LRA Maintains Entity Rating of Merchant Bank of Sri Lanka & Finance PLC, outlook "Stable"

The rating reflects the robust ownership of Merchant Bank of Sri Lanka & Finance PLC ("MBSL" or "the Company") and demonstrated track record of sponsors to provide support. The Bank of Ceylon (BOC) is the largest shareholder of the Company and has provided written affirmation to support MBSL. As a fully state-owned bank and one of the systematically important banks of Sri Lanka, BOC brings stability and financial strength. MBSL is a relatively small player in the leasing industry, accounting for (~2%) of the assets in CY23, and (~3)% of deposits of the sector. The Company's gross non-performing loans (3MCY24: ~21.7%) remain above the industry average, showing stressed advances portfolio as its borrowers comprise relatively high risk segment. The recent focus on recoveries and improving macroeconomic conditions are expected to have a positive impact and reduce NPLs. The Company improved its performance in CY23 and posted PAT of LKR ~21 million (CY22: loss of ~496 million) on the back of substantial gain on investments and better spread. However, sustaining these performance trends is critical, going forward. MBSL was non-complaint in regulatory Capital Adequacy Ratio ("CAR") requirement in CY22, resulting in certain restrictions on its activities by the regulator. The CAR has improved to ~16.75% in CY23 and those restrictions are now removed. MBSL intends to focus on gold loans and prudent lending in the short-term as the economic activities pick up in the country.
The rating is contingent upon continued capacity and willingness of BOC to provide support. Any substantial reduction in BOC's shareholding or other restrictions imposed on the bank that would result in diminishing support prospects, would negatively impact the rating. Meanwhile, sustenance of current performance trends, complying with regulatory capital requirements and improvement in asset quality is critical.

About the Entity
Merchant Bank of Sri Lanka & Finance PLC (“MBSL” or “the Company”) is a registered Finance Leasing Company under the provisions of the Finance Leasing Act No. 56 of 2000 and a Finance Company licensed by the Monetary Board of Central Bank of Sri Lanka under the Finance Business Act No. 42 of 2011. The largest share of (~76.6%) is owned by Bank of Ceylon (BOC) directly, while the group owns (~86.8%) of MBSL. The Board of Directors has eight members, out of which five are Non-Independent and represent the sponsor.