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

MCBSL’s rating takes into account the strong financial, managerial and operational support received from the MCB Pakistan (MCBP; Rated B3 by Moody’s). ICRA Lanka takes comfort of the healthy capitalisation profile of the Bank with high Tier I capital ratio of 39.82% as on June 2021 in comparison to the peer Licensed Commercial Banks (LCB) in the country. MCBSL also maintains a comfortable core capital of LKR 6.59 Bn as on June 2021, placing itself comfortably above the regulatory requirement of LKR 5 Bn to be met at the end of CY2022. ICRA Lanka notes that despite a reduction in the absolute NPAs in H1CY2021, the bank witnessed an increase in the Gross Non-Performing Ratio (GNPA %) to 5.24% as on June 2021 from 3.66% as on March 2020 mainly due to moderation in its loan portfolio.

The rating takes cognisance of the Bank’s modest portfolio size with a high concentration risk; the top 10 exposures accounted for 52% of the gross portfolio as on June 2021. MCBSL’s limited franchise with a branch network of 8 has resulted in low Current and Savings deposits to total deposits ratio (CASA %) in the past; although a significant improvement was seen from CY2020. ICRA Lanka notes moderation in the Bank’s profitability with a Return on Asset (RoA on PAT) of 0.15% in H1CY2021 (0.94% in H1CY2020) which was lower than the LCB sector average of 1.44% in H1CY2021 (0.99% in H1CY2020).  

Outlook: Stable

ICRA Lanka believes that MCBSL will continue to benefit from the support from MCBP. The outlook may be revised to ‘Negative’ in case of sharp deterioration in asset quality and profitability indicators. 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.

Key rating drivers

Credit strengths

Support from MCB Bank of Pakistan; MCB Bank of Pakistan (“MCBP” or “the parent”) is one of the largest commercial banks in Pakistan with over 1,400+ branches (including overseas branches). MCBP has a market share of 7.9% in terms of total deposits in Pakistan as on December 2020 (8.0% as on December 2019). MCB Sri Lanka started its operations in 1994 with the acquisition of the Middle East Bank’s local operations in Sri Lanka. As on September 2021, MCB had 8 branches operating in Sri Lanka. From an operational and managerial aspect, MCBP overlooks accounting, internal audit, risk, treasury and compliance of MCBSL. ICRA Lanka expects MCBP will support the Bank’s capital profile, if required as witnessed over the past years.

Healthy capitalisation profile;  MCBSL maintains a healthy capital position with a core capital of LKR 6.59 Bn as on June 2021 and is in a comfortable position to meet the regulatory requirement of LKR 5 Bn by the end of CY2022. Given the Bank’s modest portfolio and the sizeable investments in Government Securities, the Bank’s capital adequacy ratios (CAR) remains high at 39.82% (Core capital ratio) as on June 2021 against 8.00% regulatory requirement while a 40.73% (total capital ratio) was reported against 12.00% regulatory requirement. The non-repatriation of profits to MCB Pakistan since CY2019 due to measures implemented by the Central Bank of Sri Lanka (CBSL) as a measure of preserving the liquidity at Banks has also supported the capital profile of MCBSL.  

Improved CASA ratios and comfortable liquidity position; MCBSL’s CASA ratio significantly improved to 59.46% as on June 2021 from 42.80% in December 2020 (28.76% in December 2019). CASA ratio improvement was backed by 85%+ YoY growth in the savings deposits in June 2021 and the moderation of the fixed deposit base (-48% YoY as on June 2021). MCBSL’s CASA %  is above the LCB  sector average of 37.6% as on June 2021. The gearing levels continues to remain healthy and has further improved to 2.54 times as on June 2021 (LCB sector average of 9.80 times) from 3.49 times as on December 2020 (3.54 times as on December 2019), followed by the overall deposit portfolio moderation.

ICRA Lanka also notes a 25% foreign currency exposure as on June 2021 on the deposit portfolio of the Bank which has also somewhat moderated from about 30% as on June 2020. The Bank reported a decline in its Sri Lanka Development Bonds ( SLDBs) exposure to LKR 1,439 Mn as on June 2021 compared to LKR 3,627 Mn as on December 2020. This was in-line with management’s plan to reduce its exposure of the dollar denominated bonds following sovereign rating downgrade. Stemming from the highly liquid investment portfolio and the relative short-term nature of the lending portfolio, MCB Sri Lanka continued to report a positive and improved short-term asset liability cumulative mismatch (ALM) of 36.80% as on June 2021 (18.83% as on June 2020). ICRA Lanka also notes the comfortable liquidity ratios with statutory liquid asset ratio (Domestic banking unit) stood at 53.20% as on June 2021 against the regulatory requirement of 20.00% while the all currency liquid coverage ratio stood at 535.20% as on June 2021 against the 90.00% regulatory requirement. ICRA Lanka takes comfort from the expected timely funding support from MCBP, if required.

