Lanka Rating assigns AA3/L1 ratings to MBSL

RATING: LRA has assigned a long-term financial institution rating of AA3 (with a stable outlook) and a short-term rating of L1 to Merchant Bank of Sri Lanka ("MBSL" or "the Bank").

The ratings are primarily based upon the credit strength and financial flexibility of MBSL, which stems from its parent - the state-owned Bank of Ceylon ("BOC").

The ratings are also supported by the Bank's strong capitalisation, improving performance, recovering liquidity levels and healthier asset quality.

Furthermore, the ratings are underscored by MBSL's expansion plans for the medium term and their resultant longer-term benefits. The sharp downturn of the stock market during 1995 - 2001 had rendered MBSL's trading portfolio, which had constituted almost 50% of its total assets, relatively illiquid.

Since these investments had been funded by debt assumed during an environment of lofty interest rates, the cost of holding had been pushed beyond the recoverable values, therefore severely eroding its bottom line and liquidity.

MBSL consequently restructured its capital base in FYE 31 December 2004 ("FY Dec 2004") to absorb its loss of Rs 1.45 billion, which had been accumulated over the 1995 - 2001 period.

As at end-FY Dec 2005, the Bank's shareholders' funds stood at Rs 1.32 billion, making up 40.54% of its total assets.

MBSL's liquidity position had also improved significantly during the year whilst its gearing ratio had been maintained at 1.25 times its shareholders' funds.