The Merchant Bank of Sri Lanka and Finance PLC (MBSL), a subsidiary of Bank of Ceylon would require around Rs.1.4 to Rs.2.7 billion fresh equity over the next three years to meet the regulatory capital requirements set by the Central Bank, according to ICRA Lanka Ratings.
“The company (MBSL) would require Rs.1.4 billion to Rs.2.7 billion fresh equity over the next three years (CY2020-22) to meet the minimum Tier I capital ratio of 9.50 percent, with a buffer of 1.00 percent, given the expected RWA growth of 10-20 percent during the same period.”
ICRA Lanka said it would continue to monitor MBSL’s capital raising plan from parent Bank of Ceylon (BOC) or a new investor in FY2020 and FY2021, and timely capital support from BOC will be a key rating sensitivity.
The Central Bank imposed lending and borrowing caps early this year on MBSL after it failed to meet the regulatory capital requirements for the year.
As of June this year, MBSL’s Tier-1 core capital ratio was 4.70 percent and the total capital adequacy ratio (CAR) of the lender was 7.89 percent, which was below the regulatory requirement of 6 percent and 10 percent respectively.
“The company failed to meet the regulatory capital requirements due to IFRS-9 day one adjustment and weak profitability with losses at operating level in 9MCY2019. As a result, CBSL imposed lending and borrowing caps of Rs.35 billion (Rs 30.7 billion as on Sep-19) and Rs.23 billion (Rs. 22.5 billion on Sep-19) in April-19 and May-19 respectively,” ICRA Lanka stated.
Although, the parent company, BOC continues to provide financial support with term loan facilities and contingent funding lines to the company, ICRA Lanka noted that the timely capital support was observed to be lower than expected from the parent.
MBSL’s asset quality deteriorated as the gross non-performing asset (GNPA) ratio increased from 10.10 percent in Dec-17 to 11.24 percent in Dec-18, which was further worsened to 13.82 percent by Jun-19. The GNPA ratio was also higher than the system average of 9.18 percent as of Jun-19.
“The asset quality of the portfolio deteriorated due to poor performance reported in micro, business and personal loans with GNPA ratio of 48.81 percent, 35.96 percent and 9.01 percent respectively in Jun-19,” ICRA Lanka said.
Consequently, MBSL has discontinued the microfinance and unsecured business loan facilities, while curtailing the personal loans by strengthening the credit underwriting for the product.
The company has also discontinued its clean lending portfolio and targets to increase the asset-backed portfolio to 95 percent by Dec-20. In addition, the company has centralised the credit operations process to improve the quality of the new facilities to control further slippages and strengthened its recovery activities. ICRA Lanka noted that the action taken by the company to control the NPAs and further deterioration in asset quality would have a negative impact on the earnings and capital profiles of the company.
MBSL reported a profit after tax (PAT) of Rs.13 million for the first nine months of 2019 as compared to PAT of Rs.181 million during the same period last year, which was due to reversal of provisions worth Rs.166 million made on its insurance subsidiary MBSL Insurance Company Limited.
“The company’s overall earnings profile is characterized by operational inefficiencies and increasing credit costs. The credit cost continued to increase as it was 0.49 percent of the average total assets for the 9MCY2019 as compared to 0.21 percent in CY2018 (0.88 percent in CY2017).
The increase was due to higher slippages witnessed in micro, business and personal loans. The company’s operational level viability is hindered by its higher operating expenses to average total assets,” ICRA Lanka pointed out.
ICRA Lanka has revised the issuer rating of MBSL to [SL] A- from [SL] A along with the rating of the bank’s Rs.2 billion subordinated unsecured redeemable debenture to [SL]BBB+ from [SL]A-. The outlook on the ratings is Negative.
ICRA Lanka has also revised the rating on the Rs.343.5 million Trust certificates of MBSL Trust-01 to [SL] A(SO) from [SL]A+(SO). The outlook on the rating is Negative.
Further, ICRA Lanka has also revised the rating of the bank’s Rs.2 billion senior unsecured redeemable debenture to [SL] A- with Negative outlook from [SL] A with Negative outlook and has withdrawn the rating at the request of the company.