Singapore, April 17, 2012 -- Moody's Investors Service has assigned following debt and deposit ratings
to Bank of Ceylon (BOC), with a stable outlook.
The detailed ratings assigned are:
Local currency deposits: B1/NP
Foreign currency deposits: B2/NP
Foreign currency senior unsecured debt: B1
Foreign currency Issuer rating: B1
Moody's has also assigned E+ bank financial strength rating (BFSR),
mapping to a baseline credit assessment (BCA) of b2, with a stable
outlook.
RATINGS RATIONALE
This is the first time Moody's is assigning international ratings
for BOC. These ratings and outlook take into account the balance
of strengths and weaknesses characterizing BOC's credit profile
on a standalone basis, as well as Moody's assumptions for
the probability of government support in times of stress, which
Moody's assesses as very high. At E+/ b2, Moody's
support assumption results in a one-notch rating uplift to the
B1 local currency deposit rating.
The BFSR reflects BOC's leadership position in the domestic banking
system that underpins its strengths in loan and deposit mobilization and
stable profitability, which is supported by both lending and fee-based
services. The rating also takes into account the bank's relatively
weaker financial profile and risk positioning compared with other E+
Moody's-rated banks globally.
It reflects the bank's declining capital and liquidity buffers available
to withstand systemic stresses as a result of its recent above-industry
credit growth. Also, we view the bank, like its domestic
peers, to be vulnerable to the unavoidable cyclicality inherent
to emerging markets, which exposes it to periodic asset quality
pressure. Also, for a bank exposed to such risk, we
consider its provision coverage to be low.
Given its full ownership by the Sri Lankan government, its dominant
market shares in domestic deposits and treasury activities, as well
as past evidence of support received from the government, Moody's
believes BOC is very important to the Sri Lankan banking system.
These considerations have resulted in a one-notch uplift for its
local currency deposit rating from its b2 BCA.
The stable outlook for the bank's ratings reflect Moody's
expectation that its credit growth will moderate and become in line with
the industry level over the next 12-18 months, and its capital
and liquidity buffers will increase and be sufficient to withstand additional
credit losses and systemic stresses at its current rating level.
BOC's loan mix is geared towards large corporations and government-related
entities. Its retail and small and medium-sized enterprise
(SME) portfolios are fairly sizable and it plans to grow these segments.
Its credit profile is characterized by its leadership position in the
Sri Lankan banking system, with a market share of 21% in
loans and deposits. It manages the majority of inward remittances
and foreign exchange transactions in Sri Lanka, and operates the
most extensive network of branches and ATMs distributed throughout the
country. Leveraging this entrenched franchise and operating platform,
BOC has steadily generated strong profitability and maintained better
asset quality metrics than similarly-rated global peers.
Due to BOC's focus on lending to lower-yielding large corporations
and government-related entities compared to retail and SMEs,
its net interest margins have trended lower than its peers and the industry
average.
Nonetheless, the bank has maintained stable margins which support
its net interest income. Its fee-based income from its strong
FX, inward remittances, and trade finance businesses has also
consistently been a significant contributor to its overall profits.
At end-2011, pre-provision profits and net income
were 4.9% and 3.5%, respectively,
as a percentage of its risk-weighted assets. Compared to
Moody's E+ rated banks globally, BOC fares better in
terms of profitability.
BOC's asset quality has shown consistent improvement over the past
three years, evidenced by the steady decline in nominal non-performing
loans (NPL), NPL ratios and new NPL formation rates. At end-2011,
its NPL ratio declined to 3.6%, from 5.4%
at end-2010 and 8.4% at end-2009.
Similarly, new NPL formation rate slowed to 0.9% at
end-2011, from 1.2% at end-2010 and
3.6% at end-2009. NPL write-offs were
minimal as the bank focused on loan collection, recovery and restructuring.
