ICRA Lanka revises the rating outlook of Merchant Bank of Sri Lanka & Finance PLC
|Instrument*||Rated Amount (LKR Mn)||Rating Action|
|Issuer rating||N/A||[SL]BBB+ reaffirmed; Outlook revised to “Stable” from “Negative”|
|Subordinated Unsecured Redeemable Debenture Programme||2,000||[SL]BBB reaffirmed; Outlook revised to “Stable” from “Negative”|
ICRA Lanka Limited has reaffirmed the issuer rating of Merchant Bank of Sri Lanka & Finance PLC (“MBSL”/ “the Company”) at [SL]BBB+ (Pronounced as S L Triple B plus) while revising the outlook to Stable from Negative. ICRA Lanka has also reaffirmed the issue rating of LKR 2,000 Mn Subordinated Unsecured Redeemable Debenture Programme at [SL]BBB (Pronounced as S L Triple B) while revising the outlook to Stable from Negative.
The outlook revision factors in the improvement of the capital profile, improved profitability and improvement in the solvency (Net NPA/Networth) of the Company. MBSL raised LKR 2,152 Mn through a rights issue on September 16, 2021. Subsequently, on the October 18, 2021, the Central Bank of Sri Lanka (“CBSL”) has removed the lending cap of LKR 35 Bn (imposed on March 2019) and deposit cap of LKR 23 Bn (imposed on May 2019). ICRA Lanka also noted the improvement in the profitability in CY2021 amidst improvement in the core margins of the Company. MBSL reported a Profit after tax (PAT) of LKR 140 Mn for H1CY2021 vis-à-vis loss of LKR 460 Mn for H1CY2020. Furthermore, the outlook revision also factors in the improvement of the solvency ratio of the Company amidst the improvement of the Networth. The ratings continue to factor in the strategic and financial support received from its parent entity; Bank of Ceylon (“BOC”); which owns 85.49% of MBSL.
However, ICRA Lanka takes cognisance of the stretched asset quality indicators in terms of Gross Non Performing Assets (“GNPA %”) which stood at 16.44% as on June 2021 against 12.99% for the Licensed Finance Companies (LCF) Sector. Going forward, MBSL’s ability to control the new slippages and improve the asset quality indicators would be a key rating sensitivity.
The outlook revision to “Stable” from “Negative” reflects the improvement of the capital profile of the Company from the rights issue which was completed in September 2021. The outlook revision also factors in the improvement of the profitability indicators of the Company and the improvement in the solvency ratio. The outlook may be revised to “Negative” in case of further deterioration in the Company’s asset quality levels or weakening profitability. The outlook may be revised to “Positive” in case of an improvement in the asset quality indicators of the Company.
Key rating drivers
Being subsidiary of BoC ensures strategic and financial support; MBSL is 85.49% owned subsidiary of Bank of Ceylon (“BoC”, rated [SL]AAA (Negative) by ICRA Lanka). The company derives strategic and financial support from its parent company. MBSL’s board consist of seven directors, out of which four directors are from BOC. As the parent company, BoC has provided strong financial support by subscribing to the recently completed rights issue, where the Company raised LKR 2,152 Mn in total. In addition, BoC provides term loan facilities and contingent funding lines to the Company. MBSL was incorporated in 1982 as a specialised bank, operated as the leasing and merchant banking arm of BoC. Subsequently, it became a Non-Banking Financial Institution offering leasing, term loans, personal loans, microfinance, and gold loan facilities to its customers. The company had a network of 48 branches around the country and over 976 employees as on June 2021.
Improved Capital profile following the recent capital infusion; MBSL operated below Capital Adequacy Ratios (CAR) over the past years and was operating under the lending cap of LKR 35 Bn and deposit cap of LKR 23 Bn since early CY2019. As on June 2021, MBSL reported a Tier 1 capital adequacy ratio of 3.97% against the regulatory requirement of 6.50% and a total capital adequacy ratio of 4.52% against the regulatory requirement of 10.50%. The Company also fell short of the minimum core capital requirement of LKR 2,000 Mn in December 2020. After several attempts to enhance the capitalization profile, the Company recently completed a rights issue on September 16, 2021 raising LKR 2,152 Mn. ICRA Lanka envisages the CAR to improve by about 700 bpp from this capital infusion. MBSL is also now in a comfortable position to meet the next regulatory minimum core capital requirement of LKR 2,500 Mn which is to be met by December 31, 2021. Subsequent to the completion of the rights issue, the Central Bank of Sri Lanka has also removed the above-mentioned lending and deposit caps placed on the Company. ICRA Lanka also expects a sharp improvement in the Company’s gearing levels from the high 18.44 times as on June 2021.
Improved Earnings profile, while the overall profitability remains moderate: The company’s lending spreads significantly improved in H1CY2021 due to the steep reduction in cost of funding and the improvement in the yield on advances. With much of the deposits of the Company having a tenure of 1 year or more, the repricing of deposits for the low systemic rates prevailing from Mid CY2020 was reflected in H1CY2021. Furthermore, although, the Company’s lending portfolio remained stagnant during CY2020, the pawning portfolio witnessed a growth (~20% in CY2020) and this relatively high-yielding product aided the improvement in the Company’s yield on advances. As a result, the Company’s Net Interest Margin (“NIM”) improved to 8.19% in H1CY2021 from 3.48% in H1CY2020. NIM remained comparatively lower in CY2020 at 4.09%. Improved operating income also helped the improvement of the Company’s cost to income ratio which improved to 77.06% in H1CY2021 from 119.72% in CY2020 (144.18% in H1CY2020). ICRA Lanka envisages this ratio to further improve from the expected increase in the operating income of the Company with the removal of the lending caps. The credit cost (Provisions/ATA) was significantly high in CY2020 at 2.94% (0.04% in CY2019), due to impairment provisioning of its subsidiary; MBSL Insurance (MBSLI). However, the same was not incurred in H1CY2021 and hence, the credit cost remained at 1.00% in H1CY2021. Overall, the Company reported a profit after tax of LKR 140 Mn for the H1CY2021, compared to the LKR 460 Mn loss in H1CY2020 and LKR 1,108 Mn loss in CY2020. As a result, the ROA (PBT) increased to 1.04% in H1CY2021 vis-à-vis -2.61% in H1CY2020. For CY2020, RoA was -3.87%. The industry average RoA (On PBT) for H1CY2021 was 1.83% vis-à-vis -2.37% in H1CY2020.
