Bank of Ceylon rating affirmed at ‘CC’ and ‘A(lka)’/Stable by Fitch

Fitch Ratings yesterday affirmed Bank of Ceylon’s (BOC) Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘CC’. 

The rating does not carry an Outlook because of the potential for high volatility at this rating level, in line with Fitch’s rating definitions. At the same time, Fitch has maintained BOC’s Viability Rating (VR) of ‘cc’ on Rating Watch Negative (RWN).

Fitch has also affirmed BOC’s Long-Term Local-Currency IDR at ‘CCC-’ with a Stable Outlook, the Short-Term IDR at ‘C’, Government Support Rating at ‘ns’ and the National Long-Term Rating at ‘A(lka)’ with a Stable Outlook.
The rating agency said it has maintained BOC’s VR on RWN to reflect risks to the bank’s credit profile from potential capital stress stemming from the restructuring of loans granted to state-owned entities. Fitch’s affirmation of BOC’s IDRs continues to reflect a high risk of default from the sovereign’s restructuring of debt.

“The recapitalisation plan to address potential capital erosion, should it materialise, may constitute extraordinary support,” the rating agency said.

In accordance with Fitch’s Bank Rating Criteria, extraordinary capital support to restore viability would be viewed by Fitch as a “bank failure” and would lead to the bank’s VR being downgraded to ‘f’. Subsequently, upon recapitalisation, the VR could be upgraded to a level commensurate with its standalone credit profile.

“BOC’s large exposure to the sovereign’s fragile credit profile - which we estimate at around 60 percent of assets - continues to weigh on the bank’s risk profile assessment,” Fitch said.

This includes credit extended to a state-owned entity that has been transferred to the government effective end-2022 and its holdings of defaulted sovereign bonds (2 percent of assets), which are currently under restructuring negotiations. These exposures have made the bank vulnerable to the sovereign’s repayment capacity and liquidity position.