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Fitch affirms MCSL at ‘BBB(lka)’

Fitch Ratings Lanka has on Friday affirmed Merchant Credit of Sri Lanka Ltd’s (MCSL) National Long-term rating at ‘BBB(lka)’. The Outlook is Stable.

The affirmation reflects the implied support from MCSL’s main shareholder and Sri Lanka’s largest bank - state-owned Bank of Ceylon. Fitch believes that support is likely to be available to MCSL from BOC should it be necessary, in view of BOC’s predominant shareholding in MCSL, its association with the BOC franchise and resulting reputation risk, as well as BOC’s demonstration of support to subsidiaries.

MCSL’s core business continues to be vehicle finance through hire purchases (HPs) and finance leases. In FY09, its HP (40 percent of the portfolio) continued to dominate leases (20 percent of the portfolio). However, MCSL’s portfolio growth of 16.7 percent in FY09 was driven predominantly by an increase in its loans, supported in part by the company’s participation in some relatively large loan syndications. Consequently, loans accounted for 40 percent of the portfolio at FYE09 (29 percent at FYE08).

MCSL’s asset quality remained weak, reflecting a legacy of poor credit risk management. Its gross NPL ratio (defined by Fitch as advances in arrears for three months or above) was 23.6 percent in H110 (FYE09: 28.1 percent).

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