Merchant Bank resorts to short term loans - RAM Ratings

The Merchant Bank of Ceylon (MBSL), a subsidiary of the Bank of Ceylon, has been increasingly relying on short term loans after it was unable to raise all the Rs 600 million it sought through two debenture issues.

“… although the Bank (MBSL) 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,” RAM Ratings said in a statement. It said short-term debts constituted 30.65% of the Bank’s total interest-bearing funds as at the end of financial year 31 December 2007. However the Bank was able to secure other financing lines on top of the temporary overdraft facility provided by its parent.

Moving forward, the Bank intends to apply for a specialised banking license in order to alleviate its funding risk, the rating agency said, while reaffirming MBSL’s long- and short-term financial institution ratings at AA- and P1, respectively. RAM said the current high interest environment, coupled with MBSL’s funding mix, has pushed up its interest costs. As a result, net interest income for FY Dec 2007 only nudged up 3.36% year-on-year (“y-o-y”). Even though MBSL had managed its overheads well, the Bank’s cost–to-income ratio still increased marginally as a result of provisioning vis-à-vis its portfolio of trading equities, the statement added.