Fitch Ratings Lanka on Friday affirmed the National Long-term rating of DFCC Bank (DFCC) at 'AA(lka)', and at the same time, the agency affirmed DFCC's senior debentures at 'AA(lka)' and subordinated debentures at 'AA-(lka)' (AA minus (lka).

The ratings reflect DFCC's strong capital base and sustained high profitability, but also factors in the bank's inherent lack of product and funding diversity as a development finance institution (DFI), as well as its relatively large exposure to riskierlong-term project finance, Fitch said in a statement.

Fitch says that the contribution from its commercial banking subsidiary, DFCC Vardhana Bank Ltd (95.58% stake owned by DFCC at end-December 2007), currently remains modest. DFCC's portfolio is still dominated by longer-tenure project lending, accounting for 52.5% of the bank's loan portfolio at end-March 2008 (FYE08), with retail loans and corporate loans accounting for 23.1% and 21.1%, respectively. Loan growth slowed considerably to 6.2% at FYE08 (CAGR of 24.4% in the period FYE04-FYE07), due to a lack of demand for long-term project loans in tandem with the current macroeconomic environment, as well as the bank's conscious decision to curtail credit growth.

As a development finance institution, DFCC has enjoyed concessionary-rate credit lines from multilateral and bilateral donor agencies. This component amounted to 33.7% of DFCC's funding base at FYE08. “However, Fitch notes that since one of the main criteria for securing such funds is the country's stage of development, and as Sri Lanka has shifted from a low-income nation to a middle-income nation, securing such funds would become increasingly difficult. Therefore the bank is likely to place greater reliance on institutional and retail funds at market rates to fund growth in the future,” the statement said.