Sri Lankan Ratings

Q2 2012

Contents
Contents ................................................ 1 Fitch Affirms Sri Lanka at 'BB-'; Outlook Stable .................................................... 1 Fitch Rates Central Finance Co's Senior Debt 'A+(lka)' ......................................... 3 Fitch Assigns Bank of Ceylon 'BB-' IDRs 3 Fitch Rates Sampath Leasing at 'A(lka)'; Outlook Positive .................................... 5 Fitch Affirms Multi Finance PLC at 'B+(lka)'/Stable ...................................... 6 Fitch Rates People's Leasing's Proposed LKR500m CP at 'F1(lka)' ....................... 7 Fitch Assigns Bank of Ceylon's USD Senior Notes Final 'BB-' Rating.............. 7 Fitch Affirms Hatton National Bank at 'AA-(lka)' ................................................ 8 Fitch Revises National Development Bank's Outlook to Negative; Affirms at 'AA(lka)' (199) ........................................ 8 Fitch Rates Sampath Leasing's Proposed Senior Debt at 'A(lka)' ............................ 9 Fitch Affirms National Savings Bank at 'AAA(lka)'; Outlook Stable.................... 10 Fitch Revises Sinhaputhra Finance PLC's Outlook to Stable; Affirms at 'B(lka)' ................................................. 10 Fitch Rates Singer's Proposed CP 'F1(lka)' & Sr Notes 'A(lka)' .................. 12 Fitch Affirms HNB Assurance at 'A(lka)'/Stable ...................................... 13 Fitch Affirms Sri Lanka Insurance at 'AA(lka)'/Stable .................................... 14

Special Reports
Fitch Affirms Sri Lanka at 'BB-'; Outlook Stable
Philip McNicholas, Hong Kong/Art Woo, Hong Kong On 4 May Fitch Ratings affirmed Sri Lanka's Foreign- and Local-Currency IDRs at 'BB-'. The Outlook for both ratings is Stable. The Country Ceiling has also been affirmed at 'BB-', and the Short-Term Foreign Currency IDR at 'B'. "The ratings reflect Fitch's view that the authorities have taken the appropriate action to correct recent pressure on the balance of payments and place it on a more sustainable trajectory," said Philip McNicholas, Director in Fitch's Asia-Pacific Sovereign Ratings group. "Given the weakened state of Sri Lanka's external finances and a heavy external debt refinancing schedule through to 2013, the authorities' ability to persist with policies that address existing macroeconomic imbalances and improving external liquidity is crucial." Although Sri Lanka was able to record real GDP growth over 8% for the second consecutive year in 2011, such economic performance, coupled with policy missteps, resulted in the current account deficit rapidly widening to 7.8% of GDP from 2.2% in 2010. This, in conjunction with deterioration in the external economic environment and limited currency flexibility, led to balance of payment pressures and in turn a sharp depletion of foreign exchange (FX) reserves to USD5.8bn (3.4 months of imports) in January 2012 from USD8.1bn (equivalent to 5.7 months of imports) in July 2011. The pace of deterioration in external buffers, rather than their level, is Fitch's main focus. The level of FX reserves meets with international conventions and does not indicate an immediate risk of substantial balance of payments stress. However, Fitch believes the rapid depletion of FX reserves in H211 has heightened the vulnerability of the Sri Lankan sovereign credit profile to a spike in global risk aversion. Therefore, the resumption of IMF tranche disbursements following the implementation of policy measures aimed at macroeconomic rebalancing is a positive development. More importantly, measures implemented by the Central Bank of Sri Lanka and the government since February 2012 have tightened monetary conditions and could help Sri Lanka to return to a more sustainable GDP growth trajectory over the long-term. In the near-term, certain policy measures have resulted in adverse risks to both growth and inflation that have the potential to impact policy consistency. Due to the authorities' pro-growth bias and the fragile balance of payments, Fitch believes developments in the coming months warrant close monitoring.

www.fitchratings.com

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Fitch notes that the government has been able to rationalise expenditure and continue consolidation efforts despite lower-than-expected fiscal revenues. As a result, the fiscal deficit (including grants) narrowed to 6.9% of GDP in 2011 from 8% in 2010 and public debt declined to 78.5% of GDP from 81.9%. Further simplification of the tax system could bolster measures announced in previous budgets and aid in the attraction of greater foreign direct investment inflows. Successful implementation and persistent application of policies aimed at improving external liquidity, including further monetary tightening if required, would support the ratings. Concerted efforts to persist with fiscal consolidation, by both enhancing the tax revenue base and rationalising expenditure, in tandem with lowering public debt would be supportive of Sri Lanka's ratings. Conversely, reversal of policy measures leading to further balance of payment pressure would be negative for the ratings. Further FX reserve depletion, resulting from domestic policy or an external shock would likely have the same effect. Deterioration in public debt and budget deficit ratios owing to revenue shortfalls and/or failure to rationalise expenditure would also be negative for the ratings.

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Financial Institutions
Fitch Rates Central Finance Co's Senior Debt 'A+(lka)'
Gerard Wickrema/Dilranie Mudannayake On 5 April the agency assigned Central Finance Company Plc's (CF) proposed senior debentures of up to LKR700m a National Long-Term rating of 'A+(lka)'. A list of outstanding ratings is provided at the end of this commentary. The issue is rated at the same level as CF's National Long-Term rating of 'A+(lka)' which has a Stable Outlook. This is in compliance with Fitch's rating criteria on senior unsecured bond instruments of financial institutions. The proposed instrument will rank pari passu with CF's senior creditors. The debentures carry maturity options of three years, and will be issued at fixed and floating interest rates, helping CF to reduce interest rate mismatches between its assets and liabilities and fund loan growth. CF's rating factors in its relatively strong financial profile in Sri Lanka's registered finance company sector. The rating also takes into account CF's lack of product and funding diversity in relation to banks - an inherent limitation of the RFC business model. The latest research www.fitchratings.lk on CF is available on www.fitchratings.com and

