Fitch rates ComBank’s Basel III sub debt ‘AA-(lka)(EXP)’

Fitch Ratings has assigned Commercial Bank of Ceylon PLC’s (CB, AA(lka)/Stable) proposed Basel III-compliant subordinated unsecured debentures of up to Rs.10 billion an expected National Long-Term Rating of ‘AA-(lka)(EXP)’.

The debentures will have maturities of five and 10 years and carry fixed coupons. The debentures will qualify as Basel III-compliant regulatory Tier-two capital for the bank and include a non-viability clause whereby they would convert to ordinary shares if so determined by the Monetary Board of Sri Lanka.

The debentures will be listed on the Colombo Stock Exchange.

The bank plans to use the proceeds to strengthen its Tier-two capital base and support its loan book expansion.

The final rating is subject to the receipt of final documentation conforming to information already received.

Fitch rates the proposed Basel III Tier-two notes one notch below the bank’s National Long-Term Rating of ‘AA(lka)’.

This reflects the notes’ higher loss-severity risks compared with senior unsecured instruments due to the notes’ subordinated status.

CB’s National Long-Term Rating is used as the anchor rating because the rating reflects the bank’s standalone 
financial strength.

Fitch believes the bank’s standalone credit profile best indicates the risk of becoming non-viable.

Fitch has not differentiated the notching on the proposed notes from the notching on CB’s legacy Tier-two notes as it is assumed that the authorities would step in late, moving the point of non-viability close to liquidation.

Fitch has not applied additional notching to the notes for non-performance risk according to our criteria, as the notes have no going-concern loss-absorption features. CB’s ratings reflect its modest risk appetite, strong funding profile, solid franchise and stable performance.