FOR IMMEDIATE RELEASE

Aug 31, 2015

ICRA Lanka assigns [SL]BBB- rating with Positive outlook to

Sanasa Development Bank PLC
ICRA Lanka Limited, a wholly owned subsidiary of ICRA Ltd, a group company of Moodys Investors Service has
assigned the Issuer rating of [SL]BBB- (pronounced SL triple B minus) with a Positive outlook to Sanasa
Development Bank PLC (SDB or the Bank). The rating factors in SDBs established position, especially in the rural
and the semi urban segments, on the back of the SANASA movement and the currently comfortable capitalisation
profile (core capital at 12.6% as in June 2015). The positive outlook takes note of the improvement in the asset
quality (GNPAs at 3.2% in June 2015 vis a vis 3.8% in December 2014 and 5.1% in December 2013) and the
profitability indicators (RoA1 at 1.8% for 6M2015 vis a vis 1.4% for 2014 and 0.9% for 2013) over the recent past.
The rating however takes cognisance of SDBs exposure to customer segments with modest credit profile, limited
revenue (non interest income at 0.7% of the average total assets for the year ended December 2014) and funding
(deposits accounted for 87% of the total borrowings as in March 2015) diversification, subdued liquidity profile
characterised by high asset-liability mismatches (<1 year mismatch at 22% of the total assets as in March 2015)
and the steep portfolio growth witnessed during 2014 and H12015. The bank has implemented an integrated risk
management system in 2013 and, is currently implementing a loan origination system to improve the overall credit
risk assessment. ICRA Lanka however notes that there is scope for improvement in the internal controls,
monitoring and information systems of the bank due to the risks inherent with the key target segments of the bank
i.e. micro, small and medium enterprises (MSMEs) in the rural/semi urban segments, to assess the risks in the new
product categories (personal and pension/ex-military personnel loans) and, as it envisages to grow its total assets
at CAGR of about 30% over the next 4 years.
SDBs gross lending portfolio grew at a robust pace of about 45% in 2014 and at about 55% (annualized) in six
months ended June 2015. SDBs portfolio largely consists of loans to micro, small and lower end medium
enterprises, and pensioners/ex-military personnel for income generating purposes, which together accounted for
close to 45% of the portfolio as in June 2015. The bank also extends agriculture loans (10%) and other retail loans
including housing (14%), personal loans (11%) and vehicle loans (9%). The pensioner/ex-military personnel loans
and personal loans (to Government and Private sector employees) accounted for about 50% and 60% of the
portfolio increase during 2014 and in 6M2015. Going forward, SDB is expected to diversify its exposure by
increasing the share of the above mentioned segments while the primary focus would be on the MSME and
agriculture segments.
The banks asset quality has improved over the recent past, with GNPAs moderating to 3.2% in June 2015 as
compared to 3.8% in December 2014 and 5.1% in December 2013, supported to a extent by the robust portfolio
growth as incremental NPA generation rate in Q12015 was higher at 2.4% (annualised) as compared to 1.6% in
2014 (2.6% in 2013). However, the improvement in the provision cover to about 85% in June 2015 as compared to
54% in December 2014 (40% in December 2013) provides comfort on the overall asset quality. Further, ICRA Lanka
notes that more than 80% (as in June 2015) of the total portfolio are secured loans against fixed assets and, the
granularity of the loans ( about 60% of the loans below Rs. 500,000 and <5% of the loans are >Rs. 10 million as in
December 2014). SDB however is exposed to the risks associated with the key target customer segment; i.e. MSME
and agriculture loans due to the modest credit profile of the borrowers and their vulnerability to adverse economic
and weather changes. Further, the ability of the bank to grow its portfolio at envisaged pace and control
delinquencies in the new product segments would be crucial from a rating perspective.

