Friday 15 December 2017

Moody’s affirms long-term ratings of 3 banks

Moody’s Investors Service has affirmed the long-term ratings of three banks, Bank of Ceylon, Hatton National Bank Ltd and Sampath Bank PLC in Sri Lanka, B1 negative.

The rating actions follow the affirmation of Sri Lanka’s B1 sovereign rating.

The baseline credit assessments (BCAs) and Adjusted BCAs of the three banks were affirmed at b1. The counter party risk assessments (CRAs) of the three banks were affirmed at Ba3 (cr)/NP (cr).

The outlook on the ratings of the three banks, where applicable, are maintained at negative.

Operating conditions for Sri Lanka’s banks have weakened because of the high loan growth over the last two years, driven by a loosening of underwriting standards. As a result, Moody’s has changed Sri Lanka’s Macro Profile to “Weak +” from “Moderate -”, and considered the new Macro Profile in the affirmation of the three Sri Lankan banks.

The affirmation of the three banks ratings and the maintained negative outlooks follow Moody’s affirmation of Sri Lanka’s B1 sovereign rating with a negative outlook on December 12, 2017.

The ratings and outlooks of banks typically follow the ratings and outlooks of their respective governments if the banks’ ratings are positioned at the same level as the sovereign rating, which is the case for Bank of Ceylon, Hatton National Bank Ltd and Sampath Bank PLC.

Typically, such linkages between the sovereign credit profile and the credit metrics of the domestic banks are driven by the banks’ large investments in sovereign bonds, as well as by common drivers of the underlying operating conditions, Moody’s say.

The key factor driving the negative outlook on Sri Lanka’s sovereign rating is Moody’s view that persistently high government liquidity and external vulnerability risks continue to pressure Sri Lanka’s credit profile.

Specifically, measures to build reserves and smooth the profile of external payments may be insufficient to stem imminent government liquidity and balance of payments pressures starting in 2019, when large international debt repayments come due and Sri Lanka’s three-year International Monetary Fund (IMF)

Meanwhile Moody’s has also changed the Macro Profile for Sri Lanka to “Weak +” from “Moderate -”, reflecting Moody’s view that operating conditions have weakened for Sri Lankan banks. In particular, Moody’s has adjusted downwards the credit conditions score by one notch to reflect rapid credit growth in Sri Lanka over the last three years to end June 2017, growing at a compounded annual growth rate (CAGR) of 21%.

Because Sri Lanka is an underpenetrated banking market, strong credit growth in itself is not necessarily a cause for concern. However, the current episode of strong credit growth has come against a backdrop of moderating economic growth.

The lowering of Sri Lanka’s Macro Profile to “Weak +” from “Moderate -” has no impact on the BCAs of the three Sri Lankan banks.
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