ECONOMYNEXT – Moody’s Investors Service has downgraded the long-term foreign currency deposit ratings of Bank of Ceylon (BOC), Hatton National Bank PLC (HNB) and Sampath Bank PLC (Sampath) to Caa1 from B3 after a cut in the sovereign rating.
“The three banks have significant credit exposure to the sovereign through their holdings of government securities and lending to the domestic economy, which is itself correlated to sovereign creditworthiness,” the rating agency said.
“Moody’s expects the banks’ asset quality to worsen significantly as a result of coronavirus disruptions, although the increase in problem loans will not be evident until 2021 because of regulatory forbearance measures, including a moratorium on loan repayments.”
Moody’s said it had also lowered Sri Lanka’s Macro Profile – a key input to the banks’ Baseline Credit Assessment – to ‘Weak-‘ from ‘Weak’, to reflect the deterioration in the operating environment.
The full statement is reproduced below:
Moody’s downgrades three Sri Lankan banks; outlooks stable
Singapore, September 29, 2020 — Moody’s Investors Service has today downgraded the long-term foreign currency deposit ratings of Bank of Ceylon (BOC), Hatton National Bank PLC (HNB) and Sampath Bank PLC (Sampath) to Caa1 from B3, and the banks’ long-term local currency deposit ratings to Caa1 from B2.
At the same time, Moody’s has downgraded the Baseline Credit Assessment (BCA) of BOC to caa1 from b3, and those of HNB and Sampath to caa1 from b2.
The rating outlooks, where applicable, are stable.
Today’s rating actions conclude the review for downgrade that was initiated on 20 April 2020, and follow Moody’s downgrade on 28 September 2020 of Sri Lanka’s sovereign rating to Caa1 from B2, with a stable outlook.
RATINGS RATIONALE
The downgrade of the BCAs of BOC, HNB and Sampath is driven by the downgrade of Sri Lanka’s sovereign rating.
The three banks have significant credit exposure to the sovereign through their holdings of government securities and lending to the domestic economy, which is itself correlated to sovereign creditworthiness.
Moody’s has also lowered Sri Lanka’s Macro Profile — a key input to the banks’ BCAs — to Weak- from Weak, to reflect the deterioration in the operating environment.
In particular, the coronavirus outbreak has weighed on Sri Lanka’s already weak economy and has weakened the government’s fiscal position.
Moody’s expects the banks’ asset quality to worsen significantly as a result of coronavirus disruptions, although the increase in problem loans will not be evident until 2021 because of regulatory forbearance measures, including a moratorium on loan repayments.
The banks’ profitability will also deteriorate largely because of higher credit costs and a compression in net interest margins following successive policy rate cuts by the central bank.
The banks’ capital and funding will, however, remain as key strengths.
Moody’s incorporates a high or very high level of government support in the long-term deposit ratings of the three banks. However, this does not lead to any rating uplift because the banks’ BCAs are already at the same level as the sovereign rating.
Moody’s will subsequently withdraw the ratings of BOC. Moody’s has decided to withdraw the ratings of BOC for its own business reasons.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of the BCAs and long-term deposit ratings of HNB and Sampath is unlikely, given that they are already at the same level as Sri Lanka’s sovereign rating and the outlook on the sovereign rating is stable.
A downgrade of Sri Lanka’s sovereign rating could lead to a downgrade of the BCAs and long-term deposit ratings of HNB and Sampath.
Moody’s could also downgrade the banks’ BCAs if there is a material deterioration in asset quality. A significant decline in capitalization could also pressure the banks’ BCAs.
The principal methodology used in these ratings was Banks Methodology published in November 2019 and
available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865 .
Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Bank of Ceylon, headquartered in Colombo, reported total assets of LKR2,722 billion at 30 June 2020.
Hatton National Bank PLC, headquartered in Colombo, reported total assets of LKR1,244 billion at 30 June
2020.
