Fitch places Merchant Credit on rating watch
Fitch Ratings Lanka has placed Merchant Credit of Sri Lanka Ltd’s (MCSL)
‘BBB(lka)’ National Long-term rating on Rating Watch Evolving (RWE).
The rating action follows Merchant Bank of Sri Lanka is (MBSL) May 4
announcement that the Central Bank of Sri Lanka has provided “in
principle approval” for the issuance of a specialised banking license to
MBSL subject to its amalgamation with MCSL and another two entities of
the Bank of Ceylon (BOC; ‘AA(lka)’/Positive) group.
MBSL is a 72 percent held subsidiary of BOC.
The announcement follows the August 26, 2010 announcement by MBSL
that it was considering a proposal to merge with MCSL and another
subsidiary of the BOC group. The RWE reflects uncertainty regarding the
modalities of the intended merger, the profile of the merged entity, and
the shareholding of BOC in the merged entity.
The rating reflects MCSL’s association with its main shareholder,
State-owned BOC, in terms of the latter’s effective shareholding of 86
percent and representation on MCSL’s board, and could be affected by a
change in circumstances that would warrant a review of Fitch’s opinion
on the expectations of support from BOC.
MCSL’s core business of vehicle finance in the form of finance leases
(21 percent of the loan book) and hire purchase (HP; 39% of the loan
book) continued to account for the majority loan book at end-2010, while
loans accounted for the remaining 40 percent.
However, with the management’s recognition of the relatively
problematic recoverability of loans, and alongside the growth in leases
and HP, the proportion of loans is expected to decrease (38 percent at
Q1FY11 - the three months ended March 31, 2011).
MCSL’s gross non-performing loan (NPL) ratio (defined as advances in
arrears for three months or more) fell to 16.8 percent at end-2010
(end-2009: 28.1 percent) driven by loan expansion of 35.7 percent in
2010 and write-off of NPLs.
However, asset quality could deteriorate and should growth take place
to the detriment of credit standards. |
