Fitch places 12 NBFIs on Rating Watch Negative on tightening operating conditions

• These could turn into multiple-notch downgrades in six months upon review
• Highlights sector’s susceptibility to soaring interest rates 
• Says higher contagion risk between banks and NBFIs concerning 

Latest in a series of rating actions in the last two weeks, Fitch Ratings this week placed 12 non-bank financial institutions (NBFIs) under Rating Watch Negative (RWN), with a greater likelihood of multiple-notch rating downgrades when they come 
up for review in six months. 

The ratings agency placed the national long-term rating of 11 finance and leasing companies and one securities firm on Tuesday, due to the heightened downside risks to the NBFIs’ credit profiles, amid the increased economic and financial market volatility in 
Sri Lanka. 

These risks, according to Fitch, have been exacerbated by the deteriorating sovereign credit profile and the ensuing risks to the stability of the 
financial system. 

Fitch downgraded Sri Lanka’s sovereign credit rating to ‘C’, after the country announced that it would suspend repayment of most of its foreign currency debt obligations on April 12. 

Besides the 12 companies under RWN, the rating agency said it would separately review the national ratings of financial institution subsidiaries of Sri Lankan corporates. 
“The NBFIs’ credit profiles are being pressured by Sri Lanka’s challenging operating environment, with significant near to medium-term downside risk presented by the weakening sovereign credit profile,” the rating agency said. 
“This could further impair the economy and weigh on financial market performance, raising downside risks to NBFIs’ asset quality and earnings,” it added. 

Besides that, Fitch is also concerned about these companies’ susceptibility to soaring interest rates, as their mostly fixed rate loans get repriced more slowly than their liabilities.  The ratings agency said any stress in the funding or liquidity in the banking sector would carry contagion risk for the NBFIs, as they are closely linked. 

“We view NBFIs’ funding and liquidity conditions as tied to the funding and liquidity positions of Sri Lanka’s banks, due to direct funding and deposit relationships as well as the banking sector’s importance to the domestic financial system,” it said. 

“In particular, any restrictions on banks’ ability to service their obligations are likely to be extended to finance and leasing companies, while entities that rely on local banks to hedge their foreign-currency obligations may be subject to counterparty risk on these exposures,” the rating agency added.