LRA Assigns Initial Rating to Merchant Bank of Sri Lanka & Finance PLC

The rating reflects the competence of Bank of Ceylon (BOC) as the largest shareholder of Merchant Bank of Sri Lanka & Finance PLC (MBSL or the Company). As a fully state-owned bank and one of the systematically important banks of Sri Lanka, BOC brings stability to MBSL. The rating takes comfort from BOC, which has been provided in written form. MBSL has a capital augmentation plan to become compliant with capital requirements by March 2023, and this plan is backed by BOC. The Company earned a Net Interest Income (NII) of LKR 2.9bn as of CY21 with a Net Interest Margin (NIM) of ~52%. Its performance suffered in CY22 due to the dire economic condition in the country. It incurred a loss of LKR 421mn in the 3rd quarter and it was caused by the drop in core spread, which resulted in the NIM dropping to ~31%. The ratings reflect the small relative position the Company holds and its ability to sustain and improve its performance in the long run. The Company does not comply with the Tier II capital requirement of the regulator and therefore has regulatory restrictions imposed. The Capital Adequacy Ratio (CAR) as at CY22 and 9MCY22 is recorded at ~12.2% and ~11.2% respectively. MBSL issued an unsecured subordinated redeemable debenture to comply with the Tier II capital requirement, however since the instrument was not fully subscribed, the Tier II capital requirement remains non-compliant. The Company records gross and net Non-Performing Loans (NPL) of ~15.92% and ~6.01% as of CY21, which increased to ~18.51% and ~9.32% at 9MCY22 respectively.
The rating is dependent on the Company's ability to improve its Tier II capital to adhere to the statutory requirements. Improving its credit risk in the current macroeconomic conditions would be vital for the improvement of its performance. The rating will rely on the continuous support from BOC and the Company's proficiency in building a diversified portfolio while preserving its asset quality.

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 nine members, out of which six are Non-Independent and represents the sponsor.