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Sunday May 19th, 2024

Merchant Bank of Sri Lanka and Finance given ‘BBB+(lka)’ rating by Fitch

ECONOMYNEXT – Fitch Ratings said it assigned Merchant Bank of Sri Lanka and Finance Plc (MBSL) a first-time national long-term rating of ‘BBB+(lka)’.

“MBSL’s rating is driven by our view that the parent, BOC, would provide extraordinary support to MBSL, if required,” the rating agency said.

“We assess MBSL’s standalone credit profile as being weaker than its support-driven rating because of its small franchise with 1.8% market share of sector loans, evolving business model, and weak financial profile, which is reflected in its poor asset-quality metrics, weak profitability and high leverage.”

The full statement is reproduced below:

Fitch Ratings – Mumbai – 22 Feb 2024: Fitch Ratings has assigned Merchant Bank of Sri Lanka & Finance PLC (MBSL) a first-time National Long-Term Rating of ‘BBB+(lka)’.
The Outlook is Stable.

MBSL is 84.5% owned by Bank of Ceylon (BOC, A(lka)/Stable) and other BOC group entities. BOC is the largest banking group in the country.

Key Rating Drivers

Shareholder Support Drives Ratings: MBSL’s rating is driven by our view that the parent, BOC, would provide extraordinary support to MBSL, if required. BOC’s ability to support MBSL is reflected in its credit profile, which is underpinned by its standalone strength. We believe that any required support for MBSL would be manageable relative to BOC’s financial capacity.

Our support assessment also takes into consideration BOC’s majority shareholding in MBSL, increasing product offerings by MBSL that are complementary to those provided by BOC, the parent’s oversight of MBSL’s policies and strategy through board representation, and the usage of the BOC brand by MBSL in its business operations, which raises reputational risk for BOC should MBSL default.

Limited Importance to Parent: MBSL is rated two notches below BOC due to its limited importance to the group. MBSL mainly serves high-yielding, under-banked segments that have limited overlap with BOC’s core customer base, but this is partly offset by BOC’s focus on increasing merchant banking via MBSL to strengthen group feebased revenue. MBSL made up 0.8% of BOC’s consolidated assets at end-September 2023, and makes negligible contribution to group profitability. MBSL also has considerable management independence and there is limited operational integration between the entities.

Weak Standalone Profile: We assess MBSL’s standalone credit profile as being weaker than its support-driven rating because of its small franchise with 1.8% market share of sector loans, evolving business model, and weak financial profile, which is reflected in its poor asset-quality metrics, weak profitability and high leverage. MBSL focuses on vehicle leasing, and gold- and property-backed loans. It has a high risk profile stemming from its significant exposure to borrower segments that are highly susceptible to economic and interest rate cycles.

Stabilising Economic Outlook: We expect the operating environment for Sri Lankan finance and leasing companies (FLCs) to continue to stabilise following the inflation and interest-rate shocks over the past two years. Easing inflation and interest-rate pressures should provide steadier conditions for FLC sector performance. Some headwinds linger, as higher taxes will continue to weigh on household finances in 2024. Investor confidence will also take time to recover. Nonetheless, we expect economic activity in Sri Lanka to improve in the financial year ending March 2025 as GDP growth recovers.

Asset Quality Pressure: The company’s loans that are more than three months past due were high at 25.3% of total loans at end-September 2023 (end-2022: 24.3%) due to its high risk profile. Nonetheless, MBSL’s focus on bad debt recovery has resulted in a decline in the non-performing loan ratio from a much higher level in previous years. We expect a pick-up in borrowers’ business activity and declining interest rates to aid loan collections in the medium term.

Weaker Profitability: MBSL’s pre-tax profit/average asset ratio was low at 0.9% in 9M23 and -0.9% in 2022, primarily due to the sharp reduction in its net interest margin and increase in operating costs on lower business volumes. We expect MBSL’s profitability to improve in the near to medium term, though it will likely remain weaker than that of peers, as its lending operations pick up, borrowing costs decline, and bad debt recovery improves.

History of Capital Shortfalls: MBSL’s capital adequacy ratio (CAR) rose to 16.9% (equity Tier 1 ratio at 13.4%) by end-September 2023 from 12.3% (11.7%) at end-2022, and against the regulatory minimum CAR of 12.5%. MBSL suffered significant capital shortfalls in 2020, with CAR at end-2020 of 5.6% below the minimum required 10.5% due to losses. BOC injected equity into MBSL in 2021 to improve its capitalisation. The breaches resulted in the regulator limiting MBSL’s deposit and lending balances, which affected its business franchise. The caps were removed after its capital ratios increased.

The recent improvement in CAR was due to significant reduction in total gross loans, an increase in gold loans, which carry lower risk weights, in the lending mix, and an increase in Tier 2 capital. We expect capitalisation pressure to ease in the medium term due to improved profitability prospects.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

MBSL’s rating is sensitive to changes in BOC’s credit profile, as reflected in BOC’s National Long-Term Rating, as well as Fitch’s opinion around BOC’s ability and propensity to extend timely extraordinary support. Developments that could lead to a downgrade include:

– meaningful reduction in the parent’s ownership, control or influence that could weaken its propensity to support the subsidiary

– notable decline in MBSL’s capital buffers, indicating reduced timeliness in financial support to back growth or meet regulatory norms

– insufficient or delayed liquidity support from the parent relative to MBSL’s needs, which hinders MBSL’s ability to meet its obligations in a timely manner

– sustained weak performance of MBSL that we believe will weaken the parent’s propensity to support the subsidiary

– a material increase in size relative to the parent that makes extraordinary support more onerous for the parent.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

An upgrade is less likely in the near term. However, a significantly greater strategic role for MBSL within the BOC group, along with closer integration with BOC across broader functional areas and greater sharing of the BOC brand name besides the operational usage of brand, could be positive for the rating in the long term.

