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Fitch places 13 Lankan banks on Negative Rating Watch

Thirteen Sri Lanka banks are facing heightened near-term downside risk stemming from constrained access  to foreign-currency funding and the resulting indications of stress experienced by the  banks in the system.

 Under these circumstances ,Fitch Ratings yesterday placed the National Long-Term  Ratings of 13 Sri Lankan banks on Rating Watch Negative (RWN). 

The banks are: People’s Bank; Commercial Bank of Ceylon PLC; Hatton National Bank PLC; Sampath Bank PLC; National Development Bank PLC; DFCC Bank PLC; Seylan Bank PLC; Nations Trust Bank PLC; Pan Asia Banking Corporation PLC; Union Bank of Colombo PLC; Amana Bank PLC; SANASA Development Bank PLC and -Housing Development Finance Corporation Bank of Sri Lanka.

Fitch said the RWN reflects heightened near-term downside risk stemming from constrained access  to foreign-currency funding and the resulting indications of stress experienced by the  banks in the system. 

This risk is exacerbated by the sovereign’s credit profile (Long-Term  Foreign-Currency Issuer Default Rating (IDR): CC, Long-Term Local-Currency IDR: CCC) and the ensuing risks to the stability of the financial system.

“Fitch believes mounting currency stress increases the likelihood of restrictions being  imposed on banks’ ability to service their obligations in foreign currency – excluding HDFC, as the bank does not have any outstanding foreign-currency obligations – and local currency in the event of a sovereign default, or prior, should confidence deteriorate,” Fitch said. 

“Its aim is to resolve the RWN in the next six months, depending on the evolution of the banks’ funding and liquidity positions, which could result in multiple notch downgrades. 

 Fitch expressed the belief  that the domestic banks’ foreign-currency funding and liquidity positions are prone  to sudden changes amid already weak creditor sentiment. Loan and deposit dollarisation  for the sector was at 18% of total loans and 17% of total deposits as at end-2021,” Fitch added. 

It said Sri Lanka’s operating environment remains challenging and Fitch’s negative outlook on the  score reflects the significant near- to medium-term downside risk presented by the  weakening sovereign credit profile, as spillover effects could damage the country’s  economic performance.

“This has lead us to revise our 2022 outlook on the banking sector to ‘Deteriorating’, from  ‘Neutral’. Macroeconomic challenges are likely to be greater than we initially anticipated  which could result in a sharp deterioration in asset quality and impaired profitability  metrics that expose the banks to capital deficiencies,” Fitch said. 

It also said the RWN on the ratings of the banks’ senior unsecured debentures, where assigned, stem  from the RWN on the corresponding banks’ National Long-Term Ratings. Sri Lanka  rupee-denoted senior debt, where applicable, is rated at the same level as the National  Long-Term Rating in accordance with Fitch criteria.

 This is because the issues rank  equally with the claims of the banks’ other senior unsecured creditors.

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