Fitch Affirms Bank of Ceylon Long-Term Foreign Currency and Local Currency Issuer Default Ratings (IDRs) at ‘BB-’ with a Stable Outlook

01st April 2013, www.ft.lk

Fitch Ratings has affirmed Bank of Ceylon (BOC)’s Long-Term Foreign Currency and Local Currency Issuer Default Ratings (IDRs) at ‘BB-’ with a Stable Outlook.

It has also affirmed BOC’s Viability Rating at ‘b+’ and its National LT rating at ‘AA+(lka)’ with a Stable Outlook. BOC’s Support rating and Support Rating Floor have also been affirmed at ‘3’ and ‘BB-’ respectively, the latter at the same level as the sovereign.

Fitch has also assigned BOC’s proposed senior unsecured USD-denominated notes an expected rating of ‘BB-(EXP)’, same as its FC IDR given that the notes are expected to rank equally with the bank’s senior unsecured creditors. The proposed notes will have a maturity of five years, while semi-annual coupon payments will be at a fixed rate. The final rating is contingent upon receipt of final documents conforming to information already received.

BOC’s LT IDRs are driven by the Government of Sri Lanka’s high propensity and limited ability to provide support to the bank under extraordinary situations. In Fitch’s view, the State’s high propensity stems from BOC’s systemic importance as the largest bank in the country (accounting for nearly 20% of banking system deposits and assets), its quasi-sovereign status, its role as a key lender to the Government and full Government ownership, while the State’s limited ability is reflected in the ‘BB-’/Stable Sovereign rating.
BOC’s VR – which is one notch lower than the LT IDR – reflects the growing pressures particularly in terms of its weakening capitalisation and deteriorating asset quality, which may experience further deterioration in the near term. While BOC’s strong domestic franchise remains a strength from a funding perspective, near-term funding challenges will likely remain, considering the high loans-to-deposits ratio (LDR) amid rising interest rates.

BOC’s loan book has a high exposure to the State and State-Owned Entities (SOE) and while a sizeable portion of the exposure is State guaranteed, the resulting concentration risk is significant.
For example, Ceylon Petroleum Corporation itself accounts for nearly 20% of BOC’s total exposure. Notwithstanding State exposures, BOC’s gross non-performing loan ratio weakened to 2.8% (FY11: 2.1%) in FY12 owing to one-off event risks such as floods and drought (in Q412) and the Maldives’ political turmoil.

BOC’s capitalisation (Tier 1 Capital Adequacy Ratio, 2012:9%, 2011:9.3%) – which is already impacted by high dividend pay-outs (FY12: 38.4%, FY11: 34%) – has been steadily weakening. High loan growth, deteriorating net NPL-equity (FY12: 15%) and the absence of fresh capital injection since 2007 remain the key reasons.
While slowing loan growth and higher SOE exposure (zero risk weight for State guarantee) may help BOC to negotiate the difficulty in the interim, timely capital injections from the State remain critical to BOC’s future capitalisation.

The dip in BOC’s low-cost deposits ratio (FY12: 44%, FY11: 51%) was broadly in line with the industry trend. Given the intense competition for deposits and high credit demand from the State, Fitch believes that BOC’s endeavour to reduce its LDR to around 90% may not be possible in the near term.
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 and National Ratings. Visible demonstration of preferential support for BOC will be instrumental to an upgrade of its National LT Rating.

The VR remains under pressure and could be downgraded if a sharp asset-quality downturn is not complemented by timely recapitalisation from the State. An upgrade to VR, though unlikely in the near-term, will be triggered by consistent improvement in both asset quality parameters and capital levels and supported by BOC’s ability to lower loan-deposits ratio overtime.
BOC is the largest bank in terms of assets in Sri Lanka and has a wide domestic presence across Sri Lanka. BOC has 13 subsidiaries and five associates and has branches in Chennai, India and Male (Maldives); and a fully-owned subsidiary, Bank of Ceylon (UK) Ltd, in the UK.

