ICRA Lanka has placed the ratings of Bank of Ceylon, People’s Bank, DFCC Bank PLC and Union Bank of Colombo PLC on Watch with Negative Implications
The rating action takes into account the intensified risk in the banking sector, particularly the Licensed Commercial Banking (LCB) sector from the effects of the sharply weakened foreign reserve position of the country, and the deteriorating sovereign credit profile. As part of the debt restructuring process, the Central Bank of Sri Lanka (CBSL) on April 12, 2022 announced the suspension of servicing all foreign debts. However, the CBSL excluded the suspension of Sri Lanka Development Bonds (SLDB) from above given the large quantity of the same being held by the state-owned banks.
ICRA Lanka takes some comfort from the relatively low exposure on the International Sovereign Bonds (ISBs) by ICRA rated LCBs. However, ICRA Lanka does not drive much comfort from the same as the extremely weak foreign currency position of the country would exert pressure on all the dollar-denominated liabilities. In addition, ICRA Lanka takes cognizance of the higher impairment costs of these exposures that would affect the capital buffers of the banks.
Also, ICRA Lanka notes the weakening sovereign credit profile would affect the funding flexibility of the local LCB sector, as the banks are increasingly constrained in terms of foreign funding. The heightened counterparty risk would also affect the trade-related activities of the banks.
ICRA Lanka’s rating Watch with Negative Implications also factors in the core margin compression in CY2022 due to the sharp increase in systemic interest rates. In addition to this, ICRA Lanka envisages marked-to-market losses on the debt instruments (primarily treasury securities) held at fair value, due to this sharp rate increase. From ICRA Lanka rated LCBs, DFCC Bank PLC and Union Bank of Colombo has placed the majority of its treasury investments at fair value through other comprehensive income; and therefore, will have a larger impact on their capitalization profiles, while Bank of Ceylon and People’s Bank have recognized the bulk at amortized cost.
Finally, ICRA Lanka also expects the current challenging operating environment to exert pressure on the asset quality levels of the banking sector, despite the healthy recovery witnessed post-COVID. Overall GNPA levels of the LCB sector improved to 4.27% by Dec-21 from the peak levels of 5.27% in June-20. However, the same is expected to deteriorate over in Q2 and Q3 CY2022 as the current operating environment has affected several segments of the economy, including the SME sector.
The current rating action does not cover MCB Bank (Sri Lanka Branch) and Habib Bank Limited (Sri Lanka Branch) as the ratings of the two entities are primarily driven by the strength of their parents.
For arriving at the ratings, ICRA has applied its rating methodologies as indicated below. Links to applicable criteria: ICRA Lanka’s Credit Rating Methodology for Banks
|Sachini Costa |
Subsidiary of ICRA Limited
CORPORATE OFFICELevel10, East Tower, World Trade Center, Colombo 01, Sri Lanka Tel:+94 11 4339907;Fax:+94112333307 Email:firstname.lastname@example.org; Website:www.icralanka.com
© Copyright, 2022 ICRA Lanka Limited. All Rights Reserved. Contents may be used freely with due acknowledgement to ICRA Lanka.
ICRA Lanka ratings should not be treated as recommendations to buy, sell or hold the rated debt instruments. ICRA Lanka ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA Lanka rating is a symbolic indicator of ICRA Lanka’s current opinion on the relative capability of the issuer concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icralanka.com or contact ICRA Lanka’s office for the latest information on the outstanding ICRA Lanka ratings.
All information contained herein has been obtained by ICRA Lanka from sources believed by it to be accurate and reliable, including the rated issuer. ICRA Lanka however has not conducted any audit of the rated issuer or of the information provided by it. While reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any kind, and ICRA Lanka in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information.
ICRA Lanka does not take any responsibility for accuracy of material/documents prepared or published by other parties based on this document. All ICRA Lanka official rating rationales are prepared in English and external parties may present or publish translated versions of the same. Readers are henceforth advised to refer to the ICRA Lanka’s official rating rationale in the event of any inconsistency found in such documents.
ICRA Lanka or any of its group companies may have provided services other than rating to the issuer rated. All information contained herein must be construed solely as statements of opinion, and ICRA Lanka shall not be liable for any losses incurred by users from any use of this publication or its contents.