Fitch Ratings-Colombo/Singapore-09 March 2010: Fitch Ratings has today affirmed Sri Lanka-based Seylan Bank PLC's (Seylan) National Long-term rating at 'BBB+(lka)'. The Outlook is Stable. At the same time, the agency affirmed the 'BBB(lka)' rating on Seylan's outstanding subordinated debentures.

The ratings continue to reflect state support, given the bank's size and systemic importance. The state owns 28% of Seylan's voting equity at present, consequent to an equity infusion of over LKR1.1bn in October 2009 (37% of a total new-share issue of LKR3bn). Furthermore, the state replaced the bank's board with state appointees to restore depositor confidence and stem the bank's failure in December 2008. The rating also factors in the considerable re-structuring measures taken by the bank's present board of directors, in terms of re-organizing Seylan's risk management processes and controls. However, Seylan's standalone credit profile is still weak compared to its domestic peers of similar size, stemming from its weak asset quality. This mainly reflects the bank's historically weak lending policies and controls, but it is also partly brought on by the weak economic environment that prevailed during the three years to end-2009.

On 29 December 2008, the regulator replaced the bank's board of directors and placed it under the management of Bank of Ceylon (BOC, rated 'AA(lka)'/Stable) - the largest state bank - in order to restore public confidence and avoid a deposit run on Seylan, which was triggered by the failure of an unregulated entity within the Ceylinco group of companies (the erstwhile principal shareholder of the bank). Following a new share issue in October 2009, the Ceylinco group's ownership of Seylan's voting shares was diluted to 6% from 23% previously. The bank was able to reverse the deposit run, and reported a net deposit inflow of over LKR5bn in H209, compared to a net outflow of LKR9bn in H109. Seylan's loans/deposits ratio improved to 76% at FYE09 (FYE08: 98%), in line with the banking sector trend where deposit growth outpaces loan growth amid slow credit demand. Fitch expects the recovery in credit growth for the overall banking sector to remain relatively weak through 2010.

Seylan's gross non-performing loans (NPL) ratio at the group level stood at 29.3% at FYE09, compared to a median of 6.8% for the three largest domestic private commercial banks. However, the pace of incremental NPL growth reduced in Q209, while gross NPLs reduced in absolute terms by 2.8% and 4.5% in Q309 and Q409 respectively, due to the bank's recovery efforts. Over 16% of NPLs at FYE09 consisted of direct loans to the Ceylinco group, most of which were accounted for by five companies. Seylan's management expects to recover (or where the entity is a going-concern, restructure) such exposures over the short to medium-term.

Profitability in terms of return on assets (ROA) improved to 0.30% at FYE09 from a negative 0.06% at FYE08. This was driven primarily by reduced costs and recovery of NPLs. An upgrade will be contingent upon a sustained improvement in Seylan's asset quality, ROA, and a sustained reduction in Seylan's un-provided NPL/equity ratio (FYE09: 157.2%).

At FYE09, Seylan was the sixth largest domestic licensed commercial bank, with an asset base of LKR137bn and an island-wide network of 93 branches.

A full rating report (credit analysis) will shortly be available on the agency's websites www.fitchratings.lk and www.fitchratings.com.

Applicable criteria available on Fitch's websites www.fitchratings.com and www.fitchratings.lk: 'Global Financial Institutions Rating Criteria', dated 29 December 2009.