Fitch affirms Standard Chartered Bank, Sri Lanka at ‘AAA(lka)’; Outlook Stable

Fitch Ratings has affirmed Standard Chartered Bank, Sri Lanka’s (SCBSL) National Long-Term Rating at ‘AAA(lka)’. The Outlook is Stable.

SCBSL’s National Long-Term Rating is supported by Fitch’s expectation of a high likelihood of support from the head office, Standard Chartered Bank (SCB, A+/Stable/a), if necessary, although this is subject to any regulatory limits on remittances to Sri Lanka.

“This expectation stems from SCBSL’s position as a branch of SCB, making it part of the same legal entity,” Fitch said in a ratings commentary.

SCB’s Long-Term Issuer Default Rating (IDR) is significantly higher than Sri Lanka’s Long-Term Local-Currency IDR of ‘CCC+’, and the branch’s support-driven credit profile is one of the strongest among Fitch-rated domestic entities. Consequently, SCBSL’s rating is at the highest end of Sri Lanka’s National Rating scale.

The high probability of support is reinforced by the alignment of SCBSL’s and the group’s strategic objectives and their robust operational integration.

“SCBSL’s small size, at only about 0.1 percent of SCB’s total assets, implies that support, if needed, would not be a burden to the head office,” said Fitch.

The branch’s core capitalisation metric - the regulatory common equity Tier 1 (CET1) ratio - remained high at 33.2 percent at end-3Q24 (end-2023: 36.0 percent). Fitch said it estimates the post-audit CET1 ratio would have been 40 percent upon the inclusion of profit for 9M24. It said it expects capital buffers to remain robust despite a potential resumption in profit repatriation from 2025, similar to peers, and the growth in risk-weighted assets as the loan book expands.

SCBSL’s liquidity remains robust, although levels may drop in 2H25 as it pursues loan growth in line with its conservative risk appetite. The branch continues to place a portion of its excess foreign-currency liquidity at SCB’s other foreign branches while its Sri Lankan rupee liquidity is increasingly maintained in government securities, following the country’s debt optimisation.

Loans were 33 percent of assets while other liquid placements accounted for 55 percent at end-3Q24, which covered nearly all its deposits.

Profitability is expected to moderate in the medium term because of narrower net interest margins, and a normalisation in fees and trading gains as market conditions stabilise amid the lower interest rate environment. However, non-recurring impairment reversals could support profit in 2025.

SCBSL’s operating profit/risk-weighted assets remained high at 13.5 percent at end-3Q24 (14.4 percent in 2023). This was due to healthy net interest margins (end-3Q24: 7.3 percent, end-2023: 6.9 percent) given the increased allocation to government securities, healthy fee income, and impairment reversals.

SCBSL’s stage 3 loan ratio improved to 6.2 percent by end-3Q24, from 11.7 percent at end-2023, a trend that is likely to continue in the near to medium term. 

“This improvement was largely due to the growth in the loan book, while the stock of stage 3 loans also declined. Loan-loss allowances/gross loans decreased to 8.4 percent by end-3Q24 (14.9 percent at end-2023). However, the decrease in stage 3 loans kept provision coverage adequate at 136 percent of impaired loans,” said Fitch.