While the bank has instituted an integrated risk-management framework
and implemented risk management processes, which include clearly
laid out credit approval processes, limits and controls, our
scenario analysis indicates that its asset quality could rapidly deteriorate
in a cyclical downturn, given the characteristics of the emerging
market in which it operates in and its rapid credit growth during 2010
and 2011. Profits would be under pressure due to the unavoidable
increase in provisions that would result while considering the low base
from which these provisions started.
With these characteristics in mind, we assessed the capital and
liquidity buffers available to protect the bank from systemic stresses.
BOC's Tier 1 capital ratio has been steadily falling over the past
three years.
At end-2011, its Tier 1 capital ratio stood at 9.3%,
lower than 11.4% in 2010 and 12.0% in 2009.
While its capital ratios have consistently remained above the local regulatory
minimums (Tier 1 ratio of 5% and Total capital ratio of 10%),
its capital levels have trended below the average industry level since
2009.
Importantly, although the bank recorded strong profits in both years,
it was unable to replenish capital internally at the same rate as it grew
its loans to maintain capital levels.
Moody's believes BOC's current capital level is insufficient
to protect it from insolvency pressures in the event of an economic downturn.
In an adverse stress scenario in which asset quality deteriorates to 2009
levels -- with gross NPL ratio peaking at 8.4%
over the past five years and profits declining broadly by 10% --
BOC's Tier 1 capital ratio could fall to 4% based on its
2011 financials.
Like other banks in Sri Lanka, BOC's deposit growth has not
been able to keep pace with its credit growth. However, while
its liquidity profile has in the past trended in line with the industry,
its loan-to-deposit ratio significantly exceeded the industry's
average in 2011. At end-2011, its overall loan-to-deposit
ratio deteriorated to 98.7%, from 77.0%
a year ago, compared with 85% for the industry for the same
period. Similarly, its foreign currency loan-to-deposit
ratio deteriorated to 89.5% at end-2011, from
61.0% a year ago.
Its rating outlook could be revised to negative if its core Tier 1 capital
ratio drops to less than 9% and/or loan-to-deposit
ratio exceeds 100%. Also, if its net income drops
to below 3% of risk-weighted assets and weighs on internal
capital generation, then its ratings would be under pressure.
In order for its standalone ratings to be upgraded, BOC would need
a sustained recovery of its capital and liquidity buffers, as reflected
for instance in a core Tier 1 capital ratio of more than 10% and
a loan-to-deposit ratio of less than 85% over six
consecutive quarters.
The foreign currency senior unsecured debt rating of B1 factors in the
very high level of systemic support from the government, which is
also rated B1 for foreign currency debt. As part of Moody's joint
default analysis model, Moody's considers Sri Lanka to be a medium
support country.
In assessing the probability and the likelihood of external support,
Moody's took into account the systemic importance of the bank, as
well as the willingness and capacity of the government to provide support,
including the non-fiscal measures that could be deployed to support
a bank, if needed.
The rating is subject to the receipt of final documentation, with
terms and conditions that do not deviate materially from the preliminary
documents already reviewed by Moody's.
Established in 1939 and headquartered in Colombo, BOC had assets
of LKR856.4 billion (USD7.5 billion) at end-December
2011.
PRINCIPAL METHODOLOGIES
The methodologies used in this rating were Bank Financial Strength Ratings:
Global Methodology published in February 2007, and Incorporation
of Joint-Default Analysis into Moody's Bank Ratings: Global
Methodology published in March 2012. Please see the Credit Policy
page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
Although this credit rating has been issued in a non-EU country
which has not been recognized as endorsable at this date, this credit
rating is deemed "EU qualified by extension" and may still
be used by financial institutions for regulatory purposes until 30 April
2012. Further information on the EU endorsement status and on the
Moody's office that has issued a particular Credit Rating is available
on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Information sources used to prepare the rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Simon Chen
Analyst
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
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Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308
Moody's assigns B1 rating to Bank of Ceylon
