November 23, Colombo (LNW): Fitch Ratings stated that Sri Lankan banks’ operating environment and credit profiles could improve with a better sovereign credit profile, particularly after completing foreign-currency debt restructuring.
Sri Lanka’s current sovereign ratings of Long-Term Foreign-Currency IDR: RD and Long-Term Local-Currency IDR: CCC- indicate the financial challenges faced by the country. These ratings directly impact the banks due to their significant exposure to domestic economic conditions, including 33.4% of assets in local-currency treasury instruments and 3.4% in foreign-currency instruments as of mid-2024.
The rating agency noted that improved sovereign financial health would enhance the national ratings of large Sri Lankan banks, reflecting their relative creditworthiness compared to other issuers. Fitch emphasized that state-owned banks have higher sovereign exposure, particularly in lending to public sector entities, and their ratings currently exclude assumptions of government support due to the state’s financial constraints.
With pressures on liquidity easing and banks actively preserving their resources, Fitch expects Sri Lanka’s banks to regain access to foreign-currency wholesale funding once the sovereign credit profile is restored. A successful debt restructuring is anticipated to significantly reduce challenges for the banking sector and improve financial conditions.
Fitch recalibrated its Sri Lankan national rating scale in January 2023 following the sovereign downgrade to CC, illustrating the interconnectedness of sovereign and institutional creditworthiness. A sustained improvement in the sovereign’s financial flexibility could reshape the banking sector’s outlook and enhance stability in the broader financial system.
