Lanka Rating Assigns Preliminary Instrument Rating to Bank of Ceylon - LKR 15bn Basel III Compliant, Tier 2, Listed, Rated, Unsecured, Subordinated, Redeemable 5-year Debentures

The rating assigned to the debentures reflects the Bank of Ceylon's ("BOC" or "the Bank") dominant position in the Banking Industry as the largest Commercial Bank in terms of Advances, Deposits and Asset base of LKR 2.2tn, LKR 3.9tn, and LKR 4.4tn respectively. The rating also factors in BOC's position as a Domestic Systemically Important Bank (DSIB) and its 100% ownership by the Government of Sri Lanka (GoSL). BOC’s loan portfolio is characterized by sizable exposure to the state-owned enterprises (SOEs). The Bank's financial risk profile reflects its ability to absorb the eventual impact of SOEs' debt restructuring (if any) to an extent. BOC's exposure to GoSL International Bonds is limited and well provided for (~55%), while it maintains significant investments in the domestic Government Securities. The Bank's Gross NPL ratio (~13.5% in 3MCY24) has risen in recent years, in line with the Banking Industry trend. The Net NPL ratio of the bank stood at ~5.5% as of 3MCY24. During CY23, BOC's Net Interest Income (NII) contracted to LKR 91.2bn, while it recorded a Profit-After-Tax (PAT) of LKR 26.7bn in the same period. In 3MCY24, the Bank improved its spreads and posted a PAT of LKR 5.1bn. The Bank strategizes to limit its open position against its foreign currency exposure and further enhance its liquidity (LCR of 248.6% in 3MCY24). BOC's Capital Adequacy Ratio was recorded at 15.84% in CY23 and 15.41% in 3MCY24, slightly below its peers, but above the regulatory requirement of 14%. The rating incorporates the subordinated Tier 2 structure of debentures and a non-viability write-down feature. This feature allows for the debentures to be permanently written off upon the occurrence of a trigger event, with resultant liability being reclassified as Additional Tier 1 (ADT-1) Bonds, thereby subordinating them to the rest of the claims.
The rating is contingent upon the Bank’s ability to maintain its asset quality, capitalization, and profitability in the near term. Any significant deterioration in the Bank’s financial position, particularly stemming from its exposure to the SOEs and foreign currency, could negatively impact the rating, if it is not rectified in a timely manner. GoSL's 100% ownership and expected support remain the key rating factors.

About the Entity
BOC is a Government owned Bank in Sri Lanka, established under the Bank of Ceylon Ordinance No. 53 of 1938. The management team is led by Mr. Russel Fonseka, the CEO/GM. He has over 34 years of experience in various roles within the Bank, both locally and internationally.

About the Instrument
BOC is expected to issue a Basel III-compliant, Tier 2, listed, rated, unsecured, subordinated, redeemable 5-year debentures with non-viability write-down features, aiming to raise up to LKR 15bn. The initial issue is 5bn and Bank retains the option to issue an additional LKR 10bn in the event of oversubscription. The issue comprises two types of debentures: Type A offers a fixed annual interest rate, while Type B provides a floating rate with payments to be made annually. The primary objectives of this issuance are to enhance Tier 2 capital, manage and minimize the gap exposure in the Bank’s asset/liability portfolios, and strengthen the Bank’s liquidity position.