Fitch affirms four finance and leasing companies’ ratings; off RWN; outlooks stable

Fitch Ratings said this week it has affirmed the support-driven National Long-Term Ratings of four Sri Lankan bank subsidiary Finance and Leasing Companies (FLCs). The outlooks are stable. 

The four FLCs are: CBC Finance Ltd. (CBCF) at ‘BBB+(lka)’; HNB Finance PLC (HNBF) at ‘BBB+(lka)’;

Siyapatha Finance PLC at ‘BBB+(lka)’; and UB Finance PLC (UBF) at ‘BB(lka)’.

At the same time, Fitch has removed the Rating Watch Negative (RWN) on the four FLCs’ National Long-Term Ratings as well as HNBF’s and Siyapatha’s subordinated debt ratings.

Key rating drivers

Parents drive RWN resolution: The rating action on the four FLCs stems from similar action on their respective parent banks’ ratings. On 5 October 2023, Fitch affirmed the National Long-Term Ratings of Commercial Bank of Ceylon PLC, Hatton National Bank PLC and Sampath Bank PLC at ‘A(lka)’ and Union Bank of Colombo PLC at ‘BBB-(lka)’, with stable outlooks, and removed the banks from RWN. 

Shareholder support underpins ratings: The National Long-Term Ratings of CBCF, HNBF, Siyapatha and UBF are driven by our view that their respective parent banks would provide extraordinary support to their finance subsidiaries, if required. The parents’ ability to extend support to these FLCs is reflected in their credit profile, which is underpinned by their standalone strength.

The key rating drivers are those outlined in our previous published RACs for these four entities as follows:

- CBCF: Fitch maintains CBC Finance’s National Long-Term Rating of ‘BBB+(lka)’ on Watch Negative, dated 10 April 2023;

- HNBF: Fitch maintains HNB Finance’s National Rating of ‘BBB+(lka)’ on Watch Negative, dated 10 April 2023;

- Siyapatha: Fitch maintains Siyapatha Finance’s National Rating of ‘BBB+(lka)’ on Watch Negative, dated 10 April 2023; and

- UBF: Fitch assigns UB Finance first-time ‘BB(lka)’ Rating; on RWN, dated 18 May 2023

Rating sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade

The four FLCs’ ratings are sensitive to changes in their respective parents’ credit profile, as reflected in the parents’ National Long-Term Ratings as well as Fitch’s opinion around the parents’ ability and propensity to extend timely extraordinary support.

Factors that could, individually or collectively, lead to positive rating action/upgrade

An upgrade would most likely result from an upgrade of the parents’ National Long-Term Ratings, which would reflect the parents’ increased ability to support the subsidiary.

An upgrade could also stem from a greater propensity to support these FLCs through a significant increase in their strategic importance to the parent banks, although we regard this as unlikely in the near term.

Debt and other instrument ratings: Key rating drivers

The removal of the RWN on HNBF’s and Siyapatha’s outstanding subordinated debt corresponds to the action taken on the companies’ National Ratings. The outstanding subordinated debentures are rated two notches below their respective National Long-Term Ratings.

We have applied our bank rating criteria in rating these instruments, as we view the prudential capital framework for finance companies to be closer to that for banks in Sri Lanka. Our baseline notching of two notches for loss severity reflects our expectation of poor recovery in the event of default. We have not applied additional notching to the notes for non-performance risk, as they have no going-concern loss-absorption features, in line with Fitch criteria.