Fitch places HDFC’s and SMIB’s National Ratings on Rating Watch Positive on proposed acquisition

Fitch Ratings has placed Housing Development Finance Corporation Bank of Sri Lanka’s (HDFC) National Rating of ‘BB+(lka)’ and State Mortgage & Investment Bank’s (SMIB) National Rating of ‘BB(lka)’ on Rating Watch Positive (RWP). 

HDFC’s rating was previously on a Negative Outlook.

The rating action follows the announcement by the government on November 11, 2025 that the Cabinet of Ministers granted approval for the proposal to transfer all the state-owned shares of HDFC and SMIB to Bank of Ceylon (BOC; CCC+/AA-(lka)/Stable) and People’s Bank (Sri Lanka) (PB; AA-(lka)/Stable), respectively. The modalities and resolution of the intended acquisitions are not yet known.

The RWP reflects Fitch’s view that the acquisitions of HDFC and SMIB by BOC and PB, respectively, would result in HDFC and SMIB benefitting from a very high likelihood of support from their new owners. Fitch will reflect this likelihood of support via support-driven national ratings upon the completion of each transaction. Fitch expects to resolve the RWP upon closing of the transaction and the resolution is likely to take longer than Fitch’s normal Rating Watch resolution horizon of six months.

Fitch revised its Outlook on HDFC’s National Rating to Negative from Stable on August 15, 2025 to reflect the potential deterioration in its standalone credit profile relative to similarly rated peers, due to the regulatory restrictions on deposit mobilisation and selected lending products. These restrictions have dampened HDFC’s competitive position in the housing loan segment, which is driven predominantly by the Employees’ Provident Fund (EPF)-backed loans and its loan and deposit market share.

SMIB’s capital position remains below the regulatory minimum capital requirement of Rs.7.5 billion. The shortfall is estimated at around Rs.2 billion-3 billion based on the June 2025 financials. SMIB is profitable, while Fitch believes that earnings retention alone will be insufficient to meet this shortfall in the near to medium term.

Fitch reviewed SMIB’s ratings with no rating action on September 8, 2025. 

Fitch would remove the ratings from RWP if the acquisition does not proceed (which is not its base case). In such an instance, Fitch would be likely to affirm SMIB’s ratings at the current standalone-driven rating levels.

For HDFC, Fitch may affirm the ratings at the current standalone-driven rating levels and reassign the Negative Outlook on the National Rating if the regulatory restrictions remain in force which continue to pose risks to its business model and overall credit profile.
However, Fitch would also consider a downgrade in HDFC’s National Rating at the time of removing the RWP, if HDFC experiences material deterioration in its franchise due to a sustained loss of competitiveness in the housing-loan segment, particularly in EPF-backed loans. Negative rating action could also stem from persistent deterioration in HDFC’s financial profile, notably if capital levels fall below the regulatory minimum of Rs.7.5 billion and remains unaddressed for an extended period. In addition, widening asset-liability mismatches arising from the bank’s inability to access funding could trigger a downgrade.

Fitch would be likely to remove the RWP and upgrade HDFC’s and SMIB’s National Ratings, which would then be based on Fitch’s view of the strength of extraordinary support from their new shareholders, following completion of the transaction. This could lead to a multiple-notch upgrade for HDFC and SMIB, given the shareholder strength. That said, Fitch would be likely to maintain a difference of several notches between the ratings of acquirers and the acquirees due to the latters’ limited strategic importance to the new owners.
SMIB has a 1.78 percent equity stake in Fitch Ratings Lanka Ltd.