Impairments on dollar bonds to be moderate at BOC despite hefty exposure, says ICRA Lanka

Further provisions against the dollar bonds held by Bank of Ceylon (BOC) remain moderate even in case of another sovereign downgrade but the bank may face renewed concerns of asset quality on its loans with the pandemic’s resurgence, a condition which isn’t only spared to BOC, according to ICRA Lanka.    

The state-owned licensed commercial bank has a hefty exposure to dollar bonds and by June 30, 2021, it held Sri Lanka Development Bonds worth of Rs.165 billion in rupee equivalence and Rs.52 billion worth of International Sovereign Bonds, the data cited by ICRA 
Lanka showed.

 However, the credit rating agency doesn’t think that to significantly increase the bank’s provisions against the possible losses on account of such bonds, even if the country has to go through another sovereign downgrade, given the bank’s capitalisation level. 

“ICRA Lanka envisages the impairment charge arising from a further sovereign downgrade to be moderate compared to the overall capitalisation profile of the bank (net worth of Rs.175 billion as in June-21),” the rating agency said last while affirming the bank credit ratings.

The bank last year raised Rs.15 billion, followed by another Rs.3.35 billion in July 2021, via equity-like bonds, to stay above the minimum BASEL III-mandated minimum capital adequacy levels. ICRA Lanka affirmed the two instruments at AA (hyb), with a negative outlook, due to the renewed pressure on the bank’s asset quality caused by the prolonged effects of the third wave of the pandemic.

The banks were seen making sizeable provisions against possible losses on Sri Lanka-issued dollar bonds they held last year, after the rating agencies downgraded Sri Lanka’s sovereign rating, stoking fresh concerns about the country’s ability to make good on the foreign loans when they come due.  These were on top of the much higher provision they made on possible defaults on the loans after the pandemic stung the cash flows on swaths of businesses and individuals, making them scrambling to remain solvent.  

A spectre of a similar scenario is re-emerging in earnest, due to prolong lockdowns, with many small-scale businesses are at their brink of collapse, which ICRA Lanka believes would inflict damage on the banks’ asset quality, something which isn’t unique to BOC. 

“ICRA Lanka envisages the asset quality of the entire banking industry to be stretched, due to the current surge in the pandemic,” ICRA Lanka said. 

The signs were already seen with the slight uptick in the banks’ reported non-performing loans ratio for the quarter ended in June 2021. 

For instance, at BOC, which makes strides in asset quality by reducing its gross non-performing loans ratio to 4.43 percent by March 2021, from a June 2020 peak of 5.35 percent, saw the ratio going again up to 4.70 percent in the most recent quarter ended in June 2021. 

The industry also mirrored this trend with its reported gross NPL ratio moving up to 5.0 percent of total loans outstanding by June 2021, from 4.6 percent in March 2021.  However, ICRA Lanka observed relatively better asset quality indicators compared to a few large private sector commercial banks, for which they attribute to its higher state exposure.  The rating agency also expects the capital to be forthcoming to BOC as and when it is required while the bank also remains well above the liquidity parameters. 

“ICRA Lanka believes that BOC will continue to benefit from timely and adequate capital support from GoSL,” they added.