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Wednesday July 24th, 2024

Sri Lanka Insurance, NITF local ratings cut two levels after sovereign downgrade

ECONOMYNEXT – Fitch Ratings has lowered the local Insurer Financial Strength (IFS) ratings of state-run Sri Lanka Insurance to ‘AA(lka)’ from ‘AAA(lka)’ and National Insurance Trust Fund Board to ‘A+(lka)’ from ‘AA-(lka)’.

Fitch has lowered the ratings of state-linked firms and others such as banks that had state assets after sovereign downgrades.

“SLIC’s National IFS Rating continues to mirror its ‘Favourable’ business profile, and capital position and financial performance that are better than that of the industry,” Fitch said.

“The rating also factors in the insurer’s high exposure to equity investments, non-core subsidiaries as well as sovereign-related investments, which increase its investment and asset risks due to the sovereign’s weakened credit profile.”

SLIC’s regulatory risk-based capital (RBC) ratios of 451 percent for its life and 203 percent for its non-life segments at end-1H20 were well above the industry averages and the 120 percent, regulatory minimum.

NITF’s RBC ratio temporarily increased to 519 percent by end-1H20 (end-2019: 263 percent) along with a temporary improvement in earnings, evident from a reduction in its combined ratio to 48 percent in 1H20 from 89 percent in 2019.

The full statement is reproduced below:

Fitch Revises Two Sri Lankan Insurers’ National IFS Ratings on National Scale Recalibration

Fri 22 Jan, 2021 – 00:55 ET

Fitch Ratings – Sydney/Colombo – 22 Jan 2021: Fitch Ratings has revised the National Insurance Financial Strength Ratings (IFS) of two Sri Lankan insurers following the recalibration of the agency’s Sri Lankan national rating scale. The recalibration reflects changes in the relative creditworthiness among Sri Lankan issuers, following Fitch’s downgrade of the country’s sovereign rating to ‘CCC’ from ‘B-‘ on 27 November 2020. For details, see “Fitch Ratings Recalibrates its Sri Lankan National Rating Scale”, dated 22 December 2020, at https://www.fitchratings.com/site/pr/10147729.

Rating revisions are used to modify ratings for reasons that are not related to changes in credit quality, but to reflect changes in the national rating scale.

The National IFS Ratings of the two Sri Lankan insurers were revised as follows:

– Sri Lanka Insurance Corporation Limited revised to ‘AA(lka)’/Stable from ‘AAA(lka)’/Stable.

– National Insurance Trust Fund Board revised to ‘A+(lka)’/Stable from ‘AA-(lka)’/Negative.

National scale ratings are a risk ranking of issuers in a particular market designed to help local investors differentiate risk. Sri Lanka’s national scale ratings are denoted by the unique identifier ‘(lka)’. Fitch adds this identifier to reflect the unique nature of the Sri Lankan national scale.

National scales are not comparable with Fitch’s international rating scales or with other countries’ national rating scales. Other Sri Lankan insurers’ National IFS Ratings, which are not mentioned in this commentary, have not been affected by the recalibration exercise because, in our view, the rating relativities of these insurers are unaffected.

KEY RATING DRIVERS

Sri Lanka Insurance Corporation Limited (SLIC)

SLIC’s National IFS Rating continues to mirror its ‘Favourable’ business profile, and capital position and financial performance that are better than that of the industry.

The rating also factors in the insurer’s high exposure to equity investments, non-core subsidiaries as well as sovereign-related investments, which increase its investment and asset risks due to the sovereign’s weakened credit profile.

SLIC’s sovereign investment-to-capital ratio was 125% at end-1H20 (2019: 88%).

Fitch regards SLIC’s business profile as ‘Favourable’ compared with that of other Sri Lankan insurance companies due to its leading business franchise, participation in well-diversified and stable business lines, and large domestic operating scale. SLIC was Sri Lanka’s second-largest life and non-life insurer based on gross premiums in 2019.

SLIC’s regulatory risk-based capital (RBC) ratios of 451% for its life and 203% for its non-life segments at end-1H20 were well above the industry averages and the 120% regulatory minimum.

