ICRA Lanka Limited has assigned a rating of [SL]AA(hyb) with Stable outlook for the proposed LKR 5,000 Mn Basel III Compliant, Unlisted, Rated, Unsecured, Subordinated, Perpetual, Additional Tier I Capital Bond Programme of National Savings Bank (NSB or the Bank). The letters ‘hyb’ in parenthesis suffixed to a rating symbol stand for ‘hybrid’, indicating that the rated instrument is a hybrid subordinated instrument with equity-like loss-absorption features, which may translate into higher levels of rating transition and loss severity vis-à-vis conventional debt instruments.
ICRA Lanka has an issuer rating outstanding of [SL]AAA (pronounced SL triple A) with Stable outlook for the Bank. ICRA Lanka also has an issue rating of [SL]AAA (pronounced SL triple A) with Stable outlook outstanding for the LKR 20,000 Mn senior, unlisted, unsecured, redeemable debenture programme and an issue rating of [SL]AA+ (pronounced SL double A plus) with Stable outlook for the LKR 6,000 Mn subordinated, unsecured, redeemable debenture programme of NSB.
The rated Basel III compliant Tier I bond programme (Additional Tier I or AT-I bonds) has the following loss-absorption features that make them riskier:
- Coupon payments are non-cumulative and discretionary, and the Bank has the full discretion at all times to cancel coupon payments. Cancellation of discretionary payments shall not be an event of default.
- Coupon can be paid out of the current year profits. However, if the current year’s profit is not sufficient, or, if the payment of coupon is likely to result in a loss, the coupon payment can be done through reserves and surpluses created through appropriation of profits. However, the coupon payment is subject to the Bank meeting the minimum regulatory requirements for CET I, Tier I and total capital ratios (including capital conservation buffer, CCB) at all times as prescribed by the Central Bank of Sri Lanka under the Basel III regulations.
These Tier I bonds are expected to absorb losses through the write-down mechanism at the objective pre-specified trigger point. The trigger point event is the earlier of;
- A decision that a write-down, without which the Bank would become non-viable, is necessary, as determined by the Monetary Board; and
- The decision to make a public sector injection of capital, or equivalent support, without which the Bank would have become non-viable, as determined by the Monetary Board.
Given the above distinguishing features of the Tier I bonds, ICRA Lanka has assigned a one notch lower rating to these bonds compared to the rating of subordinated debentures. The distributable reserves, that can be used for servicing the coupon in case of inadequate profits or a loss during the year, stood at a comfortable 8.60% of the risk-weighted assets (RWAs) as on June 30, 2020 as compared to 9.19% as on March 31, 2020. The rating of the Tier I bonds continues to be supported by NSB’s adequate capital profile (Capital Adequacy Ratio: 13.25%; Tier 1 ratio: 10.96% as on June 30, 2020), which is likely to remain comfortable, given its low risk investment mandated by the NSB Act and healthy lending profile. The Bank is mandated to invest a minimum 60% of the total deposits in government securities which attracts zero risk weight and supports its capital profile. The rating on the Basel III compliant Tier I bonds also factors in the Bank’s muted profitability indicators, given the uncertainty regarding the asset quality amid the pandemic induced stress on the same. However, the same is expected to be absorbed through NSB’s strong operating profits, the buffer in the existing capital levels and the sizeable distributable reserves for servicing the Tier I bonds.
The ratings of the Bank take 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 money deposited with the Bank and the interest thereof through the National Savings Bank Act (NSB Act). The ratings factor in the low-risk investment portfolio, healthy lending portfolio and the adequate capital profile. 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 Jun-20, 62.58% of the deposits were in government securities.
