In a report datelined 1 November 2021, ICRA Lanka reaffirmed the Issuer Rating of Merchant Bank of Sri Lanka & Finance PLC (MBSL) at [SL]BBB+ (i.e., S L Triple B Plus) while revising the Outlook to Stable from Negative. ICRA Lanka has also reaffirmed the issue rating and outlook of its LKR 2 billion Subordinated Unsecured Redeemable Debenture Program at the same levels.
According to ICRA the upgrade in the outlook for MBSL is based on the improvement of their capital base, profitability and solvency (defined as Net NPA/Net Worth). MBSL raised LKR 2.1 billion through a rights issue on September 16, 2021. Subsequently, on the October 18, 2021, CBSL removed the lending cap of LKR 35 Bn (imposed on March 2019) and deposit cap of LKR 23 Bn (imposed on May 2019). ICRA Lanka also noted the improvement in profitability in 2021 amidst improvement in their core margins. MBSL reported a Net Profit of LKR 140 Mn for the 01st half of 2021 vis-à-vis loss of LKR 460 Mn for the same period in 2020. Furthermore, the upgrade in outlook factors in the improvement of their solvency ratio resulting from the rights issue just completed.
In terms of Key Rating Drivers, the ICRA Report focuses on three aspects of the MBSL operation. The first is the strength derived by MBSL by being a majority owned subsidiary of BOC. MBSL is 85.5% (directly 76.6%; indirectly 8.9% via other BOC subsidiaries) owned subsidiary of BOC, which is itself rated [SL] AAA (Negative) by ICRA. Given such high ownership, MBSL derives strategic and unstinted financial support from its parent BOC. Reflecting the close relationship between subsidiary and parent, a majority of the directors of MBSL, are from BOC. Again, reflecting strong support, BOC subscribed fully to the recently completed rights issue.
MBSL is now in a comfortable position to meet the next regulatory minimum core capital requirement by December 31, 2021. ICRA also expects a sharp improvement in the gearing level of MBSL from the high of 18.4 times reported in June 2021. The third and final rating driver ICRA points to is the improved earnings profile of MBSL, while its overall profitability remains moderate. ICRA notes that the lending spreads of MBSL improved significantly in the first half of 2021.
Overall, MBSL reported a profit after tax of LKR 140Mn for the first half of 2021, compared to the LKR 460Mn loss in the same period in 2020 with a favorable uplift in RoA.
The full rating report is available at https://www.icralanka.com/rationale/icra-lanka-revises-the-rating-outlook-of-merchant-bank-of-sri-lanka-finance-plc/