DFCC Bank to sell Rs5.0bn debt; Fitch Sri Lanka AA-(lka) rating confirmed

June 24, 2014 (LBO) - Sri Lanka's DFCC Bank is to sell 5.0 billion rupees in debt with the lender's long term domestic rating confirmed at 'AA(lka)' with a stable outlook.

Its international rating was also confirmed at 'B+' with a stable outlook.
Fitch said it had given a 'AA-(lka)(EXP)' rating to a proposed 5.0 billion rupee senior debenture sale.

DFCC is in merger discussions with Sri Lanka's National Development Bank.

Fitch said DFCC's loan book grew faster than the banking sector and recorded an increase of 15.4 percent in the year to March 2014. More than 75 percent of the growth came from DFCC Vardana Bank which Fitch rated the same as the parent.

DVB's loan book accounted for about 45 percent of the group's loans at end-Mar 2014 (end-Mar 2013: 40.9 percent).

"Although DFCC's asset quality has historically remained weaker than its peers, the bank has been able to control the slippage of asset quality better than most peers in a challenging operating environment," Fitch said.

"DFCC's provision coverage remained comparable with its rating peers."

Capitalization had fallen over the year but was strongest among peers with Fitch Core Capital Ratio at 28.4 percent and Tier I capital adequacy ratio at 18.8 percent. The difference came from DFCC's unrealized equity gains.
The full statement is reproduced below:-

Fitch Affirms DFCC Bank at 'B+'; Outlook Stable

Fitch Ratings-Colombo/Hong Kong-23 June 2014: Fitch Ratings has affirmed Sri Lanka-based DFCC Bank's (DFCC) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDRs) at 'B+' with a Stable Outlook. The agency has also affirmed DFCC's Viability Rating (VR) at 'b+'. DFCC's National Long-Term Rating has also been affirmed at 'AA-(lka)' with a Stable Outlook. Fitch has assigned an expected rating of 'AA-(lka)(EXP)' to DFCC's proposed senior debenture issue of up to LKR5bn.

Fitch has also affirmed its 99.1% subsidiary, DFCC Vardhana Bank PLC's (DVB) National Long-Term Rating at 'AA-(lka)' with a Stable Outlook. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS - IDRS, VR, NATIONAL RATING AND DEBT

DFCC's IDRs, VR and National Rating reflect its intrinsic risk profile, driven by its strong profitability and capitalisation, counterbalanced by the group's expanding commercial banking business conducted through its 99% subsidiary, DVB.

Fitch considers DVB to be a core subsidiary of DFCC, and as such the credit profiles of the banks cannot be meaningfully disentangled. Therefore the agency has equalised the ratings of DFCC and DVB. This approach is outlined in greater detail in Fitch's published criteria for "Rating FI Subsidiaries and Holding Companies".

DFCC's USD notes are rated at the same level as DFCC's Long-Term Foreign-Currency IDR as they constitute unsecured and unsubordinated obligations of the issuer. Fitch has assigned a Recovery Rating of 'RR4' to the notes to reflect average recovery prospects of 31%-50% for holders of this debt, in case of default under both a standalone and consolidated basis.

DFCC's proposed and outstanding LKR denominated senior debt is rated at the same level as DFCC's National Long-Term Rating as they constitute direct, unconditional, unsecured and unsubordinated obligations of the issuer. The proposed debentures are expected to have a tenor of three years with a bullet principal payment at maturity. The final rating is contingent upon the receipt of final documentation conforming to information already received.

DFCC's and DVB's subordinated debt is rated one notch lower than the respective issuer ratings to reflect its gone-concern loss-absorption qualities in the event of liquidation, in line with Fitch's criteria for rating such securities.

DFCC is engaged in merger discussions with National Development Bank (B+/Stable). This is as a part of the Government of Sri Lanka's "Master Plan" to consolidate the financial system, which includes establishment of one large development bank to provide impetus to policy-driven development banking activities in the country. Fitch believes that the merged bank will primarily focus on supporting economic development. Fitch is of the view that synergies from such an amalgamation could be beneficial to the credit profile of the merged entity in the long run although credit neutral in the short to medium term. Fitch will further comment on the matter once details and the time frame of this deal become clearer.

DFCC's loan book grew faster than the banking sector and recorded an increase of 15.4% in the financial year ended March 2014 (FYE14). More than 75% of this growth stemmed from DVB and as a result, DVB's loan book accounted for about 45% of the group's loans at end-Mar 2014 (end-Mar 2013: 40.9%). Although DFCC's asset quality has historically remained weaker than its peers, the bank has been able to control the slippage of asset quality better than most peers in a challenging operating environment. DFCC's provision coverage remained comparable with its rating peers.

Capitalisation declined over the year, but it remained strongest among the peers both in terms of Fitch Core Capital (FCC) ratio and Tier 1 Capital Adequacy Ratio (CAR) and stood at 28.4% and 18.8% respectively at FYE14, while the deviation among the two ratios is mostly attributed to the significant unrealised gains in DFCC's equity investments.

RATING SENSITIVITIES - IDRS,VR, NATIONAL RATING AND DEBT

The upgrade of DFCC's IDRs, VR and National Rating would be contingent on DFCC consolidating its commercial banking franchise alongside its ability to sustain strong credit metrics. The IDRs, VR and National Rating could be downgraded if there is a sustained and substantial increase in risk appetite that could materially weaken its strong capital position.

Because Fitch views DVB as carrying the same risk as DFCC, DVB's ratings will move in tandem with DFCC's ratings. DVB's ratings are also sensitive to changes in its strategic importance to DFCC.

As the rating of the notes is linked to DFCC's IDR, any changes to that rating would impact the issue's rating.

The rating of DFCC's LKR-denominated senior debt will move in tandem with its National Long-Term Rating.

Any change in the issuer ratings would impact the ratings of subordinated debt issued by DFCC and DVB.

A full list of ratings:

DFCC

Long-Term Foreign- and Local-Currency IDRs affirmed at 'B+'; Stable Outlook

Short-Term Foreign-Currency IDR: affirmed at 'B'

Viability Rating: affirmed at 'b+'

Support Rating: affirmed at '4'

Support Rating Floor: affirmed at 'B'

US dollar senior, unsecured notes: affirmed at 'B+'; Recovery Rating: 'RR4'

National Long-Term Rating: affirmed at 'AA-(lka)'; Stable Outlook

Sri Lanka rupee-denominated senior unsecured debentures affirmed at 'AA-(lka)'

Proposed Sri Lanka rupee-denominated senior unsecured debentures: assigned 'AA-(lka)(EXP)

Sri Lanka rupee-denominated subordinated debentures: affirmed at 'A+(lka)'

DVB

National Long-Term Rating: affirmed at 'AA-(lka)', Outlook Stable

Sri Lanka rupee-denominated subordinated debentures: affirmed at 'A+(lka)'

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