Fitch downgrades 10 Sri Lankan Banks’ ratings

Fitch Ratings has downgraded the National LongTerm Ratings of 10 Sri Lankan banks following the recent sovereign downgrade and recalibration of the agency's Sri Lankan national rating scale.

The recalibration is to reflect changes in the relative creditworthiness among Sri Lankan issuers following Fitch's downgrade of Sri Lanka's Long-Term Local Currency Issuer Default Rating (IDR) to 'CC' from 'CCC'/Under Criteria Observation on 1 December 2022. 

Fitch typically does not assign Outlooks or apply modifiers to sovereigns with a rating of 'CCC+' or below.

National scale ratings are a risk ranking of issuers in a particular market designed to help local investors differentiate risk. Sri Lanka's national scale ratings are denoted by the unique identifier '(lka)'. Fitch adds this identifier to reflect the unique nature of the Sri Lankan national scale. National scales are not comparable with Fitch's international rating scales or with other countries' national rating scales. 

The National Ratings of the Sri Lankan banks consider their creditworthiness relative to other issuers in the country. The recalibration of the Sri Lankan National Rating scale has resulted in downgrades of the National Long-Term Ratings of the following banks:

• Bank of Ceylon (BOC) to ‘A(lka)’/Rating Watch Negative (RWN) from ‘AA-(lka)’/RWN

• People's Bank (Sri Lanka) (PB) to ‘A(lka)’/RWN from ‘AA-(lka)’/RWN

• Commercial Bank of Ceylon PLC (CB) to ‘A(lka)’/RWN from ‘AA-(lka)’/RWN

• Hatton National Bank PLC (HNB) to ‘A(lka)’/RWN from ‘AA-(lka)’/RWN

• Sampath Bank PLC (Sampath) to ‘A(lka)’/RWN from ‘AA-(lka)’/RWN

• Cargills Bank Limited (CBL) to ‘A(lka)’/RWN from ‘A+(lka)’/RWN

• DFCC Bank PLC (DFCC) to ‘A-(lka)’/RWN from ‘A+(lka)’/RWN+

• National Development Bank PLC (NDB) to ‘A-(lka)’/RWN from ‘A(lka)’/RWN

• Seylan Bank PLC (Seylan) to ‘A-(lka)’/RWN from ‘A(lka)’/RWN

• Nations Trust Bank PLC (NTB) to ‘A-(lka)’/RWN from ‘A(lka)’/RWN

Other Sri Lankan banks' national ratings, which are not mentioned in this commentary, have not been affected by the recalibration exercise.

Fitch said the downgrades of the National Ratings of the 10 banks are driven by the downgrade of the sovereign's Long-Term Local-Currency IDR and the recalibration of the national rating scale while also reflecting the relative creditworthiness among Sri Lankan issuers. 

A probable default on the sovereign's local-currency obligations increases the risk that authorities will impose restrictions on banks servicing their local-currency obligations.  That said, we believe this risk is lower than non-payment by the sovereign. 

The downgrade of CBL's rating incorporates the additional consideration of parent CT Holdings PLC's (CTH) limited ability to provide extraordinary support. This is reflected in CBL's large size relative to the group and the bank's weak standalone credit profile.

“We have maintained the national ratings on RWN to reflect the potential for these banks’ creditworthiness relative to other entities on the Sri Lankan national ratings scale to further deteriorate amid the likelihood of capital and funding stress as the default risk on domestic debt increases while access to foreign-currency funding remains constrained. The RWN on CBL's rating reflects our view that CBL is not immune to these systemwide stresses despite parental support,” Fitch added.