Fitch Ratings has today affirmed Sri Lanka's Nations Trust Bank PLC's (NTB) National Long-term rating at 'A(lka)'. The Outlook is Stable. The agency has also affirmed the National Long-term rating of NTB's outstanding senior unsecured redeemable debentures of LKR500m at 'A(lka)', and its LKR1bn outstanding subordinated redeemable debentures at 'A-(lka)'.

NTB's ratings reflect the group's modest profitability and capital position in relation to the bank's relatively high-risk loan book and its adequate liquidity.

The bank reported a foreign exchange loss of over LKR800m in Q209, due to an operational lapse in NTB's treasury. This was however offset by exceptional bond trading gains of over LKR1bn, which were driven by the sharp decline in market interest rates during the same period. Over LKR800m of such gains have been realised into equity by the sale of securities, which has mitigated the risk of profit-reversal if market rates rise. Consequently NTB's equity position remains intact. Group equity/assets improved marginally to 5.88% at end-Q209, from 5.80% at end-Q109.

Foreign exchange trading within NTB's Domestic Banking Unit (DBU) has historically been subjected to daily profit reconciliations. The operational lapse, however, occurred as a result of a lack of independent monitoring of transaction approvals that led to open positions being created and maintained within the Foreign Currency Banking Unit (FCBU), contrary to the bank's internal policy which prohibits trades within the FCBU. NTB has taken steps to mitigate such occurrences in future, including the implementation of a treasury middle-office function which facilitates independent monitoring of operations. The bank also commenced monitoring of FCBU open positions, as well as daily profit reconciliations, despite the continued prohibition on trading within the unit.

NTB's profitability in terms of ROA remained broadly flat y-o-y at 0.96% at FYE08. ROA has generally remained below the 1% mark, compared to the peer median of 1.15% at FYE08. NTB's core profitability excluding exceptional items improved in Q209, driven by lower credit and operating costs. Core operating profit before taxes increased to an annualised 1.06% at end-H109 from 0.54% at end-Q109. However, Fitch expects core ROA to remain constrained, at least over the near term, by slowing fee income and possibly high credit costs in the present weak economic climate, despite possible benefits to net interest margin and further bond gains if market interest rates continue to decline.

NTB's liquidity has been good and above the regulatory minimum of 20% over the 12 months to end-June 2009. Fitch expects operating liquidity to generally remain good, as deposit growth is expected to outpace loan growth, at least over the near term.

Central Finance PLC (which owns 20.0% of NTB's equity) owns 1.78% of the shares in Fitch Ratings Lanka Limited. No shareholder, other than Fitch Ratings Limited of the UK, is involved in the day-to-day operations of, or credit rating reviews undertaken by Fitch Ratings Lanka Limited.