Fitch affirms BOC’s ‘BB-’ IDRs

Fitch Ratings has affirmed Bank of Ceylon (BOC)'s Long-Term (LT) Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDRs) at ‘BB-’ with a Stable Outlook. The agency has also affirmed BOC's Viability Rating (VR) at ‘b+’ and its National LT rating at ‘AA+(lka)’ with a Stable Outlook. BOC's Support rating and Support Rating Floor have also been affirmed at ‘3’ and ‘BB-’ respectively, the latter at the same level as the sovereign.

Fitch has also assigned BOC's proposed senior unsecured USD-denominated notes an expected rating of ‘BB-(EXP)’, same as its FC IDR given that the notes are expected to rank equally with the bank's senior unsecured creditors. The proposed notes will have a maturity of five years, while semi-annual coupon payments will be at a fixed rate. The final rating is contingent upon receipt of final documents conforming to information already received.

BOC's LT IDRs are driven by the Government of Sri Lanka's (the State) high propensity and limited ability to provide support to the bank under extraordinary situations.

In Fitch's view, the State's high propensity stems from BOC's systemic importance as the largest bank in the country (accounting for nearly 20% of banking system deposits and assets), its quasi-sovereign status, its role as a key lender to the Government and full government ownership, while the State's limited ability is reflected in the ‘BB-'/Stable Sovereign rating.

BOC's VR, which is one notch lower than the LT IDR, reflects the growing pressures particularly in terms of its weakening capitalisation and deteriorating asset quality, which may experience further deterioration in the near term. While BOC's strong domestic franchise remains a strength from a funding perspective, near-term funding challenges will likely remain, considering the high loans-to-deposits ratio (LDR) amid rising interest rates.

BOC's loan book has a high exposure to the State and State owned entities (SOE) and while a sizeable portion of the exposure is state guaranteed, the resulting concentration risk is significant. For e.g. Ceylon Petroleum Corporation itself accounts for nearly 20% of BOC's total exposure.

Notwithstanding state exposures, BOC's gross non-performing loan (NPL) ratio weakened to 2.8% (FY11: 2.1%) in FY12 owing to one-off event risks such as floods and drought (in Q412) and the Maldives’ political turmoil.