Lanka Rating Maintains Entity Rating of State Mortgage & Investment Bank, assigns "Rating Watch"

State Mortgage and Investment Bank (SMIB or The Bank) operates as a licensed specialized bank, wholly owned by the Government of Sri Lanka, implying strong linkage to the sovereign and potential state support. The Bank has an established operating history, although its presence in the sector remains limited, reflected by its share of ~4.4% and ~2.4%, in sector assets and deposits, respectively. The Bank’s operational focus is primarily retail-oriented, with lending concentrated in personal loans, housing finance backed by Employee Provident Fund ("EPF") balances, and mortgage facilities. The Bank’s core capital continues to fall short of the regulatory minimum requirement of LKR 7.5bn. To achieve compliance, a capital infusion of approximately LKR 1.7bn is deemed necessary. The Bank's management is exploring various options to meet capital requirements including potential amalgamation with another state-owned bank and capital injection by the Government. However, meaningful progress has not been made in this regard. The Bank seeks extension from CBSL for meeting regulatory capital requirement and a response is awaited.

The relatively low interest rates during CY24 have resulted in a decline in profitability indicators of the Bank, where Net Interest Margin ("NIM") moderated to ~3.8% in CY24 (CY23: ~1.0%) remaining below industry average of ~4.6%. The Bank posted a Profit After Tax of LKR 36mn in 3MCY25, sustaining its recovery following a PAT of LKR ~32mn in CY24. This reflects a gradual improvement from the loss of LKR 1bn reported in CY23. The Bank’s asset quality remains under pressure, with the non-performing loan ("NPL") ratio rising to ~33.0% in CY24 and further to ~36.0% as of 3MCY25, significantly higher than the industry average of ~12.9%. NPL ratio of SMIB has historically remained elevated, largely driven by delinquencies within the EPF loan portfolio. Nonetheless, the risk is partially mitigated by The Bank's ability to recover through EPF balances at the end of each year. NPL ratio without EPF stood at ~17% in CY24 (CY23: ~14.0%). SMIB’s CAR remains at a comfortable level, supported by low-risk assets such as EPF-backed and mortgage loans. As of CY24 Tier 1 and Total CAR were reported at ~19.3% (3MCY25: ~19.6%) and ~19.3% (3MCY25: ~17.9%), respectively. However, the CAR is expected to moderate as the Bank gradually shifts its lending focus away from zero-risk weighted EPF loans and diversifies its exposure. The "Rating Watch" signifies these developments and potential impact on the Bank's rating.
The rating is dependent on asset quality, profitability indicators, and the capitalization of the Bank. The Bank’s ability to meet regulatory requirements or garner support from the Government will remain critical. Any weakening of profitability levels and/or deterioration in asset quality will have a negative effect on the rating. The Bank's ability to effectively realize operational and strategic synergies from the proposed amalgamation will be a key consideration for the rating and will be assessed upon completion of the transaction.

About the Entity
State Mortgage & Investment Bank (SMIB or the Bank) is a government-owned bank established under State Mortgage and Investment Bank Law No. 13 of 1975. The Bank was recognized as a Licensed Specialized Bank (LSB) and the license was issued by the Central Bank of Sri Lanka in April 1998 in terms of the Banking Act No. 30 of 1988 and the bank commenced its operation in January 1979. The Board of Directors consists of six Non-Executive directors five are Independent directors. The Chairman of the Bank, Mr. M. P. Kuragama was appointed in October CY24.