FT Quick Take -  A full list of BOC’s ratings:

Long-term Foreign- and Local-Currency IDRs: affirmed at ‘BB-’; Outlook Stable
Viability Rating: affirmed at ‘b+’
Support Rating: affirmed at ‘3’
Support Rating Floor: affirmed at ‘BB-’
USD senior unsecured notes: affirmed at ‘BB-’
Proposed USD senior unsecured notes: assigned at ‘BB-(exp)’
National Long-Term rating: affirmed at ‘AA+(lka)’ ; Outlook Stable
Outstanding subordinated debentures: affirmed at ‘AA(lka)’.

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Fitch & Standard & Poor’s Warn Sri Lanka on Its Weak External Position and the Risk to Sovereign Credit Rating

01st March 2012, www.ft.lk

Fitch and Standard & Poor’s rating agencies yesterday warned Sri Lanka that its sovereign credit rating was at risk due to the country’s weak external position and the depletion of its foreign currency reserves to protect the rupee exchange rate.

The country’s Central Bank, which is under a $ 2.6 billion International Monetary Fund (IMF) loan programme, for months last year disregarded the global lender’s warning that the policy of defending the rupee was unsustainable.


The monetary authority blew through more than $ 2.7 billion in the second half of last year staving off depreciation pressure, cutting its forex reserves by a third. At the same time, rising oil prices produced a record trade gap.

Fitch in a special report said the sharp drop in reserves in the second half of 2011 has increased the risks on the sustainability of the country’s balance-of-payments.

Going a step further, S&P revised down the country’s sovereign rating outlook to stable from positive due to the external imbalances stemming from a decline in the reserves. “We revised our outlook on the long-term foreign currency rating to reflect the country’s deteriorating external liquidity,” S&P Credit Analyst Takahira Ogawa said.

S&P said it may lower the rating if there is “substantial further deterioration” of external liquidity or if Sri Lanka’s growth and revenue prospects fall below expectations.
“Recent policy developments are encouraging as they indicate the authorities are seeking an adjustment in the current account that could place the balance-of-payments on a more sustainable footing,” Fitch Sovereign Team Director Philip McNicholas said in a statement.

Retaining investor confidence in the policy framework will be especially important to ward off the risk of capital flight, and thus adhering to policies aimed at delivering a sustainable balance of payments, even at the cost of slightly slower growth, would support the current ratings, Fitch said.

Related Info :

• Large Sri Lanka Firms Strong Enough. New capital Expenditure Commitments to Slow Down in South Asia Except for Sri Lanka - Standard & Poor's

• Fitch and Moody's Upgrade Sri Lanka's Sovereign Rating due to Key Factors

Large Sri Lanka Firms Strong Enough. New capital Expenditure Commitments to Slow Down in South Asia Except for Sri Lanka - Standard & Poor's

01st February 2012, www.island.lk

Large companies in India, Pakistan, and Sri Lanka are strong enough to withstand the effects of a slowdown in demand and a rise in input costs and country risks. Nevertheless, the credit quality of a large number of their smaller peers is likely to deteriorate. That is according to a report, titled "Increased Country Risk And Reduced Demand To Test Most South Asia Companies In 2012," that Standard & Poor’s Ratings Services published yesterday (Feb 01).

"The outlook on most of the companies that we rate in South Asia is stable. These companies are generally large in their respective markets and have diversified operations, experienced managements, and strong financial resources. This should help them sustain their credit profiles," said Standard & Poor’s credit analyst Mehul Sukkawala.

Nevertheless, South Asia companies are vulnerable to any further weakening in domestic demand in 2012. That’s because their respective governments have limited capability to provide a fiscal boost in the face of a domestic or global crisis.

The report notes that country risk continues to play an important role in the credit profile of companies in South Asia. The risk has increased in India and Pakistan in the past two years. The rise in risk in India is due to a perceived increase in corruption and uncertainty in policies. Political turmoil and an energy crisis have raised country risk in Pakistan. Such risks make it harder for companies to manage their cash flows, form long-term strategies, and proceed with investment plans.

In India, the government is engaging with the industry to address policy issues, but we have yet to see any significant positive actions.

"We expect new capital expenditure commitments to continue to slow down in South Asia, with the exception of Sri Lanka. The slowdown is most intense for projects in the electric utilities, and metals and mining sectors," said Mr. Sukkawala.

We anticipate that liquidity for companies we rate in the region will remain adequate to strong because of companies’ large cash balances, strong banking relationships, and access to capital," S&P said.