LRA Assigns Initial Instrument Rating to National Savings Bank - LKR 5Bn Additional Tier 1 Perpetual Bond.

The rating of the debenture 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 a trigger point. In the occurrence of the trigger point, the transfer of bonds among investors will be suspended, partially or fully principal will be written down and interest payments will be canceled. In event of a trigger point, as determined by the Monetary Board of the Central Bank of Sri Lanka, the cancelation of coupon payments won't be considered in an event of default. However, due to this structure, the rating of the Additional Tier 1 Bonds is one notch below senior unsecured debentures and two notches below the entity. The entity rating of the National Savings Bank (NSB or The Bank) reflect 100% ownership of the Government of Sri Lanka. The rating of the Bank is driven by the Government's explicit guarantee on 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. The ratings reflect the Bank's significant market share in industry deposits (11% of industry deposits). Due to the Government's statutory requirement of 60% investment in government securities, the Advances to Deposit Ratio (ADR) of the Bank remains low and the lending book of the Bank is granular exhibiting lower risk. The recent steep increase in policy rates has impacted the margins of the Bank but overall performance remains strong with 9MCY22 profit standing at LKR ~3bn. The Bank enjoys strong asset quality but under current circumstances, the Bank has acted prudently and booked a provisioning of LKR 7.2bn in 9MCY22 which will act as a cushion for the rising NPLs. An expected decrease in policy rates by mid-next year may improve the margins and in turn performance. The Bank has a strong asset base of LKR 1.6tn and strong equity well above the regulatory requirements. Despite a recent decrease in margins, increased provisioning expense, and decrease in profitability, the capital adequacy of the Bank remained strong with Capital Adequacy Ratio (CAR) standing at ~17.7% as of 9MCY22.
The rating is dependent on the guarantee of the Government 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. Any haircut imposed by the Government on its government securities for managing government debt can impact the margins of the Bank and in turn rating.

About the Entity
National Savings Bank (“NSB” or “the Bank”) was incorporated in 1972 by the National Savings Bank Act, No.30 of 1971, and was granted the status of a Licensed Specialized Bank in terms of 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 4,538 staff members.

About the Instrument
NSB issued Basel III Compliant, Unlisted, Rated, Unsecured, Subordinated, Perpetual, Additional Tier 1 Capital Bonds in 2020. The initial amount issued was LKR 5bn and the objective of the issue was to increase Tier 1 capital of the Bank. The bonds are perpetual and not redeemable but are subjected to a Call Option after a period of 5 years.