Return on average assets

SDBs capitalization is currently comfortable notwithstanding the moderation due to the robust portfolio growth
during 6M2015. The bank secured about Rs.1 billion via a rights issue in 2014, which supported the capital profile
(core capital at 14.9% in December 2014 vis a vis 14.0% in December 2013) although the portfolio grew by about
45% during the period. The banks profit retention is expected to improve going forward as it would provide
sizeable scrip dividend, as in 2014, vis a vis cash dividends in the past. Consequently, the profit retention is likely
to improve to about 8-10% going forward, as compared to 3-5% in the past. Assuming the above and based on
the expected CAGR growth of about 30%, the bank is expected to require about Rs. 2-3 Bn over the next 4 years
to maintain core capital over 10% level. The bank is expected to secure capital of about Rs. 1.5-2bn in another
round of rights issue in Q1-Q22016.
The banks funding profile is largely characterized by fixed deposits, which account for about 65-70% of the total
debt of the bank, while the proportion of savings deposits remained range-bound at about 19-20% over the last
three years; borrowings from other banks accounted for the remaining. SDBs Credit-Deposit (CD) ratio increased
to 106% in December 2014, as compared to 94% in December 2013, as the steep portfolio growth was supported
by incremental borrowings while deposit growth was moderate at 28% during the period. The CD ratio remained
high at 107% in June 2015 as portfolio growth remained high. While the deposit growth improved in 6MFY2015 to
about 52%, ability of the bank to achieve the same in a sustained manner remains to be seen. SDBs ALM profile is
characterized by sizeable mismatches in the <1 year bucket due to the short term nature of the fixed deposits
(87% of FDs had maturity of less than a year in December 2014) and while the portfolio generally have a tenure of
about 5-7 years. ICRA Lanka takes note of the initiatives to diversify its funding profile by raising long term
debentures, which would to an extent moderate the liquidity related risks.
SDB enjoys a good yield on its portfolio due to its micro and small credit exposures. The weighted average
effective yield was about 16.0% in for 2014, and the same moderated to about 14.8% for Q12015. However, the
cost of funds also fell quite steeply from about 11-12% in 2013 to about 8% in 2014 and further to about 7.0%
presently, which supported a healthy NIM for the bank that remained largely stable at about 7.0% during the
above mentioned period. The banks core fee based income has remained moderate at about 0.5-0.6% over the
above period, thus there is scope for improving the same. SDBs operating expenses are higher; however the
same has reduced (4.6% annualized for 6M2015 vis a vis 5.3% for 2014) over the last few years due to
rationalization on account of the portfolio growth. The higher credit cost, especially in 2013, was due to the
pawning exposures that resulted in lower profitability for that period. While the credit losses have moderated in
the recent past, higher provisions than in the past, as the bank increased its provision covers kept the overall
provisions at elevated levels. The net profitability indicators have improved in 2014 and in H12015, as credit
provisions moderated from 2013 levels along with improvement in the operating efficiency, while the NIM
remained largely stable. Going forward, SDBs ability to control operating costs and credit costs as the business
expands and due to diversification to newer products would be critical for overall profitability, while the bank is
expected to enjoy good NIMs on account of its exposures to high yielding segment.

Bank Profile
Established in the year 1997, as the key credit institution for the SANASA movement, SANASA Development Bank
Plc (SDB/the bank) is a Licensed Specialised Bank. The bank has a primary listing on the Colombo Stock Exchange.
Close to about 46% of the total shareholding is with the SANASA affiliate entities, which includes, Co operative
Societies, Trusts and other institutions. SDB had a network of 82 branches, about 1004 employees and mobile
banking services with 43 field officers as in December 2014. The target market segments include the agriculture,
micro, small and medium enterprises and other retail segments. In the year ended 2014, the bank reported a net
profit of about Rs. 504 million on a total asset base of about Rs. 41 billion. The total networth of the bank as on
December 31, 2014 was about Rs. 4.7 billion. The bank Gross NPA stood at 3.8% as on December 2014.

In the six months ended June 2015, the bank reported a net profit of Rs. 414 million on a total asset base of Rs. 51
billion.
August 2015

For further details please contact:

Analyst Contacts:
Mr. Karthik Srinivasan, (Tel No. +91-22-30470028)
karthiks@icraindia.com
Relationship Contacts:
Mr. W. Don Barnabas, (Tel. No. +94-11-4339907)
wdbarnabas@icralanka.com

Subsidiary of

ICRA Limited
A Group Company of Moodys Investors Service
CORPORATE OFFICE
Level 10, East Tower, World Trade Center, Colombo 01, Sri Lanka
Tel: +94 11 4339907; Fax: +94 11 2333307
Email: info@icralanka.com; Website: www.icralanka.com

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