CF's ratings: National Long-Term rating: 'A+(lka)'; Outlook Stable Outstanding subordinated debentures: 'A(lka)' Outstanding commercial paper: 'F1(lka)' Proposed senior debentures of up to LKR700m: 'A+(lka)'

Fitch Assigns Bank of Ceylon 'BB-' IDRs

Ehsan Syed, Mumbai/Rukshana Thalgodapitiya, Colombo On 17 April Fitch Ratings has assigned Sri Lanka's Bank of Ceylon (BOC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of 'BB-' with Stable Outlooks. Fitch has also assigned BOC a 'b+' Viability Rating (V/R). Simultaneously, BOC's National Long-Term rating and its outstanding subordinated debentures have been affirmed at 'AA+(lka)' with a Stable Outlook and 'AA(lka)', respectively. Fitch has also assigned BOC's proposed senior unsecured USD-denominated notes an expected rating of 'BB-(exp)', same as its Foreign Currency IDR. The size and tenor of the notes are yet to be determined. The final rating is contingent upon receipt of final documents conforming to information already received. A full list of rating actions is provided at the end of this commentary. BOC's IDRs and National Long-Term ratings reflect Fitch's expectation of support from the government of Sri Lanka (GoSL, 'BB-'), if required, given its quasi sovereign status, high systemic importance and role as one of the main bankers to the government. BOC is the largest bank in Sri Lanka and fully owned by GoSL. Any change in Sri Lanka's sovereign ratings would likely be reflected in the ratings of BOC. Please see Fitch's special report on Sri Lanka, dated 1 March 2012, for an update of the sovereign's credit profile.

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The V/R reflects BOC's domestic franchise being underpinned by its sovereign linkages and extensive branch network, as well as its weak capitalisation, improving profitability, increasing loan/deposit ratio and concentration in the state sector (GoSL and state entities). While BOC's IDRs and National Long-Term rating are closely correlated with Sri Lanka's sovereign rating, an upgrade of BOC's National Long-Term rating could result from a demonstration of preferential support for BOC. The V/R could be upgraded if BOC enhances its capital buffer substantially (including a high loan loss reserve coverage), the loan-deposit ratio is maintained/sustained at 80%-85% and/or supplemented by medium term wholesale funding, and operating performance and asset quality remain stable. The V/R could be downgraded if capital buffer weakens from continued high asset growth, or if a large asset quality downturn from domestic/external macroeconomic shocks leads to capital impairment. BOC has established a strong domestic deposit franchise, as reflected in a high current and savings accounts deposit ratio (51% at end-2011). Nevertheless, aggressive 45% loan growth in FY11, driven by increased lending to the state and certain private sector business segments, sharply increased its loan/deposit ratio to 95% (FY10: 74%). Management is challenged to reduce this ratio to the target 85%, amid increased competition for deposits and expected continued strong credit growth. Fitch notes that the high credit growth, alongside high dividend payouts in the last two years and no fresh capital injection since FY07, has weakened BOC's capitalisation. Tier 1 capital and capital adequacy ratios were reported at 9.3% and 12.8%, respectively, at end-2011, compared with 11.4% and 15.2% at end-2010; Although these are well above the local regulatory requirements of 5% and 10%, respectively, but are inflated by the zero-risk weighted exposures to the state sector and gold-backed loans as per local regulatory guidelines. Equity/asset ratio remains low at 5.1% at end-2011, although marginally improved from 4.3% at end2010. Fitch notes that BOC's profitability remains low.; although return on assets improved to 1.45% in 2011 (2010: 1.08%) mainly from reduced effective taxes due to the reduction in tax rates in Sri Lanka and from reduction/reversal of general provision as per the Central Bank of Sri Lanka guidelines. BOC's large exposure to the state sector and local corporates (that are perceived as lower risk in the local market) has resulted in its net interest margins (2011: 3.70%, 2010: 3.64%) being historically lower than peers, while its operating cost base is also high. The high credit concentration of BOC in the state sector reflects its sovereign linkages, and as such is unlikely to reduce in the foreseeable future. On balance sheet and off-balance sheet exposure to the state sector accounted for 43% and 18% of assets at end-2011, with the top five exposures accounting for a significant 645% of equity. However, Fitch notes that all these relate to state-owned entities and bulk of these are secured. Although net non-performing loans (NPLs minus specific loan loss reserves (LLRs)/equity) improved to 11.9% at end-2011 (2010: 19.5%), Fitch considers a high LLR buffer as imperative amid the strong credit growth in the last two years. The requirement of provisioning starting only for NPLs delinquent beyond 180 days, together with the reversal of a part of the general provisions (as per local regulatory guidelines), elevates residual provisioning risks. Fitch also expects some slippages from the seasoning of the non-state sector portfolio, a latent asset quality impact from rising domestic interest rates and possible external shocks from a flare-up in geo-political tensions and economic slow-down in Sri Lanka's key import/export markets. BOC is the largest bank in terms of assets in Sri Lanka. Its established domestic franchise is supported by 970 service points (318 branches, 248 extension offices July 2012

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and 404 ATMs) across the country. The bank has maintained a sizeable share of domestic banking system assets, loans and deposits at 22%, 21% and 21%, respectively, at end-2011. A full list of BOC's ratings: LT Foreign- and Local-Currency IDRs assigned at 'BB-'; Outlook Stable Viability Rating assigned at 'b+' Support Rating assigned at '3' Support Rating Floor assigned at 'BB-' Proposed USD senior unsecured notes assigned at 'BB-(exp)' National Long-Term rating affirmed at 'AA+(lka)' ; Outlook Stable Outstanding subordinated debentures affirmed at 'AA(lka)'.

