Moody’s extends review for downgrade on 3 Lankan banks

• Says further downgrade of sovereign could lead to downgrade of banks’ ratings

Moody’s Investors Service yesterday extended its review for downgrade on Bank of Ceylon’s (BOC), Hatton National Bank PLC’s (HNB) and Sampath Bank PLC’s (Sampath) long-term local currency deposit and foreign currency issuer ratings of B2.

“The extension of the review for downgrade on the banks’ ratings follows the review for downgrade that remains in place on Sri Lanka’s B2 sovereign rating,” Moody’s said.
Moody’s believes that there is a high level of dependency between the creditworthiness of the banks and that of the sovereign, given that the banks operate mainly within the country and hold significant amounts of sovereign debt. 

“A downgrade of the sovereign rating could lead to a downgrade of the banks’ Baseline Credit Assessments (BCAs) and long-term ratings,” the rating agency said.

It noted that the government’s ability to support the banks in times of need is a key input to Moody’s assessment of the banks’ ratings.

In addition, Moody’s cautioned that it could also downgrade the banks’ BCAs, if there is a material deterioration in the asset quality. 

“A significant decline in capitalisation could also exert downward pressure on the banks’ BCAs,” the rating agency noted.

The NPLs of the banking sector has spiked to 5.6 percent at end-May, according to the Central Bank preliminary data.

The Central Bank has been pressing the banking sector to increase credit disbursements to COVID-19-hit businesses in the country while relaxing policy rates and injecting additional liquidity to the system.

Fitch Ratings on Monday said Sri Lanka’s banks’ operating environment had deteriorated, exerting further pressure on their ratings after the rating agency downgraded the country rating in April, citing heightened public and external debt sustainability challenges caused by the pandemic-induced economic difficulties and the tax cuts late last year.