Fitch Rates Commercial Bank of Ceylon’s Basel III Sub Debt Final ‘A(lka)’

Fitch Ratings has assigned Commercial Bank of Ceylon PLC’s (CB, AA-(lka)/Stable) proposed Sri Lankan rupee-denominated Basel III-compliant subordinated debentures of up to LKR10 billion a final National Long-Term Rating of ‘A(lka)’.

The final ratings are the same as the expected ratings assigned on 24 June 2021 (and subsequently affirmed on 3 August 2021) and follow the receipt of documents conforming to information already received.

The proposed debentures, which have maturities of five and seven years and carry fixed coupons, will be listed on the Colombo Stock Exchange. The bank plans to use the proceeds to further strengthen its Tier 2 capital base, raise long-term funding and bridge maturity mismatches.

The bank expects the proposed debentures to qualify as Basel III-compliant regulatory Tier 2 capital. They include a non-viability clause whereby they will convert to ordinary voting shares subject to the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka.

KEY RATING DRIVERS

Fitch rates the proposed Basel III Tier 2 notes two notches below the bank’s National Long-Term Rating of ‘AA-(lka)’. This reflects Fitch’s baseline notching for loss severity for this type of debt, and our expectations of poor recoveries. There is no additional notching for non-performance risks, as the debentures do not incorporate going-concern loss-absorption features.

CB’s National Long-Term Rating is used as the anchor rating for this instrument because the rating reflects the bank’s standalone financial strength and best indicates the risk of the bank becoming non-viable. CB’s National Long-Term Rating was affirmed on 3 August 2021, and is driven by its intrinsic credit profile.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade: CB’s subordinated debt would be upgraded if the bank’s National Long-Term Rating is upgraded. Factors that could, individually or collectively, lead to negative rating action/downgrade: CB’s subordinated debt would be downgraded if the bank’s National Long-Term Rating is downgraded.