Commercial Bank to raise Rs3 bn through 10-year debt paper

Mar. 31 (LBO) – Sri Lanka’s Commercial Bank of Ceylon is raising up to Rs3.0 billion in long term funds next month through a combination of private and public placement of debentures, an official said Friday. Fitch Ratings Lanka Friday gave the issue a rating of ‘AA (sri)’ and a stable outlook, for the unsecured subordinated debenture issue, which is one notch below the bank’s ‘AA+(sri)’ rating for its senior debt.

Commercial Bank is currently the island’s largest private sector bank with Rs180.1 billion in assets as at end 2005.

Profitability in terms of return on assets improved to 1.32 percent in 2005 over 1.18 percent in 2004, said Fitch.

However, the bank’s capital position has not kept place with balance sheet growth over the last few years, says Fitch analyst Gerard Wickrema.

“The bank’s equity-to-assets ratio declined from 9.5 percent in 2000 to 7.8 percent in 2005. To some extent the impact of its lower capital position was mitigated by an improvement in asset quality and higher provision cover,” said a Fitch statement.

“The long-term debentures will help ease our capital position and minimize some of the maturity mismatches we currently have,” the bank’s Deputy General Manager, Ranjith Samaranayake said.

Issued in two-tranches, the first billion-rupee issue will be privately placed next week and Samaranayake is confident the funds will be in place by end April.

The issue comes in tenures of five, seven and ten-years priced at two-percent over the 3-month treasury bill rate.

Three month government treasuries currently carry a yield of 10.11 percent at this week’s auction.

Fitch said the bank’s gross non-performing loans (NPL) ratio was 3.3 percent as at Dec 2005 (4.4 percent as at Dec ’04).

Solvency, as measured in terms of Net NPL/Equity improved to 13.4 percent as at end Dec 2005 (16.8 percent as at Dec ’04), which compares well in the local context.

“The decline in equity/assets ratio is largely attributed to significantly higher taxation, but also higher dividend payouts by Commercial Bank, reducing the bank’s ability to build up reserves,” notes Fitch.

Effective tax rates for the bank were high at over 46.0 percent in both 2004 and 2005, while dividend payouts have steadily increased from 16.0 percent of net profits in 2002 to 30.0 percent of net profits in 2005.

“Commercial Bank’s ability to accommodate any deterioration in asset quality, (while maintaining a high solvency position required for this rating category) is weaker on account of its lower capital position,” warns Fitch.

Trends in asset quality and equity position are viewed as key rating triggers going forward.

Commercial Bank’s reported total capital adequacy ratio and Tier I ratio was 12.08 percent and 9.68 percent respectively as at Dec ’05 (13.16 percent and 10.78 percent as at Dec ’04).

-Mel Gunasekera: mel@vanguardlk.com