Fitch affirms long-term rating of 'AA (lka)' on Bank of Ceylon

RATING: Fitch Ratings Lanka affirmed the 'AA(lka)' National Long-term rating on Bank of Ceylon ("BOC"). The outlook on the rating is stable.

The rating reflects BOC's systemic importance as the largest bank in Sri Lanka (c. 18.6% of banking system assets), improved financial profile and State ownership.

BOC's ability to maintain profitability, asset quality and accrete equity in pace with growth in assets are key drivers of the rating.

BOC is a full service bank with a network of 302 domestic branches, 88 customer service points and three overseas branches. With 80% of the branches linked to an online network, BOC has the largest such online branch network in the country.

BOC is the main commercial banker to the State and one of the two commercial bankers to State Owned Enterprises ("SOE"), extending direct credit, trade finance facilities and foreign currency funding through its large deposit base and cross border borrowings.

(BOC has the largest share of inward foreign currency remittances from migrant workers.)

As a result, the bank's credit exposure to the State and SOEs remains significant at 43.7% of gross loans at H106.

Fitch expects this level of exposure to remain at the current level or even increase due to the present policy stance of the State.

Overall asset quality improved with non-performing loans ("NPL") to gross loans declining to 7.9% at FYE05 from 11.6% at FYE04 on the back of recoveries and loan growth.

However, the NPL ratio for the State and non-state sector was 1.5% and 13.4% respectively at FYE05. Solvency, measured by Fitch as net NPLs to equity also improved to 21.2% at FYE05 from 36.8% at FYE04.

Return on Assets increased to 0.7% in FY05, albeit was lower than the industry average of 1.0%.

Profitability is constrained by declining net interest margins and a high cost-to-income ratio, the latter of which is not expected to improve at least in the mid-term.

Despite high profits, internal capital generation was relatively low at 5.5% due to high dividend payouts (56.8% in FY05).