Merchant Bank of Sri Lanka & Finance PL

ICRA Lanka assigns [SL] BBB rating to the proposed debenture of Merchant Bank of Sri Lanka & Finance PLC

Instrument*Rated Amount (LKR Mn)Rating Action
Issuer RatingN/A[SL]BBB+ with Stable Outlook; reaffirmed
Subordinated Unsecured Redeemable Debenture Programme2,000[SL]BBB with Stable Outlook; reaffirmed
Subordinated Unsecured Redeemable Debenture Programme1,000[SL]BBB with Stable Outlook; assigned

Rating action

ICRA Lanka Limited has assigned the issue rating of [SL] BBB (Pronounced as S L Triple B) with Stable outlook to the proposed LKR 1,000 Mn Subordinated, Unsecured, Redeemable Debenture Programme of Merchant Bank of Sri Lanka & Finance PLC (“MBSL”/“the Company”).  ICRA Lanka has also reaffirmed the Issuer Rating of MBSL at [SL]BBB+ (Pronounced as S L Triple B plus) with Stable outlook. Further, ICRA Lanka has reaffirmed the issue rating of the LKR 2,000 Mn Subordinated, Unsecured, Redeemable Debenture Programme at [SL]BBB (Pronounced as S L Triple B) with Stable outlook.


The rating action factors in the improvement in the capital profile of MBSL following the rights issue in September 2021 of LKR 2,152 Mn (6.6% of risk-weighted assets – RWAs as of December 2021). Subsequently, the Central Bank of Sri Lanka (“CBSL”) has removed the lending cap of LKR 35 Bn (imposed on March 2019) and deposit cap of LKR 23 Bn (imposed in May 2019). The ratings also note the improved solvency profile with the Net NPA/Networth at 48.51% in December 2021 from 161.84% in December 2020. Further, the ratings consider the improved profitability in CY2021 amidst improvement in the core margins. MBSL reported a Profit after Tax (PAT) of LKR 529 Mn in CY2021 vis-à-vis a net loss of LKR 1,108 Mn in CY2020. The ratings also continue to take into account the strategic and financial support received from its parent entity; Bank of Ceylon (“BOC”), which owns 84.5% of MBSL as of December 2021.

However, ICRA Lanka takes cognizance of the stretched asset quality indicators in terms of the Gross Non Performing Assets (“GNPA %”) and Net NPA which stood at 16.88% and 6.38%, respectively, in December 2021, against 10.81% and 2.53%, respectively, for the Licensed Finance Companies (LFC) Sector. Going forward, the ability of MBSL to control new slippages and improve asset quality indicators, whilst maintaining a comfortable capital profile, would be a key rating sensitivity.

Outlook: Stable

The “Stable” outlook reflects the Company’s improved capital and solvency profile (post the rights issue) as well as the profitability indicators. The outlook may be revised to “Negative” in case of further deterioration in the Company’s asset quality levels or weakening profitability. The outlook may be revised to “Positive” in case of an improvement in the asset quality indicators, liquidity and capital profile of the Company.

Key rating drivers

Credit strengths

Being a subsidiary of BOC ensures strategic and financial support; MBSL is 84.5 % owned subsidiary of Bank of Ceylon (“BOC”, rated [SL]AAA (Negative) by ICRA Lanka). The company derives strategic and financial support from its parent company. MBSL’s board consists of nine directors, out of which six directors are from BOC as of December 2021 . As the parent company, BOC has provided strong financial support by subscribing to the rights issue, wherein the Company raised LKR 2,152 Mn on September 16, 2021. In addition, BOC provides term loan facilities and contingent funding lines to the Company. MBSL was incorporated in 1982 as a specialised bank, operating as the leasing and merchant banking arm of BOC. Subsequently, it became a Non-Banking Financial Institution offering leasing, term loans, personal loans, microfinance, and gold loan facilities to its customers. The company had a network of 48 branches across the country and over 975 employees as of December 2021.

