Fitch assigns 'AA-(lka)' rating to DFCC subordinated debt

Fitch Ratings Lanka has assigned a National rating of 'AA-(lka)' (AA minus(lka)) to the unsecured subordinated redeemable debentures to be issued by DFCC Bank (DFCC) and at the same time affirmed the bank's National Long-term rating at AA(lka).

The outlook on DFCC's ratings is stable. Fitch said DFCC's rating reflects its long and sound operating history, conservative operating policies, good asset quality, strong capital base and effective management. It also takes into consideration DFCC's greater exposure to riskier long-term project lending and less diversified funding base.

“In FY06, profitability as measured by return on assets (RoA) remained flat at 3.5% but compared well with other banks. The contribution of the Commercial Bank (CB), rated AA+(lka)), its associate, to DFCC's FY06 profit after tax was substantial at 28%. Nevertheless, RoA excluding CB's, is still high at 2.6% in FY06. DFCC's earnings are still largely derived from project lending. Fitch recognises the bank's diversification initiatives such as the acquistition of a small Licensed Commercial Bank renamed DFCC Vardhana Bank Limited (DVB, rated AA-(lka) (AA minus(lka)) in 2003. However, the contribution from DVB to DFCC's earnings is still low,” the statement said.

Funding channelled through or guaranteed by the state, including long-term concessionary credit lines obtained from international agencies, constituted 40% of funding as at FYE06. Fitch said DFCC's good track record has enabled it to continue sourcing suh international concessionary funding. DFCC is well capitalised with capital ratios that compare well with other banks. Core and total capital adequacy ratios were 24.7% and 14.4%, respectively, at FYE06 against 25.2% and 17.6%, respectively, at FYE05.