NSB’s asset quality remains better as compared to Licensed Specialised Bank (LSB) average with a GNPA ratio of 2.34% as on Jun-20 lower than the LSB segment’s GNPA ratio of 7.08% and system average of 5.43% for the same period. The quality of the lending portfolio is driven by zero Gross NPAs on its exposure to GoSL, State-owned Entities (“SOE”) and Corporate segments which accounted for 34% of the lending portfolio in Jun-20 and 3.51% gross NPA in the retail portfolio (66% of the lending portfolio) as of Jun-20 compared to 2.52% in Mar-20. NSB’s BASEL III complied capital adequacy ratio (CAR) stood at 13.25% (Common Equity Tier I and Tier-I capital ratios at 10.96%) as compared to regulatory requirement of 12.00% (Common Equity Tier I ratio at 4.00% and Tier-I capital ratio at 8.00%) as of Jun-20. Further, in Dec-19, CBSL reclassified NSB as a Non-Domestic-Systemically Important Bank (“Non -DSIB”) based on its new criteria for this assessment. As a result, NSB’s regulatory capital requirement in terms of Tier I capital reduced to 8.50% from 10% earlier. ICRA Lanka notes that a reduction in regulatory capital requirement would reduce the pressure of securing external capital in the medium term. Going forward, continuous maintenance of adequate buffers (at least 1%) over and above the minimum capitalisation requirements (Tier-I plus CCB and CAR) would be critical for the sustenance of the current rating.
ICRA Lanka believes that NSB will continue to benefit from Government support considering its position as the largest licensed 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 significant weakening in the profitability and asset quality indicators.
Key rating drivers
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’ capital and the interest thereon. 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 the largest licensed specialised bank in the country 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 a 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 total deposits in government securities. As of Jun-20, 62.58% of the total deposits were invested in government securities, as compared to 61% as of Dec-19 (61 % as of Dec-18). As of Jun-20, 92% of the investment portfolio consisted of Treasury Bills and Bonds followed by 4% in debentures issued by government institutions, 2% in placement with banks, 1% in Debentures and Trust Certificates, 1% in listed equity and the balance as investments in subsidiaries, unquoted equities and others.
As of Jun-20, close to 99% of the government security portfolio was classified as Held to Maturity (“Financial Assets Measured at Amortised Cost”) and balance as Held for Trading (Fair value through Profit and Loss and Fair Value through Other Comprehensive Income”).
The Bank’s FVOCI equity portfolio reported a significant mark to market (MTM) loss of LKR 954 Mn in Q2CY2020 due to the weak equity market performance as a result of the pandemic. Since the equity portfolio represents less than 1% of the total investment portfolio, the 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 453 Bn lending portfolio as of Jun-20 as compared to LKR 454 Bn as of Dec-19 (LKR 423Bn as of Dec-18). The portfolio growth was muted at 1.32% YoY in Jun-20 as compared to 7.43% YoY growth in Dec-19 (12.56%YoY in Dec-18). The portfolio growth in CY2019 and Q1CY2020 was driven by retail lending which grew from LKR 249 Bn in Dec-18 to LKR 287 Bn in Dec-19 and LKR 298 Bn in Jun-20.
As of Jun-20, NSB’s portfolio included retail exposure which accounted for 66%, followed by Government and SOE at 27% and corporate at 7%. Under the retail segment, personal loans, housing loans, pawning and loans against FDs represented 34%, 16%, 8% and 7%, respectively of the total portfolio as of Jun-20. 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 1.57% as of Dec-19 as compared to 1.44% as of Dec-18. This increased to 2.34% as of Jun-20 due to the lockdown to control the pandemic. The Bank offered moratorium at concessionary interest rate to 91% of its retail loan portfolio as directed by the regulator as in Mar-20.
NSB’s gross NPA ratio was better as compared to the licensed specialised banks average of 7.08% and system average of 5.43% in Jun-20. ICRA Lanka noted that corporate and government & SoE portfolios of the Bank which accounted for 34% of the total lending portfolio as in Jun-20 had zero NPAs.
The retail portfolio of the Bank reported a GNPA ratio of 3.51% as of Jun-20 as compared to 2.51% as of Dec-19 and 2.46% in Dec-18. At the product level, Auto Loans reported a GNPA ratio of 11.14% followed by Personal loans at 4.62%, Housing loans at 4.17% and Pawning at 0.79% as of Jun-20. ICRA Lanka expects the Bank to maintain its GNPA ratio below the systemic averages going forward.
