Loans to the government and investments in government securities by the Bank of Ceylon (BOC), Sri Lanka’s biggest bank, have risen over the years to fund the country’s growing defence expenditure, an international credit rating agency said.
“The bank has partly funded this through short-term interbank liabilities. Exposures to the government are likely to stay at a high level given the bank’s close relationship to the state, “Capital Intelligence (CI) said on Wednesday while affirming BOC’s foreign currency ratings at B long-term and B short-term with ‘Stable’ outlooks.
The low ratings reflect the government’s weak finances and external position. “Given BOC’s systemic importance, government support for the bank is assured. However, the quality of support is in question, particularly given the vulnerable finances of the government. Therefore, the support rating is maintained at 3,” it said in a statement.
Although non-performing loans (NPLs) may rise further due to the slow growth of Sri Lanka’s GDP this year, falling inflation and interest rates could help mitigate credit risks next year. BOC’s prospects have improved with the recent end of the protracted civil war, although the benefits are likely to be seen only over the medium- term.
BOC’s operating profitability and ROAA were low last year owing to narrowing interest margins, high operating costs and increased loan-loss provision charges. Interest margins have narrowed due to the high level of government risk on the bank’s books and an increased reliance on short-term interbank borrowings which are more expensive to service than deposits.
Operating costs are high due to overstaffing in the past and generous retirement benefits available to older employees. Staff costs have declined with the gradual reduction in head count, but the cost to income ratio remains high. Provision charges rose last year and in the first half of this year due to increasing NPLs, it said.
There have been some positive developments as well. BOC has a large non-interest income base and its operating profit to average total assets ratio has improved over the years. Despite high provision charges the bank’s profit before tax was reasonably good last year and in H1 2009.
BOC’s asset quality weakened in 2008 and in the first half of 2009. This is a concern given the bank’s low profitability and its modest capital base. Unprovided NPLs to free capital increased sharply in H1 2009. |
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