Banking

Sri Lanka Fitch downgrades PABC, confirms ratings of 04 small, mid-size banks

Monday October 17, 2016 7:21 pm

ECONOMYNEXT – Fitch Ratings Lanka has downgraded Pan Asia Banking Corporation’s (PABC) National Long-Term Rating to ‘BBB-(lka)’ from ‘BBB(lka)’, saying above-industry loan growth had weakened its capitalisation.

The Outlook on PABC was revised to Stable from Negative, the rating agency said in a statement after Fitch’s periodic review of Sri Lanka’s small and mid-sized bank peer group.

The agency has also revised the Outlook on the National Long-Term Rating of Union Bank of Colombo (UB) to Positive from Stable, and affirmed its rating at ‘BB+(lka)’.

The National Long-Term Ratings on Nations Trust Bank PLC (NTB), SANASA Development Bank PLC (SDB) and Amana Bank PLC (Amana) have been affirmed with a Stable Outlook.

The full report follows:

Fitch Ratings-Colombo-17 October 2016: Fitch Ratings Lanka has downgraded Pan Asia Banking Corporation PLC’s (PABC) National Long-Term Rating to ‘BBB-(lka)’ from ‘BBB(lka)’. The Outlook is revised to Stable from Negative. The agency has also revised the Outlook on the National Long-Term Rating of Union Bank of Colombo PLC (UB) to Positive from Stable, and affirmed its rating at ‘BB+(lka)’. The National Long-Term Ratings on Nations Trust Bank PLC (NTB), SANASA Development Bank PLC (SDB) and Amana Bank PLC (Amana) have been affirmed with a Stable Outlook. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

NATIONAL RATINGS AND SENIOR DEBT

The rating actions follow Fitch’s periodic review of Sri Lanka’s small and mid-sized bank peer group.

The banks’ operating environment has become more challenging – as signalled by the downgrade of the sovereign Long-Term Issuer Default Rating to ‘B+’ from ‘BB-‘ on 29 February 2016. Fitch expects increased volatility in operating conditions to add pressure on the banks’ credit metrics.

Fitch believes capitalisation is the main problem for the banks, due to weakening capital buffers from rapid loan-book growth and high exposure to retail and SME segments, which are more susceptible to deteriorating economic conditions. PABC and Amana are yet to meet the LKR10bn minimum capital requirement set by the regulator. Fitch believes capital-raising may also be a challenge amid increased country risk.

The downgrade of PABC’s National Long-Term Rating reflects the continued deterioration in its capitalisation following above-industry loan growth (2015: 37% versus 21% for the industry, 2014: 27.2% versus 13.7%). The rating factors in Fitch’s expectation of an equity infusion, as PABC is required to increase its minimum regulatory capital to LKR7.5bn by 1 January 2017 and LKR10bn by 1 January 2018. Fitch believes that the bank’s earnings retention alone is not likely to be sufficient to achieve the capital standards, despite improved profitability.

PABC’s regulatory NPL ratio improved to 4.4% at end-June 2016, from 5.7% at end-2014, mostly due to high loan growth, although the stock of NPLs also decreased marginally. ROA improved to 1.1%, from 0.6%, due to better revenue generation stemming from higher business volumes.

The Positive Outlook on UB’s rating reflects the structural changes taking place through a shift in the risk profile of the bank’s loan book. This stems from a higher exposure to corporates as opposed to SMEs in the past, which could support better asset quality. However, UB continued to sustain rapid loan growth of 51.5% in 2015 and 20.5% in 1H16. This could put pressure on asset-quality if not managed.

