MBSLs liquidity position had also improved significantly during the year whilst its gearing ratio had been maintained at 1.25 times its shareholders' funds. The agency, which gave the bank a 'stable outlook', also assigned a L1 rating for Merchant Bank’s short term debt.
Merchant Bank's credit rating rides on the strength of its parent company, Bank of Ceylon - the island's biggest commercial lender in terms of assets.
"The ratings are also supported by Merchant Bank's strong capitalisation, improving performance, recovering liquidity levels and healthier asset quality."
The risk evaluator has also taken into consideration the medium-term outlook of Merchant Bank's expansion plans.
The bank has made a turnaround, after a down turn in the stockmarket from 1995-2001 left it with a 1.45 billion rupees in accumulated losses, forcing MBSL to restructure its capital.
Nearly 50 percent of MBSLs total assets at that time were invested in equities, the agency said.
"Since these investments had been funded by debt assumed during an environment of lofty interest rates, the cost of holding had been pushed beyond the recoverable values, therefore severely eroding its bottomline and liquidity," Lanka Rating said.
As at end-FY Dec 2005, the Bank's shareholders' funds stood at 1.32 billion rupees, making up 40.54 percent of its total assets.