Lanka Rating Maintains Instrument Rating of National Savings Bank - Additional Tier 1 Perpetual Bonds | LKR 5Bn

The National Savings Bank's (NSB or the Bank) rating reflects 100% ownership of the Government of Sri Lanka and explicit guarantee of the Government on all of its deposits and interest thereon as mandated by the National Savings Bank Act. The Act requires the Bank to invest 60% of its deposits in government securities, which lowers its credit risk and strengthens liquidity. On the other side, this restricts NSB's ability to extend loans limiting its profitability. This has led to significant market share in banking industry's total deposits (~8.7% 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 its profitability over the years. During 9MCY24, the Bank's liquidity profile demonstrated a notable improvement with liquidity coverage ratio (LCR) at ~343.78% at 9MCY24 (CY23: ~293.71%, CY22: ~193.59%). The Bank’s net interest income surged to LKR~53.4bn (CY23: LKR~29.6bn), a ~191.0% increase from 9MCY23. The Profit Before Tax (PBT) recorded significant growth in 9MCY24 (LKR~25.5bn) compared to 9MCY23. The Bank recorded Profit After Tax (PAT) of LKR~7.2bn and LKR~2.5bn in CY23 and CY22, respectively. The Bank’s Impaired Loans (Stage 3) Ratio (net of stage 3 Impairment) was well below the industry average and stood at ~4.05% in 9MCY24, demonstrating its robust asset quality. The Bank maintained very strong Capital Adequacy Ratio (CAR) of ~20.5% as of 9MCY24, 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 while maintaining its profitability and other key performance indicators.

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 Specialized Bank (LSB) according to the Banking Act No. 30 of 1988. It is regulated by the Central Bank of Sri Lanka. 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 five 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.