Sri Lanka’s NSB, Bank of Ceylon, People’s ratings confirmed by Fitch; outlooks stable

ECONOMYNEXT – Fitch Ratings said it is confirming ratings of state-run National Savings Bank, Bank of Ceylon and People’s Bank with stable outlooks based on expected support from the government.

The issuer default rating has been confirmed at ‘B’ for NSB and Bank of Ceylon.

“The National Long-Term Rating of People’s Bank reflect Fitch’s expectation of extraordinary support from the sovereign (B/Stable).

The domestic rating has been confirmed at ‘AA+(lka) for all three Sri Lanka state banks.

The full statement is reproduced below:

Fitch Ratings-Colombo/Hong Kong-02 September 2019: Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of the following Sri Lanka-based banks:

– National Savings Bank (NSB) at ‘B’; Outlook Stable

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– Bank of Ceylon (BOC) at ‘B’; Outlook Stable

Fitch has also affirmed the National Long-Term Ratings of the following banks:

– NSB at ‘AA+(lka)’; Outlook Stable

– BOC at ‘AA+(lka)’; Outlook Stable

– People’s Bank (Sri Lanka) at ‘AA+(lka)’; Outlook Stable

At the same time, Fitch has affirmed and withdrawn the rating on BOC’s proposed Basel III
compliant Sri Lanka rupee-denominated subordinated debentures at ‘AA(lka)’, as the issuance has
not taken place.

A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

IDRS, NATIONAL RATINGS, VIABILITY RATINGS AND SENIOR DEBT

The IDRs and National Long-Term Ratings of NSB and BOC and the National Long-Term Rating of
People’s Bank reflect Fitch’s expectation of extraordinary support from the sovereign (B/Stable).

NSB

Fitch believes state support for NSB stems from its policy mandate of mobilising retail savings and
investing them in government securities as well as its systemic importance and full government
ownership.

NSB is the only bank in Sri Lanka to carry an explicit government guarantee on its
deposits, although the benefit of this is offset by the state’s weak ability to provide support, as
reflected in the low sovereign rating. Fitch has not assigned a Viability Rating to NSB as it is a policy
bank.

The US-dollar senior unsecured notes issued by NSB are rated at the same level as the bank’s
Long-Term Foreign-Currency IDR, as they rank equally with the bank’s other senior unsecured
obligations. The notes have a Recovery Rating of ‘RR4′, which indicates typical historical recovery
prospects of 31%-50%. This reflects Fitch’s view of average recovery prospects for unsecured
senior creditors in case of default.

BOC

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Fitch expects support for BOC to stem from its high systemic importance, quasi-sovereign status,
its role as one of the key lenders to the government and full state ownership.

BOC’s Viability Rating reflects its thin capitalisation and asset-quality pressures amid a challenging
operating environment. This is partly balanced by a stronger domestic funding franchise than the
majority of sector peers. Fitch considers state support as BOC’s primary rating driver, even though
its Viability Rating is at the same level as its Support Rating Floor.

People’s Bank

Fitch expects support for People’s Bank to stem from its high systemic importance,
quasi-sovereign status, its role as one of the key lenders to the government and full state
ownership.

SUPPORT RATING AND SUPPORT RATING FLOOR

The Support Ratings and Support Rating Floors of NSB and BOC reflect the state’s ability and
propensity to provide support to the banks given their high importance to the state and high
systemic importance.

SUBORDINATED DEBT

BOC’s old-style Basel II and proposed Basel III compliant Tier 2 Sri Lanka rupee-denominated
subordinated debt is rated one notch below its National Long-Term Rating to reflect the
subordination to senior unsecured creditors.

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RATING SENSITIVITIES

IDRS, NATIONAL RATINGS, VIABILITY RATINGS AND SENIOR DEBT

Changes to Sri Lanka’s sovereign rating and/or in Fitch’s perception of state support for the banks
could result in a change in the banks’ IDRs and the National Long-Term Ratings of NSB, BOC and
People’s Bank.

NSB

A lower expectation of state support, a substantial change in NSB’s policy role or a deviation from
mandated core activities, indicating the bank’s reduced importance to the state, could trigger a
rating downgrade. However, this is not our base case scenario.

NSB’s senior debt rating is sensitive to changes in the bank’s Long-Term IDRs. The Recovery Rating
on the bank’s notes is sensitive to Fitch’s assessment of potential recoveries for creditors in case of
default or non-performance.

BOC

A downgrade of BOC’s IDRs and National Long-Term Rating would most likely result from negative
rating action on the sovereign, which could weaken the state’s ability to support the bank.

BOC’s Viability Rating may come under pressure if there is a continued decline in capitalisation
through a surge in lending or high dividends. Further deterioration in the operating environment,
leading to sustained weakening of BOC’s key credit metrics, could also place negative pressure on
its rating.

SUPPORT RATING AND SUPPORT RATING FLOOR

Lower propensity of the state to support systemically important banks could result in downward
pressure on BOC’s and NSB’s Support Ratings and Support Rating Floors, but Fitch believes this to
be unlikely in the medium term. Changes in the sovereign rating could also affect BOC’s and NSB’s

Support Ratings and Support Rating Floors.

SUBORDINATED DEBT

BOC’s subordinated debt ratings will move in tandem with its National Long-Term Rating.
The rating actions are as follows:

National Savings Bank:

Long-Term Foreign-Currency IDR affirmed at ‘B’; Stable Outlook

Long-Term Local-Currency IDR affirmed at ‘B’; Stable Outlook

Short-Term Foreign-Currency IDR affirmed at ‘B’

National Long-Term Rating affirmed at ‘AA+(lka)’; Stable Outlook

Support Rating affirmed at ‘4’

Support Rating Floor affirmed at ‘B’

US dollar senior unsecured notes affirmed at ‘B’; Recovery Rating at ‘RR4’
Bank of Ceylon:

Long-Term Foreign-Currency IDR affirmed at ‘B’; Stable Outlook

Long-Term Local-Currency IDR affirmed at ‘B’; Stable Outlook

Short-Term Foreign-Currency IDR affirmed at ‘B’

National Long-Term Rating affirmed at ‘AA+(lka)’; Stable Outlook

Viability Rating affirmed at ‘b’

Support Rating affirmed at ‘4’

Support Rating Floor affirmed at ‘B’

Basel II compliant Sri Lanka rupee-denominated subordinated debentures affirmed at ‘AA(lka)’
Proposed Basel III compliant Sri Lanka rupee-denominated subordinated debentures affirmed at
‘AA(lka)’; Withdrawn

People’s Bank (Sri Lanka):

National Long-Term Rating affirmed at ‘AA+(lka)’; Outlook Stable. (Colombo/Sept03/2019)