Saturday Sep 28, 2024
Saturday Sep 28, 2024
Friday, 6 October 2023 01:04 - - {{hitsCtrl.values.hits}}
Fitch Ratings said yesterday it has affirmed Bank of Ceylon’s (BOC) Long-Term Local-Currency Issue Default Rating (IDR) at ‘CCC-’ and removed it from Rating Watch Negative (RWN). The Outlook is Stable.
At the same time, Fitch has affirmed the National Long-Term Ratings of the following banks, removed them from RWN and assigned Stable Outlooks:
Fitch has also affirmed Cargills Bank Limited’s (CBL) National Long-Term Rating at ‘A(lka)’ and removed it from RWN. Fitch has assigned a Negative Rating Outlook.
The RWN on these banks’ senior and subordinated debt ratings, where assigned, has also been removed.
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.
In its statement Fitch said the following.
Downside Risks to Banks Easing: The removal of the RWN on BOC’s Long-Term Local-Currency IDR and the national ratings of all the above banks reflects our 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.
Manageable Risks from Foreign-Currency Bonds: The restructuring of Sri Lanka’s foreign-currency debt, including the defaulted sovereign bonds that banks hold, has not been completed, but we believe 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.
Negative Outlook on CBL: The Negative Outlook on CBL’s national rating reflects downside risks from its increasing size relative to that of its ultimate parent, CT Holdings PLC (CTH), which could constrain the parent’s ability to provide extraordinary support in times of need. At end-1H23, the bank’s assets accounted for 193% of group equity and 51% of group assets.
The removal of parental support considerations due to rising relative size could result in a downgrade of CBL’s rating to a level that reflects its standalone credit strength. Fitch views this to be significantly weaker than the support-driven rating of ‘A(lka)’ due to its weak financial profile and small and developing franchise.
Rating sensitivities
factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
BOC’s Long-Term Local-Currency IDR
Fitch would downgrade BOC’s Long-Term Local-Currency IDR if we perceive 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.
National ratings of all banks, except CBL.
A 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.
National rating of CBL
CBL’s rating is sensitive to changes in CTH’s credit profile as well as Fitch’s opinion around the ability or propensity of CTH to extend timely extraordinary support. A continued increase in CBL’s balance sheet relative to that of CTH that makes extraordinary support more onerous for the parent, could lead to a multiple-notch downgrade in CBL’s national rating to reflect its standalone credit strength.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
BOC’s Long-Term Local-Currency IDR
An upgrade of BOC’s Long-Term Local-Currency IDR would most likely result from an improvement in Sri Lanka’s operating environment, which could occur after the successful completion of the restructuring of the remainder of the foreign-currency sovereign debt.
National ratings of all banks, except CBL
Positive rating action on the sovereign may lead to an upgrade in the banks’ ratings. A sustained improvement in the banks’ key credit metrics beyond our base-case expectations relative to peers, could also lead to an upgrade of the banks’ ratings.
National rating of CBL
There is limited upside potential given the Negative Outlook on the bank’s national rating.
BOC and PB have a 1.78% equity stake each in Fitch Ratings Lanka Ltd. No shareholder other than Fitch, Inc. is involved in the day-to-day rating operations of, or credit reviews undertaken by, Fitch Ratings Lanka Ltd.