Fitch Rates Sampath Leasing at 'A(lka)'; Outlook Positive

Hasira De Silva/Dilranie Mudannayake On 24 April the agency assigned Sampath Leasing and Factoring Limited (SLFL) a 'A(lka)' National Long-Term rating. The Outlook is Positive. The rating reflects Fitch's expectation of continuous support from SLFL's parent Sampath Bank PLC (SB, 'AA-(lka)'/Positive, 100% ownership), given the strong strategic and operational linkages between the two entities. Six out of SLFL's eight board seats are held by current or former senior SB officials and directors, including the bank's CEO on an ex-officio basis. The board is also advised by SB's current CFO. SB guaranteed or directly lent nearly all of SLFL's borrowings at end-2011 (FYE11). SLFL also benefits from business referrals from SB's extensive branch network, and has a growing number of window offices within the latter's branches. In 2011, SLFL accounted for 65% of SB's consolidated net lease portfolio growth. The Positive Outlook on SLFL mirrors SB's rating Outlook, and indicates that the ratings of SB and SLFL will move in tandem. A material weakening of SLFL's linkages with SB, such as a substantial dilution in ownership or reduced operational integration, could result in a rating downgrade. Conversely, a significant increase in SLFL's strategic importance to the SB group as measured by its contribution to the group's profits or closer operational integration, could result in a rating upgrade. At FYE11, SB had issued corporate guarantees to 63% of SLFL's third-party creditors in terms of value. In 2009, the bank recapitalized SLFL with LKR300m of equity and brought in new management, which improved SLFL's internal processes and controls and consequently its stand-alone credit profile. SLFL is a specialised leasing company (SLC) licensed by the Central Bank of Sri Lanka. SLFL was founded by SB in 2005 to cater to the lower-end of the SME and retail market. By regulation, SLCs are allowed to recognize a loan as performing until it is in arrears for six months (compared with three-months for banks). This serves as the key incentive for a bank to establish a separate SLC to cater to this specialised and higher-risk market segment. At FYE11, SLFL's assets amounted to LKR4.1bn (2% of SB's group assets) while posttax profits stood at LKR192m (5% of SB's group profits).

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Fitch Affirms Multi Finance PLC at 'B+(lka)'/Stable

Prabudda Uluwita/Ramali Perera On 26 April Fitch Ratings Lanka affirmed Multi Finance PLC's (MFP) National LongTerm rating at 'B+(lka)' with a Stable Outlook. The agency has also affirmed and withdrawn the 'B(lka)' rating on MFP's proposed subordinated debenture issue of up to LKR100m, as the issue did not proceed as previously envisaged. The ratings reflect MFP's small size (asset base of LKR990m at end-2011) relative to local sector peers and small franchise. The ratings also reflect the company's recent rapid loan growth, modest asset quality relative to local peers, and comfortable capitalisation in relation to its operations. The ratings may be downgraded upon a significant or sustained weakening in liquidity and/or capitalisation due to either aggressive loan growth or up streaming of cash flows. Conversely, an increase in MFP's scale of operations without a significant compromise on asset quality or capitalisation could result in an upgrade of its ratings. MFP's rapid loan growth of 43% in 9MFY12 (FY11: 70%) was in line with the local finance company (LFC) sector. The growth stemmed from lease and hire purchase segments and was helped by lower import duties on vehicles in 2010-2011. Asset quality remained high at end-9MFY12, with a three-month non-performing loan (NPL) ratio flat at 3.9% and a six-month regulatory threshold of 0.4% (FY11: 1.2%), which compares well with other Fitch-rated LFCs (5.9% and 2.9%, respectively, at end-H1FY12). However, with rising interest rates and increasing external pressures on the domestic economy, MFP's unseasoned loan book is likely to face asset quality stresses unless strong monitoring and controls measures are maintained on new disbursements. MFP diversified its funding sources at end-9MFY12 (nine months ended December 2011) with deposit funding increasing to 32% of assets from 22% at end-FY11 (sector: 65%). However, this has significantly increased deposit concentration in relation to peers, with the 10 largest depositors accounting for 43% of total deposits at end-9MFY12 (FY11: 15.7%). Fitch notes that this could place pressure on liquidity in the event of large withdrawals. In July 2011, LKR157m of the parent company's borrowings were converted to equity, resulting in MFP's equity/assets improving to 44.9% at end-9MFY12 (end-FY11: 41.1%). However, Fitch cautions that if such equity infusions are debt funded at the holding company level, there may be pressure to upstream cash flows which could weaken MFP's current high level of capitalisation (Tier 1 capital adequacy ratio: 40.15% in 9MFY12). Core profitability was sustained in 9MFY12, as the company was able to control credit costs through managing asset quality and also as new branches started to generate income thereby improving cost structures. Net interest margins (9MFY12: 14.6%, FY11: 19.1%) are in line with peers and benefit from a higher proportion of equity-funded assets, and as such could narrow as equity/assets decreases. Fitch notes that given tightening market liquidity conditions and the intense competition for deposits, controlling funding costs will be challenging for MFP. MFP is an LFC, 85% owned by Entrust Limited (Entrust). The latter is an investment holding company and has other subsidiaries: Entrust Investments Limited and Entrust Securities PLC. Entrust is 99.9% held by Pacific Trust (Private) Limited.

