Bank Of Ceylon

ICRA Lanka assigns [SL]AA+ (Negative) to the LKR 5,400 Mn Basel III compliant Subordinated Debenture programme of Bank of Ceylon

InstrumentRated Amount (LKR Mn)Rating Action
Basel III Compliant, Tier II Subordinated Debenture Programme5,400 [SL]AA+ (Negative); Assigned
Issuer ratingN/A [SL]AAA (Negative); Outstanding
Basel III Compliant Additional Tier I Capital Bond Programme-202010,000 [SL]AA (hyb) (Negative); Outstanding
Basel III Compliant Additional Tier I Capital Bond Programme-20213,350 [SL]AA (hyb) (Negative); Outstanding

Rating action

ICRA Lanka Limited has assigned the Issue Rating of [SL]AA+ (pronounced as S L double A plus) with Negative outlook for the Basel III compliant, Tier II, Unlisted, Rated, Unsecured, Subordinated, Redeemable, debentures with non-viability write down features by Bank of Ceylon (“BOC”/ “the Bank”) amounting to LKR 5,400 Mn.

ICRA Lanka also has an outstanding Issuer rating of [SL]AAA (pronounced as S L triple A) with Negative outlook, an 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 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.

Rationale

The rated Basel III compliant Tier II subordinated debenture programme shall have a principal loss absorption feature through a write-down mechanism which allocates losses to the instrument, at a point of non-viability/trigger event determined by the Monetary Board of Central Bank of Sri Lanka (CBSL). If the trigger event occurs the debentures shall be permanently written off and any liability arising from such instrument at the point of non-viability shall take the character of an Additional Tier 1 instrument and shall be subordinated to claims of every other liability.

The trigger event for the purpose of loss absorption at the point of non-viability is the earlier of:

  1. A decision that a write-down, without which the Bank would become non-viable, is necessary, as determined by the Monetary Board of CBSL.
  2. The decision to make a public sector injection of capital, or equivalent support, without which the Bank would have become non-viable as determined by the Monetary Board of CBSL.

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 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 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 surge in the pandemic during August to September 2021. 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.

Please refer the detailed rationale dated September 09, 2021

Outlook: Negative

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.

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
LKR MnCY2019CY2020H1CY2020*H1CY2021* 
Net Interest Income75,14674,77631,48951,482 
Profit after Tax23,09817,7655,78322,070 
Net worth (adjusted for revaluation reserves)130,588139,978135,752157,811 
Loans and Advances1,549,8051,988,4091,758,7942,319,605 
Total Assets2,415,1172,982,9812,680,7323,304,628 
Return on average Networth16.83%11.89%7.98%26.59% 
Return on Assets (based on PAT)0.99%0.66%0.45%1.40% 
Gross NPA4.79%4.76%5.35%4.70% 
Net NPA1.75%1.36%2.09%1.44% 
Capital Adequacy Ratio (BASEL III)15.58%14.88%14.70%15.01% 
Gearing (times)15.7017.7416.9317.54 

*Unaudited figures

Rating history for last three years
Analysts
Sachini Costa
+94-774781595
sachini.costa@icralanka.com  

Rasanga Weliwatte
+94-773553564
rasanga@icralanka.com


Disclaimer
ICRA Logo

Subsidiary of ICRA Limited

A Group Company of Moody's Investors Service

CORPORATE OFFICE
Level10, East Tower, World Trade Center, Colombo 01, Sri Lanka
Tel:+94 11 4339907;Fax:+94112333307 Email:info@icralanka.com; Website:www.icralanka.com

© Copyright, 2021 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 www.icralanka.com 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.

Bank Of Ceylon

ICRA Lanka assigns [SL]AA+ (Negative) to the LKR 5,400 Mn Basel III compliant Subordinated Debenture programme of Bank of Ceylon

InstrumentRated Amount (LKR Mn)Rating Action
Basel III Compliant, Tier II Subordinated Debenture Programme5,400 [SL]AA+ (Negative); Assigned
Issuer ratingN/A [SL]AAA (Negative); Outstanding
Basel III Compliant Additional Tier I Capital Bond Programme-202010,000 [SL]AA (hyb) (Negative); Outstanding
Basel III Compliant Additional Tier I Capital Bond Programme-20213,350 [SL]AA (hyb) (Negative); Outstanding

Rating action

ICRA Lanka Limited has assigned the Issue Rating of [SL]AA+ (pronounced as S L double A plus) with Negative outlook for the Basel III compliant, Tier II, Unlisted, Rated, Unsecured, Subordinated, Redeemable, debentures with non-viability write down features by Bank of Ceylon (“BOC”/ “the Bank”) amounting to LKR 5,400 Mn.

ICRA Lanka also has an outstanding Issuer rating of [SL]AAA (pronounced as S L triple A) with Negative outlook, an 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 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.

Rationale

The rated Basel III compliant Tier II subordinated debenture programme shall have a principal loss absorption feature through a write-down mechanism which allocates losses to the instrument, at a point of non-viability/trigger event determined by the Monetary Board of Central Bank of Sri Lanka (CBSL). If the trigger event occurs the debentures shall be permanently written off and any liability arising from such instrument at the point of non-viability shall take the character of an Additional Tier 1 instrument and shall be subordinated to claims of every other liability.

The trigger event for the purpose of loss absorption at the point of non-viability is the earlier of:

  1. A decision that a write-down, without which the Bank would become non-viable, is necessary, as determined by the Monetary Board of CBSL.
  2. The decision to make a public sector injection of capital, or equivalent support, without which the Bank would have become non-viable as determined by the Monetary Board of CBSL.

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 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 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 surge in the pandemic during August to September 2021. 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.

Please refer the detailed rationale dated September 09, 2021

Outlook: Negative

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.

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
LKR MnCY2019CY2020H1CY2020*H1CY2021* 
Net Interest Income75,14674,77631,48951,482 
Profit after Tax23,09817,7655,78322,070 
Net worth (adjusted for revaluation reserves)130,588139,978135,752157,811 
Loans and Advances1,549,8051,988,4091,758,7942,319,605 
Total Assets2,415,1172,982,9812,680,7323,304,628 
Return on average Networth16.83%11.89%7.98%26.59% 
Return on Assets (based on PAT)0.99%0.66%0.45%1.40% 
Gross NPA4.79%4.76%5.35%4.70% 
Net NPA1.75%1.36%2.09%1.44% 
Capital Adequacy Ratio (BASEL III)15.58%14.88%14.70%15.01% 
Gearing (times)15.7017.7416.9317.54 

*Unaudited figures

Rating history for last three years
Analysts
Sachini Costa
+94-774781595
sachini.costa@icralanka.com  

Rasanga Weliwatte
+94-773553564
rasanga@icralanka.com


Disclaimer
ICRA Logo

Subsidiary of ICRA Limited

CORPORATE OFFICE
Level10, East Tower, World Trade Center, Colombo 01, Sri Lanka
Tel:+94 11 4339907;Fax:+94112333307 Email:info@icralanka.com; Website:www.icralanka.com

© Copyright, 2021 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 www.icralanka.com 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.