- Says banks have significant credit exposure to the sovereign via G-Secs
- Expects banks’ asset quality to worsen notably as a result of coronavirus disruptions
- Says profitability will also deteriorate largely because of higher credit costs
Moody’s Investors Service yesterday downgraded the long-term foreign currency deposit ratings of Bank of Ceylon (BOC), Hatton National Bank PLC (HNB) and Sampath Bank PLC to Caa1 from B3, and the banks’ long-term local currency deposit ratings to Caa1 from B2, following Monday’s sovereign rating downgrade to Caa1 (CCC+ equivalent) with stable outlook.
At the same time, Moody’s has downgraded the Baseline Credit Assessment (BCA) of BOC to Caa1 from B3, and those of HNB and Sampath to Caa1 from B2. The rating outlooks, where applicable, are stable.
“The downgrade of the BCAs of BOC, HNB and Sampath is driven by the downgrade of Sri Lanka’s sovereign rating. The three banks have significant credit exposure to the sovereign through their holdings of government securities and lending to the domestic economy, which is itself correlated to sovereign creditworthiness,” Moody’s said.
Moody’s has also lowered Sri Lanka’s Macro Profile—a key input to the banks’ BCAs—to reflect the deterioration in the operating environment.
In particular, the coronavirus outbreak has weighed on Sri Lanka’s already weak economy and has weakened the government’s fiscal position, the rating agency noted.
Moody’s expects the banks’ asset quality to worsen significantly as a result of coronavirus disruptions, although the increase in problem loans will not be evident until 2021 because of regulatory forbearance measures, including a moratorium on loan repayments.
“The banks’ profitability will also deteriorate largely because of higher credit costs and a compression in net interest margins following successive policy rate cuts by the Central Bank. The banks’ capital and funding will, however, remain as key strengths,” the rating agency noted. Moody’s incorporates a high or very high level of government support in the long-term deposit ratings of the three banks. However, this does not lead to any rating boost because the banks’ BCAs are already at the same level as the sovereign rating.
Meanwhile, Moody’s said it has decided to withdraw the ratings of BOC for its own business reasons.