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Fitch Rates People's Leasing's Proposed LKR500m CP at 'F1(lka)'

Hasira De Silva/Dilranie Mudannayake On 27 April the agency assigned People's Leasing Company Plc's (PLC, 'A+(lka)'/Stable) proposed commercial paper (CP) issue of up to LKR500m a 'F1(lka)' National Short-Term rating. This issue enhances the previous LKR1bn issuance which was rated 'F1(lka)' on 23 March 2012, taking the total issuance to LKR1.5bn. This new issue will be utilised to finance PLC's working capital and lending. The enhanced issue will increase PLC's CP-funded assets to about 9% based on 31 March 2012 assets, compared with 7% as at end-December 2011. PLC's ratings reflect Fitch's view that its parent, People's Bank (PB, 'AA(lka)'/Stable), is likely to extend support in a stressed scenario, if required. This view is underpinned by PB's majority ownership of PLC (31 December 2011: 71.5%), common board representation, PLC group's significant profit contribution to PB's consolidated profile (end-September 2011: 36% of PB group profits), and the strong strategic and operational linkages between the companies. An 'F1(lka)' category short-term rating indicates the strongest capacity for timely payment of financial commitments relative to other issuers or obligations in the same country. Under Fitch's National Rating scale, this rating is assigned to the lowest default risk relative to others in the same country. Where the liquidity profile is particularly strong, a "+" is added to the assigned rating.

Fitch Assigns Bank of Ceylon's USD Senior Notes Final 'BB-' Rating
Ehsan Syed, Mumbai/Rukshana Thalgodapitiya, Colombo On 2 May Fitch Ratings has assigned Sri Lanka-based Bank of Ceylon's (BOC) USD500m senior unsecured notes due 2017 a final rating of 'BB-'. This follows the completion of the notes issue and the receipt of documents conforming to information previously received. The final rating is the same as the expected rating assigned on 17 April 2012. The notes are rated at the same level as BOC's 'BB-' Long-Term Foreign-Currency Issuer Default Rating (LT FC IDR). The notes carry an interest rate of 6.875% per annum. For more details on BOC's ratings and credit profile, please refer to "Fitch Assigns Bank of Ceylon 'BB-' IDRs", dated 17 April 2012 and available at www.fitchratings.com. A full list of BOC's outstanding ratings: LT FC IDR: 'BB-'; Outlook Stable LT Local Currency IDR: 'BB-'; Outlook Stable USD senior unsecured notes: 'BB-' Viability Rating: 'b+' Support Rating: '3' Support Rating Floor: 'BB-' National Long-Term Rating: 'AA+(lka)'; Outlook Stable Subordinated debentures: 'AA(lka)'

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Fitch Affirms Hatton National Bank at 'AA(lka)'

Gerard Wickrema/Rukshana Thalgodapitiya On 22 May the agency affirmed Hatton National Bank PLC's (HNB) National LongTerm rating at 'AA-(lka)'. The Outlook is Stable. The agency has also affirmed HNB's subordinated debentures at 'A+(lka)'. The ratings reflect HNB's sound financial profile, supported by its strong capitalisation levels, asset quality and profitability among local commercial banks. The ratings are, however, constrained by the bank's exposure to weak credits in Maldives, lower loan loss reserve coverage and a rising loan/deposit ratio. Therefore, a sustained improvement of these three factors would lead to a rating upgrade. Conversely, a sustained deterioration in HNB's capitalisation and asset quality relative to 'AA(lka)' peers would result in a rating downgrade. Fitch notes that regulatory Tier I and capital adequacy ratios improved to 12.9% and 14.8%, respectively, at end-2011 (end-2010: 11.0% and 12.7%) due to the LKR6.1bn Tier I and LKR2bn Tier II capital raised in 2011. Nevertheless, the low loan loss reserve cover of 31% (including general provisions coverage was 41%), amid high loan growth and associated risks with a fast growing emerging market economy, warrant a higher overall capital buffer. HNB's return on assets has stayed above 1.6% in the last three years, supported by its high exposure to retail and SME segments. This has benefited its high net interest margins (above 5% in the last five years), despite a relatively high costincome ratio (60% in 2011). While the bank's increasing focus towards SME and retail loans has also diversified its domestic loan book composition, the SME sector is more vulnerable to economic cycles and sudden shocks, and may expose the bank to potential higher credit costs in future. Although reported gross non-performing loan ratio fell to 3.92% at end-2011 (2010: 4.51%), the specific low loan loss reserve cover, vulnerability of domestic loan-book to global economic slowdown, growing SME book, and exposure to Maldivian resort projects (23% of equity at end-2011) mean downside risks from asset quality remain. Fitch also notes that the bank's loan/deposit ratio increased to 90% at end-2011 (2010: 86%), amid high loan growth of 27% in 2011 (2010: 19%). Therefore, the management may be challenged to reduce the loan/deposit ratio to manageable levels, amid increased competition for deposits and continued high loan growth. HNB is a licensed commercial bank, accounting for 9% of banking assets at end-2011. It is the fourth-largest bank in the country, and defined as a systemically important bank by the Central Bank of Sri Lanka. The Government of Sri Lanka and entities related to the Stassen Group held 27.6% and 18.4%, respectively, of voting equity at end-2011.

Fitch Revises National Development Bank's Outlook to Negative; Affirms at 'AA(lka)' (199)
Rukshana Thalgodapitiya/Gerard Wickrema On 24 May Fitch Ratings revised the National Development Bank PLC's (NDB) Outlook to Negative from Stable. Its National Long-Term rating has been affirmed at 'AA(lka)'. Fitch has also affirmed NDB's subordinated debentures at 'AA-(lka)'. The Outlook revision reflects NDB's increased risk profile in terms of its decreasing capitalisation alongside aggressive loan expansion and potential pressure on its asset quality and profitability through portfolio seasoning and higher credit costs. July 2012

