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Fitch explains ratings and outlook for 9 Sri Lankan banks

Wednesday, 23 July 2014 00:00 -     - {{hitsCtrl.values.hits}}

Fitch Ratings has affirmed the ratings on nine of Sri Lanka’s banks, all with Stable Outlooks. The Long-Term Issuer Default Ratings (IDRs) on National Savings Bank and Bank of Ceylon (BOC) have been affirmed at ‘BB-’ and their National Long-Term Ratings have been affirmed at ‘AAA(lka)’ and ‘AA+(lka)’, respectively. Fitch has also affirmed the National Long-Term Rating of People’s Bank at ‘AA+(lka)’. At the same time, Fitch has affirmed the Long-Term IDRS of DFCC Bank and National Development Bank PLC (NDB) at ‘B+’ and their National Long-Term Ratings at ‘AA-(lka)’. The National Long-Term Ratings of Commercial Bank of Ceylon PLC (Commercial Bank) have been affirmed at ‘AA(lka)’. The National Long-Term Ratings of Hatton National Bank PLC (HNB), Sampath Bank PLC and DFCC Vardhana Bank Ltd. have been affirmed at ‘AA-(lka)’. A full list of rating actions is included at the end of this rating action commentary. Key rating drivers – IDRs, VRs, National Ratings and Debt The operating environment, which remains potentially volatile, is a key rating driver for the Sri Lankan banking sector. This is a challenge for banks, notwithstanding the current high real GDP growth, which Fitch expects to continue. While private-sector credit demand is currently muted, the potential for high growth exists given the low overall levels of credit to GDP. Rapid credit growth – including pawning (gold-backed lending) – in the past raised Fitch’s Macro-Prudential Indicator for Sri Lanka into the highest ‘3’ category. The consequence of this was a rise in NPLs in the banking system. The agency does not expect the deterioration in the banks’ asset quality stemming from NPLs from gold-backed lending to persist given the relatively short life cycle of the product. The IDRs and the National Long-Term Ratings of National Savings Bank and BOC and the National Long-Term Rating of People’s Bank reflect the government of Sri Lanka’s (BB-/Stable) high propensity but moderate ability to provide extraordinary support to the banks if needed. The state’s moderate ability to provide support is reflected in the sovereign rating. The Stable Outlook reflects the Stable Outlook on Sri Lanka’s sovereign rating. Fitch believes that State support for National Savings Bank stems from its policy mandate of mobilising retail savings and investing them in Government securities. Its ratings also reflect preferential state support to the bank in the form of the explicit guarantee for its deposits contained in the NSB Act. Fitch is of the view that the authorities would support, in case of need, depositors and senior unsecured creditors of National Savings Bank to maintain confidence and systemic stability, even though the NSB Act only contains an explicit deposit guarantee. Fitch expects support for BOC and People’s Bank to stem from their high systemic importance, quasi-sovereign status, role as key lenders to the Government and full Government ownership. National Savings Bank’s and BOC’s senior debt is rated at the same level as the Long-Term Foreign Currency IDRs as the notes rank equally with other senior unsecured obligations. BOC’s Viability Rating (VR) reflects its thin capitalisation and weak asset quality. This is counterbalanced by its strong domestic funding franchise, which is underpinned by its state linkages. The ratings on Commercial Bank, HNB, Sampath Bank, DFCC, DFCC Vardhana Bank and NDB are driven by their intrinsic financial strength. Fitch considers Commercial Bank the strongest bank in this peer group. Its rating captures moderate risk appetite as reflected in negligible pawning exposures and loan growth that has consistently been below the sector average. Other key rating factors include its solid franchise, stable earnings and satisfactory asset quality. Although its operations in Bangladesh are potentially of higher risk, they should remain manageable at a moderate 8% of end-2013 assets. HNB’s rating reflects its long operating history, strong franchise, satisfactory capitalisation and relatively higher risk appetite. Its senior debentures carry the same rating as they constitute direct, unconditional, unsecured and unsubordinated obligations. Sampath