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Tuesday January 31st, 2023

Sri Lanka’s Bank of Ceylon downgraded to RD

ECONOMYNEXT – Fitch Ratings has downgraded the rating of Sri Lanka’s Bank of Ceylon’s foreign currency rating to ‘Restricted Default’ from ‘CC’ after earlier downgrading the sovereign rating to RD after the country defaulted on most of its external debt.

“Fitch Ratings has been made aware of missed payments on BOC’s foreign-currency obligations which underpins our rating action…” the agencys said.

“We believe the foreign-currency funding and liquidity profile is highly stretched, and also believe this is exacerbated by the sovereign’s debilitated credit profile.”

The state banks have also been used by government bureaucrats to fund deficits.

Fitch Downgrades BOC’s Foreign Currency IDRs to RD; Fitch Downgrades BOC’s Foreign Currency IDRs to RD>

Fitch Ratings – Colombo – 24 Jun 2022: Fitch Ratings has downgraded Bank of Ceylon’s (BOC) Long- and Short-Term Foreign Currency (FC) Issuer Default Ratings (IDRs) to ‘RD’ (Restricted Default) from ‘CC’ and ‘C’, respectively.

Fitch has also downgraded the Viability Rating (VR) to ‘f’ from ‘cc’, and removed the ratings from Rating Watch Negative (RWN). The rating actions are in accordance with Fitch’s rating definitions.

At the same time, Fitch has maintained BOC’s Long-Term Local-Currency (LT LC) IDR of ‘CCC’ on RWN as well as its National Long Term Rating of ‘AA-(lka)’.

A full list of the rating actions is detailed below.

KEY RATING DRIVERS

Fitch Ratings has been made aware of missed payments on BOC’s foreign-currency obligations which underpins our rating action on its LT FC IDR, ST FC IDR and VR. We believe the foreign-currency funding and liquidity profile is highly stretched, and also believe this is exacerbated by the sovereign’s debilitated credit profile (Long-Term Foreign-Currency IDR of ‘RD’ and Long-Term Local-Currency IDR of ‘CCC’). Please see “Correction: Fitch Downgrades Sri Lanka to ‘RD'”.

Local-Currency Ratings Unchanged: BOC’s LT LC IDR takes into consideration that the risk of local-currency restrictions being imposed is lower than that of foreign-currency restrictions, should there be any, due to the sovereign having defaulted on its foreign-currency obligations. It reflects our view of the sovereign’s current and likely continued access to local-currency funding. The bank has so far maintained access to local-currency liquidity, such as via the Central Bank of Sri Lanka (CBSL).
The RWN on BOC’s National-Long Term Rating reflects the RWN on its LT LC IDR and also the potential for the bank’s creditworthiness relative to other Sri Lankan national scale ratings to deteriorate, given the potential stress on bank’s funding and liquidity, and also its significant exposure to the sovereign and broader public sector that raises its risk profile.

Funding and Liquidity is Weakest Link: BOC’s ability to honour its senior, foreign currency obligations has been significantly impeded by the sovereign’s worsening credit profile which has limited the bank’s access to foreign currency funding and liquidity. We believe that any foreign-currency liquidity flows from the state or the CBSL is unlikely to be forthcoming, given the sovereign’s default status and precarious reserve position.

Rupee liquidity has also tightened following the bank’s excessive lending to the state in 2021, but we expect local-currency liquidity to be much more manageable than foreign currency, supported by BOC’s strong domestic franchise as well as its ability to access the CBSL liquidity.

OE Remains Challenging: The current operating environment (OE) score of ‘ccc’/negative reflects the pressure on the Sri Lankan banks’ OE and their already stressed credit profiles following the sovereign’s default on its foreign-currency obligations. The score also captures the rapid deterioration in the broader macroeconomic environment which has limited BOC’s operational flexibility. The negative outlook on the OE score reflects significant near- to medium-term downside risks presented by the weakening sovereign credit profile.

Economic Instability Pressures Business Profile: We have maintained BOC’s business profile score at ‘ccc’/negative to reflect the vulnerability of the bank to heightened risks in the domestic market, which affects its ability to generate and defend business volume. As such, BOC’s business profile score is constrained by our assessment of the OE. The negative outlook captures pressure on the business profile stemming from the OE and, ultimately, the sovereign.

Significant Exposure to Sovereign: We maintain BOC’s risk profile score at ‘cc’/negative, to reflect BOC’s significant exposure to the sovereign’s weak credit profile via its loan book exposures, off-balance sheet liabilities, as well as its investment securities making the bank vulnerable to the sovereign’s repayment capacity and liquidity position. The negative outlook reflects downside risk to the risk profile from the OE and sovereign.

