ICRA Lanka reaffirms the issuer rating of MCB Bank Limited (Sri Lanka branch)
|Instrument||Rated Amount |
|Issuer rating||N/A||[SL]A+ (Stable); Reaffirmed|
ICRA Lanka Limited, subsidiary of ICRA Limited, a group company of Moody’s Investors Service, has reaffirmed the issuer rating of MCB Bank’s Sri Lanka branch (MCBSL or the Bank) at [SL]A+ (Pronounced SL A plus). The outlook on the rating is Stable.
The rating factors in the financial, managerial and operational support provided by MCB Bank Limited, Pakistan (MCBP; rated Caa1/ NP by Moody’s) to its Sri Lankan branch operation. The rating takes note of the comfortable capitalisation profile with Total Capital ratio including – Capital Conservation Buffer (“CCB”) at 28.23% as in Sep-19 compared to minimum regulatory requirement of 12.50%. Further, the Bank’s core capital was at LKR 6.2 Bn as in Sep-19, against regulatory minimum requirement of LKR 5.0 Bn by Dec-20. The capital profile was supported by healthy profitability indicators with Return on Assets of 1.35% and Return on Equity of 6.32% in 9MCY2019.
The rating takes note of MCBSL’s weak asset quality profile with gross NPA of 4.13% as in Sep-19 vis a vis 5.73% as in Dec-18 (4.18% as in Dec-17). The rating however takes cognizance of MCBSL’s modest size and franchise, geographically concentrated presence, its concentrated exposures and a moderate deposit profile. MCBSL’s lending and deposit portfolios are quite concentrated with top 10 exposures accounting for about 71% and 45%, respectively as in Sep-19.
ICRA Lanka believes that MCBSL will continue to benefit from the support from MCBP. The outlook may be revised to ‘Positive’ in case of a sharp improvement in the resource and earnings profile as portfolio expands, while keeping the asset quality under control. The outlook may be revised to ‘Negative’ in case of sharp deterioration in asset quality and profitability indicators.
Key rating drivers
Support from MCB Bank of Pakistan (rated Caa1 by Moody’s); MCB Bank of Pakistan (“MCBP” or “the parent”) is one of the largest commercial banks in Pakistan with market share of about 8% in terms of customer deposits, as in December 2018. MCBSL started its operations in 1994 with the acquisition of the Middle East Bank’s local operations in Sri Lanka. MCBP provides operational, management and financial support to MCBSL. From an operational and management aspect, MCBP supervises accounting, internal audit, risk and compliance of MCBSL. Financially, ICRA Lanka envisages, MCBP would support the Bank by providing liquidity and capital support, whenever required.
Comfortable capitalisation profile; The Bank has a comfortable capital profile with Tier-I (including CCB) at 30.38% and overall Total Capital including CCB at 28.23% as of September 30, 2019 (regulatory Tier-I (including CCB) of 8.50% and Total Capital including CCB requirement of 12.50%) as compared to 30.14% and 27.78%, respectively as on December 31, 2018. The Bank’s core capital stood at LKR 6.2 Bn as in Sep-19, which complied with the regulatory minimum requirement of LKR 5.0 Bn by December 2020. ICRA Lanka takes note of the direction issued by the State Bank of Pakistan in 2018 to repatriate 50% profits of the foreign branches of the Pakistan Banks. This is expected to moderate the future growth potential of MCBSL. However, the current capital profile is expected to support the envisaged portfolio growth of about 10% per annum for CY2020, in spite of modest internal generation due to the increased profit repatriation since 2018..
Healthy profitability; MCBSL maintained a healthy Net Interest Margin (“NIM”) of 4.96% for CY2018 as compared to 5.37% in CY2017, the same was 5.35% in 9MCY2019. The NIM improved in 9MCY2019 due to improvement in yields on advances and investments. The Bank’s operating expenses/ATA increased to 3.46% in 9MCY2019 as compared to 2.90% in CY2018 to 2.95% in CY2017. The operating expenses of the Bank increased as a result of apportioning the service cost of MCBP to MCBSL. The Bank’s credit costs (loan impairment expenses/ ATA) decreased to 0.14% in 9MCY2019 from 0.54% in CY2018 (0.53% in CY2017) due to moderation in new slippages. The net profitability of the Bank moderated since CY2018, although ROA and ROE of the Bank were still healthy at 1.35% and 6.32% for 9MCY2019 as compared to 1.50% and 7.15% for CY2018 (1.94% and 8.64% in CY2017). The profitability of MCBSL moderated as a result of recognising service fee of MCBP and Debt Servicing Levy imposed by the Government of Sri Lanka. Going forward, MCBSL’s ability to improve operational efficiency by expanding the portfolio would help to improve profitability.
