Fitch affirms People’s Bank at ‘A(lka)’; Outlook Stable

Fitch Ratings yesterday announced it has affirmed the National Long-Term Rating on People’s Bank (Sri Lanka) (PB) at ‘A(lka)’. The Outlook is Stable.

In the announcement, Fitch Ratings said PB’s National Long-Term Rating is driven by its intrinsic financial strength and is highly influenced by the bank’s large exposure to the Sri Lankan sovereign’s weak credit profile (Long-Term Foreign-Currency Issuer Default Rating: RD) and the ongoing sovereign debt restructuring, which has exerted pressure on PB’s financial profile, particularly capitalisation and funding. 

It also reflects the bank’s strong domestic franchise as Sri Lanka’s second-largest bank.

While there are sustained improvements in reported headline macro variables, persistent delays in the completion of the sovereign debt restructuring exercise could impede the progress made thus far, the rating agency said.
The ongoing restructuring of the debt of state-owned enterprises that has been assumed by the government raises significant risks to PB’s capital, as reflected in the allocation of Rs. 450 billion by the government for the recapitalisation of the state banks, including PB. 

This is in addition to the risks to capital stemming from its holdings of defaulted sovereign bonds where the bank has already absorbed a provision of around 50 percent, although the adequacy of such impairment is unknown.
PB’s large exposure - estimated at around 60 percent of assets - to the sovereign’s fragile credit profile continues to weigh on the bank’s risk profile assessment. This includes credit extended to a state-owned entity that has been transferred to the government since end-2022 and its modest holding of defaulted sovereign bonds (1 percent of assets), which are presently under restructuring negotiations. 

“These exposures have made the bank vulnerable to the sovereign’s repayment capacity and liquidity position,” Fitch Ratings pointed out.

Fitch expects Sri Lanka’s stabilising economic environment to support PB’s ability to generate and defend business volumes, but its business profile remains highly susceptible to the elevated risks in the operating environment. 
“Net settlements from state exposures amid improved financial performance, as well as muted credit demand from the private sector underpin the sustained reduction in the share of net loans in assets (1Q24: 57 percent, 2022: 61 percent), a trend that is likely to reverse in the near to medium term as private sector credit expands,” it said.