S&P confirms Sri Lankan DFCC Bank’s ‘B/B’ ratings

ECONOMYNEXT – S&P Global Ratings said it had affirmed its ‘B’ long-term issuer credit rating on Sri Lanka’s DFCC Bank with a negative outlook, and confirmed its ‘B’ short-term issuer credit rating.

The rating agency said it also confirmed its ‘B’ long-term issue rating on DFCC’s senior unsecured debt.

"We affirmed the rating because we expect DFCC to maintain its satisfactory business position and earnings over the next 12 months," said S&P Global Ratings credit analyst Amit Pandey in a statement.

The full statement follows:
SINGAPORE (S&P Global Ratings) June 10, 2016–S&P Global Ratings said today that it had affirmed its ‘B’ long-term issuer credit rating on DFCC Bank. The outlook is negative. We also affirmed our ‘B’ short-term issuer credit rating on the Sri Lanka-based bank. We also affirmed our ‘B’ long-term issue ratings on DFCC’s senior unsecured debt.

"We affirmed the ratings because we expect DFCC to maintain its satisfactory business position and earnings over the next 12 months," said S&P Global Ratings credit analyst Amit Pandey.

We consider it unlikely that DFCC would be immune to increasing sovereign credit pressures on Sri Lanka (B+/Negative/B) and the broader operating environment. We reflect these risks in our view that the economic risk trend and industry risk trend for Sri Lanka’s banking sector have become negative.

DFCC’s business position reflects the bank’s satisfactory business stability, diversification, management, and strategy, compared with that of peers in emerging markets.

We expect DFCC’s pre-diversification risk-adjusted capital (RAC) ratio to be 5%-5.5% for next 12-18 months. We estimate the bank’s loan growth to be 13%-15% and dividend payout ratio to be about 35% over the next couple of years. We anticipate that the bank’s net interest margin will improve marginally because the interest rate cycle in Sri Lanka has turned, with higher policy and market rates. At the same time, we forecast higher credit costs due to economic headwinds in Sri Lanka.

DFCC’s risk position reflects the bank’s higher exposure to the small and midsize and project finance sectors, which are susceptible to economic downturns and execution risks. The bank also has some single name concentration risk. However, we note that the bank has limited exposure to riskier segments, such as pawning, and has taken steps to improve risk management processes.

"Our negative outlook on DFCC reflects our view that the bank faces increasing risks stemming from Sri Lanka’s weakening external and fiscal performance," said Mr. Pandey.

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We could lower our ratings on DFCC if we downgrade Sri Lanka. We could lower our ratings on Sri Lanka in the next 12 months if we see no tangible signs of a substantial and sustained reversal of the weakening of external and fiscal credit metrics we currently project. In this scenario, we believe that the systemic risks facing Sri Lankan banks would also have increased. And consequently, we would expect to revise the assessment of the banking sector’s anchor stand-alone credit profile to ‘b+’ from ‘bb-‘, resulting in DFCC’s downgrade.

We could also lower the ratings on DFCC if the bank’s capitalization weakens, such that the pre-diversification RAC ratio falls below 5%, even if the systemic risks facing Sri Lanka’s banking sector remain unchanged, in our view. DFCC’s capitalization may deteriorate if the bank is not able to replenish its capital to support growth and dividend payouts or its profitability is weaker than our expectations.

We could revise the outlook on DFCC to stable if the risks to the sovereign credit ratings subside while DFCC maintains its pre-diversification RAC ratio above 5%.

(Colombo/June 10 2016)
 

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