Asset Quality Weaker than Private Peers: BOC’s underlying asset quality is significantly weaker relative to its private counterparts on account of its large exposure to the sovereign and broader public sector, as reflected in the ‘cc’ score. The score also reflects rising pressure on its non-state loan exposures as corporate and household balance sheets deteriorate significantly amidst worsening macroeconomic conditions. The negative outlook reflects our view of downside risk to the asset-quality score from its exposure to the sovereign and the OE.

Core profitability Under Pressure: We have lowered BOC’s earnings and profitability score to ‘ccc’/negative from ‘ccc+’/negative, underpinned by our view that the difficult OE is likely to constrain the bank’s earnings and profitability. We believe that the sovereign default and ensuing macroeconomic challenges increases the possibility of BOC becoming structurally unprofitable. The negative outlook on the score is due to the downside risk from potential economic fallout.

Significant Pressure on Capital: We maintain capitalisation and leverage score at ‘ccc’/negative, as we believe that capital deficiencies may arise in a very likely scenario that the bank has to absorb a haircut on its foreign-currency government securities exposure, thus requiring a capital injection. This is in conjunction with the heightened constraints on accessing capital, given the sovereign’s weak ability to provide support. The negative outlook reflects downside risk to capitalisation and leverage in a scenario of increased sovereign stress, particularly on local currency.

RATING SENSITIVITIES

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

The LT IDR, ST IDR and VR are already at the lowest level and thus have no downside risk.
We expect to resolve the RWN on BOC’s LT LC IDR and national rating when the impact on the bank’s credit profile becomes more apparent, which may take longer than six months. Potential triggers that could lead to a downgrade include:

– funding stress that impedes bank’s repayment ability in local currency

– significant banking-sector intervention by authorities that constrain banks’ ability to service their local currency obligations

– a temporary negotiated waiver or standstill agreement following a payment default on a large local-currency financial obligation

– where Fitch believes a bank has entered into a grace or cure period following non-payment of a large local current financial obligation.

GOVERNMENT SUPPORT RATING

The rating is already at its lowest level, and thus has no downside risk. Factors that could, individually or collectively, lead to positive rating action/upgrade:

The LT IDR, ST IDR and VR are unlikely to be upgraded until Fitch believes that BOC is able to meet its foreign-currency obligations in full and in a timely manner – as evident from a material improvement in its foreign-currency funding and liquidity position. We believe any upgrade to the ratings would likely be tied to the trajectory of Sri Lanka’s sovereign rating – given BOC’s large exposure to the latter – while also taking into consideration other weaknesses in the bank’s credit profile and performance challenges that domestic banks are facing.

There is limited scope for upward rating action on the LT LC IDR and National Rating in light of the RWN, and the negative outlook we have on all rating factors.

GOVERNMENT SUPPORT RATING

The Government Support Rating is constrained by the sovereign rating. An upward revision is possible, provided the sovereign’s ability to provide support significantly improves. However, this appears unlikely in the near to medium term.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

The RWN on the subordinated debt stems from the RWN on the National Long-Term Rating. The Basel II Sri Lankan rupee-denominated subordinated debt of BOC is rated two notches below its National Long-Term Rating, in line with Fitch’s baseline notching for loss severity for this type of debt and our expectations of poor recovery. OTHER DEBT AND ISSUER RATINGS:

RATING SENSITIVITIES

BOC’s subordinated debt rating will move in tandem with the National-Long Term Rating. VR ADJUSTMENTS
The assigned VR is below the implied VR, reflecting a negative adjustment from the weakest link of BOC’s funding and liquidity, which has a greater impact on the VR than what the weighting suggests.
BOC has a 1.78% equity stake in Fitch Ratings Lanka Ltd. No shareholder other than Fitch, Inc. is involved in the day-to-day rating operations of, or credit reviews undertaken by, Fitch Ratings Lanka Ltd.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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.

ESG CONSIDERATIONS

Bank of Ceylon has an ESG Relevance Score of ‘4’ for Governance Structure due to ownership concentration, with a 100% state shareholding and several related-party transactions with the state and state-owned entities, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.

Bank of Ceylon has an ESG Relevance Score of ‘4’ for Financial Transparency. It reflects our view that the recent regulatory forbearance measured announced by the Central Bank of Sri Lanka could distort the true solvency and liquidity position of the bank thereby limiting financial transparency.

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  1. jeewantha B J says:

    People will not hesitate to support if all transactions are done in a transparent manner

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  1. jeewantha B J says:

    People will not hesitate to support if all transactions are done in a transparent manner

Sri Lanka shares down for 2nd day as tax hike, delay in Chinese debt assurance weigh

ECONOMYNEXT – Sri Lanka’s shares edged down on Tuesday as worries over delay in financial assurances from China which is mandatory for a $2.9 billion dollar IMF loan and rise in protests against tax hike kept investors in check, analysts said.

The main All Share Price Index (ASPI) edged down by 0.28 percent or 24.62 points to 8,865.05. It fell for the second session after hitting more than three-month high.