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Thus, a sustained deterioration of NDB's profile in terms of these credit metrics could result in a rating downgrade, while its ability to stem such deterioration could revise the Outlook back to Stable. Notwithstanding the deterioration, the ratings continue to reflect NDB's strong credit metrics in terms of its capitalisation, asset quality, and profitability. NDB's strong loan expansion of 41.8% in 2011 (28.8% in 2010) led to a decline in its equity/assets to 12.7% from 14.7%. Fitch expects lending momentum to remain high alongside its expanding operations, as part of the repositioning of the bank to target the mass market. Pre-provisioning return on assets stood at 3.60% (annualised) in Q112 (3.10% (adjusted for gains) in 2011). However, Fitch believes that NDB's profitability could be pressured by higher credit costs following a strong increase in lending and higher operating costs alongside its expanding operations. NDB's gross non-performing loan (NPL) ratio remained among the lowest in the sector at 1.3% at Q112. However, Fitch believes that the bank's high loan growth and the shift in its loan book composition towards mid-sized corporates and SMEs among others could test its credit risk management. Specific provision coverage also remained high in a local context at 74% of NPLs at Q112 (2011: 78%; 2010: 96%). The agency notes that the bank's historically high specific loan loss reserves have decreased with the release of discretionary specific provisions leading to a weakened provision buffer to absorb a potential increase in credit costs. Fitch notes that the share of deposit funding continued to increase (57% at end2011, 55% at end-2010) supported by deposit growth of 35% yoy. However, the share of low-cost current and savings accounts (CASA) remained low (23%) relative to peers that have more mature franchises. The agency believes that the NDB's ability to secure a stable CASA and thereby cushion its net interest margins (4.2% in 2011) from the rising interest rates is essential to sustain its long-term profitability in view of the intensified competition for deposits and continued strong credit growth. NDB was established in 1979 as a specialised bank and transformed into a commercial bank in 2005. NDB accounted for 3.9% of banking sector assets at end2011 and operates through 62 branches.

Fitch Rates Sampath Leasing's Proposed Senior Debt at 'A(lka)'

Dilranie Mudannayake/Hasira De Silva On 8 June Fitch Ratings Lanka assigned Sampath Leasing and Factoring Ltd's (SLFL) proposed senior unsecured redeemable debentures of up to LKR500m a 'A(lka)' National Long-Term rating. The issue has been rated at the same level as SLFL's National Long-Term rating of 'A(lka)' - which has a Positive Outlook, in line with Fitch's criteria for rating senior unsecured debt of financial institutions. The rating reflects the implied support assumed from SLFL's main shareholder Sampath Bank PLC (SB, 'AA-(lka)'/Positive, 100% ownership), given the strong strategic and operational linkages between the two entities. The issue offers semi-annual, fixed-rate interest payments, which help SLFL mitigate its interest rate risk and equal bullet principal repayments in the third and fourth year. The issue proceeds will be utilised to fund SLFL's lease and hire purchase portfolio.

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At 31 December 2011, SLFL's asset base stood at LKR4.1bn, which amounted to a 2% share of SB's group assets, while SLFL's share of SB's group post-tax profits amounted to 5%. For a detailed credit profile, please refer the full rating report on SLFL dated 25 April 2012.

Fitch Affirms National Savings Bank at 'AAA(lka)'; Outlook Stable

Dilranie Mudannayake/Gerard Wickrema On 15 June Fitch Ratings Lanka affirmed National Savings Bank's (NSB) National Long-Term rating at 'AAA(lka)'. The Outlook is Stable. The rating action follows the halting and subsequent reversal of, a transaction by NSB to acquire shares in The Finance Company PLC, which, in Fitch's view, underlines the government's continued involvement with the bank to ensure that it adheres to its policy mandate. NSB's rating reflects Fitch's expectation of timely support from the government of Sri Lanka, if required, given its state ownership, significant policy mandate and systemic importance. Fitch is of the view that state support is likely to flow to benefit both deposits and senior unsecured creditors due to the confidence risk that could potentially undermine systemic stability. NSB's stipulated policy role under the NSB Act No.30 of 1971 is to mobilise retail savings and invest in government securities. The bank is bound by the Act to invest a minimum of 60% of its deposits in government securities. NSB's deposits have an explicit guarantee from the government of Sri Lanka. A substantial change in NSB's policy role and deviation from its mandated core business activities indicating its reduced importance to the government could put downward pressure on NSB's rating. Reflecting its mandate, deposits have been the predominant source of funding for NSB (85.5% of total group assets at end-2011). Borrowing accounted for a further 6%, comprising largely of repo borrowings of 5.9%. NSB's holding of government securities accounted for 67% of its total assets and represented about 43% of the banking system's exposure to government securities at end- 2011.

Fitch Revises Sinhaputhra Finance PLC's Outlook to Stable; Affirms at 'B(lka)'

Gerard Wickrema/Prabudda Uluwita On 27 June Fitch Ratings Lanka affirmed Sinhaputhra Finance PLC's (SFL) National Long-Term rating at 'B(lka)'. The Outlook is Negative. The affirmation reflects the latest improvement in SFL's credit risk management practices and the subsequent stabilisation in its asset quality, although the latter still remains weaker than its peers' average. The rating may face downward pressure if SFL fails to prevent its asset quality and net non-performing loans (NPL)/equity from weakening under the regulatory six-month classification. The high proportion of NPLs will also constrain the company's overall net interest margins (NIM) and reduce its internal capital generation. In addition, any deterioration in corporate governance performance at SFL would also lead to a negative rating action.

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Fitch notes that SFL's clientele are largely limited to the Kandy district (Central province) and its surrounding areas, and consist of the small and medium enterprise sector. Vehicle finance via leases and hire purchase agreements accounted for half of SFL's loan portfolio at end-March 2011 (FYE11), with the remainder consisting primarily of loans (majority backed by property mortgages) which has been the case over the last five years. Incremental portfolio loan growth was 11% in FYE11 following a contraction of 4% in FYE10. Operationally, SFL's operating costs/average assets (historical five-year average was 3.5% at FYE11) has been low relative to its sector. This is partly due to better utilisation of collection centres within its network. Statutory liquidity ratios were comfortable, while interest rate risks were managed by better matching of interest bearing assets and liabilities. The company's NIM continued to be well below the sector average at FYE11, largely because a large proportion of the lending portfolio was non-performing. SFL's NPLs over three months as a percentage of loans spiked to 32% at FYE10 from 22% at FYE09. In early January 2011, its restructured recovery and credit procedures began to take effect with its three-month NPLs/loans declining to 27% at FYE11 (end-May 2011: 24%). SFL's advances in arrears over six months (regulatory NPLs) followed a similar trend. Established in 1978, SFL is a registered finance company. It was listed on the Colombo Stock Exchange on 2 June 2010. However, its current managing director, Ravana Wijeyeratne, continues to maintain control, holding 52% of SFL's equity.