UB’s rating reflects its still-small franchise, weak profitability and higher capitalisation compared with that of its peers. The bank accounted for just 1% of sector assets in 1H16 and is among the smallest licensed commercial banks in the sector. UB’s profitability in terms of ROA has been gradually increasing (1H16: 0.67%, 2015: 0.41%), but remains low relative to peers. Fitch expects capitalisation to decline to levels more comparable with that of its peers in the medium-term, alongside rapid loan growth. Its Fitch Core Capital ratio decreased to 19.8% in 1H16, after being boosted to 35.8% at end-2014 following an LKR11.4bn capital injection from an affiliate of Texas Pacific Group (TPG). However, Fitch expects the bank to sustain stronger capitalisation in the medium-term than in the past.

UB reported a sharp decline in its gross NPL ratio to 2.90% in 1H16, from 3.55% at end-2015 and 8.25% at end-2014. This figure excludes NPLs at its subsidiary, UB Finance Company Ltd (UBF), formerly a distressed company. UBF accounted for 31.3% of the groups’ total NPLs at 1H16. UBF’s asset quality remains a significant drag on the group’s asset quality, even though it has been improving.

NTB’s ratings reflect its moderate franchise, high product concentration and declining capitalisation. The bank’s product concentration relative to peers remain high, with leasing accounting for 23% of gross loans at end-June 2016, and credit cards accounting for 11%. Fitch believes these exposures could put pressure on NTB’s asset quality. The bank’s reported gross NPL ratio improved to 2.8% at end-June 2016, from 4.2% at end-2014, due mainly to recoveries and write-offs in the leasing portfolio. The ratio of the bank’s reserves for impaired loans/gross loans stood at 1.7%, which was lower than that of its peers.

The bank’s capitalisation, as measured by the Tier 1 regulatory capital ratio, decreased to 10.7% by end-June 2016, from 13.2% at end-2015 (end-2014: 14.2%). Fitch believes capitalisation could deteriorate further amid loan growth and the absence of capital-raising activity. A sustained decline in capitalisation could put pressure on NTB’s ratings.

Fitch expects NTB’s net interest margin (NIM) to moderate in the near-term due to the rising interest-rate environment and planned increase in exposure to lower-yielding customer segments. The bank’s cost structure remains high compared with peers due to branch expansion, but we expect this to moderate with process improvements the bank has undertaken. NTB’s low cost current account savings account (CASA) improved to 31% of overall deposits by end-June 2016, from 25% at end-2013, but lags behind that of higher-rated peers.

SDB’s rating captures the bank’s high-risk appetite in terms of its substantial exposure and rapid loan growth to the retail and lower-end SME segments. Fitch believes a capital injection would support SDB’s rating, as internal capital generation is not likely to be sufficient to cushion the decline in capitalisation as a result of rapid loan book expansion. SDB’s reported gross NPL ratio decreased to 2.34% in 1H16, from 3.76% at end-2014, largely due to rapid loan growth as the stock of NPLs remained flat. Fitch expects asset quality to deteriorate as the loans season. The bank continues to benefit from above-average NIM stemming from its loan book exposures, although the contraction in its NIM has lowered SDB’s profitability.

The affirmation of Amana’s National Long-Term Rating reflects our expectation that the bank will increase its capital to meet the minimum level as directed by the Central Bank of Sri Lanka. In July 2015, the regulator granted approval for an extended timeline to comply with the minimum capital requirement which requires a minimum of LKR7.5bn and LKR10bn to be achieved by 1 January 2017 and 1 January 2018, respectively.

Amana’s rating reflects its small and developing domestic franchise and limited operating history. It also captures Amana’s relatively high-risk appetite, primarily indicated through rapid growth in the retail and SME segments. This could put pressure on the bank’s asset quality if economic conditions deteriorate. Amana’s NPL ratio has remained at less than 1% since end-December 2015, supported by rapid loan book growth, while absolute NPLs have moved up moderately. Fitch deems the placement of Amana’s excess funds in overseas financial institutions to be less liquid than domestic government securities although tenors on these placements have been shortened. The bank has maintained a stable CASA base relative to peers, with a CASA of over 50%.

PABC’s and NTB’s senior debentures carry the same rating as their National Long-Term ratings, as they rank equal with other unsecured obligations.

