The largest commercial bank in the country, state-run Bank of Ceylon (BOC) has recently come under scrutiny by multiple international rating agencies and the Central Bank over its faltering capital adequacy, Mirror Business learns.
The Capital Adequacy Ratio (CAR), a strictly regulated and monitored financial ratio by the Central Bank, gauges the strength of the capital of any financial sector entity to withstand liquidity shocks.
However BOC’s total CAR has followed a declining trend over the past five years to 11.40 percent by the end of 2012, due to the high asset growth seen over the last three years.
The situation has left BOC with a narrow margin of safety between the bank’s CAR and the minimum requirement of 10.0 percent that should be maintained by any licensed commercial bank.
“This is a concern for us and therefore we have designed new strategies for capital growth”, a senior bank official said on the condition of anonymity.
By the end of 2012 December, the banking sector core capital adequacy ratio stood at 14.0 percent while the total capital adequacy ratio was 16.0 percent, both well above the regulatory minimum of 5.0 percent and 10.0 percent respectively.
When asked why BOC’s ratio is below the industry average than the ratio of some of the private sector banks, the official said that 50 percent of BOC’s balance sheet was constituted by sovereigns and therefore it was quite unreasonable to compare their exposure directly with another private bank.
“Therefore the quality of our assets is different. 11.40 percent is a reasonable exposure for BOC and does not pose an immediate risk,” said the official citing international banks in the likes of Bank of America and Merrill Lynch which maintain only the required ratio and nothing in excess.
Nevertheless the limitation in capital could restrict future expansion of the bank and according to the immediate past Chairman Dr. Gamini Wickramasinghe, the next priority of the bank was the strengthening of the balance sheet with additional capital supported by a farsighted planning process.
The same sentiments were echoed by the new BOC Chairman Razik Zarook in his message in the Bank’s latest annual report.
“We shall certainly focus on improving capital adequacy to complement the asset growth enjoyed by the Bank in the past few years,” he noted.