RAM assigns ratings of AA+/P1 to Commercial Bank

RAM Ratings Lanka has assigned the respective long- and short-term financial institution ratings of AA+ and P1 to Commercial Bank of Ceylon PLC; the outlook on the long-term rating is stable.

The ratings are premised on the strong market position of the Group, being the largest private licensed commercial bank and the third largest LCB in the country in terms of assets.

The ratings also reflect its strong franchise; healthy financial performance, funding, liquidity and capitalisation levels, as well as its adequate asset quality.

Incorporated in 1969, the Group is the third largest LCB in the country, accounting for 12.47% of the industry’s asset base as at end-December 2010. It ranks behind the two State-owned banks, namely Bank of Ceylon and People’s Bank (rated AAA by RAM Ratings Lanka), which make up 42.52% of the industry’s total assets. In addition, it has the single largest automated teller machine network in the country, numbering 400 in fiscal 2010.

Given its size, RAM Ratings Lanka opines that COMB is systemically important to the Sri Lankan financial system. Furthermore, the fact that the Government of Sri Lanka held a stake of 14.19% in the Bank through state-owned entities as at end-December 2010, increases the likelihood of support in times of need.

COMB’s asset quality is deemed adequate. Absolute gross non-performing loans have been improving on the back of better collections, curtailed lending to high-risk segments and improving macroeconomic conditions.

“That said, our view on asset quality is moderated by the unseasoned personal and retail loan portfolio which expanded Rs. 23.18 billion (or 108.73%) year-on-year in FYE 31 December 2010. Nonetheless, we derive comfort from COMB’s underwriting standards as its lending is essentially to high-income earners while its monitoring and collection procedures were also strengthened this year,” RAM said.

On the back of improved NPLs and moderate gross loan growth of 24.85% y-o-y in FY Dec 2010 (industry: 27.89%), its gross NPL ratio improved from 6.85% as at end-FY Dec 2009 to 4.21% as at end-FY Dec 2010, which is in line with its peers. The ratio deteriorated slightly to 4.58% as at end-March 2011 due to more stringent NPL classifications imposed by the Central Bank of Sri Lanka.

The Group’s performance is viewed to be healthy. Its cost-to-income ratio is the best among its peers due to economies of scale and the use of low-cost delivery channels. These cost efficiencies have translated into a better return-on-assets ratio relative to its peers. Its ROA improved to 2.68% in FY Dec 2010 (FY Dec 2009: 2.36%), improving further to 3.11% in the 1st quarter of FY Dec 2011. Prospectively, its performance is expected to ameliorate as the Group expands its margins by focusing on the high-yielding pawning, personal and small and medium enterprises segments.

Meanwhile, COMB’s funding and liquidity positions are deemed healthy as the majority of its funding mix comprises deposits, thanks to its strong franchise and widespread branch network. Its deposits grew 10.66% y-o-y (or Rs. 25.01 billion) from Rs. 234.73 billion to Rs. 259.74 billion as at end-FY Dec 2010 before augmenting another Rs. 14.79 billion in the 1Q FY Dec 2011. Moreover, the Group’s statutory liquid asset ratio clocked in at 29.74% as at end-FY Dec 2010, in line with those of its peers.

COMB’s capitalisation is viewed to be healthy. Its overall risk weighted capital adequacy ratio had eased to 12.26% as at end-FY Dec 2010, albeit in line with its peers, and declined again to 11.59% as at end-March 2011 due to loan expansion. The expected capital infusion of Rs. 4.85 billion through a rights issue in 2011 will further strengthen the Group’s capital adequacy. In addition, we note that COMB’s net NPL to shareholders’ funds ratio clocked in at 18.44% as at end-FY Dec 2010, which is better than its peers.