Fitch Ratings Lanka has upgraded the National Long-Term Ratings of Union Bank of Colombo PLC (UB) to ‘BBB-(lka)’ from ‘BB+(lka)’ and of Cargills Bank Ltd (CBL) to ‘A-(lka)’ from ‘BB(lka)’. The Outlooks are Stable.
The agency has also affirmed the National Long-Term Ratings of Amana Bank PLC, Nations Trust Bank PLC (NTB), Pan Asia Banking Corporation PLC (PABC), SANASA Development Bank PLC (SDB) and Housing Development Finance Corporation Bank of Sri Lanka (HDFC). The rating actions follow Fitch’s periodic review of Sri Lanka’s small and mid-sized bank peer group. The agency maintains the negative outlook on Sri Lanka’s banking sector, as we expect challenging operating conditions to persist in 2019.
Fitch expects the banks’ ratings to be weighed down by their high-risk appetites as they pursue above-sector loan expansion in the medium term, which will pressure their already-thin capital buffers. The ratings also take into account these banks’ small franchises.
Fitch expects credit risks to linger in 2019 due to the banks’ exposure to the more susceptible customer segments at a time when the country faces domestic and external challenges. The banks’ profitability metrics are likely to remain weak owing to high impairment losses and effective taxes.
PABC, HDFC, Amana and CBL need to raise equity to meet the enhanced capital requirements by end-2020; capital raising could be more difficult for these banks than for larger peers.
UB: The upgrade of UB’s rating reflects its risk profile, which has improved in the previous few years, as indicated by a more diversified loan book, increased profitability and higher-than-average capitalisation. The rating also takes into account the bank’s small franchise and still-high exposure to vulnerable customer segments. CBL:The multiple-notch upgrade of CBL’s rating follows Fitch’s assessment of support from its ultimate parent, CT Holdings PLC (CTH), and our expectation that the bank is likely to receive extraordinarysupport from its ultimate parent, if needed.
NTB: NTB’s ratings reflect its higher-than-peer product concentration, with leasing and credit cards forming 20% and 11%, respectively, of its loan book, and modest franchise, with 2.8% of systemassets at end-2018. PABC: PABC’s rating reflects pressure on the bank’s capital due to downside risks from asset quality and earnings. The ratings also reflect PABC’s high-risk appetite, as seen through its predominant exposure to the retail and SME segments, which accounted for 51% and 33%, respectively, of total loans..
SDB: SDB’s rating reflects its weak capital buffers, high-risk appetite and small franchise.
Fitch believes it would be challenging for the bank to maintain adequate capital buffers that are commensurate with its risk appetite in light of its weak profitability and in the absence of sufficient capital infusions.
HDFC: HDFC’s rating reflects the bank’s high-risk appetite, limited access to capital markets and weaker-than-average asset quality and profitability owing to its large exposure to low and middle-income customers, who are susceptible to economic and interest-rate cycles.
Amana: Amana’s rating reflects its small and developing franchise and high-risk appetite that stems from its focus on the SME and retail segments, which collectively formed 70% of gross advances at end 2018.