Fitch upgrades BOC’s Foreign-Currency IDR and VR to ‘CCC-’

• Rating Watch Negative on the Viability Rating has been removed 

Fitch Ratings has upgraded Bank of Ceylon’s (BOC) Long-Term Foreign Currency Issuer Default Rating (IDR) to ‘CCC-’ from ‘CC’. 

At the same time, the Rating Watch Negative (RWN) on the Viability Rating (VR) has been removed and the VR upgraded to ‘ccc-’ from ‘cc’. Fitch has also affirmed the Short-Term IDR at ‘C’ and the Government Support Rating (GSR) at ‘ns’.

BOC’s Local-Currency IDR and National Ratings were not considered in this review.

The removal of the RWN and the upgrade of the VR reflects our view that risk of failure - as per Fitch’s Bank Rating Criteria - stemming from capital deficiencies has declined significantly. The action reflects the advanced stages of the government’s efforts to restructure the debt granted to a state-owned entity. We do not expect the estimated losses from this restructuring to be sufficiently large to require extraordinary support to restore viability.
BOC’s VR of ‘ccc-’ is highly influenced by our operating environment assessment, as it is likely to constrain the intrinsic credit profile through its effect on financial and non-financial key rating factors. 

The upgrade of the Foreign Currency IDR is driven by the upgrade of its VR, and both remain above Sri Lanka’s Foreign Currency IDR. This reflects our view of a lower risk that the authorities will impose restrictions on the bank servicing its foreign-currency obligations despite the sovereign being in default.

The restructuring of loans granted to a state-owned entity that have now been assumed by the government, is nearing completion. We view the agreed terms as more favourable for BOC than initially anticipated, thereby reducing the risk of material capital erosion for the bank. On account of this, we have revised upwards BOC’s capitalisation and leverage score to ‘ccc-’ from ‘cc’.

The upward revision in BOC’s risk profile assessment to ‘ccc-’ from ‘cc’ reflects easing risk-profile constraints as the sovereign debt restructuring - including loans extended to a state-owned entity - draws to a conclusion. 
The risk profile assessment on BOC continues to reflect its large exposures to the weak sovereign - estimated at nearly 60 percent of assets. We expect BOC’s exposure to the sovereign to moderate in the medium term as private-sector lending opportunities expand.