RAM Ratings Lanka reaffirms ComBank AA+/P1 ratings

RAM Ratings Lanka has reaffirmed Commercial Bank Of Ceylon PLC's ("COMB" or "the Group") long- and short-term financial institution ratings at AA+ and P1, respectively; the long-term rating has a stable outlook. The ratings are premised on the Group's strong market position as Sri Lanka's largest privately owned licensed commercial bank

("LCB") and third-largest overall LCB. The ratings also reflect COMB's strong franchise and healthy financial performance, funding and liquidity, as well as good capitalisation levels.

Incorporated in 1969, COMB accounted for 12.34% of the LCB industry's asset base as at end-December 2011.

It ranked behind 2 state-owned banks, which took up 41.92% of the industry's total assets. Given its size, COMB is also deemed one of the country's 5 systematically important financial institutions by the Central Bank of Sri Lanka ("CBSL"). Moreover, the government has an 18.82% direct stake in COMB; this enhances the likelihood of state support if needed.

COMB's asset quality is considered adequate in comparison to its peers. While its gross non-performing-loan ("NPL") ratio is in line with those of its similarly rated peers, the Group's asset quality is weighed down by its weaker gross NPL coverage levels and, relatively unseasoned loan portfolio amid strong growth in 2011. The Group's credit assets expanded 26.15% y-o-y to LKR 287.80 billion as at end-fiscal 2011, i.e. faster than the previous year's 24.85% but slower than the industry's 31%.

On the back of loan expansion, COMB's gross NPL ratio had improved to 3.43% as at the end of FYE 31 December 2011 ("end-FY Dec 2011") (end-FY Dec 2010: 4.21%). By end-March 2012, the ratio remained relatively stable at 3.57%. Meanwhile, its gross NPL coverage ratio had also remained relatively stable at 51.97% as at end- FY Dec 2011 (end-FY Dec 2010: 52.26%); albeit weaker than similar-rated peers.

In the meantime, the Group's performance is deemed healthy; although its net interest margin ("NIM") of 4.43% last year was lower than most of its peers' (FY Dec 2010: 4.73%), easing further to 4.42% in 1Q FY Dec 2012, its performance is supported by its operational cost efficiencies achieved through its low-cost delivery channels and economies of scale.

This is reflected in its cost-to-income ratio of 54.03% as at end-FY Dec 2011, which is better than its peers'; the ratio improved further to 45.87% in 1Q FY Dec 2012, backed by a large quantum of foreign-exchange gains, following the sharp depreciation of the rupee against the US dollar; these gains are expected to moderate to historical levels going forward.