Improved capital profile following the recent capital infusion; MBSL operated below regulatory Capital Adequacy Ratios (CAR) over the past few years and was operating under the lending cap of LKR 35 Bn and deposit cap of LKR 23 Bn since early CY2019. However, post the recent rights issue, the Core and Total CAR ratios of the Company increased to 11.56% and 12.14%, respectively, in December 2021, against the regulatory minimums of 7.00% and 11.00%, respectively. The Company also had core capital of LKR 3.8 Bn in December 2021, against the regulatory requirement of LKR 2.5 Bn. MBSL’s compliance with capital regulations, resulted in removal of the lending and deposit caps imposed by the CBSL. Moreover, with the higher networth, gearing improved to 6.90 times in December 2021 vis-à-vis 20.25 times in December 2020.

Improved earnings profile: The company’s lending spread stood at 10.78% in CY2021 versus 4.75% in CY2020 due to a reduction in the cost of funds (to 9.15% in CY2021 from 11.27% in CY2020) and higher yields (of 19.93% in CY2021 from 16.02% in CY2020). Loan growth following the removal of the lending cap, rise in the high-yield pawning segment (37.34% YoY in CY2021), and access to low cost deposits following removal of the deposit cap has benefitted the lending spread. Consequently, the Net Interest Margin (NIM) improved to 9.48% in CY2021, compared with 4.09% in CY2020 The higher operating income and the recent cost rationalization initiatives of the Company has helped to improve the cost to income ratio to 63.23% in CY2021 from 119.71% in CY2020 The credit cost also improved to 0.27% in CY2021 compared to 2.94% in CY2020. The high credit cost in CY2020 was mainly due to impairment provisioning of its subsidiary; MBSL Insurance (MBSL).  Overall, the Company reported a profit after tax (PAT) of LKR 529 Mn in CY2021, compared to a net loss of LKR 1,108 Mn in CY2020. The RoA and RoE had increased to 1.58% and 18.70%, respectively, in CY2021 vis-à-vis -3.20 % and -54.39%, respectively, in CY2020. MBSL’s RoE was better than the industry average RoE of 17.11% in CY2021.

Credit challenges

Stretched asset quality indicators; The Gross Non-performing asset ratio (GNPA %) peaked at 23.66% in September 2021 vs. the LFC sector average of 12.66%. However, ICRA Lanka also notes that the contraction of the overall portfolio due to the lending cap and lockdown imposed in Q3 CY2021, has contributed to the high GNPA ratio. With the lifting of lockdown restrictions and faster collections, and strengthening of internal processes, the GNPA % improved to 16.88% in December 2021 (sector average stood at 10.81%).  The solvency measured in terms of Net NPA/Networth has shown significant improvement to 48.5% in December 2021 (161.84% in December 2020), following the LKR 2.2 Bn rights issue. Going forward, MBSL’s ability to control fresh slippages and recoverability of the legacy NPA portfolio would be a key rating sensitivity.

Modest lending portfolio; The gross lending portfolio grew to LKR 31.7 Bn in December 2021 vis-à-vis LKR  30.2 Bn in December 2020. As of December 2021, the net lending portfolio of the Company amounted to LKR 28 Bn which accounted for only 2.55% of the Non- Banking and Financial Industry (NBFI). The unfavourable macro outlook of the country presently may also constrain future growth. Apart from pawning (17% of the gross portfolio in December 2021) and the loans segment (41% of the portfolio), all other products have witnessed de-growths in their respective portfolios over the past 3 years. Healthy gold market prices and demand for working capital finance on the back of low interest rates, have respectively contributed towards the expansion in pawning and loans.

Moderate liquidity; The Company reported a short term (less than 1 year) negative cumulative ALM mismatch of 20.39% in Dec-21 as compared to negative 15.56% in Mar-21 and negative 6.40% in Mar-20. However, ICRA Lanka notes that the Company has unutilized funding lines of LKR 2.3 Bn as of Dec-21, which mitigates the liquidity risk.

Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated below. The ratings also factor in the capital support from BOC, which uplifted the credit risk profile of MBSL. 

Links to applicable criteria: ICRA Lanka’s Credit Rating Methodology for Non-Banking Financial Institutions

About the Company:

MBSL was established in 1982 as a merchant bank. The Company had two subsidiaries, MBSL Savings Bank Ltd (MSB, Licensed Specialised Bank) and MBSL Insurance Company (Composite Insurer) and two associate companies, Lanka Securities (Pvt) Ltd (registered stockbroker) and MCSL Financial Services Ltd (a licensed finance company). Pursuant to the Master Plan on Consolidation of the Financial Sector proposed by the Central Bank of Sri Lanka (CBSL), in January 2015, MBSL Savings Bank Limited (MSB) and MCSL Financial Services Limited (MCSL) were merged with MBSL. MBSL offers leasing & HP, long and short-term loans, microfinance and gold loans to its clients. The Company had  48 branches as on December 2021. MBSL Insurance Company Limited (MBSI) is a 53.81% owned subsidiary of MBSL. The Company offers general insurance products and maintains life insurance to its customers. MBSI has close to 50 branches and window offices covering Sri Lanka.

MBSL reported a Profit After Tax (PAT) of LKR 529 Mn for CY2021 on a total asset base of LKR 34,277 Mn vis-à-vis a net loss of LKR 1,108 Mn for CY2020 on a total asset base of 32,406 Mn.

MBSL Group reported a Profit After Tax (PAT) of LKR 477 Mn for CY2021 on a total asset base of LKR 36,270 Mn vis-à-vis a net loss of LKR 909 Mn for CY2020 on a total asset base of LKR 34,355 Mn.

Key financial indicators  – Company
Net Interest Income2,2011,418                    2,850
Profit after Tax103(1,108)                      529
Net worth2,6081,468                    4,169
Loans and Advances (Net)29,26126,786                   28,185
Total Assets36,97532,406                   34,277
Return on Equity4.00%-54.39%18.70%
Return on Assets (On PAT)0.28%-3.20%1.58%
Gross NPA14.53%17.86%16.88%
Net NPA7.10%7.86%6.38%
Capital Adequacy Ratio (Tier 1)5.60%4.41%11.56%
Gearing (times)12.6220.29                     6.87

*Unaudited financials

Rating history for last three years:
Apsara Thurairetnam
Senior Analyst

Sahil Udani
Assistant Vice President


Subsidiary of ICRA Limited

Level10, East Tower, World Trade Center, Colombo 01, Sri Lanka
Tel:+94 11 4339907;Fax:+94112333307;

© Copyright, 2022 ICRA Lanka Limited. All Rights Reserved. Contents may be used freely with due acknowledgement to ICRA Lanka.

ICRA Lanka ratings should not be treated as recommendations to buy, sell or hold the rated debt instruments. ICRA Lanka ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA Lanka rating is a symbolic indicator of ICRA Lanka’s current opinion on the relative capability of the issuer concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website or contact ICRA Lanka’s office for the latest information on the outstanding ICRA Lanka ratings.

All information contained herein has been obtained by ICRA Lanka from sources believed by it to be accurate and reliable, including the rated issuer. ICRA Lanka however has not conducted any audit of the rated issuer or of the information provided by it. While reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any kind, and ICRA Lanka in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information.

ICRA Lanka does not take any responsibility for accuracy of material/documents prepared or published by other parties based on this document. All ICRA Lanka official rating rationales are prepared in English and external parties may present or publish translated versions of the same. Readers are henceforth advised to refer to the ICRA Lanka’s official rating rationale in the event of any inconsistency found in such documents.

ICRA Lanka or any of its group companies may have provided services other than rating to the issuer rated. All information contained herein must be construed solely as statements of opinion, and ICRA Lanka shall not be liable for any losses incurred by users from any use of this publication or its contents.