Stretched asset quality indicators; Amidst few large ticket facilities falling into NPA in CY2019 and the high slippages in the personal loans portfolio in CY2020, the Gross Non-performing asset ratio (GNPA %) peaked at 18.14% in June 2020 vs. the LCF sector at 14.31%. However, ICRA Lanka also notes that the contraction of the overall porfolio, due to the lending cap, has also contributed to the high GNPA ratio. The Company has managed to improve the GNPA % to 16.44% in June 2021 amidst improved recoveries in Q1CY2021. However, ICRA Lanka envisages the asset quality of the Company to remain under pressure in the immediate term due to the effects of the 3rd and 4th wave of the pandemic, although some improvement in the ratio is expected in the short-medium term from the growth in the lending portfolio amidst the removal of the regulatory caps. The solvency measured in terms of Net NPA/Networth has remained high for the Company over the past 2 years mainly due to the weak capital profile (162% in December 2020) but is expected to significantly improve with the recent capital infusion. Going forward, MBSL’s ability to control the new slippages and recoverability of the legacy NPA portfolio would be a key rating sensitivity.
Modest lending portfolio; MBSL’s lending portfolio remained moderated from March 2019 amidst the lending cap of LKR 35 Bn imposed by CBSL. As on June-21, the net lending portfolio of the Company amounted to LKR 27,164 Mn which accounted for only 2.59% of the Non-Banking & Financial Industry (NBFI). The net portfolio of the Company was LKR 26,786 Mn in Dec-20 and LKR 29,261 Mn in Dec-19. The unfavourable macro-outlook of the country has also contributed to this moderation of the portfolio. Apart from pawning, all other products have witnessed degrowths in their respective portfolios over the past 2 years. The pawning portfolio accounted for about 14% of the total gross portfolio as on Mar-21.
Moderate liquidity; The Company reported a short term (less than 1 year) negative cumulative mismatch of 15.56% in Mar-21 as compared to negative 6.40% in Mar-20 and negative 9.74% in Mar-19. However, ICRA Lanka notes the LKR 1.6 Bn worth unutilized funding lines available for the Company.
Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated below. The ratings also factor in the capital support from BOC, which uplifted the credit risk profile of MBSL.
Links to applicable criteria: ICRA Lanka’s Credit Rating Methodology for Non-Banking Financial Institutions
About the Company:
MBSL was established in 1982 as a merchant bank. The Company had two subsidiaries, MBSL Savings Bank Ltd (MSB, Licensed Specialised Bank) and MBSL Insurance Company (Composite Insurer) and two associate companies, Lanka Securities (Pvt) Ltd (registered stockbroker) and MCSL Financial Services Ltd (a licensed finance company). Pursuant to the Master Plan on Consolidation of the Financial Sector proposed by the Central Bank of Sri Lanka (CBSL), in January 2015, MBSL Savings Bank Limited (MSB) and MCSL Financial Services Limited (MCSL) were merged with MBSL. MBSL offers leasing & HP, long and short-term loans, microfinance and gold loans to its clients. The Company had 48 branches as on June 2021. MBSL Insurance Company Limited (MBSI) is 53.81% owned subsidiary of MBSL. The Company offers general insurance products and serves life insurance portfolio to its customers. MBSI has close to 50 branches and window offices covering Sri Lanka.
MBSL reported a Profit After Tax (PAT) of LKR 140 Mn for H1CY2021 (LKR 460 Mn loss for H1CY2020) on a total asset base of LKR 32,426 Mn as at June 30, 2021 (LKR 33,451 Mn as at June 30, 2020). For CY2020, the Company reported a loss of LKR 1,108 Mn with a total asset base of LKR 32,359 Mn as at December 31, 2020 and a profit of LKR 103 Mn for CY2019 with a total asset base of 36,975 Mn as at December 31, 2019.
MBSL Group reported a Profit After Tax (PAT) of LKR 163 Mn for H1CY2021 (LKR 513 Mn loss for H1CY2020) on a total asset base of LKR 34,505 Mn as at June 30, 2021 (LKR 35,166 Mn as at June 30, 2020). For CY2020, the Group reported a loss of LKR 909 Mn with a total asset base of LKR 34,308 Mn as at December 31, 2020 and a loss of of LKR 469 Mn for CY2019 with a total asset base of 38,614 Mn as at December 31, 2019.
Key financial indicators
Rating history for last three years:
 Post the rights issue, BOC’s direct stake is 76.56% and it holds 7.94% through its fully owned subsidiary BOC Property Development & Management (Pvt) Ltd & 2.25% through Ceybank Unit Trust. Ceybank Unit Trust is 44 % owned by Bank of Ceylon.
|Sachini Costa |
Subsidiary of ICRA Limited
A Group Company of Moody's Investors Service
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