MCB Bank Limited (Sri Lanka branch)

ICRA Lanka reaffirms the Issuer Rating of MCB Bank Limited (Sri Lanka Branch)

InstrumentRated Amount (LKR Mn)Rating Action
Issuer RatingN/A[SL]A+ (Stable); Reaffirmed

Rating action:

ICRA Lanka Limited has reaffirmed the Issuer Rating of [SL]A+ with Stable outlook for MCB Bank’s Sri Lanka branch (MCBSL or the Bank).

Rationale:

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 operations. The rating takes note of the comfortable capitalisation profile with a Tier 1 capital ratio of 33.97% in June-20 as compared to the regulatory requirement of 8.00%. Further, the Bank’s core capital was LKR 6.2 Bn as in June-20 against the regulatory requirement of LKR 5 Bn. ICRA Lanka also takes note of the relatively better asset quality indicators with MCBSL reporting GNPA ratio of 4.47% as on June-20, as compared to the system’s GNPA ratio of 5.27%.

The rating however takes cognizance of MCBSL’s modest size, limited franchise, limited geographical presence with 8 branches, apart from the concentrated exposures and deposit profile. As in June-20, the top 10 group exposures accounted for 55% of the total portfolio. MCBSL had a somewhat concentrated deposit portfolio with the top 10 depositors accounting for 34.52% as in June-20. In terms of the overall funding profile, deposits accounted for 77% of the total borrowings as in June-20.

Outlook: Stable

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 significant improvement in the resource and earnings profile as the 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:

Credit strengths

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 the share of customer deposits as in December 2019. 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 overlooks accounting, internal audit, risk and compliance of MCBSL. Financially, ICRA Lanka envisages, MCBP would support the Bank by providing liquidity whenever required. MCBSL received capital infusion of  LKR 573 Mn from MCBP in 2015. Given the current comfortable capitalisation of the Bank, ICRA Lanka does not expect capital infusions by the parent in the short-medium term.

Healthy Asset Quality Indicators- MCBSL reported a higher GNPA ratio of 4.47% in June-20 as compared to 3.83% in Dec-19 (5.73% in Dec-18) primarily driven by a reduction in the overall portfolio of the Bank. The absolute gross NPAs was stable at LKR 815 Mn in June-20 as compared to LKR 817 Mn in Dec-19 (LKR 1,244 Mn in Dec-18). Currently, the Bank’s largest NPA facility contributes to 74% of the total GNPA portfolio. The Bank’s GNPA excluding the largest NPA facility was 1.18% in June-20. ICRA Lanka notes that the Bank has offered debt moratoriums of about LKR 4.9 Bn (~26.8% of the total portfolio as in June- 20) for businesses affected by the pandemic; moratoriums on majority of these facilities have expired in September-20 and repayments have resumed. The provision coverage ratio of MCBSL was lower at 16.08% in June-20 as compared to system average of 56.14%. The coverage ratio remained lower than the system average, as 84% of the portfolio remained asset backed (including 21% cash-backed) in June-20. The solvency ratio (Net NPA/Net Worth) remained stable at 10.12% in June-20 as compared to 10.98% in Dec-19. The sector reported a solvency ratio of 20.81% in June-20 and 18.32% in Dec-19. The Bank’s ability to recover its largest NPA, in a timely manner would be crucial from a rating point of view.

Comfortable capitalisation profile; The Bank maintains a comfortable capitalisation profile with a Core capital ratio and Total Capital Ratio of 33.97% and 33.34% in June-20, (Regulatory requirement of 8.00% and 11.50%) as compared to 31.65% and 30.24% in Dec-19. As a result of the degrowth in the Bank’s portfolio, the Risk weighted Assets have declined by 6.79% YTD, resulting in an improvement in the capital ratios from Dec-19 to June-20. The Bank’s core capital of LKR 6.2 Bn as in June-20 met the regulatory requirement of LKR 5 Bn. The current capital profile along with the healthy profitability would support the envisaged portfolio growth of about 10% per annum over the short-medium term. There have not been any profit repatriation to MCBP for CY2019 and CY2020. As a measure of strengthening the liquidity position of Banks, CBSL has restricted repatriation of profits not already declared for financial years 2019 and 2020.

