Fitch rates Seylan Bank’s Basel III Sub Debt ‘BBB+ (EXP)’

Fitch Ratings has assigned Seylan Bank PLC’s (A-(lka)/Stable) proposed Basel III compliant subordinated debentures an expected National Long-Term Rating of ‘BBB+ (lka) (EXP)’.

The notes, which will total Rs. 5 billion and mature in five years, include a non-viability clause and will qualify as regulatory Tier II capital for the Bank. Seylan plans to use the proceeds to strengthen its Tier II capital base and support its loan-book expansion. The debentures will be listed on the Colombo Stock Exchange.

The final rating is subject to the receipt of final documentation conforming to information already received.

Key rating drivers

Fitch rates the proposed Tier II instrument one notch below the Bank’s National Long-Term Rating of ‘A-(lka)’ to reflect the notes’ subordinated status and higher loss-severity risks relative to senior unsecured instruments. The notes would convert to equity upon the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka.

Seylan’s National Long-Term Rating is used as the anchor rating because the rating reflects the Bank’s standalone financial strength. Fitch believes that the Bank’s standalone credit profile best indicates the risk of becoming non-viable.

Fitch has not applied additional notching to the notes for non-performance risk, as they have no going-concern loss-absorption features, in line with Fitch’s criteria.

Seylan’s National Long-Term Rating was affirmed on 28 September 2018 and incorporates its modest franchise and weaker-than-peer asset quality.

Rating sensitivities

The rating of the notes would move in tandem with Seylan’s National Long-Term Rating.

A downgrade of Seylan’s National Long-Term Rating could come from a reassessment of State support and a significant deterioration in its credit profile. An upgrade of Seylan’s rating would be contingent on improvements in its standalone profile through better asset quality and a financial profile similar to higher-rated peers.