Fitch affirms Commercial Bank of Ceylon at 'AA(lka)'/stable

Fitch Ratings Lanka has affirmed Commercial Bank of Ceylon PLC's (CB) National Long-Term rating at 'AA(lka)' with a stable outlook. The agency has also affirmed CB's subordinated debentures at 'AA-(lka)'.

The ratings reflect CB's solid domestic franchise, improved capitalisation and high core profitability. The ratings may be upgraded upon a sustained improvement in the bank's balance sheet in terms of greater capital buffers including loan loss provisions. Conversely,a rating downgrade may result from a significant decline in CB's asset quality such as due to an economic downturn that could put pressure on its earnings and capitalisation.

CB's Tier 1 capital adequacy ratio (CAR) has remained above 10 % since 2007, and a rights issue of Rs4.8billion lifted the ratio to 12.1% at end-2011. The increase in equity has also been supported by a further increase in revaluation reserves,which had not been factored into its total CAR of 13 % at end-2011. Fitch expects CB's capitalisation to remain healthy supported by its high core profitability, greater profit retention and modest growth plans.

CB continues to sustain high core profitability (measured by pre-provision return on assets (2011: 3.5 %), largely due to its lean operating cost structure.

Loan growth (12.2 % from 2007-2011) has been modest compared with that of the sector (14.1 %). SMEs and mid-sized corporates (end-2011: 42 %, end-2010: 33 %) dominates CB's loan book while it has been reducing its exposure to the consumer/retail segments (end-2011: 28 %, end-2010: 31 %). Fitch believes that downside risks are present particularly in interest-sensitive segments (consumer/retail and SMEs/ mid-sized corporates) as well as in those susceptible to a global economic slowdown and external sector pressures.

While specific provision coverage on NPLs has been rising (end-2011: 40 %; end-2010: 34 %), bolstered by additional provisions made on a prudential basis,it remained below that of some similar rated private commercial bank peers.

CB's funding stability is underpinned by its high share of current and savings accounts (end-2011: 52%) compared with similar rated larger private commercial bank peers (41%), which should cushion net interest margins in a rising interest rate scenario.

Established in 1969 but tracing its origins to 1920, CB is the third-largest bank in Sri Lanka, accounting for 10.4% of banking sector assets at end-2011. It had a network of 213 branches and 514 ATMs as at end-2011. CB is one of the few banks in Sri Lanka that have substantial overseas operations. Its 17 branches in Bangladesh contributed 11% to net income and 7% to assets.