Lanka Rating Agency
20-Nov-23
Analyst
Gayani Randima Ariyawansa
gayani@lra.com.lk
+94 114 500099
www.lra.com.lk
Applicable Criteria
- Methodology | Financial Institution Rating | Jun-22
Related Research
- Sector Study | Commercial Bank | Dec-22
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LRA Assigns Initial Rating to State Mortgage and Investment Bank
| Rating Type | Entity | |
|
Current (20-Nov-23) |
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| Action | Initial | |
| Long Term | BBB | |
| Outlook | Stable | |
| Rating Watch | - | |
The rating of the State Mortgage and Investment Bank (SMIB or The Bank) reflects 100% ownership of the Government of Sri Lanka. Over the years, the bank’s Net Interest Margin (NIM) has been well above the sector margins, however, it has gradually decreased to 0.51% while the sector NIM was recorded at 2.3% in 6MCY23. Due to a significant increase in interest expenses and lagged repricing of the advances portfolio, profitability indicators declined and resulted in a loss in 6MCY23. The bank’s Non-Performing Loans (NPL) remained on the higher levels over the past with 21.17% in 6MCY23. The overall high NPLs are due to the sizeable composition of EPF loans which is indicated through the NPL ratio excluding EPF reporting at 12.62% in 6MCY23. Nevertheless, the rating takes comfort in the ability to recover the default amount against the borrower’s EPF balance. Despite the decline in profitability, the bank recorded healthy capital adequacy ratios (CAR) where it reported Tier 1 and Total capital adequacy ratios at 18.36% and 20.41% respectively in CY22 compared to the regulatory requirement of 8.5% and 12.5%. However, the bank’s minimum core capital is below the LKR 7.5Bn regulatory requirement which the bank is expected to comply with or get an extension of three years as soon as possible.
The rating is dependent on asset quality, profitability indicators, and the capitalization of the bank. The bank’s continuous ability to meet regulatory requirements will remain key. Any further weakening of profitability levels and delay in meeting regulatory capital requirements will have a negative effect on the rating.
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 five Non-Executive directors and all members are Independent directors. The Chairman of the Bank, Mr. J.M. Soosaithasan was appointed in May CY23 and is a fellow member of the Chartered Institute of Management Accountants UK. He is assisted by an able management team.