Bank of Ceylon: Ratings reaffirmed
|Instrument||Rated Amount (LKR Mn)||Rating Action|
|Issuer rating||N/A||[SL]AAA (Negative); Reaffirmed|
|Basel III Compliant Additional Tier I Capital Bond Programme-2020||10,000||[SL]AA (hyb) (Negative); Reaffirmed|
|Basel III Compliant Additional Tier I Capital Bond Programme-2021||3,350||[SL]AA (hyb) (Negative); Reaffirmed|
ICRA Lanka Limited has reaffirmed the Issuer rating of [SL]AAA (pronounced as S L triple A) with Negative outlook for Bank of Ceylon (“BOC”/ “the Bank”). ICRA Lanka has also reaffirmed the issue rating of [SL]AA(hyb) (pronounced as S L double A hybrid) with Negative outlook for the LKR 10,000 Mn, Basel III Compliant, Unlisted, Unsecured, Subordinated, Perpetual, Additional Tier I (AT1) Capital Bond Programme of the Bank and the issue rating of [SL]AA(hyb) (pronounced as S L double A hybrid) with Negative outlook for the LKR 3,350 Mn Basel III Compliant, Unlisted, Rated, Unsecured, Subordinated, Perpetual, Additional Tier I (AT1) Capital Bond Programme of the Bank. The letters ‘hyb’ in parenthesis suffixed to a rating symbol stand for ‘hybrid’, indicating that the rated instrument is a hybrid subordinated instrument with equity-like loss-absorption features, which may translate into higher levels of rating transition and loss severity vis-à-vis conventional debt instruments.
The ratings reaffirmation continues to factor in the 100% Government of Sri Lanka’s (GoSL) ownership, which provides a strong likelihood of sovereign support and BOC’s leading position as the most systematically important domestic bank in the country. The outlook continues to remain Negative due to the effects from the current surge in the pandemic which is likely to adversely impact the quality of the Bank’s portfolio. The Gross NPA ratio of the Bank increased to 5.35% as on Jun-20 during the first peak of the pandemic, however improved to 4.43% by Mar-21. Due to the current surge in cases since mid-April 2021, the Gross NPA ratio moderated to 4.70% in June-21. ICRA Lanka envisages the asset quality of the entire Banking industry to be stretched due to the current surge in the pandemic. Further, ICRA Lanka takes note of the moderate capitalization profile of the Bank with a Tier 1 capital ratio including capital conservation buffer (CCB) of 11.49% as on June-21 against a regulatory requirement of 9.00% and a total capital ratio of 15.01% as on June-21 against a regulatory requirement of 13.00%. Although, the Bank has a significant exposure to the dollar bonds (LKR 165 Bn in Sri Lanka Development Bonds and LKR 52 Bn in International Sovereign Bonds as on June-21), ICRA Lanka envisages the impairment charge arising from a further sovereign downgrade to be moderate compared to the overall capitalization profile of the Bank (net worth of LKR 175 Bn as in June-21)
The ratings factor in the Bank’s established franchise, healthy deposit profile and comfortable liquidity position with liquidity coverage ratio (LCR, for all currency) at 164.84% as in June-21 against a regulatory requirement of 90.00%. The ratings take into account the improved earnings of the Bank with Return on Assets (RoA) on Profit After Tax (PAT) at 1.40% in H1CY2021 as against 0.45% in H1CY2020.
The Negative outlook reflects the weakening of the asset quality and the likely pressure from the third wave of the COVID-19 outbreak in the country. The outlook may be revised to ‘Stable’ in case of a steady improvement in the asset quality profile, while maintaining a comfortable earnings profile and a capital profile with steady maintenance of the healthy capital buffers above regulatory capital requirements. ICRA Lanka believes that BOC will continue to benefit from timely and adequate capital support from GoSL.
