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Wednesday May 12th, 2021
Banking

Sri Lanka’s Standard Chartered Bank ‘AAA(lka)’ rating confirmed: Fitch

ECONOMYNEXT – Fitch Ratings has confirmed a ‘AAA(lka)’ rating of Sri Lanka’s Standard Chartered Bank branch amid a rise in bad loans but strong capitalization and support from the main bank, which has a rating higher than the island’s sovereign rating.

The outlook is stable.

“SCB’s Long-Term Issuer Default Rating (IDR) is significantly higher than Sri Lanka’s Long-Term Local- and Foreign-Currency IDRs of ‘CCC’, and the support-driven credit profile of the branch is among the strongest in the universe of Sri Lanka’s rated entities,” Fitch said.

“As a result, SCBSL’s rating is at the highest end of the National Rating scale for Sri Lanka.”

“We expect SCBSL’s financial profile to remain better than local peers in the medium term, reflecting the bank’s healthy underwriting standards and risk controls, which are in line with SCB group practices.”

SCB Sri Lanka’s non-performing loans ratio increased to 2.7 percent by the end of the third quarter of 2020, from 2.2 percent at the end of 2019, driven mostly by retail loans.

The bank’s common equity Tier 1 (CET1) ratio of 16.8 percent at end-3Q20 was higher than the sector’s 13 percetn.

The full statement is reproduced below:

Fitch Affirms Standard Chartered Bank, Sri Lanka Branch at ‘AAA(lka)’; Outlook Stable

Fitch Ratings – Colombo – 08 Apr 2021: Fitch Ratings Lanka has affirmed Standard Chartered Bank, Sri Lanka Branch’s (SCBSL) National Long-Term Rating at ‘AAA(lka)’. The Outlook is Stable.

KEY RATING DRIVERS

SCBSL’s rating is underpinned by Fitch’s expectation of a high probability of support from the head office of Standard Chartered Bank (SCB, A+/Negative/a), if required, subject to any regulatory constraints on remitting money into Sri Lanka.

This expectation is driven by SCBSL’s status as a branch of SCB, thereby a part of the same legal entity. SCB’s Long-Term Issuer Default Rating (IDR) is significantly higher than Sri Lanka’s Long-Term Local- and Foreign-Currency IDRs of ‘CCC’, and the support-driven credit profile of the branch is among the strongest in the universe of Sri Lanka’s rated entities. As a result, SCBSL’s rating is at the highest end of the National Rating scale for Sri Lanka.

Our assessment of support captures the alignment of SCBSL’s strategic objectives and its strong operational integration with SCB group. The small size of the branch, which accounts for around 0.1% of SCB’s total assets, implies that support, if needed, would not be material to the head office.

We expect SCBSL’s financial profile to remain better than local peers in the medium term, reflecting the bank’s healthy underwriting standards and risk controls, which are in line with SCB group practices. SCBSL’s non-performing loans ratio increased to 2.7% by end-3Q20 (end-2019: 2.2%), driven mostly by retail loans, but remained better than the sector’s 5.3%. Furthermore, SCBSL’s common equity Tier 1 (CET1) ratio of 16.8% at end-3Q20 was higher than the sector’s 13%. We also believe that SCBSL’s funding and liquidity profile will remain steady in the medium term, underpinned by a healthy share of customer deposits and the availability of inter-group funding.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
There is no rating upside for the National Long-Term Rating as it is already at the highest point on the scale.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

A downgrade of SCBSL’s rating is most likely to result from significant changes to Fitch’s expectation of support from SCB, such as a change in the branch’s legal status or the branch being divested. There could be pressure on the rating should SCB’s Long-Term IDR fall below ‘BB-‘ , although Fitch sees that as highly unlikely in the near to medium term.

Significant change in National Rating relativities in Sri Lanka’s rating universe could also lead to a downgrade of SCBSL’s National Rating.

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.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

SCBSL’s rating is linked with SCB’s Long-Term IDR, based on the legal status as a branch of SCB.

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