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Corporates
Fitch Rates Singer's Proposed CP 'F1(lka)' & Sr Notes 'A(lka)'
Rukshana Thalgodapitiya/Prabudda Uluwita On 20 April Fitch Ratings Lanka assigned Singer (Sri Lanka) PLC's (Singer) proposed commercial paper (CP) issue of up to LKR1bn a National Short-Term rating of 'F1(lka)'. Fitch has also assigned Singer's senior unsecured notes of up to LKR500m a National Long-term rating of 'A(lka)' with Stable Outlook. The ratings reflect Singer's market position as one of Sri Lanka's largest consumer durables retailers, as well as its established franchise and extensive distribution network. The ratings also reflect the company's multi-brand product portfolio that is diversified across price points and its well-managed financing operations. Also, Singer has had access to funding from banks, and has been regularly accessing local capital markets to raise debt. According to the company, proceeds from the proposed CP will be used to refinance its short-term debt, and the issue is likely to have a one-year tenor. The proposed issue of senior unsecured notes is to be used to replace maturing notes and is expected to have a three-year tenor. At end-2011, Singer had cash and cash equivalents of LKR365m and undrawn facilities of LKR2.1bn, against debt maturities of LKR4.3bn due within one year. Singer's total debt amounted to LKR5.1bn at end-2011.

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Insurance
Fitch Affirms HNB Assurance at 'A(lka)'/Stable
Ramali Perera/Prabudda Uluwita On 30 April, Fitch Ratings Lanka affirmed HNB Assurance PLC's (HNBA) National Insurer Financial Strength Rating and National Long-Term rating at 'A(lka)'. The Outlook is Stable. The ratings reflect HNBA's comfortable capitalisation, both in terms of regulatory solvency and Fitch's risk-based capital computations, as well as its sustained profitability and modest market share. The ratings also reflect Fitch's expectation of support from HNBA's parent - Hatton National Bank PLC ('AA-(lka)'/Stable), if required. HNBA is 60% owned by HNB and is strategically important to its parent in providing additional product range to its customer base and expanding its bancassurance channel. Regulatory solvency ratios improved to 2.89x and 3.15x for life and non-life businesses, respectively, in 2011 (2010: 1.13x and 2.01x) following a rights issue during the year. These ratios are in line with peers and supported by the company's healthy profitability and conservative investment policies. Although the solvency ratios are likely to decline marginally in 2012 with growth in premium levels, Fitch expects them to be sustained above 2010 levels. Fitch notes that as HNBA is a relatively new entrant in the local insurance industry which is dominated by a few large companies, increasing its market share has been challenging for the company. Market share in life and non-life premiums, although increasing, remained below 5% in 2011. The company does nevertheless have a competitive advantage in terms of access to the customer base of its parent. HNB is the fourth-largest commercial bank in Sri Lanka and has an extensive branch network across the country. The two companies share the 'HNB' franchise and HNBA has its bancassurance units at 120 HNB branches. HNBA adopts a fairly conservative investment strategy, with government securities accounting for 58% of life investments and 49% of non-life investments at end-2011 (2010: 71%, 60%). Investments in equity remained well below the company's internal limit of 10% of investments at end-2011. Also, single premium investments comprised less than 2% of life premiums in 2011 and are matched with investments of a similar yield and tenor. Non-life underwriting profitability improved in 2011 despite a marginal increase in the loss ratio to 69% (2010: 68%) due to better expense management. HNBA's combined ratio fell to 102.8% in 2011 (2010: 107.5%), and it is in line with peers. Fitch expects HNBA to maintain its combined ratio at the current levels through controlled expense management. HNBA's ratings could be upgraded if it is able to increase its market share while maintaining profitability and capitalisation at the current levels. Conversely, a weakening in solvency to below 1.5x in life and non-life could result in a ratings downgrade. A weakening in HNBA's perceived strategic importance to HNB, a reduction in the latter's shareholding in HNBA or a weakening of HNB's credit profile could also result in negative rating action. . HNBA was established as a composite insurer in 2001 and accounted for less than 3% of industry assets at end- 2011.

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Fitch Affirms Sri Lanka Insurance at 'AA(lka)'/Stable

