Sri Lanka's Seylan Bank needs more capital to maintain rating: Fitch

Seylan Bank, whose rating outlook was downgraded to negative by Fitch may need fresh equity in addition to boost solvency, the rating agency has said.
The bank is raising one billion rupees through a subordinated debenture to which for which a BBB+ (lka) rating was assigned.
Seylan itself has a long-term rating a notch higher, at A - (lka).
"The ratings reflect Seylan's systemic importance as the fifth-largest Licensed Commercial Bank in Sri Lanka and its established customer franchise," Fitch Ratings Lanka said.
"However, the ratings also factor in the bank's relatively weak solvency, capitalisation and asset quality."
The downgrade of the outlook came from concern over weak solvency (measured as net non-performing loans (NPL)/equity), slow NPL resolution, insufficient internal capital formation and challenges faced in raising fresh equity capital, Fitch said.
Last year 1,045 million rupees raised through a non-voting share issue had improved net NPL to equity ratio from 102.8 percent to 80.7 percent.
But Fitch says solvency would come under pressure if bad loan continue to accrue without fresh injections of share capital in the near future.
"The bank's internal capital generation also remains constrained on account of a high cost structure, taxes and dividend. Fitch views capital infusion and faster NPL resolution as crucial for Seylan to sustain its ratings," the rating agency said.
It noted that Seylan had consciously reduced loan growth to 14 percent during the 2006 financial year compared to an average loan growth of 21 percent maintained over the past five years.
Fitch said new NPL accretion (3.7percentO and the bank's overall NPL ratio (11.7 percent of gross loans) remained higher than that of its peers.
Seylan's loan loss provision coverage increased to 39 percent in 2006 from 37 percent.
"However, this is considered to be inadequate in light of its relatively weak capital position," Fitch said.
Seylan's regulatory total capital adequacy ratio at the group level was at 10.89 percent in 2006, while at the bank level total capital adequacy remained below the 10 percent regulatory minimum at 9.8 percent in 2006.
Capital adequacy fell because regulatory risk weights were increased in November 2006 by the Central Bank of Sri Lanka on 'loans secured by a primary mortgage over residential property' to 55 percent from 50 percent and 'other loans and advances' to 110 percent from 100 percent.
While the bank intends to maintain modest loan growth going forward, Fitch says that the current level of profitability (indicated by return on assets of 0.7 percent in the 2006 financial year) coupled with its dividend payout levels (42 percent of profit after tax in 2006) and credit costs do not allow for sufficient internal capital formation to improve solvency, calling for a further infusion of equity.
Started in 1988 and the bank has expanded aggressively accounting for 6.5 percent of banking system assets by 2005.
The Ceylinco group is the bank's main shareholder owning 23 percent of its voting equity while several employee share ownership trusts collectively own 27 percent of Seylan's voting equity.
Seylan currently has a network of 92 island-wide branches.