Bank’s rating is driven by its modest and expanding franchise and relatively higher risk appetite as seen in its aggressive loan growth and high gold-backed lending, which has put pressure on its asset quality. Fitch believes asset quality indicators could be weaker than those reported should a broader definition of impairment be applied. This could put pressure on its rating given the bank’s lower capitalisation relative to peers. DFCC’s ratings capture its strong profitability and capitalisation, which are offset by rapid growth in commercial banking via its 99% subsidiary, DFCC Vardhana Bank. Fitch has equalised the ratings of the two banks as it considers the latter to be a core subsidiary of DFCC DFCC’s US dollar notes are rated at the same level as its Long-Term Foreign-Currency IDR as they constitute unsecured and unsubordinated obligations of the issuer. Fitch has assigned a Recovery Rating of ‘RR4’ to the notes to reflect average recovery prospects of 31%-50% for holders of this debt, in case of default under both a standalone and consolidated basis. DFCC’s Sri Lanka rupee-denominated senior debt is rated at the same level as DFCC’s National Long-Term Rating as they constitute direct, unconditional, unsecured and unsubordinated obligations. NDB’s ratings reflect its better asset quality and capitalisation compared with rating peers, counterbalanced by its developing franchise as a commercial bank. Rating sensitivities – IDRs, VRs, National Ratings and Debt Any change in Sri Lanka’s sovereign rating or the perception of state support to National Savings Bank, BOC and People’s Bank could result in a change in these entities’ ratings. A reduced expectation of State support through, for instance, the removal of preferential support extended to National Savings Bank, or a substantial change in its policy role and/or deviation from mandated core activities indicating its reduced importance to the Government, could result in a downgrade of National Savings Bank’s National Rating. Visible demonstration of preferential support for BOC and People’s Bank in the form of an explicit guarantee will be instrumental to an upgrade of their National Long-Term Ratings. The peer banks’ intrinsic strength is sensitive to changes in the operating environment which would often be reflected through changes in the sovereign rating. Significant capital impairment risks possibly due to aggressive loan growth or a protracted macroeconomic deterioration could result in negative rating actions on the banks if Fitch believes that this could result in a material erosion of capital buffers. A continued decline in capitalisation through a surge in lending or a further decline in asset quality alongside high dividend payouts could place downward pressure on BOC’s VR. A timely capital infusion would support the VR. Commercial Bank’s ratings could be downgraded if its ability to withstand cyclical asset quality deterioration declines due to lower earnings and capitalisation. In addition, any marked weakening in its deposit franchise and a deviation from its measured risk appetite, both viewed by Fitch as key factors that differentiate Commercial Bank from its lower-rated peers, would be negative. Sustained improvements in its balance sheet strength resulting in enhanced resilience against a volatile operating environment could be positive for the rating. Fitch views the upside potential of HNB’s ratings as limited given its higher risk appetite, which has led to weaker through-the-cycle asset quality compared with peers’. A material increase in risk taking, unless sufficiently mitigated through capital and financial performance, could result in a rating downgrade. Fitch views the upside potential of Sampath Bank’s ratings as limited given its higher risk appetite, which has put pressure on its credit profile, notwithstanding its ability to establish and sustain an enhanced franchise. A further increase in risk taking, resulting in a sustained decline in its capitalisation, or a sharp decline in its asset quality could result in a rating downgrade. An upgrade of DFCC’s and NDB’s ratings would be contingent on a materially stronger commercial banking franchise while maintaining strong credit metrics. The ratings could be downgraded if there is a sustained and substantial increase in risk appetite that could materially