Bank Of Ceylon

ICRA Lanka assigns [SL]AA(hyb) for the proposed Basel III Compliant Additional Tier I Capital Bond Programme of Bank of Ceylon

InstrumentRated Amount (LKR Mn)Outstanding Amount (LKR Mn)Rating Action
Basel III Compliant Additional Tier I Capital Bond Programme-20218,000 [SL]AA(hyb) (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

Rating action

ICRA Lanka Limited has assigned the issue rating of [SL]AA(hyb) (pronounced as S L double A hybrid) with Negative outlook for the proposed LKR 3,000 Mn, with an option to increase up to LKR 8,000 Mn, Basel III Compliant, Unlisted, Rated, Unsecured, Subordinated, Perpetual, Additional Tier I (AT1) Capital Bond Programme of Bank of Ceylon (BOC or 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.

ICRA Lanka has an issuer rating outstanding of [SL]AAA (pronounced S L triple A) with Negative outlook for the Bank. ICRA Lanka also has an outstanding issue rating of [SL]AA(hyb) (pronounced as S L double A hybrid) with Negative outlook for the existing LKR10,000 Mn, Basel III Compliant, Unlisted,  Unsecured, Subordinated, Perpetual, Additional Tier I (AT1) Capital Bond Programme of Bank.


The rated Basel III compliant Tier I bond programme (Additional Tier I or AT-I bonds) has the following loss-absorption features that make them riskier:

  • Coupon payments are non-cumulative and discretionary, and the Bank has the full discretion at all times to cancel coupon payments. Cancellation of discretionary payments shall not be an event of default.  
  • Coupon can be paid out of the current year profits. However, if the current year’s profit is not sufficient, or, if the payment of coupon is likely to result in a loss, the coupon payment can be done through reserves and surpluses created through appropriation of profits[1]. However, the coupon payment is subject to the Bank meeting the minimum regulatory requirements for CET I, Tier I and total capital ratios (including capital conservation buffer, CCB) at all times as prescribed by the Central Bank of Sri Lanka under the Basel III regulations.

These Tier I bonds are expected to absorb losses through the write-down mechanism at the objective pre-specified trigger point. The trigger point event is the earlier of;

  • A decision that a write-down, without which the Bank would become non-viable, is necessary, as determined by the Monetary Board; and
  • 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.

Given the above distinguishing features of the Tier I bonds, ICRA Lanka has assigned a two notch lower rating to these bonds compared to its Issuer rating. The distributable reserves[2], that can be used for servicing the coupon in case of inadequate profits or a loss during the year, stood at a comfortable level of 8.14% of the risk-weighted assets (RWAs) as on March 31, 2021 as compared to 8.05% as on March 31, 2020.

The ratings continue to factor in the 100% Government of Sri Lanka (GoSL) ownership, which provides a strong likelihood of sovereign support and BOC’s leading position in the Sri Lankan banking industry. The outlook remains Negative due to weak asset quality which is further impacted due to the third wave of the Covid-19 pandemic. However, the Bank’s asset quality somewhat improved where the gross NPA ratio reduced to 4.4% in Mar-21 vis-à-vis 4.8% as of Dec-20. However, ICRA Lanka notes that sharp portfolio growth, on account of higher state lending has largely contributed to the improvement in the GNPA ratio. Further, the Bank’s capitalisation remained moderate as it reported a Core Capital Ratio of 11.11% and Total Capital Adequacy Ratio of 14.63% in Mar-21 as compared to the regulatory requirement of 9.00% and 13.00%, respectively.

The ratings factor in its established franchise, strong deposit profile and comfortable liquidity position with liquidity coverage ratio (LCR, for domestic currency) at 224.0% as in Mar-21. The ratings also noted an improvement in earnings profile with return on assets (RoA) on PBT at 1.68% (annualised) in Q1CY2021 (0.87% (annualised) in Q1CY2020 and 0.66% in CY2020). The improvement in overall profitability is attributable to the NIM expansion, moderation of credit cost and sizable exchange gains recorded during the period.

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 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

Credit strengths

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. The Bank is the largest commercial bank in Sri Lanka with systematic importance which provides a strong likelihood of the sovereign’s support. BOC accounts for about 25% 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 March 31, 2021. The Bank also operates 581 branches covering all the regions in Sri Lanka. 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 (22% of net advances as on Mar-21). BOC’s gross advances grew by 31% YoY in March-21. The ratings factor the Bank’s position as one of the key lenders to the GoSL and State-owned entities (SOE), which have significant exposure to the lending portfolio at 45% of net advances as on Mar-21.

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 88% of the total borrowings as in Mar-21. The deposit profile consists of a comfortable mix of both local and foreign deposits, aided by the Bank’s well-established branch network and dominant position in the remittance business. The current account savings account (CASA) ratio marginally improved to 34.7% in Dec-20, vis-à-vis 31.8% in Dec-19; the same was around 34% in Mar-21. 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 36.6% in Dec-20, from 33.0% in Dec-19. ICRA Lanka notes that the Bank’s overall deposit base has grown by about 23% during CY2020, notwithstanding the very low interest rate environment that prevailed during the period.    

Comfortable liquidity position; The Bank’s liquidity profile remained comfortable 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. 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, compared to a positive mismatch of 4.74% in Mar-20 and 1.88% in Mar-19. The Liquidity Coverage Ratio (All Currencies) was comfortably maintained at 134% (regulatory requirement 90%) and Liquid Asset Ratio (Domestic Currency) stood at 29% (regulatory requirement 20%) in Mar-21.

