The Ceylon Petroleum Corporation (CPC) owes Rs 18.5 billion, in oil hedging dues, to the Standard Chartered Bank of Sri Lanka (SCBSL) this June, boosting the bank’s financial health, said a rating report from Fitch Ratings Lanka.
In the financial year 2008, SCBSL, the Sri Lankan branch of the Standard Chartered Bank PLC (SCB), had entered into oil derivative contracts with the state owned CPC. All the contracts were hedged with back-to-back contracts with the SCB head office. However, in December 2008, CPC suspended payments on these contracts, pending an inquiry by the Monetary Board of Sri Lanka.
As a result, SCBSL had to classify these dues, amounting to Rs 18.5 billion, as non-performing, in keeping with regulatory requirements.
The bank also made a 50% provision, amounting to Rs 9.2 billion for these dues in December 2009. Consequently, the bank incurred an Rs 6.4 billion post tax loss in the financial year 2009 and its capital adequacy weakened to 6.4% in the financial year 2009, which is below the regulatory minimum of 11% for banks engaging in derivative transactions.
“However, all CPC dues were transferred to SCB, London, in June 2010 and provisions already made on the dues reversed during the period,” said the Fitch report.
Consequently, the bank's NPL ratio normalised to 2.6% by the end of the first half of 2010, from 32% in the financial year 2009, said the rating agency. Losses incurred in the financial year 2009 were also reversed in the first half of 2010. With the provision write-back, SCBSL's capital adequacy position improved to 11.6% by the end of the first half of 2010.
Following these improvements, Fitch Ratings has affirmed SCBSL’s national long-term rating at 'AAA(lka)' with a stable outlook. SCBSL started operations as a licensed commercial bank in 1892. It is the second-largest foreign bank in the country with an asset base of Rs 83,756 million as at the financial year end 2009.