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ICRA Lanka Ltd., subsidiary of ICRA Ltd., a group company of Moody’s Investors Service, yesterday reaffirmed the issuer rating of Bank of Ceylon (BOC) at [SL] AAA and has revised the outlook on the rating to Negative from Stable.
The revision in outlook factors in BOC’s moderate capitalisation levels with steady decline in capital buffers and weakening asset quality which impacted its earnings profile. The bank reported a Core Capital Ratio of 10.73% and Total Capital Adequacy Ratio of 15.48% in June as compared to the regulatory requirement of 10.00%1 and 14.00%, respectively.
However, ICRA Lanka noted the gradual decline in the bank’s capital buffers due to moderation in internal generation, mainly because of weak asset quality. With less than 1% buffer over the regulatory capital requirements, the ability of the bank to absorb any further asset quality shocks remains low.
ICRA Lanka, however, expects timely and adequate equity infusion by the Government to maintain the capitalisation profile. The rating continues to factor in the 100% Government ownership, which provides a strong likelihood of sovereign support and BOC’s leading position in the Sri Lankan banking industry.
The bank’s asset quality deteriorated with Gross NPA Ratio increasing to 5.34% in H1CY2019 as of June vis-à-vis 3.62% as of December 2018 due to weak macroeconomic conditions in the given period. The rating factors in its established franchise, healthy deposit profile and comfortable liquidity position with liquidity coverage ratio (LCR) at 199.76% as in June 2019. The rating also noted the moderation in earnings profile with Return on Assets (RoA2) at 0.92% in CY2018 (0.62% in 6MCY2019) as compared to 1.18% in CY2017.
The above, however, exert further pressure on the overall credit profile of the bank and steady improvement of these indicators would be crucial from a rating perspective.
The Negative Outlook reflects the shortfall in BOC’s capital buffers over the regulatory requirement coupled with weakening of the asset quality and profitability indicators. ICRA Lanka believes that BOC will continue to benefit from timely and adequate capital support from the Government. The outlook may be revised to ‘Stable’ in case of a steady maintenance of the capital buffers above regulatory capital requirement, improvement in the asset quality profile, while maintaining a comfortable earnings profile.
The revision in outlook factors in BOC’s moderate capitalisation levels with steady decline in capital buffers and weakening asset quality which impacted its earnings profile. The bank reported a Core Capital Ratio of 10.73% and Total Capital Adequacy Ratio of 15.48% in June 2019 as compared to the regulatory requirement of 10.00%1 and 14.00%, respectively.
However, ICRA Lanka noted the gradual decline in the bank’s capital buffers due to moderation in internal generation, mainly because of weak asset quality. With less than 1% buffer over the regulatory capital requirements, the ability of the bank to absorb any further asset quality shocks remains low.
ICRA Lanka however, expects timely and adequate equity infusion by the Government of Sri Lanka (GoSL) to maintain the capitalisation profile. The rating continues to factor in the 100% Government of Sri Lanka ownership, which provides a strong likelihood of sovereign support and BOC’s leading position in the Sri Lankan banking industry.
The bank’s asset quality deteriorated with Gross NPA Ratio increasing to 5.34% in H1CY2019 as of June 2019 vis-à-vis 3.62% as of December 2018 due to weak macroeconomic conditions in the given period. The rating factors in its established franchise, healthy deposit profile and comfortable liquidity position with liquidity coverage ratio (LCR) at 199.76% as in June 2019. The rating also noted the moderation in earnings profile with Return on Assets (RoA2) at 0.92% in CY2018 (0.62% in 6MCY2019) as compared to 1.18% in CY2017.
The above, however, exert further pressure on the overall credit profile of the bank and steady improvement of these indicators would be crucial from a rating perspective.
The Negative Outlook reflects the shortfall in BOC’s capital buffers over the regulatory requirement coupled with weakening of the asset quality and profitability indicators. ICRA Lanka believes that BOC will continue to benefit from timely and adequate capital support from the Government of Sri Lanka. The outlook may be revised to ‘Stable’ in case of a steady maintenance of the capital buffers above regulatory capital requirement, improvement in the asset quality profile, while maintaining a comfortable earnings profile.
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