“The market is looking for more macro cues because of faster Chinese debt assurance was expected. The market is also hit by fall in corporate earnings due to high taxes,” an analyst said.

China has given an initial response on debt re-structuring to Sri Lanka though analysts familiar with the process say it is not a ‘hard assurance’ sufficient for the IMF program to go through.

The International Monetary Fund is working with China on extending maturities of Chinese loans to defaulted countries like Sri Lanka, as there is resistance to hair-cuts, Managing Director Kristalina Georgieva told reporters on January 14.
The earnings for first quarter are expected to be negative for many corporates with higher taxes and rising costs. However, investors had not expected earnings to be low in the December quarter because of year end pick ups on heavy counters, the analyst said.
Earnings in the second quarter of 2023 are expected to be more positive with the anticipation of IMF loan and possible reduction in the market interest rates as the tax revenue has started to generate funds.

However, the central bank said the IMF deal is likely in the first quarter or in the first month of the second quarter.

The most liquid index S&P SL20 dropped by 0.64 percent or 17.74 points to 2,764.51 points.

The central bank has said it could cut interest rates in future when the country sees fall in inflation, which has already started decelerating.

The market saw a turnover of 1.7 billion rupees, slightly lower than the month’s daily average of 1.8 billion rupees and while being significantly lower than 2022’s daily average turnover of 2.9 billion rupees.

The bourse saw a net foreign inflow (NFI) of 93 million rupees extending the net offshore buying to 413 million rupees so far this year.

Top losers were LOLC, Royal Ceramics Limited and Hayleys. (Colombo/Jan31/2023)

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Sri Lanka exports fall in December as global recession weighs

ECONOMYNEXT – Sri Lanka’s merchandise exports earnings fell 9.7 percent in December year-on-year as the island nation saw a drop in buying from its key export destinations which are facing a looming recession after the Russia-Ukraine war.

The earnings from the merchandise exports recorded $1.04 billion  in December 2022 compared to the same month in the previous year as per the data released by the Sri Lanka Customs.

“This was mainly due to the decrease in export earnings from Apparel & Textiles, Tea, Rubber based Products, and Coconut based Products, Food & Beverages, Spices & Essential Oils and Fisheries products,” the Export Development Board (EDB) said in a statement.

“The reason for this decline was due to the ongoing recession in major markets due to rising cost of production, energy etc. Imports declined sharply due to inflation and demand for goods and services are reduced.”

However, Sri Lanka saw a record export earning of $13.1 billion in 2022 due to increased demand in the key exports throughout the year

Earnings from all major product sectors except Electrical & Electronic components as well as Diamonds, Gems & Jewellery fell in December.

Exports of Apparel & Textiles decreased by 9.6 percent to $480.3 million in December 2022.  Export earnings from Tea fell by 3 percent to $107.3 million, Rubber and Rubber Finished products dropped 20.3 percent to $74.5 million,

However, export earnings from the Electrical & Electronics Components increased by 16.18 percent to $42.9 million in December 2022, while Diamond, Gems & Jewelry jumped 35.7 percent to $30.8 million. (Colombo/Jan31/2023)

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Sri Lanka records over 6,000 dengue cases in first three weeks of January

ECONOMYNEXT – Sri Lanka recorded over than 6,000 dengue cases in the first three weeks of January 2023 after a spell of heavy monsoon rain though a drop in cases is likely from February, officials said.

Health officials identified 6,204 dengue patients by January 22, up from 5,793 recorded in the corresponding period last year.

“A rise in cases can be observed in the November-January period with the heavy rain due to the northeast monsoon,” an official from the National Dengue Control Unit told EconomyNext.

Of all reported cases, 46.3 percent were from the Western Province, official reports showed.

Akuressa, Batticaloa, Eravur, Trincomalee, Madampe, Badulla, Eheliyagoda, Kegalle, Kalmunai North and Alayadivembu MOH areas were identified as high-risk areas for dengue during the third week of January by the health officials.

“We are expecting a decline in dengue cases soon. The Western province is always in the top position with the highest number of dengue cases. Apart from that, we are seeing a higher number of cases during this period in areas like Puttalam, Jaffna districts. A certain number of cases have also been recorded in the Kandy district,” the official said.

“Usually the cases peak in December, but they decline by February. This year, too, we are facing this scenario. There is an increase of dengue during the months of November, December and January”.

Due to the economic situation in the country, the Public Health Inspectors (PHIs) in an earlier report said, diesel and pesticides are not being provided by the ministry.

However, rejecting the allegation, the official from the NDCU said the government has provided enough funds for get the necessary pesticides but it is being used according to a scientific method to avoid building a resistance in the dengue mosquito.

“The recommendation is to do the fogging if there is a dengue outbreak or if there are few patients reported from the same locality.

“If you use this pesticide haphazardly, the mosquitos will develop resistance against it,” the official said, adding that there are adequate stocks of the chemical available. (Colombo/ Jan 31/2023)

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