Fitch Affirms Commercial Bank of Ceylon at ‘AA-(lka)’; Outlook Stable
Fitch Ratings has affirmed Commercial Bank of Ceylon PLC’s (CB) National Long-Term Rating at ‘AA-(lka)’. The Outlook is Stable. At the same time, Fitch has affirmed the bank’s subordinated debt at ‘A(lka)’.
KEY RATING DRIVERS
CB’s National Long-Term Rating is driven by its intrinsic financial strength and highly influenced by our assessment of the operating environment and asset quality. It also reflects its established domestic franchise as Sri Lanka’s third-largest bank, which supports its earnings performance, and its entrenched domestic deposit franchise that underpins its funding and liquidity profile. CB’s ratings are constrained by the sovereign credit profile.
Fitch assessment of the operating environment for Sri Lankan banks reflects the risks of the banking business due to the sovereign’s credit profile and the impact of the coronavirus pandemic. Sri Lanka’s economy contracted by 3.6% in 2020 as a result of the pandemic. Fitch expects a rebound of 3.8% in 2021, but our forecasts are subject to a high degree of uncertainty, depending on the evolution of the pandemic.
The outlook on the operating environment assessment remains negative due to the potential for higher further risks from the deterioration of the sovereign credit profile or pressure on domestic operating conditions beyond our expectations independent of changes in the sovereign rating. The operating environment for Sri Lankan banks has a high influence on their ratings, as it is likely to constrain their intrinsic credit profiles through its effect on financial and non- financial key rating factors. Fitch believes CB’s credit profile would remain primarily linked to the Sri Lankan operating environment in the near-tomedium term, despite its non-domestic operations in Bangladesh, and more recently in the Maldives and Myanmar.
These operations provide a source of diversification away from Sri Lanka’s operating environment relative to domestic peers. The contribution from the Bangladesh operations to after-tax profits has risen against the muted performance of the bank’s Sri Lankan operations. Nonetheless, asset exposure through non-domestic operations remains modest at around 12%. Fitch expectation is for asset-quality risk to persist in the near-to-medium term in light of our operating environment assessment.
CB’s impaired-loan ratio based on Stage 3 loans remained elevated at end-1Q21 (10.86% at end-2020) against loan increases of 2.6% in 1Q21 and 3.3% in 2020. Pressure on impaired loans could manifest across an extended period due to relief measures that halted the recognition of credit impairments and ongoing discretionary restructuring. The bank has sought to mitigate the potential impact through increased impairment provisions, including significant management overlays (LKR5.1 bn in 2020), raising loan-loss allowances to 5.8% of gross loans by end-1Q21 and 5.4% by end-2020 from 4.0% at end-2019. Fitch expects CB’s earnings and profitability to improve in 2021 from 2020 but stay under pressure due to elevated credit costs.
Operating profit/risk-weighted assets decreased to 2.8% in 2020 from 3.0% in 2019, as a sharp increase in impairment charges consumed 42% of pre-impairment profit in 2020, before rebounding to 3.8% in 1Q21 despite continued high credit costs stemming from further overlays. The capital infusion of USD50 million from the International Finance Corporation through a private placement in 2020 raised CB’s common equity Tier 1 ratio to 13.4% by end-2020 from 12.4% at end-2019. Medium-term capitalisation hinges on the pace of expansion that could resume if operating conditions improve, but our expectation is for the bank to continue to sustain comfortable capitalisation, supported through adequate internal capital generation.