Date of Relevant Committee
19 February 2024

References For Substantially Material Source Cited As Key Driver Of Rating
The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings With Credit Linkage To Other Ratings
The rating is linked to rating on the parent, BOC.

This report was prepared by Fitch in English only. The company may prepare or arrange for translated versions of this report. In the event of any inconsistency between the English version and any translated version, the former shall always prevail. Fitch is not responsible for any translated version of this report.

Additional information is available on www.fitchratings.com

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Sri Lanka seeks to draw youth into agri-entrepreneurship with 1.6bn funding

ECONOMYNEXT – Sri Lanka’s Ministry of Agriculture and Plantation Industries has earmarked 1.6 billion rupees for the establishment of 160 model farms across the island, that are to be owned and operated by youth agri-entrepreneurs.

“The Ministry of Agriculture and Plantation Industries has taken steps to allocate 1,600 million rupees to establish 160 villages in 25 districts with 6 youth agri entrepreneurship villages in each district,” Minister Mahinda Amaraweera was quoted in a statement.

“Arrangements have been made to provide an amount of one million rupees to each village under the first phase.”

The Minister said the aim of the program is to attract youth to agriculture and to introduce them to new agricultural technology, so they could target local markets and exports.

Under the initiative vegetables, fruits, plantation crops, and fish are to be harvested, and livestock products are to be produced in the villages. (Colombo/May18/2024)

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Sri Lanka Navy nabs fishermen engaged in illegal fishing

ECONOMYNEXT – Sri Lanka’s Navy apprehended eight persons engaged in illegal fishing in the seas off Ambalanpokkanei, Mullaitivu, Poduwakattu, and Trincomalee, this week.

“The operations also led to the seizure of 3 dinghies and unauthorized fishing gear employed for these illegal acts,” it said in a statement.

“The Sri Lanka Navy remains vigilant and conducts operations to combat illegal fishing in its sea and coastal areas, with a view to supporting legal fishing activities.”

The fishermen were engaging in light-coarse fishing and using unauthorized fishing nets.

They were intercepted by the SLNS Gotabaya and SLNS Walagamba of the Eastern Naval Command.

The individuals were identified as residents of Mullaitivu, Kuchchaveli and Poduwakattu, aged between 21 to 53 years.

The fishermen, dinghies and unauthorized fishing gear were handed over to the Assistant Directorate of Fisheries – Mullaitivu, and the Fisheries Inspector of Trincomalee for legal action, the Navy said. (Colombo/May18/2024)

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Fifteen years after the end of the war, victims still await justice at Mullivaikkal: Amnesty

ECONOMYNEXT – Speaking at a commemoration marking the 15th anniversary of the end of Sri Lanka’s internal armed conflict on 18 May 2009, which culminated in the brutal Mullivaikkal offensive where countless civilian lives were lost, Secretary General at Amnesty International Agnès Callamard said:

“Today’s anniversary is a grim reminder of the collective failure of the Sri Lankan authorities and the international community to deliver justice to the many victims of Sri Lanka’s three-decade-long internal armed conflict.

It is sobering to stand in the same place where, 15 years ago, countless civilian lives were lost during the last days of the war.

Ahead of this event, we have witnessed clampdown on the memory initiatives, including arrests, arbitrary detentions and deliberately skewed interpretations of the Tamil community’s attempts to remember their people lost to the war. Authorities must respect the space for victims to grieve, memorialise their loved ones and respect their right to freedom of expression and peaceful assembly.

UN investigations have found credible evidence of crimes under international law and other violations of international human rights and humanitarian law committed by those on both sides of the conflict, yet there has been little in the way of an independent or impartial national inquiry into such serious crimes.

Meanwhile, the families of those who were forcibly disappeared during the conflict have been left to search desperately for their loved ones. It is truly heartbreaking to hear from victims how long they have been demanding justice in vain.

The Sri Lankan government is best placed to provide answers to the victims, however numerous domestic mechanisms to establish accountability in the last 15 years have been mere window dressing.

The report by the UN Office of the High Commissioner for Human Rights released earlier this week too reiterates the gaping deficits in Sri Lanka’s accountability initiatives that has contributed to impunity remaining deeply entrenched.

Tens of thousands of victims and their families continue to suffer in anguish as they await truth, justice, and reparations. We stand in solidarity with them here in Mullivaikkal today.”

Background:

During the internal armed conflict from 1983 to 2009, Sri Lankan government forces and their armed political affiliates committed extrajudicial killings, enforced disappearances and acts of torture against Tamils suspected of links to the Liberation Tigers of Tamil Eelam (LTTE).

The LTTE also launched indiscriminate suicide attacks on civilian targets like buses and railway stations, assassinated politicians and critics, and forcibly recruited children as fighters.

Violations of international human rights and humanitarian law peaked in the final months of the conflict, most notably in May 2009 when some 300,000 displaced civilians were trapped between the warring parties.

It was at Mullivaikkal, a small village in Mullaitivu district in the Northern Province of Sri Lanka, where the final offensive between the Sri Lankan forces and the LTTE took place, killing at least 40,000 civilians according to UN estimates.

Each year, on 18 May, a memorial event at Mullivaikkal brings together thousands of war-affected Tamils to commemorate those lost to the war and demand justice and accountability.

The Office of the High Commissioner for Human Rights (OHCHR) this week released a report on accountability for enforced disappearances in Sri Lanka.
(Colombo/May18/2024)

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