Commercial Bank of Ceylon ‘AA(lka)’ Sri Lanka rating confirmed by Fitch

ECONOMYNEXT – Commercial Bank of Ceylon’s ‘AA(lka)’ rating has been confirmed with a stable outlook, Fitch Rating said, though tough operating conditions may worsen bad loans.

“The bank’s profitability, measured by operating profit/risk-weighted assets, is likely to remain
relatively stable, although it could be dampened by higher impairment charges,” Fitch said.

“The contribution from its Bangladesh operations increased to 17% of group profit after tax in 2018, from 11% in 2017.”

“CB, like other Sri Lankan banks, experienced a significant increase in non-performing loans (NPL) with the reported gross NPL ratio increasing to 4.8% by end-June 2019, from 3.2% at end-2018 and 1.9% at end-2017.”

The full statement is reproduced below:

Fitch Ratings has affirmed Commercial Bank of Ceylon PLC’s (CB) National Long-Term Rating of ‘AA(lka)’. The Outlook is Stable.

Key Rating Drivers

NATIONAL LONG-TERM RATING

CB’s National Long-Term Rating reflects its established domestic franchise as the third-largest
bank in Sri Lanka, broadly stable earnings performance, and established domestic deposit
franchise, which underpins its funding and liquidity profile.

Current and savings accounts continued to make up 38% of its total deposits at end-June 2019,
remaining higher than that of most of its domestic peers. CB’s loan/deposit ratio of 86% at
end-June 2019 was lower than that of peers.

The bank’s profitability, measured by operating profit/risk-weighted assets, is likely to remain
relatively stable, although it could be dampened by higher impairment charges. The contribution
from its Bangladesh operations increased to 17% of group profit after tax in 2018, from 11% in
2017.

We expect the bank’s asset quality to remain under pressure as long as the operating environment
remains challenging. The impact could also be felt as loans start to season after the rapid
expansion in recent years.

CB, like other Sri Lankan banks, experienced a significant increase in non-performing loans (NPL) with the reported gross NPL ratio increasing to 4.8% by end-June 2019, from 3.2% at end-2018 and 1.9% at end-2017.

Fitch expects the bank to maintain its capital buffers at a level commensurate with its risk appetite
and comfortably above the minimum regulatory thresholds. Its Tier 1 capital ratio stood at 12.5%
at end-June 2019, above the regulatory minimum of 10% for a domestic systemically important
bank.

We expect CB to continue to expand its international operations, which made up 11.4% of the
bank’s assets at end-2018 (11% at end-2017). Bangladesh, which comprised 9.4% of the bank’s
total assets, remains its major overseas operation, as the bank builds its operations in Maldives
and Myanmar. As such, we believe CB’s credit profile should remain primarily linked to the Sri
Lankan operating environment.

Fitch maintains a negative outlook on the Sri Lankan banking sector as difficult operating
conditions persist, placing continued pressure on banks’ financial profiles, particularly asset quality
and profitability. The operating environment is of high importance to the ratings of Sri Lankan
banks.

SUBORDINATED DEBT

CB’s Basel II- and its outstanding and proposed Basel III-compliant Sri Lankan rupee subordinated
debt is rated one notch below its National Long-Term Ratings to reflect the subordination to senior
unsecured creditors.

RATING SENSITIVITIES

NATIONAL LONG-TERM RATING

Enhanced loss-absorption buffers could be positive for CB’s National Long-Term Rating. A
deterioration in capital buffers, including through an increase in risk appetite and/or a sharp
deterioration in asset quality, could pressure CB’s rating.

SUBORDINATED DEBT

The subordinated debt ratings will move in tandem with the bank’s National Long-Term Rating.
Commercial Bank of Ceylon PLC; National Long Term Rating; Affirmed; AA(lka); RO:Sta
—-subordinated; National Long Term Rating; Affirmed; AA-(lka)
—-subordinated; National Long Term Rating; Affirmed; AA-(EXP)(lka)