EconomyNext – Fitch Ratings said it has confirmed the ratings on nine of Sri Lanka’s banks, maintaining a Stable Outlook for the banking sector, but downgraded Sampath Bank.
The Sri Lankan banking sector’s credit profile is not likely to deteriorate materially even though there could be downside pressure on asset quality and profitability, a statement said.
The rating agency said the downgrade of Sampath Bank reflects its weakening capitalisation relative to peers, which offset benefits from the growth of its franchise.
The statement by Fitch Ratings is given below.
Fitch Ratings-Colombo-08 July 2015: Fitch Ratings has affirmed the ratings on nine of Sri Lanka’s banks.
The Long-Term Issuer Default Ratings (IDRs) on National Savings Bank and Bank of Ceylon (BOC) have been affirmed at ‘BB-‘ and their National Long-Term Ratings have been affirmed at ‘AAA(lka)’ and ‘AA+(lka)’, respectively.
Fitch has also affirmed the National Long-Term Rating of People’s Bank at ‘AA+(lka)’.
At the same time, Fitch has affirmed the Long-Term IDRs of DFCC Bank PLC at ‘B+’ and the National Long-Term Ratings of DFCC and DFCC Vardhana Bank PLC at ‘AA-(lka)’. National Development Bank PLC’s (NDB) National Long-Term Rating was affirmed at ‘AA-(lka)’. Fitch also affirmed NDB’s Long-Term IDR at ‘B+’ and subsequently withdrew the rating due to commercial reasons.
Furthermore, Fitch has affirmed the National Long-Term Rating of Commercial Bank of Ceylon PLC (Commercial) at ‘AA(lka)’, Hatton National Bank PLC (HNB) at ‘AA-(lka)’ and Seylan Bank PLC at ‘A-(lka)’.
Fitch has downgraded the National Long-Term Rating of Sampath Bank PLC to ‘A+(lka)’ from ‘AA-(lka).
KEY RATING DRIVERS
IDRS, VRS, NATIONAL RATINGS AND SENIOR DEBT
Fitch maintains a Stable Outlook for the Sri Lankan banking sector. This is because the sector credit profile is not likely to deteriorate materially even though there could be downside pressure on asset quality and profitability. The operating environment is a key rating driver for the Sri Lankan banking sector given its potential volatility. The sector outlook was revised from Negative to Stable in December 2014.
Banks With Sovereign-Support Driven Long-Term Ratings
The IDRs and the National Long-Term Ratings of National Savings Bank and BOC, and the National Long-Term Rating of People’s Bank reflect Fitch’s expectation of extraordinary support from the government of Sri Lanka (BB-/Stable). Their Stable Outlook mirrors the Stable Outlook on the sovereign’s rating.
Fitch believes that state support for National Savings Bank stems from its policy mandate of mobilising retail savings and primarily investing them in government securities. The National Savings Bank Act contains an explicit deposit guarantee and Fitch is of the view that the authorities would support, in case of need, the bank’s depositors and its senior unsecured creditors to maintain confidence and systemic stability. Fitch has not assigned a Viability Rating (VR) to National Savings Bank as it is a policy bank.
Fitch expects support for BOC and People’s Bank to stem from their high systemic importance, quasi-sovereign status, role as key lenders to the government and full government ownership.
The senior debt of National Savings Bank and BOC is rated at the same level as the banks’ Long-Term Foreign Currency IDRs as the notes rank equally with their other senior unsecured obligations.
BOC’s VR reflects its thin capitalisation and weak asset quality. This is counterbalanced by its strong domestic funding franchise, which is underpinned by its state linkages.
The National Long-Term Ratings of Seylan Bank reflects Fitch’s view that the state would provide it extraordinary support in case of need because the regulator has classified it as one of six domestic systemically important banks. Fitch assigns Seylan Bank a lower support-driven rating because it has a smaller market share compared with its larger peers.
Banks with Long-Term Ratings Driven by Intrinsic Strength
Fitch considers Commercial Bank as the strongest bank in this peer group. Its rating captures its more measured risk appetite, solid franchise, sound track record, and strong funding profile. The bank’s provision coverage has been improving and asset quality has remained satisfactory. The ratings reflect our expectation that its operations in Bangladesh will remain small.
HNB’s rating reflects its strong franchise, satisfactory capitalisation, established track record and higher risk appetite compared to better-rated peers. Its senior debentures carry the same rating as they rank equal with other unsecured obligations.
The downgrade of Sampath Bank’s National Long-Term Rating reflects the weakening of its capitalisation relative to peers, which offset benefits from the growth of its franchise. Fitch expects that this trend will continue as the bank is not likely to be able to sustain growth purely through retained earnings. The bank’s Fitch Core Capital ratio declined to 10.6% at end-March 2015 from 13.1% at end-December 2013. Its regulatory Tier 1 ratio also deteriorated to 8.3% from 10.1% over the same period while the Tier 1 ratio of its direct peers remained above 11%. The weakening was mainly due to a shift in Sampath Bank’s loan book towards consumer and retail loans which carry a higher risk weight. Pawning advances, which were zero risk weighted, decreased to 6.6% of loans at end-March 2015 from 19.4% at end-2013.
