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Fitch maintains negative outlook for Sri Lankan banks

Dec 04, 2018 12:38 PM GMT+0530 | 0 Comment(s)

ECONOMYNEXT – Fitch Ratings has maintained its negative outlook for Sri Lankan banks, saying the macroeconomic fallout of the recent political crisis, looming elections and foreign debt repayments could dampen their prospects. 

But Fitch in a statement said it expects bank credit profiles to remain broadly intact, although it is “possible that some modest pressure will be brought to bear on the ratings of some banks in the absence of sufficient buffers against risks.”

“We believe credit risks will linger in 2019, as reflected in a rise in rescheduled loans across banks alongside a surge in NPLs (non-performing loans) in 2018,” it said.

“Pressures should remain manageable alongside banks’ increased focus, although a higher-than-expected level of loan impairments can lead to a re-assessment of these trends.”

The full Fitch Ratings report follows:

Fitch maintains our negative outlook, based on our expectations for operating conditions to remain difficult. Economic expansion has remained muted, and this is also likely to be the case in 2019.

Sri Lanka faces numerous additional challenges on both the domestic and external fronts, which are likely to affect banks’ performance through 2019, mainly on asset quality.

Rating Outlook: Stable

Fitch expects bank credit profiles to remain broadly intact, although it is possible that some modest pressure will be brought to bear on the ratings of some banks in the absence of sufficient buffers against risks.

Sovereign rating action could result in similar action on the IDRs and VRs of Sri Lankan banks that are at the same level.

What to Watch

Macroeconomic Risks

Banks are likely to face increased challenges on the macro front. The recent political crisis in Sri Lanka has heightened uncertainties regarding the policy outlook, with the IMF delaying discussions regarding the programme as a result.

Sri Lanka is due to enter an election cycle. In addition, the country has large external debt-refinancing needs from 2019-2022 amidst tighter global monetary conditions, with heightened domestic political instability raising refinancing risks.

The resulting macroeconomic implications could dampen prospects for banks.

Continued Pressure on Loan Quality

We believe credit risks will linger in 2019, as reflected in a rise in rescheduled loans across banks alongside a surge in NPLs in 2018. Pressures should remain manageable alongside banks’ increased focus, although a higher-than-expected level of loan impairments can lead to a re-assessment of these trends.

Ongoing Capital Needs

Capital-raising could continue in 2019 among banks that plan to/need to strengthen capital buffers, but banks could face execution risks – given the macro instability. The impact of the implementation of SLFRS 9 is likely to be modest, and the effect on regulated capital ratios is likely to be spread out.
(COLOMBO, 04 December 2018)
 


 

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