Bank of Cey­lon rat­ings fixed at BB'

The Pak Banker - - 6BUSINESS -

SIN­GA­PORE: Credit rat­ing agency Fitch has af­firmed Bank of Cey­lon's (BOC) Long-Term For­eign Cur­rency and Lo­cal Cur­rency Is­suer De­fault Rat­ings (IDRs) at ' BB-' with a Sta­ble Out­look. The agency has also af­firmed BOC's Vi­a­bil­ity Rat­ing (VR) at 'b+'. BOC's Na­tional Long-Term rat­ing has also been af­firmed at ' AA+(lka)' with a Sta­ble Out­look.

BOC's IDRs and Na­tional Long-Term rat­ing re­flect the govern­ment of Sri Lanka's (BB-/Sta­ble) high propen­sity but mod­er­ate abil­ity to pro­vide sup­port to the bank un­der ex­tra­or­di­nary sit­u­a­tions. The state's high propen­sity stems from BOC's high sys­temic im­por­tance as the largest bank in Sri Lanka, its quasi-sov­er­eign sta­tus, its role as a key lender to the govern­ment and full govern­ment own­er­ship. The state's mod­er­ate abil­ity to pro­vide sup­port is re­flected in the sov­er­eign rat­ing. The US dol­lar se­nior un­se­cured notes are rated at the same level as BOC's Long-Term For­eign Cur­rency IDR as they con­sti­tute di­rect, un­sub­or­di­nated and un­se­cured obli­ga­tions of the bank, and rank equally with all its other un­se­cured and un­sub­or­di­nated obli­ga­tions.

BOC's Sri Lanka ru­pee-de­nom­i­nated sub­or­di­nated debt is rated one notch be­low its Na­tional Long-Term rat­ing to re­flect its gone-con­cern loss-ab­sorp­tion qual­ity in the event of liq­ui­da­tion. Any change in Sri Lanka's sov­er­eign rat­ing or the per­cep­tion of state sup­port to BOC could re­sult in a change in BOC's IDRs, Na­tional Long-Term rat­ing, and is­sue rat­ings. Vis­i­ble demon­stra­tion of pref­er­en­tial sup­port for BOC in the form of an ex­plicit guar­an­tee will be in­stru­men­tal to an up­grade of its Na­tional Long-Term rat­ing

The bank's VR re­mains un­der pres­sure due to its thin cap­i­tal­i­sa­tion and de­clin­ing as­set qual­ity. The VR also takes into con­sid­er­a­tion BOC's strong do­mes­tic fund­ing fran­chise that is un­der­pinned by its state link­ages.

In­creased delin­quen­cies in BOC's gold backed loans port­fo­lio, which ex­panded rapidly since 2010, have been the main con­trib­u­tor to the in­crease in non-per­form­ing loans (NPL), a phe­nom­e­non that has been seen across the sec­tor. BOC has con­cen­tra­tion risk aris­ing from high ex­po­sure to the state sec­tor (state and state-owned en­ti­ties). Of the bank's to­tal state sec­tor ex­po­sure at end-2013, about 40% is guar­an­teed by the state. Re­ported Tier 1 reg­u­la­tory cap­i­tal ad­e­quacy ra­tio (CAR) stood at 8.0% at end-2013 and ben­e­fited from ex­po­sures that are zero-risk weighted ac­cord­ing to lo­cal reg­u­la­tory re­quire­ments. If risk weights of 100% and 50% were ap­plied on for­eign cur­rency de­nom­i­nated state sec­tor and gold backed ex­po­sures re­spec­tively, BOC's Tier 1 CAR would be much lower. The pace of loan growth slowed to 6% in 2013 from 27% a year ear­lier. This sup­ported a re­duc­tion in the loans-tode­posits ra­tio to 91% at end-2013 from 105% at end-2012.

A con­tin­ued de­cline in cap­i­tal­i­sa­tion through a surge in lend­ing or a fur­ther de­cline in as­set qual­ity along­side high div­i­dend pay­outs could place down­ward pres­sure on the bank's VR. A timely cap­i­tal in­fu­sion would sup­port the VR.

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