Sri Lanka’s Commercial Bank raises debt to fund expansion; meet new regulatory guidelines

November 29, 2006 (LBO) – Sri Lanka’s Commercial Bank of Ceylon is coming out with a debt issue to meet Central Bank’s new capital requirement and fund ongoing credit expansions, officials said Wednesday. The island’s biggest private bank in terms of assets, is issuing a 1.5 billion rupee debenture with tenures ranging from 5-10 years. Offering rates ranging from 13.5 percent to 14.0 percent, investors can choose between floating or fixed rates.

The six options available to
investors are:

Type A : A fixed interest rate of 14.00% p.a with a tenure of 10

Type B : A
fixed interest rate of 13.75% p.a with a tenure of 7 years

Type C : A fixed
interest rate of 13.50% p.a with a tenure of 5 years

Type D : A floating
interest rate equivalent to One Year (gross) Treasury Bill rate p.a.
plus 1%, with a tenure of 10 years

Type E : A floating
interest rate equivalent to One Year (gross) Treasury Bill rate p.a.
plus 1% with a tenure of 7 years

Type F : A floating
interest rate equivalent to One Year (gross) Treasury Bill rate p.a.
plus 1% with a tenure of 5 years

“We aim to rectify some of our current funding mismatches. We have long-term housing products, 5-year leasing products,” the bank’s managing director, Amitha Gooneratne told investors.

The issue, which opens on December 11, carries a AA(lka) from Fitch Ratings Lanka, who says the bank needs to slowdown on growth, as its capital has not kept pace with it balance sheet over past 5-years.

Part of the lag is due to government taxes which have grown from 20 percent in 2000 to about 53 percent during the first six months of 2006, says Fitch in a recent report.

The bank’s deputy general manager (finance and planning) Ranjith Samaranayake says Central Bank’s recent guidelines on capital adequacy ratios and provisioning for lending will put pressure on profits.

Starting from the fourth quarter of 2006, banks have to maintain a 0.1 percent general provision on their total performing loans, each quarter. Banks’ risk weightage on loans was also raised to 110 percent from 100 percent, which puts pressure on capital adequacy ratios.

In an attempt to curb credit growth, the regulator wants banks’ to maintain a 1-percent general provision on the total performing loans, on top of the specific provisions made by each bank on their non performing loans.

Despite opposition, banks have to make the provisioning over a period of ten quarters to meet the new Central Bank directive.

“Banks with improved credit quality, comparatively high profitability, higher fee based income and improved return on assets will have a lesser blow on their bottomline compared to competing peers,” says stockbrokers CT Smith.

Well capitalised banks, can bear the new changes the way risk weightings for Capital Adequacy Ratios (CAR) is calculated, CT Smith says smaller quoted and unquoted banks will find it tough to meet minimum CARs of 5 percent for Tier I and 10 percent for Tier II.

Quarterly performance – adjusted for the expected 0.1% quarterly general










Net Profit After
Tax – 3Q2006 (
838.7 580.6 240.7 98.2 42.4 106.6 205.8 411.3
Loans net of Specific Provisions as at 30/09/2006 (
132,659.2 118,951.0 60,071.2 24,359.5 6,887.0 89,776.0 39,850.2 42,853.2

General Provision (

132.7 119.0 60.1 24.4 6.9 89.8 39.9 42.9
NPAT net of
impact from General Provision adjusted for Tax Benefit (






in Quarterly Profit (%)








Net Profit After
Tax 1-3Q2006 (
1,981.6 1,345.5 524.8 231.1 100.3 660.8 515.9 822.2
NPAT net of
impact from General Provision adjusted for Tax Benefit (





485.7 438.2 738.6
Reduction in YTD
Profit %




-15.1 -10.2

Calculations made above indicate the likely impact of an increased
general provision

Source: CT Smith Stockbrokers

Over the last few years, banks’ have been taxed heavily, with the average effective tax rate exceeding 40 percent.

From April 1, 2007 financial institutions and banks’ have to limit the way they recognise specific loan loss provisions, when they calculate income tax, to 1-percent of outstanding loan amounts at the end of the year or to actual provisions, whichever is lower.