Sri Lanka Commercial Bank ‘AA+’ rating confirmed: RAM

"The ratings also reflect COMB’s strong franchise and healthy financial performance, funding and liquidity, as well as good capitalization levels."

RAM Ratings Lanka reaffirms Commercial Bank of Ceylon PLC’s AA+/P1 ratings

RAM Ratings Lanka has reaffirmed Commercial Bank Of Ceylon PLC’s (“COMB” or “the Group”) long- and short-term financial institution ratings at AA+ and P1, respectively; the long-term rating has a stable outlook.

The ratings are premised on the Group’s strong market position as Sri Lanka’s largest privately owned licensed commercial bank (“LCB”) and third-largest overall LCB. The ratings also reflect COMB’s strong franchise and healthy financial performance, funding and liquidity, as well as good capitalisation levels.

Incorporated in 1969, COMB accounted for 12.34% of the LCB industry’s asset base as at end-December 2011. It ranked behind 2 state-owned banks, which took up 41.92% of the industry’s total assets. Given its size, COMB is also deemed one of the country’s 5 systematically important financial institutions by the Central Bank of Sri Lanka (“CBSL”). Moreover, the government has an 18.82% direct stake in COMB; this enhances the likelihood of state support if needed.

COMB’s asset quality is considered adequate in comparison to its peers. While its gross non-performing-loan (“NPL”) ratio is in line with those of its similarly rated peers, the Group’s asset quality is weighed down by its weaker gross NPL coverage levels and, relatively unseasoned loan portfolio amid strong growth in 2011.

The Group’s credit assets expanded 26.15% y-o-y to LKR 287.80 billion as at end-fiscal 2011, i.e. faster than the previous year’s 24.85% but slower than the industry’s 31%. On the back of loan expansion, COMB’s gross NPL ratio had improved to 3.43% as at the end of FYE 31 December 2011 (“end-FY Dec 2011”) (end-FY Dec 2010: 4.21%). By end-March 2012, the ratio remained relatively stable at 3.57%. Meanwhile, its gross NPL coverage ratio had also remained relatively stable at 51.97% as at end- FY Dec 2011 (end-FY Dec 2010: 52.26%); albeit weaker than similar-rated peers.

In the meantime, the Group’s performance is deemed healthy; although its net interest margin (“NIM”) of 4.43% last year was lower than most of its peers’ (FY Dec 2010: 4.73%), easing further to 4.42% in 1Q FY Dec 2012, its performance is supported by its operational cost efficiencies achieved through its low-cost delivery channels and economies of scale.

This is reflected in its cost-to-income ratio of 54.03% as at end-FY Dec 2011, which is better than its peers’; the ratio improved further to 45.87% in 1Q FY Dec 2012, backed by a large quantum of foreign-exchange gains, following the sharp depreciation of the rupee against the US dollar; these gains are expected to moderate to historical levels going forward. In line with rising business volumes and better cost management, its pre-tax profit increased 19.01% y-o-y to LKR 11.07 billion in FY Dec 2011, translating into a healthier return on assets ratio (”ROA”) of 2.73% (end-FY Dec 2010: 2.68%).

Elsewhere, COMB’s funding position is deemed healthy. Its funding mix is dominated by deposits, backed by its strong franchise and branch network, as reflected by its ability to attract deposits despite the prevalent low interest rate environment in 2011. COMB’s deposits accelerated faster than the industry’s pace last year, expanding 22.58% y-o-y Sri Lankato LKR 318.40 billion (industry: 20.78%).

On a related note, its loans-to-deposits (“LD”) ratio was elevated to 86.76% as at end-FY Dec 2011, albeit conservative relative to its peers’ (end-FY Dec 2010: 83.47%). The Group’s liquidity is also deemed healthy; COMB’s statutory liquid-asset ratio clocked in at 26.21% (end-FY Dec 2010: 29.74%), before easing slightly to 26% as of end-March 2012 on the back of loan growth, but still in line with most of its peers’.

Furthermore, COMB’s capitalisation levels are deemed good; despite loan expansion, its tier-1 and overall risk-weighted capital-adequacy ratios (“RWCARs”) came up to 12.11% and 13.01%, respectively, as at end-FY Dec 2011 - in line with its peers’.

Its capitalisation levels had strengthened following an LKR 4.86 billion rights issue last year. As at end-March 2012, the ratios had eased to a respective 11.44% and 12.73% due to loan expansion. Going forward, RAM Ratings Lanka expects COMB’s RWCAR to dip to just below 12% in line with the Group’s planned expansion. Meanwhile, its ratio on net NPLs to shareholders’ funds stood at 13.10% as at end-FY Dec 2011 (end-FY Dec 2010: 18.44%) - among the industry’s best.