Sampath Bank PLC, headquartered in Colombo, reported total assets of LKR1,045 billion at 30 June 2020.
LIST OF AFFECTED RATINGS AND ASSESSMENTS:
Downgrades:
..Issuer: Bank of Ceylon
…. Adjusted Baseline Credit Assessment, downgraded to caa1 from b3
…. Baseline Credit Assessment, downgraded to caa1 from b3
…. Long-term Counterparty Risk Assessment, downgraded to B3(cr) from B2(cr)
…. Long-term Foreign and Local Currency Counterparty Risk Ratings, downgraded to B3 from B2
…. Long-term Foreign Currency Issuer Rating, Downgraded to Caa1 from B2, outlook changed to Stable from Rating Under Review
…. Long-term Foreign Currency Bank Deposit Rating, Downgraded to Caa1 from B3, outlook changed to Stable from Rating Under Review
…. Long-term Local Currency Bank Deposit Rating, Downgraded to Caa1 from B2, outlook changed to Stable from Rating Under Review
..Issuer: Hatton National Bank PLC
…. Adjusted Baseline Credit Assessment, downgraded to caa1 from b2
…. Baseline Credit Assessment, downgraded to caa1 from b2
…. Long-term Counterparty Risk Assessment, downgraded to B3(cr) from B1(cr)
…. Long-term Foreign and Local Currency Counterparty Risk Ratings, downgraded to B3 from B1
…. Long-term Foreign Currency Issuer Rating, downgraded to Caa1 from B2, outlook changed to Stable from Rating Under Review
…. Long-term Foreign Currency Bank Deposit Rating, downgraded to Caa1 from B3, outlook changed to
Stable from Rating Under Review
…. Long-term Local Currency Bank Deposit Rating, downgraded to Caa1 from B2, outlook changed to Stable from Rating Under Review
..Issuer: Sampath Bank PLC
…. Adjusted Baseline Credit Assessment, downgraded to caa1 from b2
…. Baseline Credit Assessment, downgraded to caa1 from b2
…. Long-term Counterparty Risk Assessment, downgraded to B3(cr) from B1(cr)
…. Long-term Foreign and Local Currency Counterparty Risk Ratings, downgraded to B3 from B1
…. Long-term Foreign Currency Issuer Rating, downgraded to Caa1 from B2, outlook changed to Stable from Rating Under Review
…. Long-term Foreign Currency Bank Deposit Rating, downgraded to Caa1 from B3, outlook changed to Stable from Rating Under Review
…. Long-term Local Currency Bank Deposit Rating, downgraded to Caa1 from B2, outlook changed to Stable from Rating Under Review
Affirmations:
..Issuer: Bank of Ceylon
…. Short-term Counterparty Risk Assessment, Affirmed at NP(cr)
…. Short-term Foreign and Local Currency Counterparty Risk Ratings, Affirmed at NP
…. Short-term Foreign and Local Currency Bank Deposit Ratings, Affirmed at NP
..Issuer: Hatton National Bank PLC
…. Short-term Counterparty Risk Assessment, Affirmed at NP(cr)
…. Short-term Foreign and Local Currency Counterparty Risk Ratings, Affirmed at NP
…. Short-term Foreign and Local Currency Bank Deposit Ratings, Affirmed at NP
..Issuer: Sampath Bank PLC
…. Short-term Counterparty Risk Assessment, Affirmed at NP(cr)
…. Short-term Foreign and Local Currency Counterparty Risk Ratings, Affirmed at NP
…. Short-term Foreign and Local Currency Bank Deposit Ratings, Affirmed at NP
Outlook Actions:
..Issuer: Bank of Ceylon
….Outlook, changed to Stable from Rating Under Review
..Issuer: Hatton National Bank PLC
….Outlook, changed to Stable from Rating Under Review
..Issuer: Sampath Bank PLC
….Outlook, changed to Stable from Rating Under Review