Fitch rates Commercial Bank’s Basel III Subordinated Debt ‘A(EXP)(lka)’

Fitch Ratings has assigned Commercial Bank’s proposed Sri Lankan rupee-denominated Basel III-compliant subordinated debentures of up to LKR10 billion an expected National Long-Term Rating of ‘A(EXP)(lka)’.

The debentures, which have maturities of five and seven years, 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 debentures to qualify as Basel III-compliant regulatory Tier 2 capital. The notes 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.

The final rating is subject to the receipt of final documentation conforming to information already received.

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 notes 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 revised on 25 January 2021 and is highly influenced by our assessment of the operating environment for banks in Sri Lanka. It also reflects its established domestic franchise as Sri Lanka’s third-largest bank, which will support its earnings performance and its entrenched domestic-deposit franchise that underpins its funding and liquidity profile.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of the bank’s National Long-Term Rating will lead to an upgrade of the subordinated debt ratings.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of the bank’s National Long-Term Rating will lead to a downgrade of the subordinated debt ratings.