Fitch removes Merchant Credit from Rating Watch Evolving; affirms ‘BBB’

Fitch Ratings Lanka has affirmed Merchant Credit of Sri Lanka Ltd’s (MCSL) National Long-Term rating at ‘BBB(lka)’. The rating has been removed from Rating Watch Evolving (RWE) and assigned a Stable Outlook.

The rating has been uplifted based on Fitch’s expectations of support from MCSL’s parent, the state-owned Bank of Ceylon (BOC; ‘AA+(lka)’/Stable). BOC has an effective shareholding of 86% in MCSL and is represented on the latter’s board. The removal of the RWE, which was placed on 27 May 2011, follows Merchant Bank of Sri Lanka Plc’s (MBSL) 15 March 2012 announcement that it would not proceed with its proposed merger with MCSL and another entity of the BOC group.

Fitch views MCSL’s stand-alone financial profile to be weak. Its core business of vehicle finance, in the form of finance leases and hire purchase (HP), comprised of 37% and 29% of its loan book at end-2011, with the balance comprising loans. Due to slippages of some large facilities into non-performing loan (NPL) category, MCSL’s gross NPL ratio (three-month NPLs/gross loans) increased to 19.1% at end-2011 (financial year ending Dec) from 16.8% in end-2010. The agency notes that MCSL has made an effort to reduce average loan size and thereby concentrations in loans. Profitability in terms of pre-tax return on assets (adjusted for income of equity investments) decreased slightly to 3.1% in 2011 from 3.4% in 2010, due to an increase in operating expenses. Fitch expects MCSL’s profitability to come under pressure as its net interest margins (NIMs: 9.4% in end-2011, 9.5% in end-2010) tighten alongside an increase in its funding costs.  Capitalisation in terms of equity/ assets also remained low at 9.9% at end-2011. The agency expects the company’s capitalisation to be strengthened when it becomes listed on the Colombo Stock Exchange - a regulatory requirement for all registered finance companies (RFCs).

Funding is predominantly through deposits. Although a strong loan expansion of 37% in 2011 resulted in an increase in borrowings, MCSL’s deposit concentrations remain high with its top five deposits accounting for 26% of total deposits at FYE11. Also, unutilised credit lines were not sufficient to cover 36% of risk-sensitive assets and liabilities under 12 months maturity at end-December 2011. Fitch expects that liquidity support would be forthcoming from BOC if deemed necessary. MCSL’s rating could be affected by a change in circumstances that would warrant a review of Fitch’s expectation of support from the parent BOC. A sustained improvement in MCSL’s stand-alone financial profile may lead to a rating upgrade, while a sustained deterioration of the same may lead to a ratings downgrade.



MCSL is an RFC that accounted for 2.7% of total RFC assets at end-2010. It has a network of 12 branches. The company is jointly owned by BOC (49%) and MBSL (51%); the latter is itself 72%-owned by BOC.