(The following statement was released by the rating agency)COLOMBO/HONG KONG, June 23 (Fitch) Fitch Ratings has affirmed Sri Lanka-based DFCC Bank's (DFCC) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDRs) at 'B+' with a Stable Outlook. The agency has also affirmed DFCC's Viability Rating (VR) at 'b+'. DFCC's National Long-Term Rating has also been affirmed at 'AA-(lka)' with a Stable Outlook. Fitch has assigned an expected rating of 'AA-(lka)(EXP)' to DFCC's proposed senior debenture issue of up to LKR5bn. Fitch has also affirmed its 99.1% subsidiary, DFCC Vardhana Bank PLC's (DVB) National Long-Term Rating at 'AA-(lka)' with a Stable Outlook. A full list of rating actions is at the end of this commentary.KEY RATING DRIVERS - IDRS, VR, NATIONAL RATING AND DEBTDFCC's IDRs, VR and National Rating reflect its intrinsic risk profile, driven by its strong profitability and capitalisation, counterbalanced by the group's expanding commercial banking business conducted through its 99% subsidiary, DVB.  Fitch considers DVB to be a core subsidiary of DFCC, and as such the credit profiles of the banks cannot be meaningfully disentangled. Therefore the agency has equalised the ratings of DFCC and DVB. This approach is outlined in greater detail in Fitch's published criteria for "Rating FI Subsidiaries and Holding Companies".  DFCC's USD notes are rated at the same level as DFCC's Long-Term Foreign-Currency IDR as they constitute unsecured and unsubordinated obligations of the issuer. Fitch has assigned a Recovery Rating of 'RR4' to the notes to reflect average recovery prospects of 31%-50% for holders of this debt, in case of default under both a standalone and consolidated basis.DFCC's proposed and outstanding LKR denominated senior debt is rated at the same level as DFCC's National Long-Term Rating as they constitute direct, unconditional, unsecured and unsubordinated obligations of the issuer. The proposed debentures are expected to have a tenor of three years with a bullet principal payment at maturity. The final rating is contingent upon the receipt of final documentation conforming to information already received.  DFCC's and DVB's subordinated debt is rated one notch lower than the respective issuer ratings to reflect its gone-concern loss-absorption qualities in the event of liquidation, in line with Fitch's criteria for rating such securities. DFCC is engaged in merger discussions with National Development Bank (B+/Stable). This is as a part of the Government of Sri Lanka's "Master Plan" to consolidate the financial system, which includes establishment of one large development bank to provide impetus to policy-driven development banking activities in the country. Fitch believes that the merged bank will primarily focus on supporting economic development. Fitch is of the view that synergies from such an amalgamation could be beneficial to the credit profile of the merged entity in the long run although credit neutral in the short to medium term. Fitch will further comment on the matter once details and the time frame of this deal become clearer.DFCC's loan book grew faster than the banking sector and recorded an increase of 15.4% in the financial year ended March 2014 (FYE14). More than 75% of this growth stemmed from DVB and as a result, DVB's loan book accounted for about 45% of the group's loans at end-Mar 2014 (end-Mar 2013: 40.9%). Although DFCC's asset quality has historically remained weaker than its peers, the bank has been able to control the slippage of asset quality better than most peers in a challenging operating environment. DFCC's provision coverage remained comparable with its rating peers.  Capitalisation declined over the year, but it remained strongest among the peers both in terms of Fitch Core Capital (FCC) ratio and Tier 1 Capital Adequacy Ratio (CAR) and stood at 28.4% and 18.8% respectively at FYE14, while the deviation among the two ratios is mostly attributed to the  significant unrealised gains in DFCC's equity investments.    RATING SENSITIVITIES - IDRS,VR, NATIONAL RATING AND DEBTThe upgrade of DFCC's IDRs, VR and National Rating would be contingent on DFCC consolidating its commercial banking franchise alongside its ability to sustain strong credit metrics.  The IDRs, VR and National Rating could be downgraded if there is a sustained and substantial increase in risk appetite that could materially weaken its strong capital position.Because Fitch views DVB as carrying the same risk as DFCC, DVB's ratings will move in tandem with DFCC's ratings. DVB's ratings are also sensitive to changes in its strategic importance to DFCC. As the rating of the notes is linked to DFCC's IDR, any changes to that rating would impact the issue's rating.The rating of DFCC's LKR-denominated senior debt will move in tandem with its National Long-Term Rating.Any change in the issuer ratings would impact the ratings of subordinated debt issued by DFCC and DVB.  A full list of ratings:DFCC Long-Term Foreign- and Local-Currency IDRs affirmed at 'B+'; Stable OutlookShort-Term Foreign-Currency IDR: affirmed at 'B'Viability Rating: affirmed at 'b+'Support Rating: affirmed at '4'Support Rating Floor: affirmed at 'B' US dollar senior, unsecured notes: affirmed at 'B+'; Recovery Rating: 'RR4'National Long-Term Rating: affirmed at 'AA-(lka)'; Stable OutlookSri Lanka rupee-denominated senior unsecured debentures affirmed at 'AA-(lka)'Proposed Sri Lanka rupee-denominated senior unsecured debentures: assigned 'AA-(lka)(EXP)Sri Lanka rupee-denominated subordinated debentures: affirmed at 'A+(lka)'DVB National Long-Term Rating: affirmed at 'AA-(lka)', Outlook Stable Sri Lanka rupee-denominated subordinated debentures: affirmed at 'A+(lka)'Primary Analyst Ambreesh Srivastava (International Ratings) Senior Director  +65 67967218  Fitch Ratings Singapore PTE Ltd  6 Temasek Boulevard  #35-5 Suntec Tower Four  Singapore 038986Rukshana Thalgodapitiya (National Ratings) Vice President +941 1254 1900  Fitch Ratings Lanka Ltd  15-04, East Tower, World Trade Center Colombo 1, Sri Lanka  Secondary AnalystRukshana Thalgodapitiya (International Ratings) Vice President  +941 1254 1900Prasanka Rajapaksha (National Ratings) Assistant Vice President +941 1254 1900Committee Chairperson Sabine BauerSenior Director+852 2263 9966Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com.Additional information is available at 
  www.fitchratings.com.
 DFCC has a 1.78% equity stake in Fitch Ratings Lanka Ltd. No shareholder other than Fitch, Inc. is involved in the day-to-day rating operations of, or credit reviews undertaken by, Fitch Ratings Lanka Ltd.Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, 'National Scale Ratings Criteria', dated 30 October 2013, 'Assessing and Rating Bank Subordinated and Hybrid Securities' dated 31 January 2014, 'Rating FI Subsidiaries and Holding Companies', dated 10 August 2012, 'Evaluating Corporate Governance', dated 12 December 2012 and 'Recovery Ratings for Financial Institutions', dated 19 August 2013 are available at 
  www.fitchratings.com.
 Applicable Criteria and Related Research: Assessing and Rating Bank Subordinated and Hybrid Securities Criteria
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137
 Rating FI Subsidiaries and Holding Companies
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
 Evaluating Corporate Governance 
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649
 Recovery Ratings for Financial Institutions 
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=717538
 National Scale Ratings Criteria
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082
 Global Financial Institutions Rating Criteria
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
 Additional Disclosure Solicitation Status 
  http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=835815
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