Business Times

BOC rating up on potential government profile

Fitch Ratings Lanka has revised the Bank of Ceylon's (BOC) outlook to positive from stable, reflecting a possible future improvement in the government's profile. Fitch has also affirmed BOC’s national long-term rating at 'AA(lka)', individual rating at 'D/E' and support rating at '4'. The agency has also affirmed BOC's subordinated debentures at 'AA-(lka)'.

“BOC's positive outlook largely reflects the prospect of a potential improvement in the government's profile as indicated by the positive outlook on Sri Lanka's long-term IDR, and the consequent increased capacity for the government to provide support to the bank in view of its high systemic importance and importance to the government,” said the statement from Fitch.

BOC is the largest licensed commercial bank in Sri Lanka, accounting for 17.9% of banking sector assets as at December 2009. The bank has an extensive branch network of 310 branches including a branch in Chennai and Male. In April 2010, BOC converted its London branch to a fully owned subsidiary, BOC UK Ltd. This is expected to provide the bank an opportunity for expansion into Europe over the long-term. The reorganisation of BOC's Specialised Leasing Company and Registered Finance Company subsidiaries is set to take place through a merger of these entities.

Similar to the rest of the banking sector, BOC experienced a deterioration of its asset quality in 2009.
The gross NPL ratio increased to 5.8% by end-2009 from 5.2% at end-2008. However, the ratio improved to 5.0% in the first half of 2010. Fitch expects a further reduction of BOC's NPLs during the third quarter of 2010.

Meanwhile, BOC's loan book grew by 23.6% in the first half of 2010 and profitability (return on asset) increased to 0.9% (annualised) in the first half of 2010, after a decrease to 0.6% in 2009. BOC also reported a significant growth in deposits by 29% in 2009, which accounted for 75% of its funding.

Furthermore, Fitch noted that the proportion of demand and savings deposits diminished to 49% as at the end of the first half of 2010, from 63% by the end of 2006. BOC also reported strong capital adequacy ratios, said Fitch. However, Fitch considers BOC's absolute capitalisation (equity/assets) to be relatively low compared with 'AA(lka)'-rated licensed commercial bank peers, in view of its scale of operations and systemic importance.

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