Sri Lankan banks’ ratings under pressure as operating conditions weaken: Fitch

Jul 20, 2020 (LBO) – Fitch Ratings revised down the operating environment (OE) score for Sri Lankan banks to ‘b-‘ from ‘b’ in May 2020 after the sovereign rating was downgraded to ‘B-‘ in April 2020.

The Outlook on Sri Lanka’s Long-Term Issuer Default Rating (IDR) is Negative, as is the outlook on the OE score.

The change in the OE score followed a revision in the outlook on the score to negative from stable in January 2020, which came on the heels of a revision in the Outlook on Sri Lanka’s ‘B’ sovereign rating to Negative from Stable in December 2019.

“The OE for Sri Lankan banks has a high influence on the banks’ ratings, as it is likely to constrain their intrinsic credit profiles through its effect on financial and non-financial key rating factors, despite regulatory reliefs,” Fitch Ratings said in a new research note.

Fitch believes that there is a strong link between the sovereign credit profile and the operating conditions for banks in Sri Lanka.

“This is because our forecast 1.3% GDP contraction in 2020 will constrain the banks’ growth and recovery prospects and the increased risk of sovereign debt distress will limit banks’ access to and cost of foreign funding.”

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