Bank of Ceylon High Risk of Default
(Reuters) - (The following statement was released by the rating agency)
This announcement corrects the version published on 25 March 2014 to include disclosure language relating to Bank of Ceylon's shareholding in Fitch Ratings Lanka Ltd that was missing from the previous version.
Fitch Ratings has affirmed Bank of Ceylon's (BOC) Long-Term Foreign Currency and Local Currency Issuer Default Ratings (IDRs) at 'BB-' with a Stable Outlook. The agency has also affirmed BOC's Viability Rating (VR) at 'b+'. BOC's National Long-Term rating has also been affirmed at 'AA+(lka)' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS - IDRS, NATIONAL RATINGS AND DEBT
BOC's IDRs and National Long-Term rating reflect the government of Sri Lanka's (BB-/Stable) high propensity but moderate ability to provide support to the bank under extraordinary situations. The state's high propensity stems from BOC's high systemic importance as the largest bank in Sri Lanka, its quasi-sovereign status, its role as a key lender to the government and full government ownership. The state's moderate ability to provide support is reflected in the sovereign rating.
The Stable Outlook on BOC's IDRs and National Long-Term rating reflects the Stable Outlook on Sri Lanka's sovereign rating.
The US dollar senior unsecured notes are rated at the same level as BOC's Long-Term Foreign Currency IDR as they constitute direct, unsubordinated and unsecured obligations of the bank, and rank equally with all its other unsecured and unsubordinated obligations.
BOC's Sri Lanka rupee-denominated subordinated debt is rated one notch below its National Long-Term rating to reflect its gone-concern loss-absorption quality in the event of liquidation.
RATING SENSITIVITIES - IDRS, NATIONAL RATINGS AND DEBT
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, National Long-Term rating, and issue ratings. Visible demonstration of preferential support for BOC in the form of an explicit guarantee will be instrumental to an upgrade of its National Long-Term rating.
KEY RATING DRIVERS - VIABILITY RATING
The bank's VR remains under pressure due to its thin capitalisation and declining asset quality. The VR also takes into consideration BOC's strong domestic funding franchise that is underpinned by its state linkages.
Increased delinquencies in BOC's gold backed loans portfolio, which expanded rapidly since 2010, have been the main contributor to the increase in non-performing loans (NPL), a phenomenon that has been seen across the sector. BOC has concentration risk arising from high exposure to the state sector (state and state-owned entities). Of the bank's total state sector exposure at end-2013, about 40% is guaranteed by the state.
Reported Tier 1 regulatory capital adequacy ratio (CAR) stood at 8.0% at end-2013 and benefited from exposures that are zero-risk weighted according to local regulatory requirements. If risk weights of 100% and 50% were applied on foreign currency denominated state sector and gold backed exposures respectively, BOC's Tier 1 CAR would be much lower. The pace of loan growth slowed to 6% in 2013 from 27% a year earlier. This supported a reduction in the loans-to-deposits ratio to 91% at end-2013 from 105% at end-2012.
RATING SENSITIVITIES - VR
A continued decline in capitalisation through a surge in lending or a further decline in asset quality alongside high dividend payouts could place downward pressure on the bank's VR. A timely capital infusion would support the VR. BOC is the largest bank in Sri Lanka in terms of assets. BOC has 13 subsidiaries and five associates and has branches in Chennai, India, Male, Maldives and the Seychelles.