Fitch affirms Commercial Bank of Ceylon at 'AA(lka)'/stable
Fitch Ratings Lanka has affirmed Commercial Bank of Ceylon PLC's (CB)
National Long-Term rating at 'AA(lka)' with a stable outlook. The agency
has also affirmed CB's subordinated debentures at 'AA-(lka)'.
The ratings reflect CB's solid domestic franchise, improved
capitalisation and high core profitability. The ratings may be upgraded
upon a sustained improvement in the bank's balance sheet in terms of
greater capital buffers including loan loss provisions. Conversely,a
rating downgrade may result from a significant decline in CB's asset
quality such as due to an economic downturn that could put pressure on
its earnings and capitalisation.
CB's Tier 1 capital adequacy ratio (CAR) has remained above 10 %
since 2007, and a rights issue of Rs4.8billion lifted the ratio to 12.1%
at end-2011. The increase in equity has also been supported by a further
increase in revaluation reserves,which had not been factored into its
total CAR of 13 % at end-2011. Fitch expects CB's capitalisation to
remain healthy supported by its high core profitability, greater profit
retention and modest growth plans.
CB continues to sustain high core profitability (measured by
pre-provision return on assets (2011: 3.5 %), largely due to its lean
operating cost structure.
Loan growth (12.2 % from 2007-2011) has been modest compared with
that of the sector (14.1 %). SMEs and mid-sized corporates (end-2011: 42
%, end-2010: 33 %) dominates CB's loan book while it has been reducing
its exposure to the consumer/retail segments (end-2011: 28 %, end-2010:
31 %). Fitch believes that downside risks are present particularly in
interest-sensitive segments (consumer/retail and SMEs/ mid-sized
corporates) as well as in those susceptible to a global economic
slowdown and external sector pressures.
While specific provision coverage on NPLs has been rising (end-2011:
40 %; end-2010: 34 %), bolstered by additional provisions made on a
prudential basis,it remained below that of some similar rated private
commercial bank peers.
CB's funding stability is underpinned by its high share of current
and savings accounts (end-2011: 52%) compared with similar rated larger
private commercial bank peers (41%), which should cushion net interest
margins in a rising interest rate scenario.
Established in 1969 but tracing its origins to 1920, CB is the
third-largest bank in Sri Lanka, accounting for 10.4% of banking sector
assets at end-2011. It had a network of 213 branches and 514 ATMs as at
end-2011. CB is one of the few banks in Sri Lanka that have substantial
overseas operations. Its 17 branches in Bangladesh contributed 11% to
net income and 7% to assets.