Fitch rates Sampath Bank’s LKR6 Bn Basel III Subordinated Debt ‘A(lka)(EXP)’

Fitch Ratings Lanka has assigned Sampath Bank PLC’s (AA-(lka)/Stable) proposed LKR6 billion Basel III-compliant subordinated unsecured debentures an expected National Long-Term Rating of ‘A(lka)(EXP)’.

The proposed debentures will mature in seven years and will be listed on the Colombo Stock Exchange. The bank expects the proposed subordinated debentures to qualify as Basel III-compliant regulatory Tier 2 capital. The proposed debentures include a non-viability clause whereby they will convert to ordinary voting shares if non-viability of the bank is determined by the Monetary Board of Sri Lanka. The bank plans to use the proceeds from the debentures to strengthen its Tier II capital base and support the expansion of its loan book.

The final rating is subject to the receipt of final documentation conforming to information already received.

KEY RATING DRIVERS

Sampath’s proposed and outstanding Sri Lankan rupee-denominated subordinated debt is rated two notches below the National Long-Term Rating anchor. This reflects Fitch’s baseline notching for loss severity for this type of debt and our expectations of poor recoveries. There is no additional notching for non-performance risks.

Sampath’s National Long-Term Rating captures the bank’s weakened asset quality, which offsets benefits from its improved capitalisation and moderate domestic franchise. Sampath is the fifth-largest commercial bank in Sri Lanka.

Fitch affirmed Sampath’s National Long-Term Rating on 5 August 2020.

RATING SENSITIVITIES

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

– Sampath’s subordinated debt would be upgraded if the bank’s National Long-Term Rating is upgraded.

– Positive rating action appears unlikely in the near term due to the challenging operating environment. In the longer term, an upgrade is contingent on a sustained improvement in Sampath’s credit profile relative to the universe of Sri Lankan-rated entities. Improved asset quality and market share, while maintaining adequate capital buffers commensurate with a high-risk appetite, would be consistent with positive rating action.

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

– Sampath’s subordinated debt would be downgraded if the bank’s National Long-Term Rating is downgraded.

– A downgrade of Sampath’s National Long-Term Rating would likely arise from a weakening in its overall credit profile relative to the universe of Sri Lankan-rated entities. This could result from sustained deterioration in asset quality and profitability, or from aggressive loan growth that dents the bank’s capitalisation.