Fitch cuts outlook on People’s Bank, Commercial Bank and Serendib Finance

ECONOMYNEXT- Fitch Ratings has revised the outlook on People’s Bank (PB) Commercial Bank (CB) and Serendib Finance Limited to negative from stable, after a similar move on the Sri Lankan sovereign.

PB now has a long-term national rating of AA+(lka) with a negative outlook, while CB has a rating of AA(lka) with a negative outlook and Serendib A+(lka) with negative outlook.

The PB rating reflects the bank’s quasi-sovereign status as a lender to the Sri Lankan government, full state ownership and high systemic importance, Fitch Ratings said.

CB’s outlook was cut due to the sovereign credit profile which could limit the bank’s ratings in a deteriorating operating environment, the ratings agency said.

However, CB has stable earnings, a strong domestic franchise as the third largest bank and large deposits to back its liquidity profile, Fitch said.

The outlook revision on Serendib, a subsidiary of CB, was due to a potential weakening of support from the parent, Fitch said

The ratings agency said if capital buffers weaken or operating risks escalate, CB could experience a rating downgrade, while upside is limited due to the sovereign rating and the operating environment.

For Serendib, a ratings downgrade could be triggered if links weaken with the parent or if CB suffers a downgrade, while there could be a rise in ratings if Serendib could increase its importance within the group.

The full Fitch review on the three firms follows:

Fitch has also revised the Outlook to Negative from Stable on the National Long-Term Ratings of the following Sri Lanka-based banks and non-bank financial institutions and has affirmed their ratings:

– People’s Bank (Sri Lanka) (PB),

– Commercial Bank of Ceylon PLC (CB) and

– Serendib Finance Limited

The revision of the Outlooks follows Fitch’s Outlook revision on the Sri Lankan sovereign (B/Negative); see Fitch Revises Outlook on Sri Lanka to Negative; Affirms at ‘B’, dated 18 December 2019.

Fitch has revised its assessment of Sri Lanka’s operating environment to ‘b’/negative, from ‘b’/stable, primarily to reflect the risk of doing business in the jurisdiction, which we believe could heighten in the medium term.

Increased macroeconomic volatility could pressure the banks’ and non-bank financial institutions’ credit profiles should the sovereign’s credit profile deteriorate further.

The operating environment has a high influence on the banks’ ratings, as it is likely to constrain their intrinsic credit profiles through its effect on financial and non-financial key rating factors.

KEY RATING DRIVERS

IDRS, VIABILITY RATINGS, NATIONAL RATINGS AND SENIOR DEBT

PB

PB’s National Long-Term Rating reflects Fitch’s expectation of extraordinary state support based on its quasi-sovereign status, its role as one of the key lenders to the government, full state ownership and high systemic importance.

CB
CB’s National Long-Term Rating is driven by its intrinsic financial strength and is highly influenced by our view of its operating environment. It also reflects its established domestic franchise as Sri Lanka’s third-largest bank, broadly stable earnings performance and established domestic-deposit franchise (11.6% share of banking-sector deposits at end-9M19), which underpins its funding and liquidity profile.

The Negative Outlook reflects our assessment of the sovereign’s credit profile, which could constrain the bank’s rating upon a further deterioration in the operating environment.

Serendib

Serendib’s rating is driven by Fitch’s view that its parent, CB, would provide Serendib with extraordinary support, if required.

CB’s ability to support Serendib is reflected in its credit profile, which is underpinned by its standalone strength and Serendib’s small size.

The support assessment also takes into account CB’s full ownership of Serendib, support record via multiple equity infusions and the subsidiary’s increased level of integration with its parent.

The Negative Outlook reflects the potential weakening of CB’s ability to support Serendib.

SUBORDINATED DEBT

The old-style Basel II Sri Lanka rupee-denominated subordinated debt of BOC, DFCC, CB and HNB and the Basel III compliant Tier 2 Sri Lanka rupee-denominated subordinated debt of DFCC, CB and HNB and are rated one notch below their National Long-Term Ratings to reflect subordination to senior unsecured creditors.

The Basel III compliant debentures include a non-viability trigger upon the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka.

RATING SENSITIVITIES

IDRS, VIABILITY RATINGS, NATIONAL RATINGS AND SENIOR DEBT

Changes to Sri Lanka’s sovereign rating or Fitch’s perception of state support for the banks could result in a change in the banks’ IDRs, National Long-Term Ratings and/or in the Outlook on BOC, NSB and PB.

CB

An increase in operating-environment related risks or deterioration in capital buffers could pressure CB’s rating. Upside for the rating is constrained by the sovereign rating and our assessment of the operating environment.

Serendib

Weakening links with the parent or a downgrade of CB’s National Long-Term Rating could trigger a rating downgrade on Serendib. A rating upgrade would most likely result from a significant increase in Serendib’s strategic importance to its parent through a greater role within the group.

PB:

National Long-Term Rating affirmed at ‘AA+(lka)’; Outlook revised to ‘Negative’ from ‘Stable’

CB:

National Long-Term Rating affirmed at ‘AA(lka)’; Outlook revised to ‘Negative’ from ‘Stable’

Basel II compliant outstanding subordinated debentures affirmed at ‘AA-(lka)’

Basel III compliant Sri Lanka rupee-denominated subordinated debentures affirmed at ‘AA-(lka)’

Serendib:

National Long-Term Rating affirmed at ‘A+(lka)’; Outlook revised to ‘Negative’ from ‘Stable’ (Colombo/Jan23/2020)