Fitch expects the potential pressure on earnings from rising price competition, fueled by constrained business growth and softer investment yields, to be somewhat mitigated by lower claims from motor insurance lines due to a drop in traffic accidents following the implementation of pandemic-related travel restrictions. SLIC has consistently maintained its non-life combined ratio below 100% (1H20: 96%; 2019: 95%) for the past five years, buoyed by its scale advantages and prudent underwriting practices.

National Insurance Trust Fund Board (NITF)

NITF’s National IFS Rating reflects its ‘Favourable’ business profile and strong financial performance. The positive factors are offset partly by its inconsistent risk-management practices, which in turn increase the volatility in its capital position and earnings.

NITF’s RBC ratio temporarily increased to 519% by end-1H20 (end-2019: 263%) along with a temporary improvement in earnings, evident from a reduction in its combined ratio to 48% in 1H20 from 89% in 2019.

The improvements were due mainly to increased premium retention and reduced claims during the pandemic-induced lockdown. Fitch believes the insurer’s capitalisation and earnings will normalise in the medium term due to a gradual pick-up in claims and the renewal of its reinsurance arrangements, which will reduce NITF’s premium retention.

Fitch expects the large payment of levies to the state (three-year average payout: 115%) to keep NITF’s capitalisation in check.

We also expect the claims ratio of the Agrahara insurance scheme, which provides medical insurance for public-sector employees and their families and accounted for 29% of NITF’s gross premiums in 1H20, to increase after the government’s decision to expand coverage and benefits, if the additional risks are not adequately priced. However, we expect NITF’s low operating costs and modest claims from the insurer’s strike, riot, civil commotion and terrorism (SRCCT) programme to reinforce profitability.

Fitch believes constant delays in the renewal of NITF’s reinsurance arrangements will weaken the insurer’s risk-mitigation practices and credit profile. Fitch noted some delays in the government’s approval for the renewal of NITF’s reinsurance cover in 2020 and in the past. The insurer purchased reinsurance for its SRCCT programme and inward reinsurance covers in 2H20.

NITF’s portfolio is entirely invested in government securities and its sovereign investment-to-capital ratio was 148% at end-1H20 (2019: 215%).

NITF’s ‘Favourable’ business profile assessment reflects its substantive business franchise, which is supported by its full state ownership and role in implementing government policies. NITF is the only domestic reinsurer and a state mandate requires all domestic non-life operators to cede 30% of their reinsurance to NITF.

RATING SENSITIVITIES

SLIC

Factors that could, individually or collectively, lead to negative rating action/downgrade:

– Significant weakening in SLIC’s business profile, for instance due to a weaker franchise, operating scale or business risk profile.

– Deterioration in the RBC ratio to below 350% for the life and 200% for the non-life businesses for a sustained period or a significant increase in non-core investments.

– Deterioration in the non-life combined ratio to well above 100% for a sustained period.

Factors that could, individually or collectively, lead to positive rating action:

– Significant reduction in SLIC’s investment and asset risks on a sustained basis while maintaining its ‘Favourable’ business profile and capitalisation at current levels.
NITF

Factors that could, individually or collectively, lead to negative rating action/downgrade:

– Deterioration in the RBC ratio to below 250% for a sustained period.

– Deterioration in risk-management practices, for instance, due to persistent delays
in renewing reinsurance arrangements.

– Deterioration in the combined ratio to above 103% for a sustained period.

– Significant weakening in NITF’s business profile, such as a large reduction in government-related business.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

– Improvements to its risk-management practices, including the timely purchase of adequate reinsurance covers while our assessment of the insurer’s capitalisation and business profile remains unchanged.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

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Fitch confirms ‘A(lka)’ domestic rating of Sampath Bank Plc

ECONOMYNEXT – Fitch Ratings said it was confirming a national long-term A(lka) rating on Sri Lanka’s Sampath Bank Plc with a stable outlook, amid an improvement in operating environment, indicated by headline macroeconomic indicators.

The bank had stage 3 loans of nearly 17 percent at end-1Q24 (2023: 16.6 percent).

Fitch expected this ratio to decrease in the near- to medium-term alongside focused recoveries.

“We expect Sampath’s impaired (stage 3) loans ratio to decline gradually in the medium term, due to its recovery efforts, improvements in repayment capacity of borrowers from the stabilisation in economic conditions, and moderate loan book growth.”

