Three large banks downgraded after sovereign rating cut

22 November 2018 12:00 am - 0     - {{hitsCtrl.values.hits}}

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A day after the country rating was downgraded, Moody’s Investors Service (Moody’s) yesterday downgraded the long-term ratings of three large banks in line with the sovereign rating over challenging operating conditions, exacerbated by the current political deadlock.  


Moody’s downgraded long-term local currency deposit and foreign currency issuer ratings of Bank of Ceylon, Hatton National Bank and Sampath Bank to B2 from B1, while revising the rating outlook to ‘Stable’ from ‘Negative’. 


The rating downgrade of the three banks closely followed the sovereign rating cut the previous day to B2 from B1, with outlook changing to ‘Stable’ from ‘Negative’ over the heightened debt re-financing risks triggered by the current political standoff amid the already elevated external and domestic financing conditions. 


Foreign currency issuer ratings are directly pinned to sovereign ratings and the former moves in tandem with the latter. 


Even before the current political imbroglio set stage, Sri Lankan banks were under stress due to weakening asset quality and slowdown in growth. 
For three consecutive years starting from 2015, Sri Lankan banks have enjoyed a phenomenal growth in their balance sheets and earnings but when the Central Bank began its tightening cycle which became intense in 2018, banks felt the pinch acutely. 

“Moody’s expects that, after years of strong credit growth, the weakening operating environment will have a negative impact on the banks’ asset quality and profitability, as seen by the system-wide nonperforming loan ratio increasing to 3.6 percent as of August 2018 versus 2.5 percent in December 2017,” the rating agency said. 


However, the third quarter earnings season, which ended last week, saw all the banks reporting elevated NPL ratios with some reporting substantially higher ratios. 


The latest data seen by Mirror Business showed that the gross non-performing loan ratio in September has stayed at 3.6 percent levels. 
Along with the downgrade of long term issuer ratings, Moody’s has also downgraded the long-term foreign currency deposit ratings of the same three banks to B3 from B2.


Also, the rating agency has affirmed the short-term local and foreign currency deposit ratings of the banks at NP.


Moody’s has further downgraded the Baseline Credit Assessments (BCAs) and adjusted BCAs of the three banks to b2 from b1.


As a result, Moody’s has downgraded the three banks’ long-term local and foreign currency Counterparty Risk Ratings (CRRs) to B1 from Ba3, and their long-term Counterparty Risk Assessments (CRAs) to B1(cr) from Ba3(cr).


In addition, Moody’s has affirmed the banks’ short-term CRR of NP and short-term CRA of NP(cr).


Moody’s was the first to warn against a possible downgrade of sovereign rating within days after President Sirisena swapped prime ministers in a shock move.


Two other rating giants, Fitch and Standard & Poor’s appear to be still observing the unfolding drama as they are yet to strike with a rating action. 

 

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