Fitch affirms Commercial Bank at ‘AA’; Outlook Stable

Fitch Ratings Lanka said yesterday it 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)’.

CB’s ratings reflect its solid domestic franchise, sound profitability and its strong capital position. Fitch notes that the bank has arrested the decline in its asset quality resulting in a marked improvement in its gross non-performing loans (NPL) and net NPL/ equity ratios. However, a reversal of asset quality trends or a deterioration in capitalisation could exert pressure on CB’s ratings.

CB’s loan book expanded by 25.4% yoy in 2010, after contracting by 4.5% yoy in 2009, reflecting the recovery in private sector credit demand supported by improved macroeconomic conditions.

More than half of incremental loans originated from the consumer/retail segment that accounted for about 55% of total loans at end-2010 (about 50% at end-2007). Fitch expects the bank to sustain strong growth momentum through 2011, in light of the economic resurgence being experienced by Sri Lanka.

Further, CB continued to report strong core profitability as measured by pre-tax return on assets (adjusted for gains or losses on equities and government securities in 2009 and 2010 and loss on oil hedging transactions in 2009). It was above that of most of its peers’, increasing to 3.3% in 2010 from 3.0% in 2009, supported largely by an expansion in its net interest margins and low cost structures. The bank’s capitalisation in terms of equity/assets increased to 9.1% at end-2010 before dipping to 8.8% in Q111 (the quarter ended 31 March 2011) as asset growth outpaced equity accretion. Fitch expects adequate capitalisation to be maintained through sound internal accretion and planned capital infusions such as the upcoming rights issue.

CB’s gross NPL ratio declined to 4.2% at end-2010 from 6.9% at end-2009 due to the rebound of the operating environment, enhanced credit monitoring and restructuring through a regulatory dispensation.

The tightening of classification rules that impacted the sector caused NPLs to increase in Q111 before decreasing in Q211.

Fitch expects the bank to continue to stringently monitor its loan book to limit NPL accretion as its loan book expands and seasons. The agency notes that although CB’s net NPLs/equity ratio decreased to 17.5% at end-2010 from 28.6% at end-2009, it remains above that of some peers.

Supported by its strong franchise, CB has had a stable deposit base (70% of funding at end-2010). Current and savings deposits accounted for 56% of total deposits at end-2010. Fitch notes that the bank has a large foreign currency deposit base that accounted for 27% of total deposits at end-2010.

CB has continued to expand its presence in Bangladesh and had established 17 delivery points and 14 ATMs in its main cities at end-2010. Its operations in Bangladesh accounted for 8% of assets and 14% of net income in 2010. The asset quality of this book remained strong and Fitch expects the bank’s expansion to be prudently executed.

Established in 1969 but tracing its origins to 1920, CB is the third-largest bank and largest private bank in Sri Lanka, accounting for 10% of banking sector assets at end-2010. Its franchise is supported by its footprint of 187 delivery points and 400 ATMs throughout Sri Lanka at end-2010.