SUBORDINATED DEBT

PABC’s and NTB’s old-style Basel II Sri Lanka rupee-denominated subordinated debt is rated one notch below their National Long-Term Ratings to reflect the subordination to senior unsecured creditors.

RATING SENSITIVITIES

NATIONAL RATINGS AND SENIOR DEBT

An upgrade of PABC’s rating is contingent upon the bank achieving a sustained and significant improvement in its capitalisation, alongside a moderation in risk appetite. PABC’s rating would be downgraded if loss-absorption buffers further deteriorate, either through aggressive loan book growth or greater share of unprovided NPLs.

The upgrade of UB’s rating is contingent upon the bank’s ability to manage the risk that could stem from continued high loan growth, with a sustained improvement in asset quality and better risk management. The upgrade would also depend on an improvement in UB’s still-developing franchise alongside sustainable and improved performance similar to higher-rated peers. Capital impairment risks stemming from sustained rapid loan expansion or deterioration in asset quality could put pressure on UB’s rating.

An upgrade of NTB’s rating is contingent upon the bank lowering product concentration, significantly improved capitalisation and enhanced funding stability, alongside progress in building a strong commercial banking franchise. Weaker capitalisation or an increased risk appetite, as evident through aggressive loan growth and weaker asset quality, could result in a downgrade

SDB’s rating could be downgraded if there is a continued deterioration in capitalisation, either through aggressive loan growth or greater unprovided NPLs. An upgrade would be contingent upon moderation of its risk appetite and sustainable improvements in asset quality and profitability.

Amana’s rating may be downgraded if it fails to satisfy regulatory minimum capital requirements in a timely manner. A rating upgrade is contingent upon the expansion of Amana’s franchise and improved and sustained financial profile, similar to higher-rated peers.

Senior debt ratings will move in tandem with the banks’ National Long-Term Ratings.

SUBORDINATED DEBT

Subordinated debt ratings will move in tandem with the banks’ National Long-Term Ratings.

The rating actions are as follows:

Pan Asia Banking Corporation PLC

National Long-Term Rating downgraded to ‘BBB-(lka)’ with a Stable Outlook, from ‘BBB(lka)’ with a Negative Outlook

Senior debenture rating downgraded to ‘BBB-(lka)’, from ‘BBB(lka)’

Subordinated debenture rating downgraded to ‘BB+(lka)’, from ‘BBB-(lka)’

Union Bank of Colombo PLC

National Long-Term Rating affirmed at ‘BB+(lka); Outlook revised to Positive from Stable

Nations Trust Bank PLC

National Long-Term Rating affirmed at ‘A(lka)’; Stable Outlook

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

Proposed Basel II-compliant subordinated debentures affirmed at ‘A-(EXP)(lka)’

SANASA Development Bank PLC

National Long-Term Rating affirmed at ‘BB+(lka)’; Stable Outlook

Amana Bank PLC

National Long-Term Rating affirmed at ‘BB(lka)’; Stable Outlook
(COLOMBO, Oct 17, 2016)

FILED UNDER: Amana Bank,Fitch Ratings Lanka,Nations Trust Bank,Pan Asia Banking Corporation,Sanasa Development Bank,Union Bank

Fiscal

Sri Lanka Customs set to reach fresh record revenue this year: analysts

Wednesday October 14, 2026 3:02 pm

ECONOMYNEXT – Sri Lanka Customs is likely to achieve a fresh record high revenue this year after reaching this year’s target of Rs. 2,207 billion this week, with more than 11 weeks to the year-end, analysts say.

Customs Spokesman Chandana Punchihewa said the revenue-collecting body had already surpassed this year’s target on Tuesday (13), reaching Rs. 2,208 billion.

The Customs exceeded its target for the second straight year in 2026.

