Unhedged Constraint

Aug 01, 2009 (LBO) - The Sri Lanka unit of Standard Chartered Bank has retained its 'AAA(lka)' rating from Fitch, but the agency said its capital was hurt by a bad loan originating from oil derivative sales to a state-run oil distributor. The rating had a 'stable' outlook and reflected the financial strength of Standard Chartered Bank PLC, of which the Sri Lanka unit was a branch.

The main bank had a rating of 'A+' with a stable outlook which was higher than Sri Lanka's sovereign rating of 'B+' with a 'negative outlook'. The Sri Lanka branch accounted for 0.3 percent of total Standard Chartered assets in 2008.

In 2008 SCB Sri Lanka had entered into oil derivative contracts with state-run Ceylon Petroleum Corporation (CPC).

The contracts were drawn up under International Swaps and Derivatives Association (ISDA) documentation standards and the Sri Lanka branch was a signatory in keeping with regulatory requirements.

In the fourth quarter of 2008 CPC had suspended payments on these contracts pending an inquiry by the Central Bank.

The bank has classified these dues, amounting to about 18 billion rupees until the expiration of contracts in July 2009, as non-performing assets for capital adequacy purposes,