LRA Assigns Initial Instrument Rating to National Savings Bank - LKR 11.541Bn Senior Unsecured Redeemable Debentures

The rating of the debentures highlights its senior unsecured structure. The seniority of the claims warrants that in case of winding up, the instrument ranks above the subordinated debt, ordinary voting and non-voting shareholders, and preference shareholders of the Bank but the depositors will have a first right which has a government guarantee. However, there is no such guarantee on debt instrument holders hence, it is rated one notch below the Bank rating. The 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. Being a government-owned savings bank, the Bank has a strong foothold in Sri Lankan households. The ratings reflect the Bank's significant market share in industry deposits (11% of industry deposits). Due to the 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 Government's guarantee on the Bank's deposits 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 an Unlisted, Rated, Senior, Redeemable Debenture on September 2021. The initial issue was to raise LKR 10 Bn with an option to raise a further LKR 5 Bn in the event of the over-subscription of the initial issue to raise upto a maximum of LKR 15 Bn of which LKR 11.541 Bn was subscribed and is currently payable The objective of the issue was to finance stable funding for 5 years and more. The claims of the Debenture holders shall in the event of winding up of the Bank rank above the subordinated debt.