The Bank’s regulatory provision coverage ratio declined to 42% as of Jun-20 from 51% as of Dec-19 and 43% in Dec-18 due to higher slippages witnessed during the lockdown. The Bank’s provision coverage ratio was significantly better than the LSB sector’s average of 34% in Jun-20.
Granular deposit base; NSB reported a deposit base of LKR 1,113 Bn as of Jun-20 as compared to LKR 1,017 Bn reported as of Dec-19 (LKR 953 Bn as of Dec-18). The NSB Act provides explicit government guarantee for the deposits and interest payable thereon.
The Bank has a granular deposit base with 41% of the Rupee denominated deposits having a ticket size of less than LKR 1.0 Mn as in Jun-20. The savings deposits to total deposits ratio was 22% in Jun-20 as compared to 21% in Dec-19 and 24% in Dec-18.
The savings deposits to total deposits ratio moderated over the period due to higher growth witnessed on term deposits in 2019. The Bank’s short term (less than 1 year) negative cumulative ALM mismatch was 71% as of Jun-20 (70% as of Mar-20 and 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 320% as of Jun-20 as compared to the regulatory requirement of 90%. The Bank’s significant investment in government securities (92% of the investments as in Jun-20) provides comfort on the liquidity.
Adequate capital profile with comfortable cushion over regulatory requirement; NSB reported a Tier-I Capital Ratio of 10.96% and the total capital ratio of 13.25% as of Jun-20 as compared to the regulatory requirement of minimum Tier-I Capital Ratio of 8.00% and total capital ratio of 12.00%. The Bank’s core capital stood at LKR 44 Bn as in Jun-20 as compared to the LKR 7.5 Bn regulatory core capital threshold to be achieved by December 31, 2022.
The distributable reserves, that can be used for servicing the coupon of the proposed additional tier I bonds in case of inadequate profits or a loss during the year, stood at a comfortable 8.60% of the RWAs as on June 30, 2020. Based on ICRA Lanka’s computation, the Bank will not require Tier-I capital infusion for the next 3 years to maintain a 10-15% growth factoring a 2% capital buffer and 9% internal capital generation.
The Bank was reclassified as a non-systemically important bank which reduced the regulatory capital requirement by 150 basis points. ICRA Lanka believes that as the largest licensed specialised bank, the Government of Sri Lanka will provide the required funding support to the Bank when needed.
Continuous 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.
Moderate profitability indicators; NSB’s net interest margin (NIM) improved to 2.63% in CY2019 from 2.43% in CY2018 due to reduction in deposit rates and expansion of the loan book during the period. The NIMs declined to 2.07% in H1CY2020 due to the LKR 3.3 Bn day one loss adjustment made on the interest income factoring the impact of the moratorium.
The Bank reported a mark to market loss of LKR 954 Mn on the FVOCI equity portfolio during H1CY2020. The Bank’s PAT improved to LKR 6.7 Bn in CY2019 as compared to LKR 4.5 Bn reported in CY2018. The main reason was due to the improvement of the NIMs of the Bank during CY2019.
The cost to income ratio of the Bank remained at 65.85% in H1CY2020 as compared to 65.57% in CY2019 (66.47% in CY2018). The credit cost to average total asset ratio increased to 0.38% in H1CY2020 as compared to 0.05% in CY2019 (0.09% in CY2018) due to the pandemic. As a result, the Bank reported a PAT of LKR 1.1 Bn in H1CY2020 as compared to LKR 2.3 Bn reported in H1CY2019 (LKR 6,698 Mn in CY2019).
The Bank’s RoA (at PAT) and RoE improved to 0.61% and 15.32% in CY2019 as compared to 0.44% and 10.95% in CY2018. In H1CY2020. The Bank reported a RoA (at PAT) and RoE of 0.18% and 4.82% as compared to 0.43% and 10.43% reported in H1CY2019.