Lanka Rating Agency
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Gayani Randima Ariyawansa
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Applicable Criteria

  • Methodology | Financial Institution Rating | Jun-22

Related Research

  • Sector Study | Commercial Bank | Dec-22

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National Savings Bank – Additional Tier 1 Perpetual Bond | LKR 5 Bn

Rating Type Debt Instrument
Action Maintain Initial
Long Term AA AA
Outlook Stable Stable
Rating Watch - -

The rating of the National Savings Bank (NSB or the Bank) reflects 100% ownership of the Government of Sri Lanka and the government's explicit guarantee on all of its deposits mandated by the National Savings Bank Act. The Act requires the Bank to invest 60% of its deposits in government securities, which lowers its risk and improves liquidity. Being a government-owned savings bank, NSB has a strong foothold in Sri Lankan household. This has led to significant market share in industry deposits (9.2% of industry deposits) for the Bank. The Bank remains exposed to interest rate risk due to high exposure in government securities, as reflected by variance in the Bank's profitability over the years. The Profit Before Tax (PBT) remained low in 9M23 (LKR 499Mn) while Profit After Tax (PAT) stood at LKR 4.9Bn as the interest expense increased in higher proportion, resulting in lower core spread. The Bank is expected to improve its spread going forward as it re-prices its deposits. The Bank recorded PAT of LKR 2.5Bn and LKR 22.1Bn in CY22 and CY21, respectively. The Bank’s Impaired Loans (Stage 3) Ratio (net of Stage 3 Impairment) was well below the industry average which stood at 3.06% in 9MCY23. Despite a recent decrease in margins, increased provisioning expense and decrease profitability, the capital adequacy of the Bank remained strong with Total Capital Adequacy Ratio (CAR) standing at 16.25% as of 9MCY23, well above the regulatory minimum requirement of 12.5%.
The rating is dependent on continuation of government's guarantee on the deposits of the Bank as per the National Saving Bank Act. Any significant change in the Act or significant deterioration in the Bank's liquidity position amidst the government's inability to support the Bank can impact ratings. The Bank's continuous ability to meet regulatory requirements will remain key. At the same time, minimizing asset liability gap remains important for the rating.

About the Entity
National Savings Bank (NSB or the Bank) was incorporated as a Licensed Specialized Bank in 1972 by the Parliament Act, No.30 of 1971 and was granted the status of Licensed Specialised Bank (LSB) according to the Banking Act No. 30 of 1988. It is regulated by the Central Bank of Sri Lanka. NSB operates with 262 branches spread across the island and 4,528 staff members. The overall control of the Bank vests in the seven-member Board of Directors as per the National Savings Bank Act, No.30 of 1971 and the present Board consists of four members. The Chairman of the Board is Dr. Harsha Cabral PC since May 2023.

About the Instrument
The rating of the Bond highlights its subordinated Tier 1 structure. As an Additional Tier 1 debt instrument, it has a nonviability written down feature which means that the principal can be written down on the occurrence of the trigger point. In the occurrence of a trigger point, the transfer of bonds among investors will be suspended, partially or fully principal will be written down and interest payments will be cancelled to the extent of the value written down from the date of writing down and interest will be paid on a pro rata basis for the non-written down fraction (if any). In event of a trigger point, as determined by the Monetary Board of the Central Bank of Sri Lanka, the cancellation of coupon payments won't be considered an event of default. However, due to this structure, the rating of the Additional Tier 1 Bond is one notch below senior unsecured debentures and two notches below the entity.

The primary function of LRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. LRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. LRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.