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- 10-Mar-2016 05:07 EST
- We believe that Sri Lanka's financial institutions face increasing risks
stemming from the sovereign's weakening external and fiscal performance. - Operating conditions for the country's banks could also deteriorate,
resulting in rising credit risks, weakening funding profiles of banks, or
an increase in competition. - We are revising our outlooks on NDB, DFCC Bank, NSB, and PLC to negative
from stable. At the same time, we are affirming the issuer credit ratings
on these entities. - Credit factors specific to these entities remain broadly unchanged, in
our view.
SINGAPORE (Standard & Poor's) March 10, 2016--Standard & Poor's Ratings
Services said today that it had revised its outlook on the long-term issuer
credit ratings on National Development Bank PLC (NDB), National Savings Bank
(NSB), People's Leasing & Finance PLC (PLC), and DFCC Bank to negative from
stable. At the same, we affirmed the ratings on these Sri Lankan financial
institutions and on their outstanding notes (see ratings list below).
Our rating actions on these financial institutions reflect the potential
deterioration in the operating environment for these entities and the revision
in the outlook on the sovereign long-term credit rating on Sri Lanka
(B+/Negative/B) to negative from stable earlier today because of rising fiscal
and external imbalances in the country.
We expect operating conditions for Sri Lankan financial institutions to
deteriorate along with the sovereign's weakening external and fiscal
performance. We affirmed the ratings on these entities because we believe
credit factors specific to them are broadly unchanged.
We do not rate financial institutions in Sri Lanka above the sovereign because
of the direct and indirect influence that the sovereign in distress would have
on their operations, including their ability to service foreign-currency
obligations. Our ratings on NDB, NSB, and PLC are the same as the sovereign
credit rating on Sri Lanka.
In our view, the sovereign credit factors are also relevant for financial
institutions in Sri Lanka because: (1) these entities are subject to
government policy and regulation; (2) they invest a sizable portion of their
assets in government securities or credit; (3) a high proportion of their
revenue comes from domestic operations that are susceptible to deterioration
in macroeconomic environment typically associated with sovereign stress; and
(4) some of them rely on the government to derive foreign currency to repay or
hedge their foreign currency liabilities.
We consider it unlikely that Sri Lankan financial institutions would be immune
to increasing credit pressures on the sovereign and the broader operating
environment. We reflect these risks in our view that the economic risk trend
and industry risk trend for Sri Lanka's banking sector have become negative.
The weak operating environment could manifest in the form of rising credit
risk in Sri Lanka, particularly if remittances into Sri Lanka remain weak or
the country's economic growth is lower than our current base-case
expectations. The funding profile of the system may also deteriorate, leading
to an increase in competition among banks for funds.
Moreover, as economic risk in Sri Lanka increases, the capital that banks in
the country need to hold to maintain their risk-adjusted capital ratio (RAC)
will increase. That's because we calibrate risk weights for banks based on the
economic risk in that country.
We could lower our ratings on Sri Lanka in the next 12 months if we see no
tangible signs of a substantial and sustained reversal of the weakening of
external and fiscal credit metrics we currently project. In this scenario, we
believe that the systemic risks facing Sri Lankan banks would also have
increased, and consequently, we would expect to revise the assessment of the
banking sector's anchor stand-alone credit profile to 'b+' from 'bb-'. We
would lower our long-term ratings on DFCC, NSB, NDB, and PLC in this case.
We also expect to lower the ratings on DFCC and NDB if their capitalization
weakens, such that their pre-diversification RAC ratio falls below 5%, even if
the systemic risks facing Sri Lanka's banking sector remain unchanged, in our
view.
We expect to revise the rating outlook on these financial institutions to
stable if the above risks subside.
