Lanka Rating Agency (LRA) has reaffirmed Merchant Bank of Sri Lanka PLC’s (‘MBSL’ or ‘the Company’) respective long- and short-term financial institution ratings, at AA- and P1. Concurrently they have assigned a long-term issue rating of AA- to the company’s proposed Rs. 2 billion Unsubordinated Listed Unsecured Redeemable Debentures (2014/2019).
Meanwhile, the long-term issue ratings of Rs. 1 billion Unsubordinated Listed Unsecured Redeemable Debentures (2013/2017), Rs. 2 billion Unsubordinated Listed Unsecured Redeemable Debentures (2012/2017) and Rs. 1 billion Unsubordinated Listed Unsecured Redeemable Debentures (2011/2015) have been reaffirmed at AA-.
The outlooks on all long-term ratings are reinstated at negative. The ratings are supported by MBSL’s above average capitalisation and the financial flexibility derived from its parent, the state-owned Bank of Ceylon (‘BOC’). On the other hand, the ratings are weighed down by the company’s weak asset quality.
MBSL which is a specialised leasing company (SLC) has two subsidiaries; MBSL Savings Bank Ltd. (MSB), a licensed specialised bank (LSB) and MBSL Insurance Company Ltd. (MBSL Insurance). It also has associate stakes in MCSL Financial Services Ltd. (MCSL), a licensed finance company (LFC) and Lanka Securities Private Ltd. (LSL). Its current subsidiaries – MSB, MBSL Insurance and its associates MCSL and LSL are together known as ‘the Group’. MBSL is currently in the process of merging with MSB and MCSL. The amalgamated entity will be registered as a LFC and MBSL will be the surviving entity.
Both MBSL and MCSL chartered a rapid deterioration in asset quality over the review period; absolute gross non-performing loans (NPLs) increased 38.63% y-o-y to Rs. 1.01 billion and 135.89% y-o-y to Rs. 1.68 billion respectively in FY Dec 2013. As such, the impact on MCSL’s gross NPL ratio had been more pronounced, as it weakened from 11.53% to 19.80% while MBSL’s gross NPL ratio deteriorated from 7.42% to 9.64% as at end-FY Dec 2013. Further, the additional provisioning has resulted in weakened performance. As such, the negative outlook was reinstated owing to the deterioration in asset quality.
MBSL’s NPLs primarily stemmed in from the lease and hire-purchase (HP) portfolio following its 25.27% y-o-y growth in FY Dec 2012, as seasoning took effect amidst challenging external conditions. Nevertheless, it is noted that the management has taken steps to improve recovery of NPLs by appointing a former general manager of BOC as a consultant. Overall, the Group’s asset quality is considered weak. The Group’s gross NPL ratio increased from 9.05% as at end-FY Dec 2012 to 9.74% as at end-FY Dec 2013 amid the influx of NPLs and continued to compare relatively weaker than those of its peers.
Meanwhile, the Group’s net interest margin (NIM) remained relatively stable at 7.88% in FY Dec 2013 (FY Dec 2012: 7.84%) and was more or less in line with its similar rated peers. On a separate note, the Group’s cost to income ratio continued to deteriorate from 79.90% in FY Dec 2012 to 90.37% in FY Dec 2013; the ratio remained weaker than most of its peers. Conversely, MBSL’s cost-to-income ratio improved from 64.76% to 60.90% over the same period as nine out of the 16 branches that were opened in fiscal 2012 broke-even by the end of 2013. Elsewhere, the company has appointed a former senior deputy general manager of BOC, as a business promotion consultant. Further, the Group’s performance was hampered by the increased credit cost. This was primarily driven by MBSL as reflected by its credit cost ratio which spiked to 2.06% in FY Dec 2013 (FY Dec 2012: 0.57%). Moreover, in line with the weaker performance of MBSL and losses made by both MSB and MBSL Insurance, the Group made a pre-tax loss of Rs. 80.90 million in FY Dec 2013. Overall, the Group’s performance is deemed moderate.
Looking ahead, its NIM is likely to widen in the short to medium term in light of a receding interest rate environment along with its focus on higher yielding products. That said, overall performance of the Group is expected to be pressured by its deteriorating asset quality.
The Group’s capitalisation is viewed to be above average. Although MBSL’s capitalisation levels declined during the review period, it remains strong compared to its peers. It’s tier-1 and overall risk-weighted capital-adequacy ratios (RWCAR) clocked in at 21.34% as at end-1Q FY Dec 2014 (end-FY Dec 2012: 24.36%).
Elsewhere, concerns hinge upon the deterioration of the Company’s capital cushioning, as reflected in its net NPLs to shareholders’ funds ratio of 17.20% as at end-1Q FY Dec 2014 (end-FY Dec 2012: 12.05%). Nonetheless, it is likely that parent support would be forthcoming from BOC should the need arise. MBSL’s ratings may be pressured if its asset quality indicators do not improve to levels in line with similar rated peers and if the company’s performance weakens. Conversely the outlook may be revised to stable if asset quality indicators improve to levels that are on par with similar-rated peers. Lanka Rating Agency (LRA), former RAM Rating Lanka’s, technical partner is CRISIL India (CRISIL). CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. CRISIL is India’s leading ratings agency and is also the foremost provider of high-end research to the world’s largest banks and leading corporations.
CRISIL’s majority shareholder is Standard and Poor’s (S&P). S&P, a part of McGraw Hill Financial (formerly The McGraw-Hill Companies), is the world’s foremost provider of credit ratings.