Ramali Perera, Colombo/Jeffrey Liew, Hong Kong On 21 May, Fitch Ratings Lanka affirmed Sri Lanka Insurance Corporation Limited's (SLIC) National Insurer Financial Strength Rating and National Long-Term rating at 'AA(lka)'. The Outlook is Stable. SLIC's ratings reflect its strong franchise and sound capitalisation levels, supported by ongoing high profitability and capital retention. Regulatory solvency ratios for life and non-life insurance segments improved to 11.55x and 2.21x, respectively, at end-December 2011 from 7.73x and 2.11x in 2010, and compare well with peers. However, Fitch notes that SLIC's risk-based capitalisation is weakened by its high equity exposure due to the associated market volatility. The ratings also reflect Fitch's expectation of support from the Government of Sri Lanka, given its 99.9% ownership in SLIC and the company's strategic importance as the largest state-owned insurer. However, the agency notes that timeliness of support could be limited given the state's own fiscal limitations. Fitch further notes that SLIC has undertaken key strategic investments in line with government policy in the past. SLIC's somewhat aggressive investment strategy, as evidenced by large equity exposures, remains a rating concern due to associated profit volatility on some of these assets. Equity investments (excluding unit trust investments) accounted for 38% of book value assets in 2011 (2010: 37%) and is likely to increase further in the medium term in line with SLIC's investment plans. Although, these investments have been made out of shareholder funds, Fitch notes that they could place pressure on capitalisation particularly given the illiquid nature of some of its non-core strategic investments. Profitability continues to benefit from high investment income and continued healthy underwriting results in 2011, resulting in a return on assets ratio of 6.9% (peer group: 4.3%). Also, the company's combined ratio stood at 87.5% in 2011 (peer group: 97.6%), with the company maintaining both loss and expense ratios at levels considerably lower than peers. However, Fitch notes that the company will have to closely monitor non-life pricing to sustain loss ratios at current levels. The ratings could be upgraded if SLIC is able to maintain its market share in the life insurance segment (2011: 19.2%, 2010: 19.3% and 2009: 20.3%) while maintaining recurring underwriting profitability and strong capitalisation, and gradually reduces its exposure to non-core private investments. Conversely, deterioration in capitalisation due to profit volatility or increased equity exposures, including a rising trend in non-core strategic investments, could result in a rating downgrade. A weakening in SLIC's importance to the Sri Lankan Government or increased pressures by the state in terms of higher dividend payouts could also result in negative rating action. SLIC has been operating for the last 50 years and has a network of 131 branches across the country. Its strong franchise has helped support premium growth above that of the sector without compromising underwriting profitability. It is the largest composite insurer in Sri Lanka, and its asset base of LKR102bn accounted for about 39% of insurance sector assets at end-2011.

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Summary of Rating Actions Q112

Banks and Financial Institutions

Date 2012-1-6 2012-1-20 2012-1-25 2012-2-14 2012-2-28 2012-2-28 2012-2-28 2012-2-2 2012-3-5 2012-3-5 2012-3-12 2012-3-23 2012-3-26 2012-3-26
Source: Fitch

Rating Action Fitch Upgrades People's Leasing Company PLC & People's Finance PLC to A+(lka) and A-(lka) Fitch rates Central Finance Company PLC's Senior Debt at A+(lka) Fitch Affirms Vallibel Finance at 'BB-(lka)'/Stable Fitch Affirms Pan Asia Banking Corp's Sub Debt at 'BBB-(lka)' Fitch Revises Commercial Leasing's Outlook to Negative Fitch Affirms Lanka ORIX Finance at 'A-(lka)'/Negative Fitch Downgrades LOLC to 'BBB+(lka)'/Negative Outlook Fitch Affirms HSBC Sri Lanka Branch at 'AAA(lka)'/Stable Fitch Affirms Edirisinghe Trust at 'BB-(lka)'/Stable Fitch Affirms People's Merchant at 'BB+(lka)'/Stable Fitch Affirms Standard Chartered Sri Lanka Branch at 'AAA(lka)' Fitch Rates People's Leasing's Proposed Commercial Paper at 'F1(lka)' Fitch Affirms Ceylease Financial Services at 'BB+(lka)'; Off RWE Fitch Affirms Merchant Credit of Sri Lanka at 'BBB(lka)'; Off RWE

Corporates
Date 2012-1-23 2012-2-27 2012-2-27 2012-3-30
Source: Fitch

Rating Action Fitch Rates Abans' Proposed Senior Debt 'A-(lka)' Fitch Withdraws Hayleys MGT Knitting Mills PLC's Ratings Fitch Withdraws Hayleys PLC's Rating Fitch Affirms Sri Lanka Telecom at 'BB-'

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Sri Lankan Ratings

National Ratings as at 18th July 2012

Insurer Financial Short-Term Long-Tem Strength Rating Rating Rating Banks and Finance Companies Citibank Sri Lanka Branch HSBC Sri Lanka Branch Standard Chartered Bank, Sri Lanka Branch National Savings Bank Bank of Ceylon Peoples Bank Commercial Bank of Ceylon PLC DFCC Bank National Development Bank PLC DFCC Vardhana Bank Hatton National Bank PLC People's Leasing Company PLC Central Finance Company PLC Nations Trust Bank PLC Peoples Finance PLC Sampath Leasing and Factoring Limited Commercial Leasing Company PLC Lanka Orix Finance Company Limited Seylan Bank Ltd Peoples Finance PLC Lanka Orix Leasing Company PLC Senkadagala Finance Co. Ltd. Housing Development Finance Corporation Bank Singer Finance (Lanka) Limited Regional Development Bank Merchant Credit of Sri Lanka Limited Pan Asia Banking Corporation PLC Union Bank of Colombo Trade Finance & Investments Ltd People's Merchant Bank PLC Ceylease Financial Services Ltd. Sanasa Development Bank Edirisinghe Trust Investments Limited Vallibel Finance The Multi Finance Company Limited Sinhaputhra Finance Limited Bank of Ceylon Subordinated Debt Commercial Bank Subordinated Debentures 2006 DFCC Bank Senior Debentures 2007/2012 DFCC Bank - Subordinated Debentures 2006 National Development Bank PLC Subordinated Debt Hatton National Bank PLC - Subordinated Debt Sampath Bank PLC Subordinated Debentures 2007/2012 DFCC Vardhana Limited Subordinated Debt Central Finance Company PLC Subordinated Debt Nations Trust Bank PLC Senior Unsecured Debt People's Leasing Company's - Senior Unsecured Debt Nations Trust Bank PLC Subordinated Debt Lanka ORIX Leasing Company PLC Senior Unsecured Debt Commercial Leasing Company Senior Unsecured Debt Nations Trust Bank PLC - Unsecured Subordinated Redeemable Debentures 2008/2013 HDFC Bank of Sri Lanka - Unsecured Senior Redeemable Debentures 2015,2020 Senkadagala Finance Company Ltd Senior Debentures Seylan Bank - Subordinated Debenture 2007/2012 Seylan Bank - Subordinated Debenture 2007/2012 AAA(lka) AAA(lka) AAA(lka) AAA(lka) AA+(lka) AA+(lka) AA(lka) AA(lka) AA(lka) AA(lka) AA(lka) AA-(lka) A+(lka) A(lka) A(lka) A(lka) A(lka) A(lka) A-(lka) A(lka) BBB+(lka) BBB+(lka) BBB+(lka) BBB+(lka) BBB+(lka) BBB(lka) BBB (lka) BB+(lka) BB+(lka) BB+(lka) BB+(lka) BB+(lka) BB(lka) BB(lka) B+(lka) B(lka) AA(lka) AA(lka) AA(lka) AA(lka) AA(lka) A+(lka) A+(lka) A+(lka) A(lka) A(lka) A(lka) A(lka) A(lka) A(lka) A(lka) BBB+(lka) BBB+(lka) BBB+(lka) BBB+(lka) Rating Outlook Stable Stable Stable Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Stable Stable Positive Negative Negative Stable Stable Negative Stable Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Stable Stable Stable Stable Rating Watch

