Implied Support

Sept 10, 2010 (LBO) – Fitch Ratings Lanka has confirmed Merchant Credit of Sri Lanka Ltd’s (MCSL) National Long-term rating at ‘BBB(lka)’ with a stable outlook, a statement said. The affirmation reflects the implied support from MCSL’s main shareholder and Sri Lanka’s largest bank – state-owned Bank of Ceylon, rated ‘AA(lka)’/Stable, it said.

“Fitch believes that support is likely to be available to MCSL from BOC should it be necessary, in view of BOC’s predominant shareholding in MCSL, its association with the BOC franchise and resulting reputation risk, as well as BOC’s demonstration of support to subsidiaries.”

MCSL’s core business continues to be vehicle finance through hire purchases (HPs) and finance leases.

However, MCSL’s portfolio growth of 16.7 percent in FY09 was driven predominantly by an increase in its loans, supported in part by the company’s participation in some relatively large loan syndications, Fitch said.

Consequently, loans accounted for 40 percent of the portfolio at FYE09 compared with 29 percent a year ago.

“MCSL’s asset quality remained weak, reflecting a legacy of poor credit risk management,” Fitch said.

Its gross NPL ra