Fitch Affirms Citibank N.A. Colombo's 'AAA(lka)' National Long-Term Rating

Fitch Ratings has today affirmed the 'AAA(lka)' National Long-term rating assigned to Citibank N.A.- Colombo Branch (CitiSL). The Outlook remains Stable.
CitiSL is a branch and part of the same legal entity as Citibank N.A. ('AA-' (AA minus)/Rating Watch Negative), which is a fully-owned subsidiary of Citigroup Inc. As such, CitiSL's rating factors in the financial strength of Citibank N.A. which is currently rated higher than the sovereign long-term foreign currency issuer default rating of 'B+'/Stable.
The bank's performance has improved considerably over the last two years. Profits increased by 86.8% yoy in FY07 (6.2% in FY06) and ROA improved to 2.5% in FY07 (FY06: 1.6%), on the back of steady growth in net interest margins (NIM) and rapid increases in non-interest income. Non-interest income has been an important contributor to CitiSL's profits in recent periods with the bank's growing trade finance and investment banking business generating increased revenues in terms of fee and commission income. High fee and commission income earned on the structuring and sale of hedging derivatives also played a particularly important role in H108, causing annualised ROA to rise further to 5.8%.
NIMs have historically been lower than the sector due to CitiSL's large corporate and government loan exposure where margins are generally thinner. However, margins have moved inline with the private licensed commercial bank (LCB) sector since FYE07, and rose to 6.3% in H108 from 4.9% in FY07 (FY06: 4.3%). This is mainly on account of re-pricing within the bank's loan portfolio and increased investments in higher yielding assets.
Due to its stringent credit evaluation criteria and strategic focus, CitiSL's loan exposure has continuously remained at the top end of the credit spectrum. At H108, 85% of loans were to large corporates and 14.5% to the Government of Sri Lanka (GoSL) and GoSL-owned entities. The bank's gross NPL ratio was 0.5% at H108 (0.5% at FY07) and NPLs are fully covered by specific provisions resulting in a zero net NPL/equity ratio.
While CitiSL's selective lending policies have enabled the bank to maintain a healthy loan portfolio - with a gross NPL ratio that is amongst the lowest in the local LCB sector, it has nevertheless resulted in some credit concentration within the lending portfolio. The bank's 20 largest group borrowers accounted for 82% of total loans at H108 (85% at FYE07). As a result, the loan book is susceptible to some fluctuations upon loan settlement. Loan growth was 69.8% yoy at FYE07 and followed a contraction of 21.2% yoy at FYE06.
The bank's asset book is funded primarily from deposits (43.3% at H108), with borrowings at 26.4% at H108 and equity at 20.7% at H108. Furthermore, deposit concentration is high, with the top 20 depositors accounting for 75% of deposits at H108 as deposits are predominantly from corporate and institutional sources.
CitiSL was established in 1979 and functions through a single branch in Colombo. The bank operates within a niche market comprised of multinationals, leading Sri Lankan corporates and the GoSL. It is the third largest foreign bank and accounted for 1.6% of Sri Lankan LCB assets at FYE07.