Sri Lanka Banks’ National Ratings Constrained by Sovereign Rating: Fitch

The National Ratings on Sri Lankan banks remain constrained by the sovereign credit profile (CCC), Fitch Ratings says. The highest National Rating for domestic banks with ratings driven by their intrinsic credit profiles is ‘AA-(lka)’. This is the highest point on the national scale that corresponds to an international scale rating of ‘CCC’ according to Fitch’s National Ratings Correspondence Table for Sri Lanka.

Given current conditions, we would not assess Sri Lankan banks’ Viability Ratings (or intrinsic credit profiles) and Local-Currency Issuer Default Ratings (IDRs) on the international scale to be above the sovereign’s Local-Currency IDR of ‘CCC’ and the banks’ operating environment score of ‘ccc’. This is because the banks have significant direct exposure to the sovereign, largely via government-security holdings, as well as to the wider domestic economy and local financial markets through their Sri Lanka-centric operations. Moreover, sovereign exposure tends to be higher among the larger banks in Sri Lanka.

This has led to rating compression at ‘AA-(lka)’ on the national scale. We have six banks rated at this level: Bank of Ceylon (BOC), People’s Bank (Sri Lanka), Commercial Bank of Ceylon PLC (CB), Hatton National Bank PLC (HNB), Sampath Bank PLC and Cargills Bank Limited (CBL). With the exception of CBL, the ratings of these banks are based on their standalone credit profiles and capture their stronger credit profiles relative to lower-rated peers, largely in terms of their more established franchises and better financial profiles. Please see Top Rated Sri Lankan Banks – Peer Review 2021, published 2 March 2021.

CB’s and HNB’s ratings are at the highest point on the national scale that corresponds to an international scale rating of ‘CCC’, despite their relative strengths, as they are constrained by the sovereign’s credit profile. Please see What Investors Want to Know: Impact of Sri Lanka National Scale Recalibration on Bank Ratings, published 17 February 2021.

We no longer factor in extraordinary support into the ratings on BOC and PB, despite their strong state linkages, because the sovereign’s ability to provide extraordinary support is severely constrained. As a result, the National Ratings on these banks are now driven by their intrinsic credit profiles rather than sovereign support.

The National Long-Term Rating on CBL is also at ‘AA-(lka)’ with Stable Outlook, but it is driven by our expectation of extraordinary support from its ultimate parent CT Holdings PLC, and takes into consideration CT Holdings’ ability and the propensity to support its subsidiary. We view CBL’s standalone credit profile as lower than the support-driven rating of ‘AA-(lka)’ due to its weaker financial profile, and small and developing franchise.

The National Long-Term Ratings on Standard Chartered Bank, Sri Lanka Branch and Citibank, N.A – Colombo Branch are at ‘AAA(lka)’ with Stable Outlook, reflecting the capacity for these international banks to support their Sri Lankan branches, if necessary.

While other domestic banks are also exposed to the sovereign credit profile and challenging operating environment, their ratings reflect relativities on the national scale. These banks’ ratings are mainly driven by considerations relating to non-financial factors, such as company profile (which includes an assessment of their franchise and business model) and risk appetite, and financial factors, such as capitalisation and leverage, asset quality, earnings and profitability, and funding and liquidity. For instance, the National Long-Term Ratings on National Development Bank PLC (NDB, A+(lka)/Stable) and DFCC Bank PLC (DFCC, A+(lka)/Stable) reflect their modest franchises and weaker financial profiles relative to banks rated ‘AA-(lka)’.