Fitch affirms DFCC Vardhana Bank's 'AA-(lka)'

Fitch Ratings Lanka has affirmed DFCC Vardhana Bank Limited's (DVB) National Long-term rating at 'AA-(lka)' (AA minus(lka)). The outlook on the rating is Stable. The principal factor supporting DVB's rating is the strong implied support assumed to be available from its parent DFCC Bank (DFCC/'AA(lka)').

DVB is envisaged to play an important strategic role in DFCC's future plans. In addition to DFCC's controlling stake and the use of a common franchise, the operations of DVB are closely integrated with those of DFCC. Hence, Fitch believes that DVB will continue to enjoy a high degree of support from DFCC.

Net profit increased by 80% to Rs. 116.8 million in FY06 on the back of high loan growth supported by cross selling of loans from DFCC, and healthy net interest margins from DVB's high exposure to the mid-market customer segment. The contribution from the bank to the overall group increased, but remains low at 7%.

Though the bank's internal capital generation through profit retention may not be sufficient to satisfy the enhanced minimum capital requirement of Rs. 2.5 billion imposed on licensed commercial banks (LCB) by the original deadline of end-2007, this requirement should be met as DFCC has indicated its commitment of providing the deficit capital by this deadline.

Fitch does not anticipate that any difficulty will be experienced in this regard given DFCC's strong capital position, though it is doubtful that the capital infused could be fully disbursed by DVB immediately.

DVB's gross NPL/gross loans ratio increased to 5.9% at FYE06, from 3.1% at FYE05 due to a high growth in NPLs during the year. Consequently, solvency as measured by net NPL/equity deteriorated to 23.6% at FYE06, from 9.1% at FYE05.

Fitch expects solvency to improve with the equity infusion from DFCC.