The bank also had defaulted sovereign bonds. “Defaulted foreign-currency sovereign bonds, which accounted for 1.9% of assets, had impairments amounting to 52% of its holdings as of end-1Q24.”

The full statement is reproduced below:

Fitch Affirms Sampath Bank at ‘A(lka)’; Outlook Stable

Fitch Ratings – Colombo – 22 Jul 2024: Fitch Ratings has affirmed Sri Lanka-based Sampath Bank PLC’s (Sampath) National Long-Term Rating at ‘A(lka)’. The Outlook is Stable. Fitch also affirmed Sampath’s outstanding Sri Lankan rupee-denominated subordinated debt at ‘BBB+(lka)’.

KEY RATING DRIVERS

Intrinsic Profile Drives Rating: Sampath’s National Long-Term Rating reflects its own financial strength, which is highly influenced by its exposure to the sovereign’s weak credit profile (Long-Term Foreign-Currency Issuer Default Rating (IDR): RD; LongTerm Local-Currency IDR: CCC-) and the ongoing sovereign debt restructuring, which had been putting pressure on Sampath’s credit profile. The rating also reflects Sampath’s modest domestic franchise as Sri Lanka’s fifth-largest commercial bank.

Stabilising OE: Sri Lankan banks’ operating environment (OE) continues to show signs of stabilisation, as evident in sustained improvements in reported headline macroeconomic indicators, supporting the recovery in banks’ operational flexibility.

Further improvement to the bank’s OE remains contingent on successful execution of the sovereign’s external debt-restructuring exercise alongside the restoration of the sovereign’s creditworthiness, given the strong link between sovereign financial health and banks’ operating conditions.

Economic Stabilisation Aids Business Profile: We believe the gradual improvement in economic conditions should support Sampath’s ability to generate and defend business volumes, despite the vulnerabilities from the weak sovereign and economy. We expect a moderate resumption in lending alongside the gradual economic recovery, similar to peers. This should result in a higher loan book share of assets (net loans to assets of 48.0% at end-1Q24) in the medium term.

Sovereign Risk Remains: Sampath’s risk profile assessment continues to reflect its exposures to the weak sovereign and economic environment. Defaulted foreign-currency sovereign bonds, which accounted for 1.9% of assets, had impairments amounting to 52% of its holdings as of end-1Q24. In addition, local-currency-denominated treasury securities contributed to 34% of its assets at end-2023, of which 59% were treasury bonds and the remainder in treasury bills, which makes the bank susceptible to the sovereign’s repayment ability and liquidity status.

Impaired Loans Decline Gradually: We expect Sampath’s impaired (stage 3) loans ratio to decline gradually in the medium term, due to its recovery efforts, improvements in repayment capacity of borrowers from the stabilisation in economic conditions, and moderate loan book growth. Prolonged economic challenges that continued for most of 2023 led to a further impaired-loans accretion, which together with loan book contraction resulted in the bank’s impaired-loans ratio rising to 16.6% by end-2023 (end-2022: 11.6%), above the industry’s 12.8%.

Declining Risks to Profitability: We believe downside risk to profitability from the restructuring of sovereign bonds has diminished, and any incremental impairment, if necessary, will be manageable, given the existing provisions on the holdings. We expect Sampath’s operating profit/risk weighted assets ratio (1Q24: 4.8%, 4-year average 3.2%) to moderate over the medium term on account of the decline in interest rates. This will be partially offset by lower credit costs, alongside the increase in risk density from the growth in the share of loans.

Downside Risks to Capital Manageable: We believe downside risk to capital from the bank’s exposure to defaulted sovereign bonds (1.9% as of end-1Q24) is manageable, as per the announced restructuring terms – given the bank’s provisions on these instruments amounting to 52% on the exposure at end-1Q24. The regulatory common equity tier 1 (CET1) capital ratio declined marginally to 15.6% by end-1Q24 (excluding 1Q24 profit) from 16.7% at end-2023, following a cash dividend payment, but remains one of the highest among Fitch-rated large Sri Lankan banks.

Funding and Liquidity Risks Remain: We believe Sampath ‘s funding and liquidity stress has eased on both the foreign- and local-currency fronts relative to the crisis period.

