Monday, 12 August 2013 00:13
RAM Ratings Lanka has reaffirmed Commercial Bank of Ceylon PLC’s (COMB or the bank) long- and short-term financial institution ratings at AA+ and P1, respectively. The long-term rating carries a stable outlook. The ratings are premised on the bank’s strong market position as Sri Lanka’s largest privately-owned licensed commercial bank (LCB) and third-largest overall LCB. The ratings also reflect COMB’s strong franchise and healthy financial performance, funding and liquidity, as well as good capitalisation levels.
Incorporated in 1969, COMB accounted for 11.75% of the LCB industry’s asset base as at end-December 2012, ranking behind the two State-owned banks which accounted for 44.08% of industry assets. Given its size, COMB is deemed one of the country’s five systemically important financial institutions by the Central Bank of Sri Lanka (CBSL). Moreover, the Government of Sri Lanka’s (GOSL) indirect stake of 18.99% in the bank enhances the likelihood of State support if needed. The bank has three subsidiaries and two associates, which are collectively referred to as the group.
Overall, COMB’s asset quality is viewed as above average owing to a better loan portfolio risk profile than that of its peers, a conservative lending strategy and prudent provisioning policy. The group focuses mainly on financing corporates and top-tier small- and medium-sized enterprises (SMEs), achieving loan growth of 18.01% year-on-year (y-o-y) in fiscal 2012.
RAM’s concerns hinges upon the 13.06% y-o-y increase in absolute gross NPLs as the loan books seasoned amidst a less conducive macro-economic environment. While the group’s gross NPL ratio remained relatively unchanged at 3.37% as at FYE 31 December 2012 (FY Dec 2011: 3.43%), it worsened to 3.59% as at end-1Q FY Dec 2013 as absolute gross NPLs continued their upward trend and credit assets decreased.
Nevertheless, the ratio remained in line with that of most peers. RAM expects the ratio to ease going forward, against gradually improving macro-economic conditions. Elsewhere, RAM deems the group’s provisioning policy to be prudent as reflected in its augmented NPL coverage level.
The group’s performance is deemed healthy, supported by a net interest margin (NIM) that is in line with that of peers and operational cost efficiencies achieved through economies of scale and low-cost delivery channels, which translated into a cost to income ratio which is amongst the best in the industry. The group’s NIM improved to 5.19% in FY Dec 2012 (FY Dec 2011: 4.97%) supported by the timely re-pricing of loans despite the rising cost of funding in a rising interest-rate environment.
However, the NIM contracted to 4.64% in 1Q FY Dec 2013 as excess liquidity was channelled towards low-yielding investment securities. Given that loan growth is expected to pick up going forward, COMB’s NIM is envisaged to improve in the short to medium term.
Elsewhere, the group’s cost to income ratio improved to 49.32% in FY Dec 2012 (FY Dec 2011: 53.27%) while remaining relatively stable at 51.54% in 1Q FY Dec 2013. Overall, the group’s pre-tax profit rose 30.35% y-o-y to Rs. 14.31 billion in FY Dec 2012, which translated into a return on assets of 3.00% which was amongst the best in the industry.
COMB’s funding composition remained relatively unchanged, dominated by customer deposits backed by its strong franchise and branch network. That said, deposit growth stemmed primarily from high cost time deposits given the rising interest rate environment which led to a decline in the proportion of low-cost current accounts/savings accounts (CASA) within the deposit base to 44.52% as at end-FY Dec 2012 (FY Dec 2011: 51.58%).
Meanwhile, the group’s foreign currency borrowings swelled in its bid to lower funding costs. Elsewhere, the group’s liquidity position remained strong. As at end-FY Dec 2012, its statutory liquid asset ratio compared high against peers’ at 25.8%, improving further to 29.50% as at end-March 2013. The ratio is expected to remain strong going forward, given moderate loan growth.
COMB’s capital adequacy is deemed good. Its tier 1 and overall risk weighted capital adequacy ratios (RWCAR) stood at 12.63% and 13.84%, respectively as at end-FY Dec 2012 (FY Dec 2011: 12.11% and 13.01%), in line with that of peers. The group’s overall RWCAR strengthened to 16.61% in 1Q FY Dec 2013 following the issuance of subordinated debt. Going forward, its capital adequacy position is expected to remain stable in view of moderate loan growth.