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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Moody’s affirms ratings of three Sri Lankan banks; maintains negative outlook

Moody’s affirms ratings of three Sri Lankan banks; maintains negative outlook

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Miss-Sangeetha

Miss-Sangeetha
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Moderator

Moody's Investors Service has affirmed the long-term ratings of three banks in Sri Lanka (B1 negative).

The rating actions follow the affirmation of Sri Lanka's B1 sovereign rating.
The affected banks are: (1) Bank of Ceylon; (2) Hatton National Bank Ltd.; and (3) Sampath Bank PLC. The baseline credit assessments (BCAs) and Adjusted BCAs of the three banks were affirmed at b1. The counterparty 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 full list of ratings and assessments affected by this rating action can be found at the end of this press release.
RATINGS RATIONALE
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 12 December 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.
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) Extended Fund Facility (EFF) program concludes.
More details on the sovereign rating action are available at https://www.moodys.com/research/Moodys-affirms-Sri-Lankas-rating-at-B1-maintains-negative-outlook--PR_375798.
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. Thus, the credit growth multiplier (credit growth/nominal GDP growth) has increased rapidly to around 2x over the three years to end 2016. The negative adjustment to credit conditions reflects Moody's concern that the divergence between credit growth and underlying economic conditions may be unsustainable.
The lowering of Sri Lanka's Macro Profile to "Weak +" from "Moderate -" has no impact on the BCAs of the three Sri Lankan banks.
RATIONALE BEHIND THE AFFIRMATION OF BANKS' BCAs, ADJUSTED BCAs, AND CRAs
Moody's has affirmed the b1 BCAs and b1 Adjusted BCAs of the three banks.
For Bank of Ceylon, its b1 BCA and adjusted BCA, as well as its B1/B2 local and foreign currency deposit ratings, were affirmed owing to the bank's broadly stable asset quality with a 3.3% problem loans ratio at the end of September 2017 (2016: 2.9%, 2015: 4.3%), as well as Moody's expectation that its profitability will remain stable. Moody's expects there could be some improvement in the bank's capital buffers as it prepares to comply with Basel III capital norms.
For Sampath Bank, its b1 BCA and adjusted BCA, as well as its B1/B2 local and foreign currency deposit ratings, were affirmed because of the bank's healthy asset quality and profitability metrics. The bank's problem loans ratio stood at 1.7% at the end of September 2017, broadly unchanged from 1.6% at year-end 2016. Return on average assets over the nine months ended 30 September 2017 was also stable at 1.6% from 1.6% at year-end 2016. The ratings were affirmed to also reflect its improving capital ratio following its recent rights issue. Finally, the BCA also captures the potential risk to the bank's asset quality on account of the very strong loan growth seen over the last three years. The bank's BCA of b1 is constrained by the Sri Lankan sovereign rating of B1.
For Hatton National Bank Ltd., its b1 BCA and adjusted BCA, as well as its B1/B2 local and foreign currency deposit ratings, were affirmed because of the bank's largely stable solvency and liquidity metrics. The bank posted a mild increase in its problem loans ratio to 2.6% of gross loans at the end of September 2017, from 1.8% at year-end 2016. However, this risk was balanced by the rights issue in the third quarter of 2017, when the bank attracted LKR14.5 billion in line with the July 2017 implementation of Basel III capital rules in Sri Lanka. Following the capital increase, its tangible common equity to adjusted risk weighted assets ratio improved to 13.7% in the third quarter of 2017, from 11.0% in the previous quarter.
The Counterparty Risk Assessments of the three banks were affirmed because of the affirmation of their Adjusted BCAs.
WHAT COULD MOVE THE RATING UP/DOWN
Given the negative sovereign outlook, there is no potential for an upward revision of the long-term credit ratings of the three Sri Lankan banks. This is because the banks' long-term ratings are positioned at the same level as Sri Lanka's sovereign B1 rating.
A downgrade of Sri Lanka's sovereign rating will result in a downgrade of the long-term credit ratings of the three Sri Lankan banks.
The BCAs of the three banks could be lowered if there is a material deterioration in solvency factors, such as asset quality, profitability and capital. Tighter liquidity and an increased reliance on market funding would also be negative for the BCAs.
LIST OF AFFECTED RATINGS AND ASSESSMENTS
Bank of Ceylon
• Long-term local currency deposit rating affirmed at B1.
• Long-term foreign currency deposit rating affirmed at B2.
• Long-term foreign currency issuer rating affirmed at B1.
• BCA and Adjusted BCA affirmed at b1
• Long-term/ short-term Counterparty Risk Assessments (CRA) affirmed at Ba3(cr)/NP(cr).
• Outlook on all ratings, where applicable, are maintained at negative.
Sampath Bank PLC
• Long-term local currency deposit rating affirmed at B1.
• Long-term foreign currency deposit rating affirmed at B2.
• Long-term foreign currency issuer rating affirmed at B1.
• BCA and Adjusted BCA affirmed at b1
• Long-term/ short-term Counterparty Risk Assessments (CRA) affirmed at Ba3(cr)/NP(cr)
• Outlook on all ratings, where applicable, are maintained at negative.
Hatton National Bank Ltd.
• Long-term local currency deposit rating affirmed at B1.
• Long-term foreign currency deposit rating affirmed at B2.
• BCA and Adjusted BCA affirmed at b1
• Long-term/ short-term Counterparty Risk Assessments (CRA) affirmed at Ba3(cr)/NP(cr)
• Long-term foreign currency issuer rating affirmed at B1
• Outlook on all ratings, where applicable, are maintained at negative.
Bank of Ceylon, headquartered in Colombo, reported total assets of LKR1,932 billion at 30 September 2017.
Sampath Bank PLC, headquartered in Colombo, reported total assets of LKR782 billion at 30 September 2017.
Hatton National Bank Ltd., headquartered in Colombo, reported total assets of LKR1,004 billion at 30 September 2017.
The principal methodology used in these ratings was Banks published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Sources:- Ada Derana

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