Adequate profitability; Historically, MCBSL has maintained healthy lending margins, where the  Net Interest Margin (“NIM”) was 4.97% in CY2019 and 4.96% in CY2018. The same has somewhat moderated during the 6MCY2020 to 3.81%, due to the lower loan growth and the sharp reduction of lending rates in the market during the period; debt moratorium offered by the Bank has also contributed to the same. However, MCBSL maintained NIMs higher than the system average of 3.31% for 6MCY2020 and 3.66% for CY2019.  Further, the cost to income ratio remained high at 64.65% for 6MCY2020 as compared to 55.95% for 6MCY2019 (64.92% for CY2019). The credit cost (loan provisioning cost/ATA) was reported at 0.24% for 6MCY2020 as compared to 0.02% for 6MCY2019 (0.23% in CY2019). MCBSL reported moderate profitability with Return on Equity (ROE) of 4.30% for 6MCY2020 as compared to 8.08% for 6MCY2019 (5.56% for CY2019). The sector reported a ROE of 10.64% for 6MCY2020. MCBSL also reported a Return on Asset (ROA) of 0.94% for 6MCY2020 as compared to 1.73% for 6MCY2019 (1.17% for CY2019). MCBSL’s ROA was in-line with sector average of 1.01% for 6MCY2020.

Credit challenges

Concentrated portfolio with limited franchise; MCBSL operates with only eight branches. MCBSL had a highly concentrated portfolio with the top 10 group exposures contributing to 55% of the total portfolio and 149% of its Networth as in June-20. Geographically, portfolio remained concentrated to the Western Province (98% in June-20) as 5 out of the 8 branches are located within this region. Due to its limited geographical presence and the modest franchise within the country, it is primarily focussed on the corporate segment which accounted for 87% in June-20. This was followed by 11% in the SME segment and 2% in the retail segment. The Bank is faced with the challenge of growing its SME and Retail portfolio due to poor performance of the SME sector during the last 3 years as a result of adverse macro conditions and the retail portfolio due to its limited franchise. ICRA Lanka also notes, that during the CY2020, Bank’s overall portfolio growth was affected by the import restrctions that came into effect due to the pandemic.

Concentrated deposit profile, however, liquidity is comfortable; The deposit portfolio of MCBSL accounted for 77% of the total borrowings in June-20 as compared to 84% in Dec-19 (85% in Dec-18). The deposit portfolio of the Bank is concentrated with the top 10 depositors accounting for 34.52% in June-20; however, the same has moderated from 41.09% in Dec-19. CASA had improved over the years to 24.33% in June-20 as compared to 20.74% in Dec-19 (18.18% in Dec-18); however, remained lower than the industry average of 33.78%. The short term (less than 1 year) ALM cumulative mismatch was positive 18.83% in June-20 and the same remained positive during the last three years. MCBSL maintained liquidity ratios well above the regulatory minimum. As in June-20, the Statutory Liquid asset coverage ratio for domestic banking units stood at 49% as compared to the regulatory requirement of 20%. The liquid coverage ratio for all currencies stood at 332% as compared to the regulatory requirement of 90%. 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 has applied its rating methodologies as indicated below.

Links to applicable criteria:  ICRA Lanka’s Credit Rating Methodology for Banks

About the Bank:

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, Batticoloa and 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, 2019, MCBSL reported a PAT of LKR 360 Mn on a total asset base of LKR 31.1 Bn as compared to a PAT of LKR 444 Mn on a total asset base of LKR 30.2 Bn in the previous financial year. For 6MCY2020, MCBSL reported a PAT of LKR 143 Mn on a total asset base LKR 29.7 Bn.

Key financial indicators
In LKR Mn         CY2018         CY2019   6MCY2019 *   6MCY2020 *
Net Interest Income1,4641,524803579
Profit after Tax (PAT)444360263143
Net worth6,3886,5506,6406,759
Loans and Advances21,13421,09022,26718,078
Total Assets30,21231,10730,67929,740
Return on Equity7.15%5.56%8.08%4.30%
Return on Assets1.50%1.17%1.73%0.94%
Gross NPA5.73%3.83%4.34%4.47%
Net NPA5.26%3.37%3.93%3.75%
Capital Adequacy Ratio (BASEL III)27.78%30.24%27.17%33.34%
Gearing (times)3.423.583.513.26

*Unaudited

Rating history for the last three years:

Analysts

Sachini Costa
+94-774781595
sachini.costa@icralanka.com  

Niraj Jalan
+91-33-71501146
niraj.jalan@icraindia.com

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