Sri Lanka Fitch confirms HSBC unit rating at 'AAA(lka)'

Fitch Ratings said it has confirmed HSBC Sri Lanka's (HSBCSL) National Long-term rating at 'AAA(lka)' with a stable outlook.
HSBCSL's rating reflects the financial strength of Hongkong & Shanghai Banking Corporation (HKB), as it is part of the same legal entity," it said in a statement.
HSBC is Hong Kong's largest banking group and is wholly-owned by HSBC Holdings Plc which has a 'AA' rating with a negative outlook.
HSBCSL's loan book contracted by seven percent in H109, after expanding 19.7 percent in FY08 (year ending 31 December 2008), the majority of the increase coming from the corporate customer segment.
Consequently, the corporate customer segment accounted for 61 percent of loans at FYE08, while the consumer/retail customer segment accounted for the remainder.
"Credit concentrations increased significantly at FYE08 resulting from exposure to large local corporate customers," Ficth Ratings said.
"HSBCSL's asset quality remains relatively strong in a local context, but has come under pressure in the face of the unfavourable macroeconomic environment."
Consequently, the gross NPL (non-performing loan) ratio increased to 3.9 percent at H109 from 2.8 percent at FYE08.
"This was mainly on account of higher delinquencies across the consumer/retail customer segment as observed across the banking sector," Fitch said.

In addition to conservative write-off policies adopted for unsecured consumer NPLs, HSBCSL's provisioning is more prudent, with specific provision covering 69 percent of NPLs at FYE08. Profitability as measured by ROA (return on assets) remained flat at 1.3 percent due to higher effective taxes, but improved to 1.8 percent in H109 due to better cost efficiency, Fitch said.
HSBCSL sustained net interest margins above that of the sector due to lower funding costs and high yielding assets.
"HSBCSL's capitalisation remains healthy, although equity/assets decreased to 9.2 percent at FYE08 (FYE07: 10.9%) due to the repatriation of profits to the head office and the increase in assets, but continued to be above the 7.4 percent for the sector at FYE08."
Further, Fitch said, capital adequacy ratios (CARs) remain comfortable under the Basel II framework, with core and total CARs of 11.16 percent and 11.9 percent, at June 2009.
Customer deposits continue to be the predominant source of funding, accounting for 63 percent of total funding at FYE08, although funding from borrowings, obtained mainly through the broader HSBC group, rose considerably to 21 percent at FYE08.