Credit Challenges:

Moderate asset quality indicators; MCBSL reported a rise in the gross non-performing ratio (GNPA %) of 5.24% as on June 2021 from 4.87% as on December 2020 and 3.49% as on December 2019. However, this was attributed to the portfolio moderation (~35% degrowth between December 2019 to June 2021). ICRA Lanka notes a reduction in the absolute value of non-performing loans in June 2021 as compared to December 2019. ICRA Lanka also considers the high concentration in the NPA portfolio where the largest NPA facility accounts for 76% of the total NPA of MCBSL as on June 2021. The GNPA % of the Bank further increased to 6.70% in September 2021 due to slippages of LKR 175 Mn (Slippage ratio is Q3CY2021 is ~1%) in Q3CY2021. However, ICRA Lanka does not foresee a high risk of further slippages at the end of the moratorium period as only 1% of the portfolio remained under moratorium as on September 2021. MCBSL’s provision coverage remained lower at 36% as on June 2021 compared to LCB sector average of 57%. Going forward, the recovery of the large NPA facilities would remain a key sensitivity for the Bank.

Concentrated portfolio with limited franchise; MCBSL operates with only eight branches. Due to its limited geographical presence and the modest franchise within the country, it is primarily focused on the corporate segment which accounted for 82% in June-21, followed by 15% in the SME segment and the remaining in the retail segment. The Bank’s gross portfolio sharply moderated to LKR 13,855 Mn in June 2021 (YoY moderation of 24%) as compared to LKR 15,444 Mn as on December 2020 (YoY moderation of 28%). The moderation of the portfolio is a result of the non-conducive business environment for lending, especially as the Bank is focused on trade financing which caters mainly to import-oriented businesses. The import restrictions by the government amidst the pandemic adversely affected these import-driven businesses. MCBSL’s concentration risk continues to remain high with top 10 single entity exposures accounting for 52% of the gross portfolio as on June 2021 while the top 10 group exposures accounts for 70% of the gross portfolio of the Bank as on June 2021. Bank’s presence remains highly concentrated in the Western province with 5 out of 8 branches being located there and 98% of the portfolio being concentrated in the Western province as on June 2021. This exposes the bank to event risks and economic conditions, especially in these geographies. ICRA Lanka expects the portfolio concentration to continue in these regions in the medium term, given the size of the existing portfolio and the branch network.

Moderate profitability indicators; The sharp moderation of the portfolio and the low systemic rates led to a reduction in the yield on advances of the Bank to 5.05% (annualised) in the H1CY2021 as compared to the 9.53% (annualised) in H1CY2020. This resulted in a reduction in the Net Interest Margin (“NIM”) of the Bank to 2.52% in H1CY2021 as compared to 3.81% in H1CY2020. However, the Bank reported higher overall income supported by a rise in other income with other income/ATA of 0.56% in H1CY2021 (0.34% in H1CY2020). The growth in other income was mainly due to gain on foreign exchange revaluation of LKR 31 Mn in H1CY2021. MCBSL’s net profitability was negatively impacted due to a sharp increase in the credit cost with  Provisioning/ATA of 0.48% in H1CY2021 (0.24% in H1CY2020). This resulted in a decline in its Profit After Tax (PAT) to LKR 22 Mn for H1CY2021 as compared to LKR 144 Mn in H1CY2020. Consequently, the return ratios declined with Return on Assets (RoA) of 0.15% for H1CY2021 compared to 0.94% in H1CY2020 and remained below the LCB sector average of 1.44% for H1CY2021 (0.99% for H1CY2020).

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, Kattankudy 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, 2020, MCBSL reported a PAT of LKR 207 Mn on a total asset base of LKR 32.3 Bn as compared to a PAT of LKR 360 Mn on a total asset base of LKR 31.1 Bn in the previous financial year. For 6MCY2021, MCBSL reported a PAT of LKR 22 Mn on a total asset base LKR 25.8 Bn.

Key financial indicators
LKR MnCY2019CY2020H1CY2020*H1CY2021*
Net Interest Income1,5231,034579365
Profit after Tax/ (Loss)36020714422
Net worth6,5506,8166,7596,916
Loans and Advances (Net)21,09015,20218,07813,501
Total Assets31,10732,27229,74025,767
Return on Equity5.56%3.09%4.32%0.65%
Return on Assets (On PAT)1.17%0.65%0.94%0.15%
Gross NPA3.49%4.87%4.05%5.24%
Net NPA3.03%3.87%3.48%3.37%
Capital Adequacy Ratio (Tier 1)31.65%37.75%33.97%39.82%
Gearing (times) (Adjusted for revaluation)3.543.493.262.54

*Unaudited financials

Rating history for 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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