Fitch explains Sri Lanka bank ratings impact after scale recaliberation, sovereign downgrade

ECONOMYNEXT – Fitch Ratings has released a Q & A explaining the recent rating changes in Sri Lanka companies and banks after the sovereign rating was downgraded to ‘CCC’, explaining in particular why bank ratings were lowered.

Domestic Bank Ratings Constrained by Sovereign’s Credit Profile

Following Fitch Ratings’ downgrade of Sri Lanka’s sovereign rating to ‘CCC’ from ‘B-‘ on 27 November 2020, the Sri Lankan National Rating scale was recalibrated to reflect changes in the relative creditworthiness among Sri Lankan issuers. The current relationship between international and national scale ratings is shown in the table on the left.

The recalibration of the Sri Lankan National Rating scale resulted in the revision of some ratings due to changes in relativities in the portfolio. After the recalibration, the highest national rating for domestic banks with ratings driven by their intrinsic credit profile is ‘AA-(lka)’. This is the highest point on the national scale that corresponds to an international scale rating of ‘CCC’.

We now have six banks rated at ‘AA-(lka)’: Bank of Ceylon (BOC), People’s Bank (Sri Lanka), Commercial Bank of Ceylon PLC (CB), Hatton National Bank PLC (HNB), Sampath Bank PLC and Cargills Bank Limited. The National Ratings of other Sri Lankan banks rated below this level on the national scale were not affected by the recalibration.

Sri Lanka’s national scale ratings are denoted by the unique identifier ‘(lka)’. National scales are not comparable with Fitch’s international ratings scales or with other jurisdictions’ national rating scales.

The following are some recent questions from investors about the recalibration and impact on bank ratings in Sri Lanka:

What Was the Reason for the Recalibration of the National Ratings on Sri Lankan Banks?

Fitch recalibrates National Rating Correspondence Tables to limit rating movements in the national scale that result from systemic factors. For instance, a sovereign rating change could drive multiple international rating changes, which would affect a large number of issuers on the national scale if a reassessment of the rating relationship between international and national ratings is not undertaken.
The recalibration of Sri Lankan National Rating scale followed the downgrade of the sovereign to ‘CCC’ from ‘B-‘ in November 2020.

The sovereign rating may act as a key rating driver or constraint for the ratings of other local issuers and drive multiple international scale rating actions. For example, Fitch downgraded BOC’s Long-Term Issuer Default Rating (IDR) and Viability Rating to ‘CCC’ and ‘ccc’ respectively, after the downgrade of the sovereign IDR, and our assessment of the operating environment, which is a key rating driver for Sri Lankan banks.

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