ECONOMYNEXT – Around 39 per cent of assets of top banks in the country are exposed to the ‘CCC’ rated Sri Lanka government, and key lenders also hold most of the dollar-denominated domestic bonds and 15.5 per cent of all international sovereign bonds, Fitch Ratings said.
Banks also have rupee-denominated bills and bonds issued by the government.
“The exposure of Fitch-rated domestic banks to the sovereign is significant, accounting for 39 per cent of combined assets and 471 per cent of equity at end-2020,” the rating agency said.
“Off-balance-sheet exposure accounted for a further 4 per cent of assets and 51 per cent of equity.”
Sri Lanka is now rated at ‘CCC’ which is barely above default but authorities have said all foreign debt will be repaid. A billion US dollar sovereign bond falls due in July.
The average hair cut on defaulted sovereign debt from 1970 and 2014 was 37.4 per cent.
If the ratio was applied, Tier I capital adequacy or common equity Tier 1 (CET1) would fall below the required rate in the case of state-run Bank of Ceylon and near the regulatory minimum for Commercial Bank and Hatton National Bank for top private banks.
A missed payment or a debt restructuring could be listed as sovereign default under Fitch criteria, especially if leading to losses on private-sector claims on local- or foreign -currency obligations.
“Aside from their government securities holdings, banks also have direct local- and foreign -currency exposure to the sovereign through loans to the government, and indirect exposure via lending to public-sector entities,” Fitch said.
“A significant share of this lending is backed by government guarantees and mostly resides on the balance sheets of large state banks.
“Lending to the government and public-sector entities surged in 2020, with large state commercial banks recording a 25 per cent rise in gross loans during the year.”