This was due to favourable external sector flows and the bank’s focus on liquidity preservation, as reflected in its high liquidity coverage ratio. We believe these developments have reduced the risk of bank failure. However, its funding and liquidity profile – particularly in foreign currency – remains susceptible to sudden changes in creditor sentiment driven by adverse changes to the sovereign’s credit profile, similar to peers.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

The bank’s National Rating is sensitive to a change in its creditworthiness relative to other Sri Lankan issuers.

A deterioration in Sampath’s key credit metrics beyond our base-case expectations relative to peers would also lead to increased pressure on the rating, which is driven by its intrinsic financial strength.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Positive rating action on the sovereign may lead to an upgrade. A sustained improvement in key credit metrics beyond our base-case expectations relative to peers, could also lead to an upgrade.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS SUBORDINATED DEBT

Sampath’s Sri Lankan rupee-denominated outstanding subordinated debt is rated two notches below the National Long-Term Rating anchor. 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 notes do not incorporate going-concern loss-absorption features.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The subordinated debt ratings will move in tandem with the bank’s National Long-Term Rating.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Additional information is available on www.fitchratings.com (Colombo/Jul24/2024)

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Sri Lanka presidential candidate cash deposits not updated in 43 years: MP

MP Dullas Alahapperuma

ECONOMYNEXT — The cash deposits Sri Lanka’s presidential candidates are required to pay have not been revised in 43 years, opposition MP Dullas Alahapperuma said, calling for a significant increase in order to save money and to prevent proxy candidates.

Alahapperuma told parliament on Wednesday July 24 that, as per the Presidential Elections Act No. 15 of 1981, a candidate nominated by a recognised political party has to deposit only 50,000 rupees while an independent candidate, or a candidate nominated by any other party or by an elector, must pay only 75,000 rupees.

The MP said the cabinet of former president Gotabaya Rajapaksa had approved an amendment to the act to increase these amounts.

“The election commission proposed that this be increased to 2.5 million rupees for political parties and 3 million for independent candidates. This was a pertinent proposal. There were 35 candidates who contested the last election,” he said.

The Act notes that “Where the number of votes polled by any candidate does not exceed one-eighth of the total number of votes polled at the election, the deposit made in respect of such candidate shall be declared forfeit and shall be transferred by the Commissioner from the deposit account to the Consolidated Fund, and in every other case the deposit shall be returned to the person who made the deposit, as soon as may be after the result of the election is declared.”

At the 2019 presidential election, said Alahapperuma, the deposits made by all candidates besides the top two contenders were transferred to the Consolidated fund.

“The number of candidates might be 80 or 85 this election. Many candidates have no basis for contesting, and it costs a vast sum of money to print ballots and other expenses, not to mention the time consumed for counting votes. This is not just to prevent proxy parties from contesting but also to save a lot of national wealth,” he said.

Leader of the House Susil Premajayantha responding to Alahapperuma said, however, that it would not be possible to pass the proposed amendment in time for the 2024 presidential election.

“The election commission made this proposal some time ago. But we know that to gazette a bill, we need to first draft the bill, the cabinet has to decide on it, send it back to the Legal Draftsman, and receive clearance from the Attorney General. So there is no time to bring this amendment for the upcoming presidential election. You can propose it at the next one,” he said. (Colombo/Jul24/2024)

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Sri Lanka deaf driver license project to be expanded islandwide

ECONOMYNEXT – A pilot project that allowed hearing-impaired persons to obtain light-vehicle driving licenses has been successful and will be rolled out island-wide, Sri Lanka’s Motor Traffic Department said.

The project was implemented in the Gampaha District initially where 50 licenses were provided to drivers who qualified.

The project was expanded to the Kurunegala District, where 150 drivers obtained licences. The drivers were given a probation period.

“Actually, this was a very successful project. It has been almost a year and we haven’t received a single complaint yet,” Motor Traffic Department Commissioner – Driving Licence Wasantha Ariyarathna told reporters on Wednesday.

“We plan to roll it out to all 25 districts islandwide.”

The issuance of driver’s licenses to hearing impaired persons will be done on a bi-annual renewal basis.
(Colombo/Jul24/2024)

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