Amana's rating reflects its small and developing domestic franchise, and limited track record.
The bank started operations in 2011 as a Sharia-compliant bank and accounted for 0.5% of total banking sector assets at end-2014.
The rating also captures Amana's relatively high risk appetite, primarily indicated through exceptionally fast growth. This has put pressure on its capitalisation and could lead to deterioration in asset quality as loans season.
Amana is entirely funded by deposits, and benefits from having current and savings accounts make up 50% of the deposit base. The absence of high-quality, Sharia-compliant liquid investments, such as Sri Lanka government securities, weighs on its rating.
Fitch believes the bank adequately manages the currency risk stemming from foreign-currency denominated placements.
The Stable Outlook reflects Fitch's expectation the bank will receive a material capital infusion during 2015 that will allow it to comply with regulatory minimum requirements. In addition, Fitch expects the bank to turn profitable after it posted a profit in 4Q14. Amana's Fitch core capital ratio declined to 14.1% of risk weighted assets at end-2014, from 21% at end-2013, largely due to the rapid expansion of its loan book. The bank needs to increase its capital base by 1 January 2016 to LKR10bn from the current LKR5bn. This is to comply with the Central Bank of Sri Lanka's requirements for all licensed commercial banks. Fitch believes that the bank's high operating cost base and potential increase in credit costs could continue to hamper its operating profitability and internal capital generation.
Its cumulative loss in 2014 was LKR80m, or 1.6% of equity.
The bank's loan book expanded by 69% in 2014 (2013: 110%). Of the bank's gross loans at end- 2014, 54% were to consumers and SMEs, which, in Fitch's view, are more vulnerable if economic conditions deteriorate, and likely to lead to an increase in the NPL ratio, which stood at 1.5% at end-2014.
A rating upgrade is contingent upon the expansion of Amana's franchise and improved performance.
Fitch would downgrade the rating if Amana fails to meet its regulatory capital requirements, both on an absolute level and relative to risk-weighted assets. This could either occur from a failure to raise new capital, aggressive loan growth or losses.