LRA Maintains Instrument Rating of Merchant Bank of Sri Lanka & Finance PLC -LKR 01bn Unsecured Subordinated Redeemable Debentures (2)

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 mln (CY22: loss of ~496 mln) 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 debenture's 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 debenture's 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.

About the Instrument
Merchant Bank of Sri Lanka & Finance PLC (“MBSL” or “the Company”) issued LKR 1bn listed, unsecured, subordinated, redeemable debenture each worth LKR 100/-. The debenture is not underwritten and the principal and the interest are not secured by any specific asset. The tenor of the debenture is 5 years. The debenture was allotted on April 10,2023 and was able to raise LKR~623mln. Type A and B offers a fixed rate paid annually and bi-annually respectively. Type C provides a quarterly payment with a floating rate of 364 days weighted average T-bill rate + 375 basis points, with a cap of 33% per annum. Type D is a zero-coupon debenture that is redeemable at the maturity value including interest. The objective of the issue is to increase the medium-term fund base to match the medium to long-term lending portfolio and to enhance the total capital base.