The ratings on DFCC and its 99% owned subsidiary DFCC Vardhana Bank capture the consolidated group’s adequate capitalisation and its developing commercial banking franchise. Fitch has equalised the ratings of the two banks due to their strong and increasing integration.
DFCC’s US dollar notes are rated at the same level as its Long-Term Foreign-Currency IDR and its Sri Lanka rupee-denominated senior debt is rated at the same level as DFCC’s National Long-Term Rating as the securities constitute unsecured and unsubordinated obligations of the issuer. Fitch has assigned a Recovery Rating of ‘RR4’ to the US dollar notes to reflect average recovery prospects under both a standalone and consolidated basis.
The affirmation of NDB’s ratings reflect its better asset quality compared with peers and long and stable operating history, counterbalanced by its rapid growth as a commercial bank.
SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Ratings (SRs) and Support Rating Floors (SRFs) of state-owned National Savings Bank, BOC, and People’s Bank reflect their high importance to the government and high systemic importance. The SRs and SRFs of privately-owned DFCC and NDB reflect their lower systemic importance.
The old style Basel II Sri Lanka rupee-denominated subordinated notes of BOC, DFCC, DFCC Vardhana Bank, NDB, Commercial Bank, HNB, Sampath Bank and Seylan Bank are rated one notch below their National Long-Term Ratings to reflect the subordination to senior unsecured creditors.
IDRS, VRS, NATIONAL RATINGS AND SENIOR DEBT
The banks are sensitive to changes in the operating environment, which would often be reflected in changes in the sovereign rating. Significant capital impairment risks, possibly due to higher risk taking or a protracted macroeconomic deterioration, could result in negative rating actions on the banks if Fitch believes that this could result in a material erosion of capital buffers.
Banks with Sovereign-Support Driven Long-Term Ratings
Any change in Sri Lanka’s sovereign rating or the perception of state support to National Savings Bank, BOC and People’s Bank could result in a change in these entities’ ratings. For National Savings Bank, a reduced expectation of state support through, for instance, the removal of preferential support, or a substantial change in its policy role and/or deviation from mandated core activities indicating its reduced importance to the government, could also result in a downgrade of the bank’s National Rating. Visible demonstration of preferential support for BOC and People’s Bank in the form of an explicit guarantee will be instrumental to an upgrade of their National Long-Term Ratings.
A continued decline in capitalisation through a surge in lending or a further decline in asset quality alongside high dividend payouts could place downward pressure on BOC’s VR.
Seylan’s support-driven National Ratings are sensitive to changes around the sovereign’s ability and propensity to provide support. Fitch would consider an upgrade on Seylan’s ratings if the bank’s standalone rating – currently at a notch below its support-driven rating – moves above the support-driven rating through a significant and sustained improvement in asset quality and provisioning, and its other credit metrics are in line with that of higher-rated peers.
Banks with Long-Term Ratings Driven By Intrinsic Strength
Sustained improvements in Commercial Bank’s asset quality and enhanced resilience against a volatile operating environment could be positive for the rating. Its ratings could be downgraded if its ability to withstand cyclical asset quality deterioration declines due to lower earnings and capitalisation. In addition, any marked weakening in its deposit franchise and a deviation from its measured risk appetite, both viewed by Fitch as key factors that differentiate Commercial from its lower-rated peers, would be negative.
Upside potential for HNB’s ratings stems from a lower risk appetite and sustained improvements in its financial profile, in particular asset quality and funding. A material increase in risk taking, unless sufficiently mitigated through capital and financial performance, could result in a rating downgrade.
Fitch views the upside potential of Sampath Bank’s ratings as limited as long as the trend of higher risk taking and declining capitalisation persists. A sharp decline in its asset quality could result in a further rating downgrade.
Rating upgrades for DFCC and DFCC Vardhana Bank would be contingent on a materially stronger commercial banking franchise while maintaining strong credit metrics. The ratings could be downgraded if there is a sustained and substantial increase in risk appetite that could materially weaken the group’s strong capital position. In addition DFCC Vardhana Bank’s ratings are sensitive to a decline in its strategic importance to DFCC, which Fitch considers unlikely as the two entities have said they plan to merge.
Fitch believes that NDB’s capitalisation and its National Long-Term Rating would come under pressure if the bank sustains its growth momentum, in the absence of other mitigating factors. The consolidation of NDB’s franchise together with the maintenance of strong credit metrics could result in an upgrade of NDB’s rating.
The assigned debt ratings are primarily sensitive to changes in the entities’ long-term issuer ratings.
SUPPORT RATING AND SUPPORT RATING FLOOR
A reduced propensity of the government to support systemically important banks could result in a downgrade in the assigned SRs and SRFs, but we view this to be unlikely in the medium term. A change in the sovereign ratings could also lead to a change in these ratings.
The assigned subordinated debt ratings will move in tandem with the banks’ National Long-Term Ratings.
(Colombo/July 08, 2015)