Fitch Ratings Lanka last week affirmed the National Long-term rating of Commercial Bank of Ceylon Ltd (CB) at ‘AA+(lka)’, reflecting its strong financial profile which is the best amongst the local commercial banks, as well as the bank’s systemic importance as the third largest bank in Sri Lanka with 10.7% of the banking system assets.

In addition, Fitch has affirmed CB’s Individual Rating at ‘D’, which is the highest among the Sri Lankan banks. At the same time, Fitch has affirmed the ‘AA(lka)’ rating of CB’s subordinated debentures and the ‘AA-(lka)’ (AA minus(lka)) rating assigned to CB’s preference shares. The Support Rating is affirmed at ‘5’, reflecting that state support is a possibility, but cannot be relied upon due to the state’s own current financial limitations.

The Outlook on the ratings remains Stable.

CB’s loan book was evenly split between corporate loans and consumer loans at both H107 and at FYE06. The bank’s loan growth was on par with the industry at 27% yoy in FY06 (FY05: 30% yoy) with overall loan mix remaining unchanged in FY05-FY06. As such, CB maintained net interest margins at a healthy level of 4% in both FY05 and FY06. Pre-tax ROA remained stable at 2.6% in
FY06 (FY05: 2.7%). Even with adjustments made for the following non-recurring items in FY06 - gains on DFCC Bank shares disposed (LKR798 million), lump sum pension cost for restructuring the pension scheme from a defined benefit pension scheme to a defined contribution plan (LKR 1,713million), translational forex gains and preference share dividends - the bank’s pre-tax ROA in
FY06 increased to 2.9% (FY05: 2.7%). However, due to effective taxes increasing from 45.1% of pretax income in FY05 to 60.8% in FY06, ROA declined to 1.0% in FY06 from 1.5% in FY05.

On account of macroeconomic factors such as the sharp rise in market interest rates, rising inflation and slowing economic growth, the entire sector saw some asset quality deterioration. Although CB’s NPLs/gross loans ratio increased to 3.6% at H107 from 2.7% at FYE06, its overall asset quality remained strong when compared to peers. Specific loan loss reserves covering NPLs declined to 51% of NPLs at H107, from 60% at FYE06 largely due to new NPLs requiring less specific provisioning as per regulatory guidelines.

The bank’s solvency ratio as measured by net NPL equity ratio deteriorated somewhat to 12.8% at H107 from 11.1% at FYE06 but remained good for this rating category.

Subsequent to a LKR5.7 billion rights issue in H107, CB’s equity/assets ratio increased to 8.9% at H107 (FYE06: 6.7%). Fitch estimates that due to expected asset growth, this ratio will decline to approximately 8.6% at end-2007. Due to the equity infusion, reported total capital adequacy ratio improved to 14.1% (Tier 1 ratio: 10.5%) at H107.

CB was established in 1969 and has a relatively wide, fully-linked network of 158 branches and customer service points and 289 ATMs as at H107. CB’s Bangladesh operations accounted for about
8% of net income and 8% of its assets at H107 and is largely a corporate bank which operates 6 branches (and two customer service points) and 9 ATMs in the main cities of Bangladesh.

CB has a 1.78% shareholding in Fitch Ratings Lanka but is not involved in either the day-to-day operations or credit rating reviews undertaken by Fitch Ratings Lanka.

Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings.

The best risk within a country is rated ‘AAA’ and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as ‘AAA(lka)’ for National ratings in Sri Lanka. Specific letter grades are not therefore internationally comparable.