Credit challenges

Asset quality pressure expected to continue in the short to medium term; BOC’s GNPA ratio somewhat improved over the last 6M (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 Dec-2020 quarter. BOC’s GNPA improvement is largely in-line with the industry trend where LCB sector GNPA ratio has also reduced to 4.74% in Dec-20, from about 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 (about 42% of gross advances is state exposures as in Mar-21). Provision coverage of BOC remains healthy at around 81% as in Dec-20 (73% in Dec-19), vis-à-vis the systemic average of 65% in Dec-20 (54% in Dec-19). However, ICRA Lanka expects the overall asset quality levels of the Bank to remain under pressure over the short to medium, due to the potential impact of the third wave of the COVID-19 outbreak, where the impact of the same on the banking sector is yet to be seen.

Moderate capitalisation levels; As in Mar-21, BOC reported a Core Capital Ratio of 11.11% (regulatory requirement of 9.00%) and a total capital adequacy ratio of 14.63% (regulatory requirement 13.00%). Furthermore, BOC reported a common equity Tier I (CET I) ratio, including capital conservation buffer of 9.99% (regulatory requirement 7.50%) as on Mar-21. BOC’s Common equity Tier-1 (CET1) capital ratio somewhat moderated from 11.16% in Dec-19 to 9.99% in Mar-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 Tier I complied perpetual debentures issued during CY2020. In the near term, ICRA Lanka expects the Bank to manage its growth capital requirements via market mechanisms such as hybrid/AT1 debt instruments, as done by other major state banks. ICRA Lanka notes that the proposed LKR 3 Bn, with an option to increase up to LKR 8 Bn, Additional Tier 1 Debenture programme will provide some comfort from a capital point of view. Also, due to the systemic importance of the Bank, ICRA Lanka expects timely capital support from GoSL, as demonstrated in the recent past (GoSL infused LKR 5 Bn each to BOC during CY2017 and CY2018). Going forward, maintenance of adequate buffers (at least 1%) over and above the minimum capitalisation requirements (Tier-I and overall CAR) would be critical from a rating perspective.

Muted profitability indicators due to the pandemic, however, the same has improved during Q1CY2021; BOC reported an operating profit[3] amounting to LKR 17,478 Mn for Q1CY2021 vis-à-vis LKR 8,303 Mn for Q1CY2020. The operating profit for CY2020 amounted to LKR 29,010 Mn (LKR 40,206 Mn in CY2019). Profitability significantly improved during Q1CY2021 where the Bank’s operating profit/ATA improved to 2.28% in Q1CY2021 as compared to 1.34% in Q1CY2020. Operating profit/ATA for CY2020 was 1.07% (1.72% in CY2019). The improved profitability in Q1CY2021 was mainly on account of the expansion in Net interest Margin (“NIM”), improvement in credit cost and increase in other income. A higher loan growth and the moderation in the cost of funds resulted in an improvement in the Bank’s NIMs to 3.08% in Q1CY2021 as compared to 2.87% in Q1CY2020 and 2.77% in CY2020. Further, BOC’s credit cost also improved to 0.63% in Q1CY2021 from 1.15% for the same period in the previous year. This is as a result of the lower incremental NPAs during Q1CY2021 as compared with Q1CY2020. Other income/ATA improved to 0.66% in Q1CY2021 vis-à-vis 0.38% in Q1CY2020. This was largely driven by the forex gain of LKR 3.8 Bn in Q1CY2021. Overall, BOC reported a Return on Assets (RoA) on PAT of 1.68% in Q1CY2021, higher than the LCB sector’s 1.42%. Bank’s RoA on PAT for Q1CY2020 was 0.87% as compared to 1.02% of the LCB Sector.

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 3.15 Tn asset base as on Mar-21 accounting for 21% of the total banking sector assets as of Mar-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 10 subsidiaries and 4 associate companies that are involved in NBFI operations, property development and leisure.

During the CY2020, BOC reported profit after tax (PAT) of LKR 17,765 Mn on a total asset base of LKR 2,983 Bn as compared to a PAT of LKR 23,098 Mn on a total asset base of LKR 2,415 Bn in the previous financial year. For the Q1CY2021, BOC reported a PAT of LKR 12,901 Mn on a total asset base of LKR 3,145 Bn compared to a PAT of 5,429 Mn on a total asset base of LKR 2,559 Bn for Q1CY2020.

Key financial indicators (audited)
LKR MnCY2019CY2020Q1CY2020*Q1CY2021* 
Net Interest Income75,14674,77617,82523,631 
Profit after Tax23,09817,7655,42912,901 
Net worth (adjusted for revaluation reserves)130,588139,978134,851152,901 
Loans and Advances1,549,8051,988,4091,653,3262,166,063 
Total Assets2,415,1172,982,9812,559,3313,145,426 
Return on average Networth17.52%11.89%15.04%31.55% 
Return on Assets (based on PAT)0.99%0.66%0.87%1.68% 
Gross NPA4.79%4.76%5.16%4.43% 
Net NPA1.75%0.92%1.61%1.15% 
Capital Adequacy Ratio (BASEL III)15.58%14.88%15.43%14.63% 
Gearing (times)15.7517.7016.1717.19 

*Unaudited figures

Rating history for last three years:
Rasanga Weliwatte

Niraj Jalan

[1] As per CBSL, any dividend or coupon to be paid under the capital instrument is only paid to the extent that the bank has retained profits for distributions

[2] Distributable reserves include all the distributable items created from retained profits; the Bank’s distributable items include retained earnings and general reserves of the Bank

[3] Operating profit= Operating profit before taxes on financial services


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