16 September 2021 01:26 am Views - 196
Sri Lanka’s banks’ credit ratings are continued to be pressured by the challenging operating environment stemming from the weak sovereign credit profile and the lingering effects of the pandemic and its toll on the broader economy, according to Fitch Ratings.
Sri Lanka’s banking sector has broadly been resilient and emerged largely unscathed with nearly every key performance indicator advancing, due to the timely and proportionate measures by the regulator to blunt the impact coming from the pandemic.
However, their credit ratings remain under pressure, due to the weak operating conditions stemming from the sovereign rating, which is placed at ‘CCC’
levels by Fitch.
“The sovereign is the overarching constraint on the large banks’ ratings, due to the banks’ high sovereign exposure and Sri Lanka-centric operations. This has led to rating compression, with the national ratings of most large banks placed at ‘AA-(lka),” Fitch Ratings said yesterday in a new report on the country’s banking sector.
Fitch Ratings in November, last year, downgraded Sri Lanka’s sovereign to ‘CCC’, citing the heightened debt sustainability risks caused by the sharp rise in sovereign debt-to-GDP ratio associated with the pandemic’s shock, amid narrowing financing options.
While Sri Lanka’s banks did well on growth, earnings, capitalisation and liquidity continuously through the end of the most recent financial quarter ended on June 30, 2021, there was some uptick seen in the gross non-performing loans attributed to the pandemic’s toll on their borrowers.
Until the March quarter, the banking sector also did well on its asset quality matrix, with a reported gross non-performing loan ratio of 4.6 percent, before it rose to 5.0 percent by June-end.
“Large banks’ financial performance since the pandemic’s onset has been better than we expected, supported by relief and forbearance, although there are significant risks to the banks’ standalone credit profiles,” the ratings agency added.
Despite the adversities caused by the pandemic, the rating agency expects a recovery in the economy in 2021 and 2022, after the growth shrank 3.6 percent in 2021.
However, Fitch Ratings cautioned that the trajectory would depend on how the pandemic would evolve.
Under this context, the rating agency said the upside for large banks’ ratings remains limited in the near term.
“We see negative rating action as most likely to stem from a deterioration in the sovereign credit profile and the operating environment, with upside for the large banks’ ratings being limited,” Fitch Ratings added.