Key rating drivers
100% government owned, systematically important bank with a long-term track record and established franchise; BOC is a licensed commercial bank, 100% owned by the government of Sri Lanka (GoSL). The Bank is the largest commercial bank in Sri Lanka with systematic importance which provides a strong likelihood of the sovereign’s support. BOC accounted for about 26% of the aggregate net loans and advances and about 25% of the aggregate deposits of all licensed commercial banks (LCBs) in Sri Lanka as on June 30, 2021. The Bank also operates 581 branches covering all the regions in Sri Lanka. BOC’s net lending portfolio stood at LKR 2.3 Tn (+32% YoY) as on June-21 and was the first bank in the country to cross the LKR 2 Tn portfolio base. BOC’s gross advances grew by 28% YoY in CY2020 (9% YoY in CY2019) which was higher than the 13% YoY growth reported by the LCB sector during the same period. The growth was mainly driven by direct short-term lending to the state treasury. The ratings factor the Bank’s position as one of the key lenders to the GoSL and State-owned entities (SOE). ICRA Lanka is also cognisant of the significant concentration levels of the portfolio, largely towards the SOEs.
Strong deposit profile with a healthy share of low-cost CASA deposits; BOC’s main funding source is its public deposits which contribute close to 86% of the total funding base as in June-21, especially supported through its strong franchise of 581 branch-network. The deposit profile consists of a comfortable mix of both local and foreign currency deposits, aided by the Bank’s well-established branch network and dominant position in the remittance business. The current account and savings account to total deposits (CASA) ratio stood at 34.65% in June-21, vis-à-vis 34.66% in Dec-20 and 31.75% in Dec-19. ICRA Lanka notes that the CASA improvement of the Bank is in-line with the industry trend, where the LCB sector CASA ratio improved to 36.32% in Dec-20, from 32.77% in Dec-19. ICRA Lanka notes that the Bank’s overall deposit base grew by about 23% YoY during CY2020, notwithstanding the very low interest rate environment that prevailed during the period.
Comfortable liquidity position; The Bank’s liquidity profile remained comfortable in CY2020 with the additional liquidity created with the reduction of Statutory Reserve Ratio (“SRR”) from 5.00% to 2.00% by the Central Bank of Sri Lanka since Mar-20 as a relief measure to face the after-shocks of the pandemic. However, the recent tightening of the monetary policy and the increase of the “SRR” to 4.00% with effect from September 01, 2021 will adversely impact this additional liquidity position going forward. BOC maintained a Liquidity Coverage Ratio (All currencies) of 164.84% as on June-21 against a regulatory requirement of 90.00%. BOC also maintained a 26.23% Liquid asset ratio (Domestic Currency) as on June-21 against a statutory requirement of 20.00%. The Bank reported a negative cumulative asset-liability mismatch of 2.45% for the short-term category of 6–12-month bucket as in Mar-21. This was in comparison to a positive mismatch of 4.74% in Mar-20 and 1.88% in Mar-19.
Improvement in the earnings profile in H1CY2021; BOC reported an operating profit  of LKR 45,968 Mn for H1CY2021 vis-à-vis LKR 24,543 Mn for H1CY2020. The operating profit for CY2020 amounted to LKR 60,243 Mn (LKR 58,804 Mn in CY2019). Profitability significantly improved during H1CY2021 where the Bank’s operating profit/ATA improved to an annualised 2.92% in H1CY2021 as compared to an annualised 1.93% in H1CY2020. Operating profit/ATA for CY2020 was 2.23% (2.50% in CY2019). The improved profitability in H1CY2021 was mainly on account of the improvement in Net interest Margin (“NIM”), moderation in the credit cost and increase in other income. The cost of funding moderated amidst low AWPLR and the higher loan growth resulted in the improvement in the Bank’s NIM. BOC’s NIM improved to 3.28% in H1CY2021 as compared to 2.47% in H1CY2020 (2.77% in CY2020). Further, BOC’s credit cost also improved to 0.86% in H1CY2021 from 1.22% for the same period in the previous year. Other income/ATA improved to 0.46% in H1CY2021 vis-à-vis 0.28% in H1CY2020, largely due to forex gains. Overall, BOC reported a Return on Assets (RoA) on PAT of 1.40% in H1CY2021 vis-à-vis 0.45% in H1CY2020. (LCB sector RoA for H1CY2021 was 1.44% and 0.99% for H1CY2020). ICRA Lanka is cognisant of the Bank’s exposure of LKR 165 Bn to Sri Lanka Development Bonds (SLDBs) and LKR 52 Bn to International Sovereign Bonds (ISBs) as in June-21, which could result in impairment losses due to potential sovereign rating downgrades.
