‘ ratings on recalibration; 2 downgrades

Fitch Ratings has revised the National Long-Term Ratings of Sri Lankan financial institutions following the recalibration of the agency’s Sri Lankan national rating scale. The recalibration is to reflect changes in the relative creditworthiness among Sri Lankan issuers following Fitch’s downgrade of the sovereign rating to ‘CCC’ from ‘B-‘/Negative on 27 November 2020. Fitch typically does not assign Outlooks or apply modifiers to sovereigns with a rating of ‘CCC’ or below. Revision ratings are used to modify ratings for reasons that are not related to credit quality in order to reflect changes in the national rating scale driven purely by the recalibration of the National Ratings Correspondence Table.

National scale ratings are a risk ranking of issuers in a particular market designed to help local investors differentiate risk. Sri Lanka’s national scale ratings are denoted by the unique identifier ‘(lka)’. Fitch adds this identifier to reflect the unique nature of the Sri Lankan national scale. National scales are not comparable with Fitch’s international rating scales or with other countries’ national rating scales. For details, see “Fitch Ratings Recalibrates its Sri Lankan National Rating Scale”, dated 22 December 2020, at https://www.fitchratings.com/site/pr/10147729.

The National Ratings of the Sri Lankan financial institutions consider their creditworthiness relative to other issuers in the country. The recalibration of the Sri Lankan National Rating scale has resulted in the revision of the National Long-Term Ratings of the following Sri Lankan financial institutions:

Banks

Commercial Bank of Ceylon PLC (CB) to ‘AA-(lka)’/Stable from ‘AA+(lka)’/Negative

Hatton National Bank PLC (HNB) to ‘AA-(lka)’/Stable from ‘AA+(lka)’/Negative

Cargills Bank Limited to ‘AA-(lka)’/Stable from ‘A+(lka)’/Stable

Non-Bank Financial Institutions

CBC Finance LTD to ‘A(lka)’/Stable from ‘AA-(lka)’/Negative

HNB Finance PLC to ‘A(lka)’/Stable from ‘AA-(lka)’/Negative

Richard Pieris Finance Limited to ‘AA-(lka)’/Stable from ‘A-(lka)’/Stable

Singer Finance (Lanka) PLC to ‘A+(lka)’/Stable from ‘BBB(lka)’/Stable

Abans Finance PLC to ‘A(lka)’/Rating Watch Evolving (RWE) from ‘BB+(lka)’/RWE

AMW Capital Leasing And Finance PLC to ‘AA-(lka)’/Negative from ‘BBB-(lka)’/Negative

At the same time, Fitch has downgraded the National Ratings of Bank of Ceylon (BOC) and People’s Bank (Sri Lanka) (PB) to ‘AA-(lka)’ from ‘AA+(lka)’. The Outlook is Stable.

The revision of the National Ratings of CB and HNB and the revision of the Outlooks to Stable from Negative are driven by the recalibration of the national rating scale. The recalibration also reflects the differing levels of constraint placed on Sri Lankan issuers due to the sovereign’s credit profile. The revision of the National Ratings of CBC Finance and HNB Finance stems from the recalibration of the National Ratings of their parents, CB and HNB. The Stable Outlooks on CBC Finance and HNB Finance mirror the Stable Outlook on CB and HNB.

The revision of the National Ratings and the Outlooks of Cargillls Bank, Richard Pieris Finance, Singer Finance (Lanka), Abans Finance and AMW Capital Leasing and Finance stem from the change in the relativity of their corporate parents due to the recalibration of the corporate parents’ National Ratings. For details, see “Fitch Revises 7, Affirms 7 Sri Lankan Non-Fin Corporates’ Ratings on National Rating Scale Revision”, dated 13 January 2021, at https://www.fitchratings.com/site/pr/10148875.

Fitch has taken corresponding rating action on the financial institutions’ national scale debt ratings, where assigned. The senior debt ratings are at the same level as the National Long-Term Ratings. National Ratings assigned to Tier 2 issues are two notches below the National Rating anchor ratings.

A full list of ratings is at the end of this commentary.

Other Sri Lankan financial institutions’ national ratings, which are not mentioned in this commentary, have not been affected by the recalibration exercise.

KEY RATING DRIVERS

The downgrade of the National Ratings of BOC and PB reflects our assessment that extraordinary support from the sovereign can no longer be relied upon as its ability to provide extraordinary support is severely constrained, which is reflected by its ‘CCC’ Rating.

BOC’s and PB’s National Ratings are therefore driven by their intrinsic credit profiles and reflect their entrenched domestic franchises, higher risk appetite and smaller capital buffers due to their state linkages, relative to similarly rated private-bank peers.

RATING SENSITIVITIES

The National Ratings are sensitive to a change in the financial institutions’ creditworthiness relative to other Sri Lankan issuers and the sovereign rating.

Fitch expects to resolve the Rating Watch on Abans Finance after the completion of its sale to Softlogic Capital PLC with the potential for the Rating Watch to be extended, which is dependent on Fitch having greater clarity on the ability and propensity of the new ultimate parent, Softlogic Holdings PLC, to support the surviving entity and its standalone credit strength.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Upside to the National Long-Term Ratings of BOC, PB, CB and HNB is limited in the near term due to our assessment of the sovereign rating and the operating environment.

The parents’ increased ability and/or propensity to provide support to their subsidiaries could lead to positive action on the National Long-Term Ratings of Cargillls Bank, Richard Pieris Finance, Singer Finance (Lanka), CBC Finance, HNB Finance, Abans Finance and AMW Capital Leasing and Finance.

Debt ratings will move in tandem with the National Long-Term Ratings.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Pressure on the National Ratings of BOC and PB will most likely stem from a deterioration in Sri Lanka’s sovereign rating as this will probably constrain their standalone credit profiles. Pressure on CB’s and HNB’s National Long-Term Ratings could stem from either a downgrade of Sri Lanka’s sovereign rating or a sustained decline in their credit profiles, largely in terms of their capital buffers, while operating environment risks remain high.

A weaker assessment of the operating environment independent of changes in the sovereign rating, or a deterioration in their key credit metrics beyond our base-case expectations relative to peers, would also lead to increased downward pressure on the ratings of BOC, PB, CB and HNB.

The parents’ weaker ability and/or propensity to provide support to their subsidiaries could lead to negative action on the National Long-Term Ratings of Cargillls Bank, Richard Pieris Finance, Singer Finance (Lanka), CBC Finance, HNB Finance, Abans Finance and AMW Capital Leasing and Finance.

Debt ratings would be downgraded if the National Long-Term Ratings were downgraded.

BOC and PB have a 1.78% equity stake each in Fitch Ratings Lanka Ltd. No shareholder other than Fitch, Inc. is involved in the day-to-day rating operations of, or credit reviews undertaken by, Fitch Ratings Lanka Ltd.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

CBC Finance’s rating is driven by CB’s rating. HNB Finance’s rating is driven by HNB’s rating. Singer Finance’s rating is driven by Singer (Sri Lanka) PLC (AA(lka)/Stable). Abans Finance’s rating is driven by Abans PLC (AA(lka)/Stable).