Merchant Bank seeks specialised licence

The Merchant Bank of Ceylon (MBSL) is planning to apply for a specialised banking licence in order to alleviate its funding risk, RAM Ratings said in a statement while affirming the Bank’s rating status. RAM reaffirmed MBSL’S long- and short-term financial institution ratings at AA- and P1, respectively; the long-term rating has a stable outlook.

The ratings are supported by the credit strength and financial flexibility which stem from its parent – the state-owned Bank of Ceylon (BOC), the largest commercial bank in Sri Lanka. At the same time, both its Rs 300 million Unlisted Private Debentures and Rs 14.60 million Unlisted Public Debentures have also been reaffirmed at AA-, with stable outlooks, the rating agency said.

Although the Bank had intended to raise Rs 600 million through two debenture issues, it had only managed to raise half that amount due to a lack of investor interest as a result of treasury yields rising above the rate offered by MBSL. Hence in recent times, MBSL has been increasingly relying on short-term loans, underscoring the inherent funding risks in its business model.

Short-term debts constituted 30.65% of the Bank’s total interest-bearing funds as at the end of FYE 31 December 2007 (FY Dec 2006: 20.85%). Yet the Bank had been able to secure other financing lines on top of the temporary overdraft facility provided by its parent, the statement said. The current high interest environment, coupled with MBSL’s funding mix, has pushed up its interest costs.

Meanwhile, the Bank’s improving - albeit still weak - asset quality resulted in slightly lower provisions. MBSL’s pre-tax profit was lifted 1.52% y-o-y to Rs 273.36 million in FY Dec 2007. RAM said a factor that enables MBSL to keep its ROA at an adequate level is its strong capitalisation. The Bank’s shareholders’ funds amounted to Rs 1.56 billion as at end-FY Dec 2007, resulting in a gearing ratio of 1.59 times, which is deemed conservative.