.

Even more aggressive liquidity injections after 2020 to target an output gap then busted the currency from 182 to 360 to the US dollar.

CEB has to use extra fuel from around February to April 2022 as the dry season hits reducing hydro power.

Sri Lanka’s Human Rights Commission has ordered the Ceylon Petroleum Corporation to supply fuel and banks to give credit for extra power.

Power Minister Kanchana Wijesekera has alleged that CPC officials agreed under duress and threat of jail sentence to supply fuel.

The CEB has to cut power in case demand outstrips supply to maintain frequency at 50 Hz to avoid cascading failures, according to sector analysts. (Colombo/Jan28/2023)

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Sri Lanka president suspends parliament till Feb 08

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe has suspended parliament till February 08, according to a gazette notice.

Parliament will re-convene at 1000 am on January 08.

President Wickremesinghe told party leaders that he would make a speech, officially declaring his intention to give effect to the 13th amendment to the constitution on provincial councils.

Provincial councils, a power sharing arrangement backed by India as a solution to the ethnic Tamil have not yet been given police and land powers. (Colombo/Jan28/2023)

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Sri Lanka, other defaulting nations have widely differing debt indicators: Expert

ECONOMYNEXT – Sri Lanka other recently defaulting nations have widely differing debt indicators, and some other countries survive with even higher levels of debt, a US based analyst has said.

“If you look at the ratio of debt to GDP, the size of the economy the number is very high, mostly because there has been a lot of depreciation, so the debt in dollars keeps growing relative to GDP,” Sergai Lanau, Deputy Chief Economist at Washington based Institute of International Finance said.

“This is sometimes over-emphasized… but this ratio at 120 is a lot.”

He was speaking at a forum organized by the Bar Association of Sri Lanka.

“Just for a reference point about 6 or 7 years ago Italy’s debt was 120 percent GDP, there was a lot of concern in the Euro area and that is a country that has the ECB. So Sri Lanka at 120 is a lot.”

Italy however is in a monetary union with Euro which is a floating exchange rate without anchor conflicts and forex shortages and basic external payment problems.

Sri Lanka is trying to bring the ratio down to 95 percent by 2032 under an International Monetary Fund backed program, according to a leaked letter from India.

“Typically for many years there was as lot of emphasis on debt ratios, when people looked at debt restructuring – or at least economists,” Lanau said.

“And that is something that always puzzled bond traders who came from the corporate sector. For them it is all about the flows and gross financing needs.

“The IMF has shifted its focus a lot financing needs over the years and it is a less of a problem now.”

Ghana has defaulted and it is trying to reduce its debt from around 90 percent to below 60 percent by 2028. It is starting at a much lower level and correcting within a shorter period to an even lower level.

Sri Lanka’s debt ratio is high but it “may or may not be a constraint”, he said.

What the … was that?

The IMF’s default workout framework is a work in progress, which has changed over the years since mass defaults hit market market countries which were denied monetary stability through intermediate regimes especially in Latin America from the early 1980s.

Until 1980, when the so-called BBC policy (now called exchange rate as the first line of defence) where countries were encouraged to bust their currencies instead of withdrawing inflationary policy, sovereign defaults were not a problem.

“During the 1970s, the risk of sovereign default was not perceived as a major concern,” the IMF itself admits.

“Most “external arrears” generated by a country were created by exchange restrictions. For example, an importer might miss a payment because the authorities were slow to release foreign exchange.

“Sovereign default had not been a problem since the Second World War.

“Therefore, the IMF’s policy framework was not equipped to confront the complications that arose in the context of the sovereign debt difficulties that emerged in the 1980s.

“In fact, it took until 1980 for the IMF’s Executive Board even to agree that a default on sovereign debt should also be covered under the external arrears policy.”

Washington based policy circles began to prescribe, inconsistent, anchor conflicting intermediate regimes with aggressive open market operations to anyone who was willing to listen after the Fed floated, in the false belief that currencies fell due to ‘overvaluation’ and not liquidity injections.

Countries like Sri Lanka where there is no doctrinal foundation in sound money and no knowledge of classical monetary theory, were easy prey, critics say.

East Asia and Japan rejected such regimes. Malaysia is a prime example which despite not having a legal hard peg, fixed itself, repaid debt ahead of time, when tin and other commodity prices collapsed in the wake of Volcker tightening, while Latin America defaulted.

