‘s &’s National Ratings on Rating Watch Positive on Proposed Acquisition

Fitch Ratings has placed Housing Development Finance Corporation Bank of Sri Lanka’s (HDFC) National Rating of ‘BB+(lka)’ and State Mortgage & Investment Bank’s (SMIB) National Rating of ‘BB(lka)’ on Rating Watch Positive (RWP). HDFC’s rating was previously on a Negative Outlook.

Key Rating Drivers

Acquisition on the Cards: The rating action follows the announcement by the government on 11 November 2025 that the cabinet of ministers granted approval for the proposal to transfer all the state-owned shares of HDFC and SMIB to Bank of Ceylon (BOC; CCC+/AA-(lka)/Stable) and People’s Bank (Sri Lanka) (PB; AA-(lka)/Stable), respectively. The modalities and resolution of the intended acquisitions are not yet known.

The RWP reflects Fitch’s view that the acquisitions of HDFC and SMIB by BOC and PB, respectively, would result in HDFC and SMIB benefitting from a very high likelihood of support from their new owners. Fitch will reflect this likelihood of support via support-driven national ratings upon the completion of each transaction. Fitch expects to resolve the RWP upon closing of the transaction, and the resolution is likely to take longer than Fitch’s normal Rating Watch resolution horizon of six months.

Regulatory Restrictions at HDFC: We revised our Outlook on HDFC’s National Rating to Negative from Stable on 15 August 2025 to reflect potential deterioration in its standalone credit profile relative to similarly rated peers, due to regulatory restrictions on deposit mobilisation and selected lending products. These restrictions have dampened HDFC’s competitive position in the housing loan segment, which is driven predominantly by Employees’ Provident Fund (EPF)-backed loans, and its loan and deposit market share.

Capital Shortfall at SMIB: The bank’s capital position remains below the regulatory minimum capital requirement of LKR7.5 billion. The shortfall is estimated at around LKR2 billion-3 billion based on the June 2025 financials. SMIB is profitable, while we believe that earnings retention alone will be insufficient to meet this shortfall in the near to medium term.

Fitch reviewed SMIB’s ratings with no rating action on 8 September 2025. Please refer to the Rating Action Commentary – Fitch Assigns State Mortgage & Investment Bank a First-Time ‘BB(lka)’ Rating; Outlook Stable – published on 28 March 2025 for the Key Rating Drivers and Sensitivities

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

We would remove the ratings from RWP if the acquisition does not proceed (which is not our base case). In such an instance, we would be likely to affirm SMIB’s ratings at the current standalone-driven rating levels.

For HDFC, we may affirm the ratings at the current standalone-driven rating levels and reassign the Negative Outlook on the National Rating if regulatory restrictions remain in force which continue to pose risks to its business model and overall credit profile.

However, Fitch would also consider a downgrade in HDFC’s National Rating at the time of removing the RWP, if HDFC experiences material deterioration in its franchise due to a sustained loss of competitiveness in the housing-loan segment, particularly in EPF-backed loans. Negative rating action could also stem from persistent deterioration in HDFC’s financial profile, notably if capital levels fall below the regulatory minimum of LKR7.5 billion and remains unaddressed for an extended period. In addition, widening asset-liability mismatches arising from the bank’s inability to access funding could trigger a downgrade.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

We would be likely to remove the RWP and upgrade HDFC’s and SMIB’s National Ratings, which would then be based on Fitch’s view of the strength of extraordinary support from their new shareholders, following completion of the transaction. This could lead to a multiple-notch upgrade for HDFC and SMIB, given the shareholder strength. That said, Fitch would be likely to maintain a difference of several notches between the ratings of acquirers and the acquirees due to the latters’ limited strategic importance to the new owners.

SMIB has a 1.78% equity stake in Fitch Ratings Lanka Ltd. No shareholder other than Fitch, Inc. is involved in the day-to-day rating operations of, or credit reviews undertaken by, Fitch Ratings Lanka.