Moody’s places ratings of 3 Lankan banks on review for downgrade

Less than a week after Sri Lanka’s sovereign rating was placed under review for possible downgrade, due to the economic shock of COVID-19, Moody’s Investors Service yesterday placed Bank of Ceylon (BOC), Hatton National Bank (HNB) and Sampath Bank under review for downgrade, due to the high level of dependency between the creditworthiness of Sri Lankan banks and sovereign. 

The long-term issuer ratings for foreign currency of all three banks are currently at B2 with the outlook being changed to ‘Rating Under Review’, 
from ‘Stable’. 

Further, the rating agency downgraded the Baseline Credit Assessment (BCA) of BOC to b3, from b2 and placed it on review for further downgrade. 

It also placed b2 BCAs of HNB and Sampath Bank on review for downgrade. 

“Today’s action also incorporates the negative impact on BOC, HNB and Sampath of the breadth and severity of the shock and the likely deterioration in the banks’ asset quality and in the government’s ability to support these banks in times of need,” Moody’s said.  

The downgrade of BOC’s BCA mainly reflects the deterioration in the bank’s asset quality and its low capitalisation, compared to its Sri Lankan peers, it added. 

BCA is an assessment of a bank’s operating environment, financial profile using predictive measures of solvency and liquidity and other qualitative factors.  

The pandemic is taking a massive toll on the economy and the banks are among the rest of the sectors.    
BCA is the starting point of the bank rating analysis of Moody’s as part of its different stages or components of bank rating methodology. 

“The decision to place the banks’ assessments and ratings on review for downgrade reflects Moody’s placement of Sri Lanka’s B2 sovereign rating on review for downgrade,” Moody’s said. 

“In addition, the sovereign’s credit strength is a key input to Moody’s assessment of the government’s ability to support the banks in times of need,” it added. 

In late March, Fitch Ratings revised Sri Lanka’s banking sector outlook to ‘Negative’, from ‘Stable’ for 2020, due to the challenging operating conditions stemming from the coronavirus-induced economic hardships, which could cause the asset quality to sour and profitability recovery to dampen. 

Fitch is also reviewing all bank ratings, which will contain an assessment of the likely impact from 
the pandemic. 

Placing Sri Lanka’s sovereign under review for downgrade, Moody’s last week said Sri Lanka’s already weak economy would take a further hit from the pandemic, due to the disruptions into tourism, export-oriented sectors and domestic activities. 

Any rating action will largely depend on how the government will refinance its external debt when the international capital markets are in risk-off mode.

“The Sri Lankan banking system has been one of the sectors affected by the shock, given Sri Lanka’s weak economy and heavy reliance on external borrowings,” Moody’s said.