Commercial Bank of Ceylon rating affirmed at ‘A(lka)’ by Fitch; Outlook Stable

Commercial Bank of Ceylon PLC (COMB) has been affirmed a National Long-Term Rating of ‘A(lka)’ by Fitch Ratings. 
While the Outlook is Stable, Fitch has also affirmed the bank’s subordinated debt at ‘BBB+(lka)’ and proposed subordinated debt at ‘BBB+(EXP)(lka)’.
COMB’s rating is driven by its intrinsic credit strength and is highly influenced by the bank’s exposure to the weak credit profile of the Sri Lankan sovereign (Long-Term Foreign Currency Issuer Default Rating: RD (Restricted Default), Long-Term Local Currency Issuer Default Rating: CCC-). 
The rating is supported by the bank’s superior domestic franchise as Sri Lanka’s third largest commercial bank.

“Our assessment of COMB’s risk profile factors in its exposure to defaulted foreign currency government securities, to which COMB has the second highest exposure among the domestic banks, at 7 percent of total assets at end-2023,” the rating agency said. 
A further 30 percent exposure stems from its local currency-denominated treasury securities, making the bank vulnerable to the sovereign’s repayment capacity and liquidity position. COMB recognised impairments of 52 percent on its sovereign bond exposure by end-2023. However, its adequacy remains uncertain as negotiations are ongoing.
Noting that funding and liquidity challenges persist, Fitch said it believes COMB’s funding and liquidity stress has eased on both the foreign and local currency fronts relative to the crisis period, given the favourable external sector flows and the bank’s focus on liquidity preservation, as reflected in its higher liquidity coverage ratio. 
However, improvements in foreign currency liquidity remains susceptible to sudden changes in creditor sentiment. The bank’s ability to access foreign currency wholesale funding remains constrained by the sovereign’s weak credit profile, similar to peers.
Fitch expects COMB’s impaired (stage three) loan ratio to fall as the repayment capacity of borrowers gradually improves. 
It added that it expects risk to COMB’s profitability to be manageable, despite the potential for one-off losses from a restructuring of sovereign bonds, should these exceed the provisions already factored in. Barring this, profitability should improve in line with the net interest margin stabilisation, envisaged lending growth and a moderation in impairments. 
COMB’s operating profit/risk-weighted assets ratio improved to 5.2 percent in 1Q24, from 2.7 percent at end-2023, on higher operating income and lower impairments that outweighed the increase in risk-weighted assets.