Last year, Customs collected a record 2,551 billion rupees in revenue, exceeding a revised target of 2,241 billion rupees for the year and achieving 64.2% higher revenue than the previous year’s revenue of 1,553 million rupees.

Analysts say Customs will surpass last year’s record revenue by the end of November if there are no major policy reversals or disruptions to the economy in the country during that time.

Customs’ 2026 target of 2,207 billion was 13.5% less than last year’s because they originally expected a significant decline in car imports early this year. (Colombo/October 14/2026)

Economy

Sri Lanka President reveals timelinefor new laws related to SOE, investments

Wednesday October 14, 2026 2:11 pm

ECONOMYNEXT – Sri Lanka President Anura Kumara Dissanayake revealed the timeline for key laws related to State-Owned Enterprises (SOE) and Public-Private-Partnership (PPP) to boost investments in the island nation.

Delays in formulating and enacting key structural legislation, specifically governing SOE reforms, PPPs, labor market flexibility, and modernizing the century-old Customs Ordinance, have emerged as major bottlenecks to Sri Lanka’s long-term economic competitiveness and fiscal sustainability.

The absence of a modernized legal framework for SOEs perpetuates fiscal leakages, inefficient governance, and persistent public sector debt burdens, while vague or outdated rules on PPPs and labor deter both domestic and foreign direct investment by creating regulatory ambiguity and rigid operational constraints.

Furthermore, the archaic Customs Ordinance of 1869 hinders trade facilitation, fosters administrative opacity, and creates revenue leakage risks at a time when export-led growth is critical.

Under the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) arrangement, Sri Lanka has committed to prioritizing these legislative enactments.

Commenting on these laws, President Dissanayake said the government has been working on them and expects them to be enacted soon.

“Regarding the SOE law, I expect it will be presented to the Cabinet in about two weeks,” Dissanayake told the gathering at the launch of the Sri Lanka Economic and Investment Summit 2026 on Monday (12).

“The PPP law has been drafted and submitted to the Legal Draftsman’s Department, and we have received their recommendations.”

“Regarding labour law, about twelve different labour statutes currently exist. We are consolidating these into unified legislation. A draft bill has already been formulated, though reviewing and finalizing it will take some time.”

He said an agreement has been reached on the Customs Ordinance following extensive discussions involving the Treasury and the Customs Department.

“The proposed amendments to the Customs Ordinance are the most appropriate way forward,” he said.

“Those proposals have now been submitted to the Legal Draftsman’s Department, and we expect the bill to be finalized promptly. Most likely, all of these bills will be presented to Parliament by February.”

The IMF contends that establishing transparent, enforceable, and modern legal frameworks is essential to eliminate governance vulnerabilities, enforce fiscal discipline, improve revenue collection, and signal regulatory stability to foreign investors, thereby ensuring Sri Lanka’s post-default recovery transitions into sustainable macroeconomic growth. (Colombo/October 14/2026)

Stocks & Companies

Sri Lanka’s Standard Capital exits loss-making paints subsidiary

Wednesday October 14, 2026 1:45 pm

ECONOMYNEXT — Sri Lanka listed investment company Standard Capital has disposed of its stake in subsidiary Standard Paints (Pvt) Ltd for a nominal consideration of 1650 rupees, saying the move would improve its financial position as the subsidiary carried a negative equity value.

In a disclosure to the Colombo Stock Exchange, Standard Capital said its board had previously decided on August 24, to either strike off the subsidiary or dispose of its equity stake for a nominal value.

The company subsequently sold its holdings in Standard Paints on September 28, comprising a 65 percent stake represented by 6.5 million ordinary voting shares and 100 percent of the subsidiary’s 10 million preferential shares.

The shares were disposed of for a total consideration of 1650 rupees. (Colombo/Oct14/2026)

General Economy

Global borrowing costs rise as bond yields increase: Fitch

Wednesday October 14, 2026 12:00 pm

Fitch Ratings-London: The recent sharp and widespread increase in government bond yields represents a significant increase in real global borrowing costs.

