28 Aug 2013 6:00 AM (EDT)
Fitch Ratings-Colombo-28 August 2013: Fitch Ratings Lanka has affirmed Commercial Bank of Ceylon PLC's (CB) National Long-Term rating at 'AA(lka)' with a Stable Outlook. The agency has also affirmed CB's subordinated debentures at 'AA-(lka)'.
Key Rating Drivers
The rating captures CB's solid franchise as the third-largest domestic commercial bank in Sri Lanka, its strong financial profile and its stable operating performance among domestic peers.
CB continues to enjoy a high share of current and savings accounts (CASA) compared with most 'AA(lka)' category peers. This is despite a contraction in CB's share of CASA in its deposit base in 2012 (end-2012: 45% of total deposits, end-2011: 52%) as seen across the sector due to rising interest rates. In addition, CB's foreign currency deposit base (20% of total deposits) was the second-largest among domestic banks at end-2012.
Loan growth at CB has historically been more moderate compared with the rest of the banking sector. Exposure is predominantly to retail/SME customers (end-2012: 39%). Exposure to volatile global gold prices, in the form of pawning advances (gold- backed loans), is low compared with large 'AA(lka)' category peers. Pawning advances accounted for under 3.5% of CB's loans at end-2012.
In line with its view for the Sri Lankan banking sector, Fitch expects CB's asset quality to decline but remain healthy on account of its cautious approach to loan expansion in terms of the quantum and quality of lending. CB's reserves for impaired loans (individual and collective) accounted for 3.9% of loans at end-2012, which was the highest among 'AA(lka)' category private commercial banks.
CB has maintained strong capital, supported by high profitability and measured loan expansion. It was further aided by access to shareholder funds in 2011 and capital retention through scrip dividends. Its adjusted Fitch core capital ratio was high at 13.3% at end-2012. Fitch included pawning advances and government securities with a 50% and 100% risk weighting respectively (zero risk weighted for regulatory purposes) in calculating this ratio.
Fitch expects CB's credit profile to remain primarily linked to the domestic economy. Its operations in Bangladesh, which accounted for about 8% of assets and 10% of net income in 2012, differentiate CB from peers but Fitch believes that related diversification benefits are offset by risks associated to this market.
The subordinated debt is rated one notch lower than the issuer rating to reflect its gone-concern loss-absorption quality in the event of a liquidation, in line with Fitch's criteria for rating such securities.
A decline in CB's ability to withstand cyclical asset quality deterioration, lower earnings and capitalisation could result in a downgrade. In addition, any marked weakening in CB's deposit franchise, which Fitch views as a key strength differentiating CB from its lower-rated peers, would be negative.
Sustained improvements in CB's balance sheet strength resulting in enhanced resilience against a volatile operating environment could be positive for the rating.
The subordinated debt rating will move in tandem with the Long-Term rating.
Established in 1969 but tracing its origins to 1920, CB had a network of 227 delivery points and 555 ATMs as at end-2012. CB's single-largest shareholder continues to be DFCC Bank Plc which held 15% of its voting equity while entities related to the state included in the list of twenty largest shareholders held a further 19%.