Moody’s downgrades three Sri Lankan banks

Moody’s Investors Service today downgraded the long-term foreign and local currency deposit ratings of three banks in Sri Lanka.

Moody’s has downgraded the long-term foreign currency deposit ratings of Bank of Ceylon (BOC), Hatton National Bank PLC (HNB) and Sampath Bank PLC (Sampath) to Caa1 from B3, and the banks’ long-term local currency deposit ratings to Caa1 from B2.

At the same time, Moody’s has downgraded the Baseline Credit Assessment (BCA) of BOC to caa1 from b3, and those of HNB and Sampath to caa1 from b2.

The rating outlooks, where applicable, are stable.

Moody’s said today’s rating actions conclude the review for downgrade that was initiated on 20 April 2020, and follow Moody’s downgrade on 28 September 2020 of Sri Lanka’s sovereign rating to Caa1 from B2, with a stable outlook.

The downgrade of the BCAs of BOC, HNB and Sampath is driven by the downgrade of Sri Lanka’s sovereign rating.

The three banks have significant credit exposure to the sovereign through their holdings of government securities and lending to the domestic economy, which is itself correlated to sovereign creditworthiness.

Moody’s has also lowered Sri Lanka’s Macro Profile — a key input to the banks’ BCAs — to Weak- from Weak, to reflect the deterioration in the operating environment.

In particular, the coronavirus outbreak has weighed on Sri Lanka’s already weak economy and has weakened the government’s fiscal position.

Moody’s expects the banks’ asset quality to worsen significantly as a result of coronavirus disruptions, although the increase in problem loans will not be evident until 2021 because of regulatory forbearance measures, including a moratorium on loan repayments.

The banks’ profitability will also deteriorate largely because of higher credit costs and a compression in net interest margins following successive policy rate cuts by the central bank. The banks’ capital and funding will, however, remain as key strengths.

Moody’s incorporates a high or very high level of government support in the long-term deposit ratings of the three banks.

However, this does not lead to any rating uplift because the banks’ BCAs are already at the same level as the sovereign rating.

Moody’s will subsequently withdraw the ratings of BOC for its own business reasons.

Bank of Ceylon, headquartered in Colombo, reported total assets of LKR2,722 billion at 30 June 2020.

Hatton National Bank PLC, headquartered in Colombo, reported total assets of LKR1,244 billion at 30 June 2020.

Sampath Bank PLC, headquartered in Colombo, reported total assets of LKR1,045 billion at 30 June 2020. (Colombo Gazette)