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Sri Lanka Bank of Ceylon 'AA(lka)' rating confirmed: Fitch
12 Sep, 2008 13:53:38
Sept 11, 2008 (LBO) - Sri Lanka's Fitch Ratings has confirmed the 'AA(lka)' rating of state-run Bank of Ceylon, with 'stable' outlook, and said its exposure to the government had fallen, though it remained high.
Fitch said the bank's 'Individual' rating at 'D/E' and 'Support' rating at '4', reflected its systemic importance as the largest bank in Sri Lanka, its stable financial profile and 100 percent state ownership and the expected state support, and its strategic importance as the primary banker to the government of Sri Lanka.

As the main banker to the government and state enterprises, Bank of Ceylon's credit exposure to the state sector remained high at 42 percent of loans and 28 percent of assets at the end of the 2007 financial year in December.

But it was lower than the 48.9 percent of loans and 31 percent of assets in 2006.

In addition, holdings of government securities (including restructuring bonds) accounted for a further 17 percent of assets at the end December 2007, compared with 15 percent of assets for the six systemically important banks.

Off-balance sheet exposure to the state sector represented 35 percent of commitments and contingencies and 11 percent of asset by December 2007.

Fitch says the exposure is to some extent because of Bank of Ceylon financing of petroleum imports.

Non performing loans (NPLs) in the non-state sector had fallen substantially to 7.4 percent at the end of 2007 from 13.0 percent at the end of 2006 on better recoveries but had risen to 8.8 percent at the end of the first half of 2008.

Fitch says the trend was noted across the industry in the face of a "challenging macro-economic environment," and the bank's management has said that it adheres to the more stringent regulatory classification standards effective from 2008.

Profitability measured by return on assets (ROA) had dipped to 0.8 percent in 2007.

"Profitability is constrained by rising interest costs, lower than average yields, high taxes and operating costs," Fitch said.

Fitch says the bank benefits from its significant state sector exposure in terms of capital adequacy.

Core capital adequacy stood at stood at 10.62 percent and total capital adequacy was at 11.60 percent at the end of the first half of 2008 under the Basel II regime effective in 2008.

Equity increased with a one billion rupee injection and higher profit retention.

Net NPL to equity ratio improved to 20 percent at the end of 2007, but declined to 30.5 percent by the first half of 2008 due to a weakening economic environment.

Bank of Ceylon was started in 1939, and nationalised in 1961 and is the largest licensed commercial bank in Sri Lanka accounting for 17.7 percent of banking system assets by end-2007. It has 307 branches including three overseas branches.


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