Note: Bold type denotes a rating change, new rating or change in Rating Outlook or Watch status during the period March-July 2012 Source: Fitch

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Sri Lankan Ratings

National Ratings as at 18th July 2012 (cont.)

Insurer Financial Short-Term Long-Tem Strength Rating Rating Rating Corporates John Keells Holdings PLC Sri Lanka Telecom PLC Dialog Axiata PLC Abans Ltd. DSI Holdings Limited Dialog Axiata PLC Preference Shares Aitken Spence PLC - Senior unsecured debt (2012) Singer (Sri Lanka) Ltd Senior unsecured debt DSI Holding Limited Senior unsecured debt Insurance Sri Lanka Insurance Corporation Limited HNB Assurance PLC AA (lka) A(lka) AAA(lka) AAA(lka) AAA(lka) A(lka) A(lka) AA+(lka) AA(lka) A(lka) A(lka) AA(lka) A(lka) Rating Outlook Stable Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Rating Watch

Note: Bold type denotes a rating change, new rating or change in Rating Outlook or Watch status during the period March-July 2012 Source: Fitch

International Ratings July 2012

Foreign Currency Long-Term Banks and Finance Companies Bank of Ceylon People's Leasing Company PLC Corporates Sri Lanka Telecom PLC
Source: Fitch

Local Currency Long-Term BB/Stable B+/Stable BB/Stable

Rating Watch -

BB-/Stable B+/Stable BB-/Stable

Sovereign Rating as at July 2011

Foreign Currency Long-Term Sovereigns The Democratic Socialist Republic of Sri Lanka
Source: Fitch

Local Currency Long-Term BB-/Stable

Short-Term B

Country Ceiling BB-

Rating Watch -

BB-/Stable

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Distribution of National Ratings Sri Lanka

Fitch's National Ratings Distribution in Sri Lanka
June 2012
(Number) 14 12 10 8 6 4 2 0 AAA (lka) AA+(lka) to AA-(lka) A+(lka) to A-(lka) BBB+(lka) to BBB-(lka) BB+(lka) to BB-(lka) B+(lka) to B-(lka) CCC(lka) to C(lka)

Includes unpublished ratings and excludes structured finance ratings Source: Fitch

Summary of National Rating Actions Sri Lanka

Apr Jun 2012 New Ratings Upgrades Downgrades Outlook Changes Watch Changes Corporates Banks and FIs 2 3 2 Insurance Total 2 3 2 -

Compares (beginning of period) rating to (end of period) rating, does not count multiple rating actions throughout the period. Rating changes defined at the modifier level, making a distinction between +/-. Includes unpublished ratings and structured finance ratings. Source: Fitch

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Sri Lankan Ratings About Fitch Ratings

Fitch Ratings is a leading global rating agency committed to providing the world's credit markets with accurate, timely and prospective credit opinions. Built on a foundation of organic growth and strategic acquisitions, Fitch has grown rapidly during the past decade gaining market presence throughout the world and across all fixedincome markets. Fitch Ratings currently maintains coverage of over 6,000 financial institutions, including over 3,200 banks and 2,200 insurance companies. Finance & leasing companies, brokerdealers, managed funds, and covered bonds make up the remainder of Fitch's financial institution coverage universe. Additionally, Fitch currently rates over 1,700 corporate issuers, 100 sovereigns, and 175 subsovereigns and maintains surveillance on over 93,000 US municipal transactions. The company currently has over 7,000 US structured finance transactions under surveillance, comprising 4,012 RMBS pools, 471 CMBS and 1,764 ABS deals. Fitch also maintains surveillance on over 1,500 European and 900 APAC structured finance transactions. Fitch is dualheadquartered in New York and London, operating offices and joint ventures in more than 50 locations and covering entities in more than 80 countries. Fitch Group is a whollyowned subsidiary of Fimalac, S.A., an international business support services group headquartered in Paris, France. Fitch Ratings Lanka Ltd is a joint venture between Fitch Ratings, USA, International Finance Corporation, Washington, Central Bank of Sri Lanka and several other leading local financial institutions.

Fitch Ratings Lanka Limited

15-04 East Tower World Trade Centre Colombo 01, Sri Lanka T +94 112 541900 F +94 112 541903

Country Head
Maninda Wickramasinghe maninda.wickramasinghe@fitchratings.lk

Corporates/Structured Finance
Hasira De Silva hasira.desilva@fitchratings.lk Prabudda Uluwita prabudda.uluwita@fitchratings.lk Natasha Alles natasha.alles@fitchratings.lk Dilranie Mudannayake dilranie.mudannayake@fitchratings.lk

Banks and Financial Institutions/Insurance

Rukshana Thalgodapitiya rukshana.thalgodapitiya@fitchratings.lk Gerard Wickrema gerard.wickrema@fitchratings.lk Ramali Perera ramali.perera@fitchratings.lk

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