Fitch assigns State Mortgage & Investment Bank first-time National Long-Term Rating of ‘BBB(lka)’

Fitch Ratings last week announced it assigned State Mortgage & Investment Bank (SMIB) a first-time National Long-Term Rating of ‘BB(lka)’. The Outlook is Stable.

SMIB is a specialised bank, fully owned by the government of Sri Lanka (CCC+). Its core business is retail-focused, with a significant concentration in personal loans, housing finance loans backed by Employee Provident Fund (EPF) balances, and mortgage loans. “SMIB’s rating reflects its standalone financial strength and factors in its weaker-than-peers funding profile that has led to balance sheet mismatches. Risk controls are showing improvement, but still have room for enhancement, and the bank’s capital position is not as strong as peers,” Fitch said in a statement.

The assessment by Fitch also takes into consideration SMIB’s long operating history, but its modest franchise, reflected in its negligible 0.3 percent market share of sector assets at end-3Q24. SMIB’s credit profile, similar to peers, is influenced by Sri Lanka’s improving, yet vulnerable, operating environment, and exposure to the sovereign. Fitch said it assesses SMIB’s standalone credit profile as being constrained by its limited mandate under the State Mortgage and Investment Bank Law No. 13 of 1975, resulting in a high concentration in housing finance and unsecured personal loans, which constituted 95 percent of gross loans at end-2024.

SMIB focuses on retail lending, particularly unsecured personal loans, which Fitch regards as higher risk, comprising 40 percent of its loan portfolio. It has a high-risk profile stemming from its significant exposure to borrower segments that are highly susceptible to economic and interest rate cycles.

The company’s impaired loan ratio was high at 33 percent of total loans at end-2024 from 26 percent at end-2023, due to its high-risk profile, exceeding the Fitch-rated small bank average of 20.8 percent. Nonetheless, excluding EPF-backed loans, the impaired loan ratio is 15 percentage points (pp) lower.

SMIB’s operating profit/risk-weighted assets ratio was low at 1.8 percent in end-2024 and -4.6 percent in 2023, primarily due to the sharp fluctuations in interest rates during Sri Lanka’s economic crisis.

“We expect SMIB’s profitability to modestly improve in the medium term, helped by the favourable interest rate environment and risk density benefits from the higher EPF loan share, though it will likely experience greater cyclical earnings volatility than peers,” Fitch stated.