Fitch assigns Habib Bank-Sri Lanka branch first-time national rating of ‘A’; outlook stable

Fitch Ratings has assigned Habib Bank Ltd. - Sri Lanka branch (HBLSL) a first-time National Long-Term Rating of ‘A(lka)’. The outlook is stable.

Parental support drives rating: HBLSL’s rating reflects Fitch’s expectation of support, if required, from the head office of Habib Bank Ltd. (HBL), Pakistan’s largest bank. 

The rating is underpinned by HBLSL’s status as a branch of HBL, which means it is part of the same legal entity as HBL, subject to any regulatory constraints on HBL remitting money from Pakistan into Sri Lanka.

Fitch’s assessment factors in the parent’s credit profile, which is constrained by the Pakistan sovereign rating of ‘CCC’, given the bank’s interconnectedness with the state. 

“Our assessment also takes into consideration HBLSL’s strong operational integration with HBL, and the small size of the branch, which makes up 0.3% of HBL’s total assets,” Fitch said,

Small franchise: HBLSL’s operation in Sri Lanka is small compared with that of other Fitch-rated banks, with a market share of only 0.05% of system loans at end-2022. 

HBLSL’s business model is concentrated in riskier mid- and small-sized corporate borrowers and it faces significant competition from larger peers.

Sufficient liquidity buffers: HBLSL’s all-currency liquidity coverage ratio of 860% at end-March 2023 is supported by the branch’s large cash balances and investments in Sri Lankan treasury securities, which make up nearly 50% of its total assets, covering around 90% of its deposit obligations by Fitch estimates. The branch’s liquidity position is supported by access to funding from HBL, given the parent’s adequate liquidity coverage ratio of 284% at end-June 2023 and stable funding position, reflected in a gross loan/customer deposit ratio of about 50% and net stable funding ratio of 146%.

Above-average capital ratios; risks remain: HBLSL’s common equity Tier 1 (CET1) capital ratio (excluding profits) of 48% at end-March 2023 was well above the system average of 13.2%, supported by improving internal capital generation, and its substantial cash balances and investments in local-currency Government securities, which carry zero risk weights.

Fitch expects HBLSL’s CET1 ratio to fall moderately in the near term due to higher loan growth as the economy recovers, but the ratio is expected to remain well above the system average. “Nevertheless, the bank’s capital buffers could be vulnerable to stress that exceeds our expectations due to its small absolute capital base and high concentration in small and mid-sized corporate exposures,” Fitch said.

HBLSL’s national rating would be downgraded on material changes to Fitch’s expectation of support from HBL, such as a change in the branch’s legal status or the branch being divested. A downgrade of Pakistan’s ‘CCC’ Long-Term Issuer Default Rating, or weakening ability of the parent relative to the Pakistan sovereign, or any other developments that affect the branch’s ability to service its obligations, could also lead to a multiple-notch downgrade of HBLSL’s national rating. A change in the relativities among the credit profiles of issuers based in Sri Lanka could also prompt a downward revision in the rating.

HBLSL’s national rating could be upgraded should HBL’s credit profile improve, reflecting a greater ability to provide extraordinary support to the Sri Lankan branch, assuming our assumptions of the propensity to support remain unchanged.