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ICRA reaffirms State Mortgage and Investment Bank rating

18 Jan 2022

ICRA Lanka Ltd. has reaffirmed the issuer rating of “BBB+” with a Stable outlook for State Mortgage and Investment Bank (SMIB). The Stable outlook reflects the 100% Government of Sri Lanka ownership and the currently adequate capital levels of the bank. The outlook may be revised to “Negative” in case of further weakening of the asset quality indicators and delays in meeting the upcoming minimum capital requirements. The outlook may be revised to “Positive” in case of a steady improvement in its asset quality indicators, profitability indicators, and the capitalisation profile. The rating factors in the 100% ownership by the Government of Sri Lanka and the comfortable capital adequacy ratios (CAR) of the bank where it reported a Tier 1 capital ratio of 21.77% as of September 2021 (regulatory requirement of 8.00%) and a total capital ratio of 22.87% (regulatory requirement of 12.00%). The bank’s minimum core capital remained below the Rs. 7.5 billion regulatory minimum which is to be complied by the end of CY2022.  ICRA Lanka envisages a sizeable capital infusion of about Rs. 1.7 billion in order to fulfil this requirement. ICRA Lanka also takes cognisance of the bank’s shift in focus from the highly secured Employees’ Provident Fund (EPF) loans to riskier business and working capital loans, mortgage loans, and personal loans. The Gross Non-Performing asset ratio (GNPA %) for the non-EPF portfolio stood at 11.22% as on September 2021; somewhat improved from 12.15% as on June 2021 (10.71% as on December 2020).  This further improved to 10.13% as of November 2021. ICRA Lanka would continue to closely monitor the improvement of SMIB’s capital structure to meet the upcoming new capital requirement, its asset quality movements, and its overall financial performance going forward. Credit strengths were 100% government ownership and healthy capital adequacy ratios; however, sizeable capital required to meet the minimum core capital requirement by CY2022. Thus, SMIB is a 100% Government of Sri Lanka-owned licensed specialised bank in the country with a good track record of financial and managerial support from the Government in the past. The board is represented by three government administrative officers representing the Ministries of Finance, Agriculture, and Housing and Construction. The Government infused Rs. 250 million in 2016 by converting a loan granted to the bank into equity. At present, the bank is under-capitalised to meet the next regulatory minimum requirement of Rs. 7.5 billion which is to be met by the end of CY2022.  ICRA Lanka envisages a capital infusion of around Rs. 1.7 billion in order to meet the same. In terms of the CAR, SMIB remains in a comfortable position given the high exposure to EPF loans and mortgage loans but expects this to somewhat moderate given the bank’s shift of focus away from the zero-risk EPF loans. SMIB’s core capital stood at Rs 5.8 billion as of September 2021 and was above the current regulatory requirement of Rs. 5 billion. However, the regulatory requirement will be further increased to Rs. 7.5 billion by the end of CY2022 and SMIB has a sizeable deficit to meet this requirement. After accounting for the expected internal generations, SMIB will further require about Rs. 1.7 billion to meet this requirement. 


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