Asset quality pressure expected to continue in the short to medium term; BOC’s GNPA ratio somewhat improved from Q4CY2020 to Q1CY2021 (GNPA 4.43% in Mar-21 and 4.76% in Dec-20), from the peak of 5.35% in June-20. ICRA Lanka notes that the improvement of the GNPA ratio is attributable to the sharp portfolio growth (~30% Y-o-Y growth) during the period and higher year-end recoveries in Q4CY2020. BOC’s GNPA improvement was largely in-line with the industry trend where LCB sector GNPA ratio has also reduced to 4.46% in Mar-21, from 5.27% in June-20, at the height of the first COVID outbreak. Also, ICRA Lanka notes that BOC demonstrates relatively better asset quality indicators compared to few large private sector LCBs, mainly due to the higher state exposure of the Bank. However, the Bank’s Gross NPA ratio has moderated to 4.70% as on June-21. This is due to the impact from the third wave of the COVID-19 outbreak from mid-April 2021. ICRA Lanka expects the overall asset quality levels of the Bank to remain somewhat under pressure over the short-term, due to the current surge in the pandemic. Provision coverage of BOC remains healthy at around 84.05% as in Mar-21 (80.61% in Dec-20), vis-à-vis the systemic average of 69.07% in Mar-21 (64.70% in Dec-20).
Moderate capitalisation levels; As in June-21, BOC reported Tier 1 capital ratio including Capital Conservation Buffer (CCB) of 11.49% (regulatory requirement of 9.00%) and a total capital adequacy ratio of 15.01% (regulatory requirement 13.00%). Furthermore, BOC reported a common equity Tier I (CET I) ratio, including CCB of 10.43% (regulatory requirement 7.50%) as on June-21. BOC’s Common equity Tier-1 (CET1) capital ratio somewhat moderated from 11.16% in Dec-19 to 10.43% in June-21, due to the sharp portfolio growth during the period. However, the Tier-1 Core capital levels remained adequate due to the LKR 15 Bn BASEL III compliant Additional Tier 1 (AT1) debentures issued in CY2020. The LKR 3.35 Bn (0.24% of risk weighted assets as of June-21) raised from Basel III compliant AT1 debentures in July-21 will also provide some comfort to the capital position of the Bank, going forward. ICRA Lanka also expects timely capital support from the GoSL as demonstrated in the recent past (GoSL infused LKR 5 Bn each to BOC during CY2016, CY2017 and CY2018), if required. Going forward, maintenance of adequate buffers over and above the minimum capitalisation requirements (Tier-I and overall CAR) would be critical from a rating perspective.
Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated below.
Links to applicable criteria: ICRA Lanka’s Credit Rating Methodology for Banks
About the entity:
BOC is the largest licensed commercial bank in Sri Lanka; 100% owned by the Government of Sri Lanka. The Bank is the first bank in the country to surpass LKR 3 Tn asset base and reported a LKR 3.30 Tn asset base as on June-21 accounting for 21% of the total banking sector assets as of June-21. BOC was incorporated in August 1939 under the Bank of Ceylon Ordinance No. 53 of 1938. Currently, BOC operates with over 581 branches including 3 overseas branches in Maldives, Chennai and Seychelles. The Bank also operates a subsidiary in the UK – Bank of Ceylon (UK) Limited. The BOC group has 9 subsidiaries and 4 associate companies that are involved in NBFI operations, property development and leisure.
During H1CY2021, BOC reported a PAT of LKR 22,070 Mn on a total asset base of LKR 3,305 Bn compared to a PAT of 5,783 Mn on a total asset base of LKR 2,681 Bn in H1CY2020.
Key financial indicators (audited)
|Net Interest Income||75,146||74,776||31,489||51,482|
|Profit after Tax||23,098||17,765||5,783||22,070|
|Net worth (adjusted for revaluation reserves)||130,588||139,978||135,752||157,811|
|Loans and Advances||1,549,805||1,988,409||1,758,794||2,319,605|
|Return on average Networth||16.83%||11.89%||7.98%||26.59%|
|Return on Assets (based on PAT)||0.99%||0.66%||0.45%||1.40%|
|Capital Adequacy Ratio (BASEL III)||15.58%||14.88%||14.70%||15.01%|
Rating history for last three years
|Sachini Costa |
 Operating profit- Operating profit before taxes on financial services and impairment charge for loans and other losses
 AWPLR- Average Weighted Prime Lending Rates
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