Fitch removes ‘Rating Watch Negative’ on 15 banks following DDO completion

Fitch Ratings yesterday affirmed ratings on 15 Sri Lankan banks and removed them from the Rating Watch Negative (RWN), following the conclusion of the Domestic Debt Optimisation (DDO).
While Bank of Ceylon’s Long-Term Local-Currency Issue Default Rating (IDR) is affirmed at ‘CCC-’, the listed banks were assigned Stable Outlooks.

BOC, People’s Bank, Commercial Bank of Ceylon PLC, Hatton National Bank PLC, and Sampath Bank PLC have been affirmed at ‘A(lka)’ while National Development Bank PLC, Seylan Bank PLC, DFCC Bank PLC, and Nations Trust Bank PLC at ‘A-(lka)’.

Pan Asia Banking Corporation PLC and Union Bank of Colombo PLC have been affirmed at ‹BBB-(lka), while Amana Bank PLC, Sanasa Development Bank PLC, and Housing Development Finance Corporation Bank of Sri Lanka at ‹BB+(lka)’.

Fitch Ratings has also affirmed Cargills Bank Limited’s (CBL) National Long-Term Rating at ‘A(lka)’ and removed it from RWN by assigning a Negative Outlook.

The RWN on these banks’ senior and subordinated debt ratings, where assigned, has also been removed.
Further, BOC’s Long-Term Foreign-Currency IDR of ‘CC’, Short-Term IDR of ‘C’, Viability Rating of ‘cc’, and Government Support Rating of ‘ns’ were not considered in this review.

The rating agency said the removal of the RWN on BOC’s Long-Term Local-Currency IDR and the national ratings of all the above banks reflects its view that near-term downside risks have substantially reduced as reflected in the upgrade of Sri Lanka’s Long-Term Local-Currency IDR to ‘CCC-’ from ‘RD’.

“The successful conclusion of the local-currency sovereign debt restructuring, including the exclusion of banks’ holdings of treasury securities from the domestic debt optimisation programme, has alleviated some of the pressure on the banks’ capital positions from weakening loan quality and rupee depreciation as well as any immediate funding and liquidity stresses,” it said.

With the restructuring of Sri Lanka’s foreign-currency debt, including the defaulted sovereign bonds that banks hold, has not been completed, Fitch said it believes that incremental risks to banks’ capital from the restructuring are likely to be manageable, given their limited exposure to these bonds (3.6% of total assets at end-1H23) and high provision coverage.

“That said, access to foreign-currency wholesale funding remains challenged by the sovereign’s weak credit profile, but the stress on banks’ foreign-currency liquidity has largely eased relative to the crisis period,” it added.
Meanwhile, Fitch noted that it would downgrade BOC’s Long-Term Local-Currency IDR if it perceives there is an increased likelihood that the bank would default on or seek a restructuring of its local-currency denominated senior obligations to non-government creditors.

Regarding the national ratings of all banks, except CBL, Fitch said the deterioration in the banks’ key credit metrics beyond our base-case expectations relative to peers could trigger a downgrade on the banks’ ratings, which are driven by their intrinsic financial strength.