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Friday August 12th, 2022

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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Comments (1)

Your email address will not be published.

  1. jeewantha B J says:

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

Sri Lanka cancels visa of Scotswoman who documented anti-govt protests

ECONOMYNEXT – Sri Lanka’s Department of Immigration and Emigration has cancelled the visa of Kayleigh Fraser, a Scotswoman who had been documenting the country’s anti-government protests on social media.

Immigration officers had approached Fraser at her home on August 02 and confiscated her passport.

“This is what will happen if you raise your voice against state violence in Sri Lanka,” Fraser wrote on Wednesday August 10, posting a letter ordering her to leave the country by August 15.

“I am proud to have been a part of this. I am proud to have met so many of you. I have… so many social enterprises I want to work on here that I know will benefit so many,” Fraser said on Instagram.

“Deporting me is a massive, massive mistake for this country. The love I have for it and its people appears to be a threat to the current rulers. Does that sound right to you?”

Fraser posted that she was not prepared for the financial cost of flights and relocation, and that all her funds were in Sri Lankan currency, and that banks were not allowing foreign transactions.

Police spokesperson Nihal Thalduwa had told a privately owned news organisation that Fraser was sharing “negative content” about Sri Lanka via her social media.

“It is not right for a foreign national to be in our country and share such mass negative content. She is not a media personnel either, to cover the protests and GotaGoGama,” he has said.

Fraser has been vocal about state sanctioned violence against protestors.

News of Fraser’s deportation has caused a small riot on social media, with many protestors voicing out their support for the foreigner who documented and showed support next to them.

Seemingly indiscriminate arrests of protestors aided by an ongoing State of Emergency have both angered and frightened Sri Lankan protestors, and many active protestors have gone into hiding to evade arrest.

Some protestors said they were “taking a break” or “distancing themselves” due to continued harassment.

However, the authorities maintain that all arrests are in accordance with the law. The government has pointed to acts of retaliatory mob violence on May 09 and the forced occupation of government buildings by protestors on July 09.

“They are calling us terrorists for holding placards. This was such a peaceful protest, the only terrorism carried out was by the government against the people,” said an active protestor, who preferred not to be named.

Fraser wrote that Sri Lankans should not forget that they got to the streets for a system change.

“Live in such a way that your children will thank you for the world they inherit,” she said.

“It’s not over till it’s over. I have an unbelievable amount of high profile people fighting this order for me to leave.”(Colombo/Aug11/2022)

 

 

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Sri Lanka to acquire 35,000MT of petrol; unloading on Aug 12

ECONOMYNEXT-  Sri Lanka to receive a cargo of 35,000 metric tonns of petrol on Thursday August 11 with unloading scheduled for Friday, Minister of Power & Energy Kanchana Wijesekara said.

Wijesekara tweeted that the ship will arrive at the Colombo port Thursday night, and that the payment for the cargo had been completed with the support of the Central Bank by Wednesday.

The minister had said earlier on Wednesday that a separate cargo of crude oil is also expected on Saturday August 13, and from August 19 onwards, locally produced fuel is expected to be released to the market from the Sapugaskanda refinery.

Meanwhile, in an earlier report, Lanka IOC, a local unit of the Indian Oil Corporation (OIC), said a vessel carrying 30,000 metric tons of fuel for LIOC is scheduled to arrive between August 10 and 15.

Related: Three shipments of fuel to arrive in Sri Lanka by mid, end July, August: Lanka IOC

Meanwhile, Wijesekara said that 5.7 million people have signed up for the QR-code facilitated National Fuel Pass.

From July 21 up to now, Wijesekara said, a total of 54.9 million litres of fuel had been sold through 1,053 CPC fuel stations while 207 LIOC stations have sold 11.26 million litres of fuel. (Colombo/Aug11/2022)

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MPs nominated to Sri Lanka’s parliamentary committee on public finance

The sun sets over the Parliament at Shri Jayewardenepura

ECONOMYNEXT – Sri Lanka’s parliament has appointed members to its Committee on Public Finance, Speaker Mahinda Yapa Abeywardena said.

According to his announcement made in parliament on Wednesday August 10, in terms of the provisions of the Standing Order 121 of Parliament, MPs Bandula Gunawardana,  Vidura Wickramanayaka,  Nalin Fernando,  Anura Priyadharshana Yapa,  Vijitha Herath,  Duminda Dissanayake,  Shehan Semasinghe,  Premitha Bandara Tennakoon and Harsha de Silva have been appointed.

Indika Anuruddha Herath,  Siripala Gamalath, Seetha Arambepola, Suren Raghavan,  M A Sumanthiran,   Kavinda Heshan Jayawardhana,  Mujibur Rahuman,  Harshana Rajakaruna,  Chaminda Wijesiri,  Isuru Dodangoda,  Anupa Pasqual and  (Prof) Ranjith Bandara also have been appointed to serve as members in the Committee on Public Finance.

President Ranil Wickremesinghe tabled a proposed framework during his time as Prime Minister under President Gotabaya Rajapaksa for sectoral oversight committees in parliament with the objective of increased bipartisan parliamentary involvement in governance and policy-making.

Wickremesinghe told parliament on July 06 that under such a system, the entire parliament irrespective of party difference will participate in governance.

On July 06, he said he had approached former Speaker of Parliament Karu Jayauriya to formulate a proposal on activating the sectoral oversight committees.

Sectoral Oversight Committees shall function for the duration of Parliament and conduct its inquiries notwithstanding any adjournment or prorogation of Parliament, according to the parliament website.

The Committee of Selection shall determine the subjects and functions to be allocated to each Sectoral Oversight Committee.

The Sectoral Oversight Committees shall have the power to examine any Bill, any subsidiary legislation including Regulation, Resolution, Treaty, Report or any other matter relating to subjects and functions within their jurisdiction.

The Parliament, any Committee or a Minister may refer any matter to a Sectoral Oversight Committee having jurisdiction over the subject or function for its consideration and report. (Colombo/Aug11/2022)

 

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