Fitch affirms Bank of Ceylon at 'AA(lka)'

Fitch Ratings Lanka has affirmed Bank of Ceylon's (BoC) National Long-term rating at 'AA(lka)', Individual rating at 'D/E' and Support rating at '4'. The agency has also affirmed the 'AA-(lka)' rating of the bank's subordinated debentures. The outlook remains stable.

The ratings reflect BoC's systemic importance as the largest bank in Sri Lanka, its stable financial profile and 100 percent state ownership. The ratings also take into account the expected level of support from the Government of Sri Lanka (GOSL), given its strategic importance as its primary banker.

BoC's capital adequacy ratios continue to benefit from its significant state sector exposure. Core and total capital adequacy ratios stood well above the regulatory minimum at 12.21 percent and 16.86 percent, under the Basel II frame work at December 2008. The issuance of subordinated debt through a public issue of Rs4.2bn and a further USD21.6m through a private placement boosted Tier II capital during FY08. Fitch notes however that BoC's equity/assets ratio remained relatively low at 5.2 percent at FYE08 (7.5 percent for the banking sector) given its scale and systemic importance.

BoC's loan portfolio contracted by 4 percent during FY08 due to the conversion of government loans to bonds, although its non-state sector portfolio grew by 7 percent.

Given it is GOSL's main banker and one of the main bankers to state-owned enterprises (SOEs), balance sheet and off-balance sheet exposure to the state sector (GOSL and SOEs), excluding government securities held for liquidity purposes, remains high at 54 percent of assets at FYE08 (FYE07: 39 percent). Fitch expects this proportion to remain high given BoC's strong government linkage and the government's increased fiscal requirements. At FYE08, loans to corporate and consumer/retail customers accounted for 19 percent and 45 percent of loans, respectively.

BoC's overall gross NPL ratio rose to 5.9 percent at Q109 and 5.2 percent at FYE08 (6.2 percent for the banking sector) from 4.3 percent in FY07, reversing the decline observed since FY03, while the non-state sector gross NPL ratio remained at 7 percent at FYE08. Fitch expects asset quality in the non-state sector portfolio to remain under pressure for the rest of FY09, although indications of reducing inflation and interest rates could ease this pressure in FY10. Profitability as indicated by ROA increased marginally to 0.84 percent in FY08 (1.1 percent for the banking sector). In addition to high effective taxes, profitability is constrained by lower than average NIMs and high operating costs.

Fitch notes that though BoC's proportion of demand and savings deposits has gradually declined (56 percent of total deposits at FYE08) it remains high compared to the banking sector average of 46 percent. Due to its strength in the remittance business, BoC has access to substantial Non Resident Foreign Currency (NRFC) and Resident Foreign Currency (RFC) deposits. NRFC and RFC deposits accounted for 24 percent of total deposits at FYE08 and 30 percent of total NRFC and RFC deposits at Licensed Commercial Banks' at December 2008.