weaken its strong capital position. DFCC Vardhana Bank’s ratings will move in tandem with DFCC’s ratings. In addition they are also sensitive to changes in its strategic importance to DFCC. The assigned debt ratings are primarily sensitive to changes in the entities’ long-term issuer ratings. Key rating drivers and rating sensitivities – SR and SRFs The Support Ratings (SRs) and Support Rating Floors (SRFs) of State-owned National Savings Bank, BOC, and People’s Bank reflect their high importance to the Government and high systemic importance. The SRs and SRFs of privately-owned DFCC and NDB reflect their lower systemic importance. A reduced propensity of the Government to support systemically important banks could result in a downgrade in the SRs and SRFs, but we view this to be unlikely in the medium term. A change in the sovereign ratings could also lead to a change in these ratings. Key rating drivers and rating sensitivities – subordinated debt The Sri Lanka rupee-denominated subordinated debt of BOC, DFCC, DFCC Vardhana Bank, NDB, Commercial Bank, HNB, and Sampath Bank are rated one notch below their National Long-Term Ratings to reflect the subordination to senior unsecured creditors. They will move in tandem with their National Long-Term Ratings. Full list of rating actions National Savings Bank:
  •     Long-Term Foreign Currency IDR affirmed at ‘BB-’; Outlook Stable
  •     Long-Term Local Currency IDR affirmed at ‘BB-’; Outlook Stable
  •     Short-Term Foreign Currency IDR affirmed at ‘B’
  •     Support Rating affirmed at ‘3’
  •     Support Rating Floor affirmed at ‘BB-’
  •     US dollar senior unsecured notes affirmed at ‘BB-’
  •     National Long-Term Rating affirmed at ‘AAA(lka)’; Outlook Stable BOC:
  •     Long-Term Foreign Currency IDR affirmed at ‘BB-’; Outlook Stable
  •     Long-Term Local Currency IDR affirmed at ‘BB-’; Outlook Stable
  •     Short-Term Foreign Currency IDR affirmed at ‘B’
  •     Viability Rating affirmed at ‘b+’
  •     Support Rating affirmed at ‘3’
  •     Support Rating Floor affirmed at ‘BB-’
  •     US dollar senior unsecured notes affirmed at ‘BB-’
  •     National Long-Term Rating affirmed at ‘AA+(lka)’; Outlook Stable
  •     Proposed Sri Lanka rupee-denominated senior unsecured debentures: assigned ‘AA(lka)(EXP)’
  •     Sri Lanka rupee-denominated subordinated debentures affirmed at ‘AA(lka)’ People’s Bank:
  •     National Long-Term Rating affirmed at ‘AA+(lka)’; Outlook Stable DFCC:
  •     Long-Term Foreign- and Local-Currency IDRs affirmed at ‘B+’; Stable Outlook
  •     Short-Term Foreign-Currency IDR: affirmed at ‘B’
  •     Viability Rating: affirmed at ‘b+’
  •     Support Rating: affirmed at ‘4’
  •     Support Rating Floor: affirmed at ‘B’
  •     US dollar senior, unsecured notes: affirmed at ‘B+’; Recovery Rating: ‘RR4’
  •     National Long-Term Rating: affirmed at ‘AA-(lka)’; Stable Outlook
  •     Sri Lanka rupee-denominated senior unsecured debentures affirmed at ‘AA-(lka)’
  •     Proposed Sri Lanka rupee-denominated senior unsecured debentures: assigned ‘AA-(lka)(EXP)’
  •     Sri Lanka rupee-denominated subordinated debentures: affirmed at ‘A+(lka)’ DFCC Vardhana Bank:
  •     National Long-Term Rating: affirmed at ‘AA-(lka)’, Outlook Stable
  •    Sri Lanka rupee-denominated subordinated debentures: affirmed at ‘A+(lka)’ NDB:
  •     Long-Term Foreign- and Local-Currency IDRs: affirmed at ‘B+’; Stable Outlook
  •     Short-Term Foreign-Currency IDR: affirmed at ‘B’
  •     Viability Rating: affirmed at ‘b+’
  •    Support Rating : affirmed at ‘4’
  •     Support Rating Floor: affirmed at ‘B’
  •     National Long-Term Rating: affirmed at ‘AA-(lka)’; Stable Outlook
  •     Outstanding subordinated debentures: affirmed at ‘A+(lka)’ Commercial Bank:
  •     National Long-Term Rating: affirmed at ‘AA(lka)’; Stable Outlook
  •     Outstanding subordinated debentures: affirmed at ‘AA-(lka)’ HNB:
  •     National Long-Term Rating: affirmed at ‘AA-(lka)’; Stable Outlook
  •     Sri Lanka rupee-denominated senior unsecured debentures affirmed at ‘AA-(lka)’
  •     Outstanding subordinated debentures: affirmed at ‘A+(lka)’ Sampath Bank:
  •     National Long-Term Rating: affirmed at ‘AA-(lka)’; Stable Outlook
  •     Outstanding subordinated debentures: affirmed at ‘A+(lka)’
 

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