Oct 21, 2019 (LBO) - ICRA Lanka Limited, subsidiary of ICRA limited, a group company of Moody’s Investors Service, has reaffirmed the issuer rating of Bank of Ceylon at [SL]AAA.
The outlook on the rating is revised to negative from stable.
Rationale
The revision in outlook factors in BOC’s moderate capitalisation levels with steady decline in capital buffers and weakening asset quality which impacted its earnings profile. The Bank reported a Core Capital Ratio of 10.73% and Total Capital Adequacy Ratio of 15.48% in Jun-19 as compared to the regulatory requirement of 10.00%1 and 14.00%, respectively. However, ICRA Lanka noted the gradual decline in the Bank’s capital buffers due to moderation in internal generation mainly because of weak asset quality. With less than 1% buffer over the regulatory capital requirements, the ability of the Bank to absorb any further asset quality shocks remains low.
ICRA Lanka however expects timely and adequate equity infusion by the Government of Sri Lanka (GoSL) to maintain the capitalization profile. The rating continues to factor in the 100% Government of Sri Lanka ownership, which provides a strong likelihood of sovereign support and BOC’s leading position in the Sri Lankan banking industry.
The Bank’s asset quality deteriorated with gross NPA ratio increasing to 5.34% in H1CY2019 as of Jun-19 vis-à-vis 3.
62% as of Dec-18 due to weak macroeconomic conditions in the given period. The rating factors in its established franchise, healthy deposit profile and comfortable liquidity position with liquidity coverage ratio (LCR) at 199.76% as in Jun-19. The rating also noted the moderation in earnings profile with return on assets (RoA2) at 0.92% in CY2018 (0.62% in 6MCY2019) as compared to 1.18% in CY2017.
The above, however exert further pressure on the overall credit profile of the Bank and steady improvement of these indicators would be crucial from a rating perspective. Outlook: Negative The Negative outlook reflects the shortfall in BOC’s capital buffers over the regulatory requirement coupled with weakening of the asset quality and profitability indicators. ICRA Lanka believes that BOC will continue to benefit from timely and adequate capital support from GoSL.
The outlook may be revised to ‘Stable’ in case of a steady maintenance of the capital buffers above regulatory capital requirement, improvement in the asset quality profile, while maintaining a comfortable earnings profile.
Key rating drivers -Credit strengths
100% government owned, systemically important bank with long term track record and established franchise; BOC is a licensed commercial bank, 100% owned by the GoSL.
The Bank is the largest commercial bank in Sri Lanka with systemic importance, which provides strong likelihood of sovereign support. BOC accounts for about 21% of the aggregate advances and about 24% of the aggregate deposits of all licensed commercial banks (LCBs) in Sri Lanka as on June 30, 2019.
The Bank operates with 579 branches covering all the regions in Sri Lanka; however, the Western province accounted for around 70% of the total loans of the Bank as of Jun-19. BOC’s total net advances grew by 23% YoY in CY2018 (16% in CY2017) which was higher than the 20% growth reported by the LCB industry during the same period. The high growth was mainly supported by lending to government entities related to infrastructure development projects.
During 6MCY2019, net advances grew by 18% YoY, driven by growth in lending to the Government and StateOwned Enterprises (SOEs). The rating factors the Bank’s position as one of the key lenders to the GoSL and SOEs, which accounted for about 31% of the total portfolio as in Jun-19 (~34% in December 2018 and ~30% in June 2018); the Bank expects to maintain the exposure at the present level.