Fitch Ratings has assigned MCB Bank Ltd. – Sri Lanka branch (MCBSL) a first-time National Long-Term Rating of ‘AA-(lka)’. The Outlook is Stable.
Fitch issued the following drivers for its rating decision:
- Head office supports rating: MCBSL’s rating reflects Fitch’s expectation of support, if required, from its head office of MCB Bank Ltd. (MCB), a large bank in Pakistan (CCC+) claiming nearly 7% of sector assets at end-2023. The rating is underpinned by MCBSL’s status as a branch of MCB, making it part of the same legal entity as MCB, subject to any regulatory constraints on MCB remitting money from Pakistan into Sri Lanka. Fitch’s assessment also takes into consideration the parent’s credit profile, which is constrained by the Pakistan sovereign on high interconnectedness, as well as MCBSL’s operational integration with MCB and the small size of its branch, at 0.9% of MCB’s total assets.
- Liquid branch: MCBSL’s all currency liquidity coverage ratio of 551% at end-1H24 is supported by the branch’s large cash balance and investments in Sri Lanka treasury securities, which make nearly 51% of its total assets. We estimate that this covers around 90% of its deposit obligations. Part of its excess liquidity is also in the form of bank placements, which make up nearly 13.5% of assets. MCBSL’s liquidity position is supported by its ability to access funding from MCB, as reflected in MCB’s adequate liquidity coverage ratio of 261.9%. MCB also maintains a stable funding position, indicated by a gross loan/customer deposits ratio of around 33.0% and a net stable funding ratio of 164.9%.
- High capital buffers to moderate: We expect MCBSL’s Common Equity Tier 1 ratio of 65% at end-1Q24 to decline moderately over the medium term due to loan growth alongside a stabilising economy. However, the ratio is likely to remain well above the system average of 14%. The bank’s capital buffers could be vulnerable should stress exceed our expectations, due to its small absolute capital base and high concentration towards small and mid-sized corporates and rising SME exposure.
- Small franchise: MCBSL’s operation in Sri Lanka is minimal, holding only 0.1% of system assets at end-1Q24. The bank’s business model focuses on riskier mid-sized and small corporate and SME borrowers. It also faces significant competition from larger banks.
