July 09, 2009 (LBO) – Foreign banks operating in Sri Lanka had maintained or improved profitability in 2008, despite adverse conditions, a report by Fitch Ratings said. Though risk management was good, Fitch said counterparty settlement risks were not studied enough on hedging deals.
But the banks are expected to get support from head offices to tide over any liquidity or capital stresses, it said in a report on foreign banks operating in the island.
Fitch said the foreign banks have better risk management systems than domestic banks although they seemed not to have worked with regard to derivative deals with the state petroleum refiner.
Fitch said that in the bank’s recent derivative transactions with the state-owned Ceylon Petroleum Corporation (CPC), while market risk was managed, counterparty settlement risk was not adequately studied.
Sri Lanka’s central bank has stopped counter-party payments after the derivative deals on oil which caused huge losses to the CPC when oil prices collapsed were challenged in court amid allegations of corruption. .
Fitch said lapses in operational procedures, insufficient study of lending processes to be foll