Fitch maintains commercial bank’s ‘AA-(lka)’ national rating on Watch Negative

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Fitch Ratings has maintained Commercial Bank of Ceylon PLC’s (COMB) National Long-Term Rating of ‘AA-(lka)’ on Rating Watch Negative (RWN). Fitch also has maintained the ‘A(lka)’ ratings on COMBank’s subordinated  debt on RWN.

 The RWN on COMB’s National Long-Term Rating reflects potential  for the bank’s creditworthiness relative to other entities on the Sri Lankan national ratings  scale to deteriorate, given the heightened stress on the bank’s funding and liquidity, and its. Significant exposure to the sovereign via investment in foreign-currency instruments that  raises risks to its overall credit profile. Fitch believes that the sharp rise in inflation, depreciation of the local currency and other factors can distort the bank’s underlying financial performance in the current operating environment.

Fitch believe the weak foreign-currency liquidity in  the system is likely to affect COMB’s funding and liquidity profile in the medium term, as  with other banks. This is despite COMB’s reported overall loan-to-deposit ratio of 72.0% at end-1Q22 (2021: 74.4%) and foreign-currency loan-to-deposit ratio of 62.1% (2021:  66.1%).

Fitch expects COMB to bolster its liquidity, supported by low credit growth. Excluding its investments in Sri Lanka Sovereign Bonds, its all-currency liquidity coverage ratio (at bank level) is lower than the reported 189.3% at end-1Q22, but comfortably above the new regulatory minimum of 90%.

Fitch assessment of COMB’s risk profile factors in its investment in foreign-currency government securities, which are currently in default. COMB has the second-largest exposure among domestic banks to  these securities in the form of Sri Lanka Development Bonds (3.1% of total assets at end – 2021) and Sri Lanka Sovereign Bonds (4.9% of total assets), exposing the bank’s capital  to restructuring of these instruments. However, this risk is mitigated by COMB’s increased provisioning for these securities in the last few quarters.

COMB’s common equity Tier 1 (CET1) ratio fell to 9.9%  by end-1Q22 (end-2021: 12.1%), as RWA rose on the impact of the rupee’s depreciation  on its foreign-currency assets and mark-to-market losses on government securities.  COMB’s high share of investment in distressed government securities also puts pressure on its capitalisation in the medium term. The Tier 1 capital ratio, which is same as the CET 1 ratio, was only slightly above the regulatory minimum of 9.0% at end-1Q22, but COMB can draw down its capital conservation buffer as part of regulatory forbearance.