Elephant in the room

A country with a soft pegged central bank (flexible exchange rate or intermediate regime) will see debt rocket each time it suppresses interest rates to target a policy rate and triggers a currency crisis.

Once a currency crisis hits, on one had the domestic currency value of external debt which is denominated in dollars protecting sovereign bond holders, goes up.

Interest rates of domestic debt also have to go up to stop the money printing and halt forex shortages which can widen the overall deficit in the short term.

The currency collapse also kills purchasing power and the real economy slows or contracts.

Once the credibility of the exchange rate has been lost, due to excess money injected the country loses the ability to settle both imports and debt repayment by exchanging domestic money for dollars.

The reserves (savings of past years) are used for current imports and debt repayments more money is injected to sterilize the interventions to maintain the policy rate, reserves collected over several years are run down in a few months.

Falling reserves, a depreciating currency then trigger rating downgrades (usually due to so-called exchange rate of as the first line of defence which saw downgrades in 2018 and 2020 in Sri Lanka) and sovereign bond as yields soar, and market access is lost, triggering a default.

As reserves dwindle further due to holding the policy rate with new money, more downgrades follow.

Countries with flexible exchange rates/flexible inflation targeting with market access can default at virtually any level of debt, critics say.

Market Access

Sri Lanka’s debt to GDP ratio shot up over 100 percent and lost almost all its reserves following a currency crisis in 2000/2001.

But at the time (or in earlier soft-peg crises in 1988/89 and earlier) the country did not have market access and bullet repayment debt.

In Sri Lanka bonds are big part of the country’s debt.

“Once you have lost market access there is virtually no level of gross financing needs that is sustainable,” Lanau said.

Analysts say the once market access has been lost, and the IMF declares that debt is unsustainable, which blocks the World Bank and ADB from giving loans, default is almost certain.

Argentina which has the archetypal soft-pegged Latin America central bank, which sterilizes interventions, strikes zeros off the peso at intervals and get into forex trouble.

“The country got into an IMF program in mid-2018, it was a very optimistic set of IMF targets, policy adjustments,” Lanau said.

“And this IMF program did not work and the situation got critical in August 2019 at which point Argentina defaulted.”

In March 2020 the IMF had presented a debt sustainability analysis where it was expected to to get its debt to 40 percent of GDP by 2030 and foreign exchange debt service to 3 percent of GDP, Lanau said, compared to 4.5 percent for Sri Lanka to make debt sustainable.

Ecuador which had a successful pre-emptive debt re-structuring, had debt levels of around 60 percent when it went talked to bond holders.

It was an ‘easy re-structuring, Lanau said.

It was a “lot about a bunch of maturities coming due in very few years as opposed to a very high debt ratio or a situation that was very unsustainable economically.”

Ecuador however is a dollarized country where its central bank effectively died in the 1990s after the sucre collapsed to 25,000 to the US dollar.

The Central Bank of Ecuador is no longer capable of creating forex shortages or driving the people to starvation and external debt is effectively in domestic currency.

Ecuador’s gross financing needs are now down to around mid single digits, while Sri Lanka’s has shot up to around 30 percent of GDP following the currency collapse.

Ecuador central bank was set up by Edwin Kemmerer, a US money doctor, with a gold peg (no obstinate policy rate) but was corrupted in 1947 by Robert Triffin, a US Keynesian who set up Argentina style central banks in several Latin America countries that frequently defaulted from the 1980s.

Sri Lanka’s central bank was also set up in 1950 by a US money doctor with broadly similar sterilizing powers.

Sri Lanka also started to depreciate the currency from around 1980 without withdrawing inflationary policy (an earlier re-incarnation of first line of defence strategy) triggering strikes, social unrest but no sovereign default due to lack of market access.

Sovereign defaults were mostly absent during the Bretton Woods era even in Latin America when countries maintained their pegs more or less with complementary monetary policy and the IMF also supported external anchors.

However after 1980 when the US tightened policy under Chairman Paul Volcker there were widespread defaults in pegged Latin American countries which did not hike rates in tandem or sterilized interventions (resisted the BOP) trying to operate independent monetary policy.

Now there are a number of market access countries in Africa and Asia with reserve collecting central bank which are trying to operate flexible inflation targeting, another monetary policy which are in conflict with the balance of payments which are ripe for serial currency crises and default.

Clean floating central bank do not use foreign reserves for imports nor collects them. (Colombo/Dec27/2022)

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