Modest size with limited franchise and concentrated portfolio; MCBSL operates with eight branches and reported an asset base of LKR 31 Bn in Sep-19. The Bank’s portfolio is concentrated in corporate segment with 84% share followed by SME (13%) and Retail (3%) segments in Sep-19. The Bank is faced with the challenge of growing its SME portfolio due to poor performance of the SME sector during the last 3 years as a result of adverse macro economic conditions and retail portfolio because of its limited franchise. MCBSL’s portfolio is concentrated on a few large customers as the top ten group exposures contributed to 71% of the total portfolio as in Sep-19 compared to 60% as in Dec-18. Geography wise, 94% of the facilities were based in Western Province. The Bank’s ability to grow a granular portfolio would reduce its portfolio concentration risk.
Asset quality affected by the portfolio’s concentration; MCB reported a gross NPA (GNPA) of 4.13% in Sep-19 as compared to 5.73% in Dec-18 (4.81% in Dec-17). GNPA of MCB was lower than the system’s GNPA of 4.92% in Sep-19. During the latest 9 months, GNPA ratio improved mainly with the recovery of LKR 479 Mn (39% of opening GNPA in Jan-19) from the NPA facilities. Presently the Bank’s largest NPA facility contributes closer to 77% of the total NPA portfolio. The Bank’s GNPA excluding the largest NPA facility was 0.99% in Sep-19. The provision coverage ratio of MCBSL was low at 11.15% in Sep-19 as compared to system average of 48.11%. However, ICRA Lanka notes that around 93% of the portfolio is backed by securities in Sep-19. The solvency ratio (Net NPA/Net Worth) improved to 11.57% in Sep-19 as compared to 17.87% in Dec-18, with the recovery of the NPA portfolio and the moderation witnessed on new slippages. The Bank’s ability to recover its largest NPA, control incremental slippages and achieve good quality granular growth in the lending portfolio, would be crucial from a rating point of view.
Concentrated deposit profile, however, liquidity is comfortable; Deposits of the Bank constitute 94% of the borrowings as of Sep-19 as compared to 96% in Dec-18 (84% in Dec-17). The deposit portfolio had 25% exposure to foreign currency deposits in Sep-19 as compared to 28% in Dec-18; however, MCB has hedged the foreign exchange risk through SWAPs. In Sep-19, top ten depositors contributed closer to 45% of the total deposits of MCBSL as compared to 46% in Dec-18. The CASA ratio stood at 30% in Sep-19 as compared to 28% in Dec-18 (27% in Dec-17); the ratio was marginally lower than the Licensed Commercial Banking sector’s average of 33% in Sep-19 due to low contribution from demand deposits (9% of total deposits as in Sep-19). The short term (less than 1 year) ALM cumulative mismatch was positive 13.27% in Sep-19 compared to 8.06% of positive cumulative mismatch in Dec-18. ICRA Lanka takes cognisance of the existing contingency funding arrangements with the parent and expects MCBP to extend timely liquidity support to MCBSL, when required.
Analytical approach: For arriving at the ratings, ICRA Lankahas applied its rating methodologies as indicated below. Links to applicable criteria: ICRA Lanka’s Credit Rating Methodology for Banks
About the company:
MCB Bank Sri Lanka (“MCBSL”) was established in Sri Lanka with the acquisition of Middle East Bank Limited’s Colombo operations in 1994. Currently, MCBSL operates with 8 branches at Kollupity, Maradana, Pettah, Wellawatte, Kandy, Galle and Batticoloa with its Head Office branch in Colombo.
The Bank currently focuses on corporate, SME and retail segments. MCBSL also operates an Islamic Banking division. During the year ended December 31, 2018, MCBSL reported a PAT of LKR 444 Mn on a total asset base of LKR 30.2 Bn as compared to a PAT of LKR 504 Mn on a total asset base of LKR 28.8 Bn in the previous financial year. For 9MCY2019, MCBSL reported a PAT of LKR 310 Mn on a total asset base LKR 31.0 Bn.
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Based on ICRA’s NPA computation
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