Fitch Ratings Lanka this week affirmed Bank of Ceylon's (BOC) National Long-term rating at 'AA(lka)', Individual rating at 'D/E' and Support rating at '4', reflecting “its systemic importance as the largest bank in Sri Lanka, its stable financial profile and 100% state ownership, and taking into account the expected level of support from the government (GOSL) and its strategic importance as the primary banker to the government.” The outlook on the ratings remains stable, Fitch said in a press release.
Being the government’s main banker and one of the main bankers to state-owned enterprises (SOEs), BOC's credit exposure to the state sector (GOSL and SOEs) remains high at 42% of loans and 28% of assets at FYE07, but decreased from 48.9% of loans and 31% of assets at FYE06. In addition, holdings of government securities (including restructuring bonds) accounted for a further 17% of assets at FYE07 (15% of assets for the six systemically important banks). Off balance sheet exposure to the state sector represented 35% of commitments and contingencies and 11% of assets at FYE07. Fitch notes that such exposure is to some extent a function of BOC's financing of petroleum imports.
The NPL ratio in the non-state sector fell substantially to 7.4% at FYE07 from 13.0% at FYE06 mostly on account of improved recoveries, but rose to 8.8% at H108 as observed across the industry, in the face of the challenging macroeconomic environment. The bank's management maintains that it already adheres to the more stringent regulatory classification standards effective from FY08.BOC's profitability as measured by ROA dipped to 0.8% in FY07. Profitability is constrained by rising interest costs, lower than average yields, high taxes and operating costs, the statement said.
Fitch noted that BOC continues to benefit from its significant state sector exposure in terms of capital adequacy. Core and total capital adequacy ratios stood at 10.62% and 11.60% at H108 under the Basel II regime effective in FY08 and remain comfortable. Equity increased through an infusion of Rs 1 billion and higher profit retention. Net NPL/equity ratio improved to 20.0% at FYE07 but declined to 30.5% at H108 due to the weakening economic environment.