Bond yields have risen to multi-decade highs in the US, Germany, UK and Japan in recent weeks, as highlighted in Fitch Ratings’ latest Economic Monitor chart pack.

Ten-year government bond yields have risen in major global markets since the previous Fitch-20 Economic Monitor in June. US yields averaged 4.99% in September, up from 4.47% in June; 3.50% from 3.00% in Germany;
5.46% from 5.06% in the UK; and 2.99% from 2.65% in Japan. In Korea there also was a marked increase, with yields averaging 4.45% from 4.18% in June.

The chart pack highlights another notable development: the pick-up in world trade growth, driven by an IT investment boom that has boosted capital goods imports in the US. Trade growth has surged in several countries, including Mexico, Korea, Canada and Indonesia.

The quarterly ‘Fitch-20 Economic Monitor’ (formerly ‘20/20 Vision’) chart pack covers the 20 major economies (the Fitch-20) that are the focus of Fitch’s Economics team’s global macro analysis, and plots five years of high-frequency economic data for 20 variables, with consistent coverage across each country.

‘Fitch-20 Economic Monitor: September 2026’ is available by clicking the link above or at www.fitchratings.com.

Employment

Sri Lanka to get $100mn ADB loan to strengthen skills training

Wednesday October 14, 2026 11:30 am

ECONOMYNEXT – Sri Lanka’s cabinet has approved obtaining a 100 million dollar results-based loan from the Asian Development Bank (ADB) to implement a Skills Development System Transformation Programme aimed at strengthening the country’s technical and vocational education and training (TVET) sector.

“The financing package comprises 50 million dollars in regular ordinary capital resources and 50 million dollars in concessional ordinary capital resources,” minister Nalinda Jayatissa said.

The funds are intended to support sector reforms and the development of a more effective skills development system aligned with labour market needs, he claimed. (Colombo/Oct14/2026)

Bonds & Forex

Fitch rates Sri Lanka Sampath Bank’s Rs10bn debenture issue A(lka)

Wednesday October 14, 2026 11:00 am

Fitch Ratings – Singapore: Fitch Ratings has assigned Sampath Bank PLC’s (AA-(lka)/Stable) proposed Sri Lankan rupee-denominated Basel III-compliant subordinated debentures of up to LKR10 billion a final National Long-Term Rating of ‘A(lka)’.

The proposed debentures, which will mature in five and seven years, will be listed on the Colombo Stock Exchange. The bank plans to use the proceeds to supplement its Tier 2 capital base to maintain capital adequacy compliance as well as to support loan book growth.

The proposed debentures will qualify as Basel III-compliant regulatory Tier 2 capital. The debentures include a non-viability clause that states they will convert to ordinary voting shares upon the occurrence of a trigger event, as determined by the Governing Board of the Central Bank of Sri Lanka.

The final rating is the same as the expected rating assigned on 10 September 2026 and follows the receipt of documents conforming to information already received.

Key Rating Drivers

Fitch rates the proposed Basel III Tier 2 debentures two notches below the bank’s National Long-Term Rating of ‘AA-(lka)’. This reflects Fitch’s baseline notching for loss severity for this type of debt and our expectations of poor recoveries. There is no additional notching for non-performance risks, as the proposed debentures do not incorporate going-concern loss-absorption features.

Sampath’s National Long-Term Rating is used as the anchor rating for this instrument because the rating reflects the bank’s standalone financial strength and best indicates the risk of the bank becoming non-viable.

Fitch affirmed Sampath’s ratings on 17 August 2026. See our latest rating action commentary, Fitch Affirms Sampath Bank at ‘AA-(lka)’; Outlook Stable , for the key rating drivers and sensitivities.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A downgrade of the bank’s National Long-Term Rating will lead to a downgrade of the subordinated debt rating.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of the bank’s National Long-Term Rating will lead to an upgrade of the subordinated debt rating.