Fitch rates Seylan Bank’s senior debt ‘A(lka)(EXP)’ & Basel III sub debt ‘BBB+(lka)(EXP)’

Aug 21, 2020 (LBO) – Fitch Ratings Lanka has assigned Seylan Bank’s proposed senior debentures an expected National Long-Term Rating of ‘A(lka)(EXP)’.

Fitch has also assigned Seylan’s proposed Basel III-compliant subordinated unsecured debentures an expected National Long-Term Rating of ‘BBB+(lka)(EXP)’.

Full Statement

The proposed debentures will total LKR10 billion, with maturities of five to ten 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 so determined by the Monetary Board of Sri Lanka. The bank plans to use the proceeds from both proposed senior and subordinated debentures to support expansion of its loan book.

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

KEY RATING DRIVERS

Seylan’s proposed and outstanding rupee-denominated senior debt is rated at the same level as its National Long-Term Rating as the debentures rank equally with other senior unsecured obligations.

Seylan’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.

Seylan’s National Long-Term Rating captures the bank’s weak financial metrics, including asset quality and profitability. The rating also factors in Seylan’s modest capitalisation and market share compared with its higher rated peers.

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

RATING SENSITIVITIES

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

  • Seylan’s senior and 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 ongoing macroeconomic pressure. An upgrade in the longer term is contingent upon a sustained improvement in the bank’s credit profile relative to the rated universe of Sri Lankan entities. Improvements in Seylan’s 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:

  • Seylan’s senior and subordinated debt would be downgraded if the bank’s National Long-Term Rating is downgraded.
  • A downgrade of Seylan’s National Long-Term Rating would be likely to arise from a weakening in its overall credit profile on a relative basis to the national-rating universe of Sri Lankan-rated entities. This could result from increased capital-impairment risk through sustained rapid loan expansion or asset-quality deterioration.