ECONOMYNEXT – S&P Global Ratings said it had confirmed its ‘B+’ long-term issuer credit rating on Sri Lanka’s National Savings Bank (NSB) with a negative outlook, and confirmed its ‘B’ short-term issuer credit rating.
At the same time, the rating agency confirmed the ‘B+’ long-term issuer rating on NSB’s senior unsecured debt.
“We affirmed the rating on NSB because we equalise them with the sovereign credit rating on Sri Lanka (B+/Negative/B),” a statement said.
The full rating report follows:
SINGAPORE (S&P Global Ratings) June 10, 2016–S&P Global Ratings said today that it had affirmed its ‘B+’ long-term issuer credit rating on National Savings Bank (NSB). The outlook is negative. We also affirmed our ‘B’ short-term issuer credit rating on the Sri Lanka-based bank. At the same time, we affirmed our ‘B+’ long-term issue ratings on NSB’s senior unsecured debt.
We affirmed the ratings on NSB because we equalize them with the sovereign credit rating on Sri Lanka (B+/Negative/B).
The government fully owns NSB. We consider the bank to be a key public policy institution, benefiting from ongoing and potential extraordinary support from the government. This approach is based on our methodology of rating government-related entities. However, our rating on NSB incorporates no uplift because of this factor, given that the bank’s ‘b+’ stand-alone credit profile (SACP) is already equal to the sovereign rating.
"We believe the Sri Lankan government is almost certain to provide extraordinary support to NSB, if needed," said S&P Global Ratings credit analyst Amit Pandey.
Our view is based on our assessment of the critical importance of NSB’s policy role and its integral link with the government. This support is legalized through an act of parliament (the National Savings Bank Act), through which the bank was established in 1972.
NSB is integrally linked to the sovereign through the government’s sole ownership. The government maintains full control over the bank’s management by appointing its chairman and board of directors. It also exercises a high degree of control over the bank’s strategic and budgetary decisions. The government guarantees all NSB’s deposits and savings certificates.
In our opinion, the bank’s critical role stems from its function as a pseudo-funding vehicle for the government. The National Savings Bank Act requires the bank to invest at least 60% of its deposits in government securities. Four entities of national significance in the savings movement were combined to form NSB. The bank’s key objective is to mobilize retail savings to obtain a higher investment rate and sustain Sri Lanka’s GDP growth.
NSB’s SACP reflects the bank’s challenging operating environment, very weak capitalization, and volatile earnings. NSB’s satisfactory business position and robust funding and liquidity temper these weaknesses.
"The negative outlook on NSB reflects the outlook on the sovereign credit rating on Sri Lanka and our expectation that the bank’s role for, and link to, the government will remain unchanged over the next few years," said Mr. Pandey.
We do not rate financial institutions in Sri Lanka above the sovereign because of the direct and indirect influence that the sovereign in distress would have on their operations, including their ability to service foreign-currency obligations.
In our view, the sovereign credit factors are relevant for NSB because: (1) the bank is subject to government policy and regulation; (2) it invests a sizable portion of its assets in government securities or credit; (3) a high proportion of its revenue comes from domestic operations that are susceptible to deterioration in macroeconomic environment typically associated with sovereign stress; and (4) it relies on the government to derive foreign currency to repay or hedge its foreign currency liabilities.
We could downgrade NSB if we lower the sovereign credit rating. We could lower our ratings on Sri Lanka in the next 12 months if we see no tangible signs of a substantial and sustained reversal of the weakening of external and fiscal credit metrics we currently project.
(Colombo/June 10 2016)