‘ National Ratings and Affirms Five after Scale Recalibration

The National Rating upgrades are driven by the upgrade of the sovereign’s Long-Term Local-Currency IDR and the recalibration of the national rating scale. The ratings reflect the relative creditworthiness of Sri Lankan issuers. We believe the sovereign’s credit profile improvement has alleviated sovereign-related stresses on the banks’ operating environment (OE) of ‘ccc+’/stable as well as on financial and non-financial factors, due to the strong link between the sovereign’s financial health and the banks’ credit profiles.

The Negative Outlook on UB reflects the potential for its capital buffers to deplete relative to similarly rated peers, alongside the loan book expansion we expect as it pursues market share growth.

The affirmation of CBL’s National Rating underpins Fitch’s view that extraordinary support would be forthcoming from the ultimate parent, CT Holdings PLC, if needed. The Negative Outlook reflects downside risks from its increasing size relative to that of its ultimate parent, which could constrain the parent’s ability to provide support in times of need.

The affirmations of the National Ratings of Amana, UB, SDB and HDFC reflect the unchanged relative creditworthiness of these banks compared to other Fitch-rated Sri Lankan entities following the recalibration.

Rating Sensitivities

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

The National Ratings are sensitive to a change in the banks’ creditworthiness relative to other Sri Lankan issuers. A downgrade of the banks’ National Ratings is most likely to stem from a deterioration in Sri Lanka’s sovereign rating, through its influence on the banks’ OE.

A deterioration in these banks’ key credit metrics beyond our base-case expectations relative to peers would also lead to increased downward pressure on the banks’ ratings, which are driven by their intrinsic financial strength, independent of any sovereign rating changes.

A deterioration in UB’s key credit metrics, especially a significant deterioration in capital ratios relative to its risk profile, such as a sustained drop in its common equity Tier 1 ratio to below 14% or excessive growth leading to a large erosion of its capital buffers relative to peers, could lead to a downgrade of UB’s rating.

CBL’s rating is sensitive to changes in its parent’s credit profile as well as Fitch’s opinion around the parent’s ability or propensity to extend timely extraordinary support. A continued increase in CBL’s balance sheet relative to the parent’s that makes extraordinary support more onerous could lead to a multiple-notch downgrade in CBL’s national rating to reflect its standalone credit strength.

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

The National Ratings are sensitive to a change in the banks’ creditworthiness relative to other Sri Lankan issuers. Upside to the National Long-Term Ratings of BOC, PB, COMB, HNB and Sampath is limited in the near term, due to our assessment of the sovereign rating and the OE. That said, an improvement in Sri Lanka’s sovereign rating may lead to an upgrade of these banks’ National Ratings. For the other banks, excluding CBL, sustained improvement in their key credit metrics beyond our base case expectations, relative to peers, could lead to an upgrade of their National Ratings.

There is limited scope for upward rating action on UB and CBL given the Negative Outlook. Fitch may revise the Outlook to Stable if UB sustains its capital buffers at a level that is commensurate with its risk profile and OE-related risks, most likely through enhanced capital levels and/or moderated growth plans. Fitch would revise the Outlook on CBL to Stable if the credit profile of its ultimate parent improves to the extent that any extraordinary support for CBL would become more manageable.

BOC and PB each have 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.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Fitch has taken corresponding rating action on the banks’ national scale debt ratings, where assigned. The outstanding senior unsecured debt ratings of DFCC and HDFC and the proposed senior unsecured green bonds of COMB are rated at the same level as these banks’ National Long-Term Ratings, in accordance with Fitch’s criteria, as the debt ranks equally with the claims of the bank’s other senior unsecured creditors.

The outstanding Sri Lankan rupee-denominated subordinated debt of BOC, COMB, HNB, Sampath, NDB, Seylan, DFCC, NTB and Seylan are rated two notches below their respective National Rating anchors. This reflects Fitch’s baseline notching for loss severity for this type of debt and our expectations of poor recoveries upon non-performance. There is no additional notching for non-performance risks, as the notes do not incorporate going-concern loss-absorption feature.

Fitch has simultaneously upgraded the expected National Long-Term Rating of Sampath’s proposed Sri Lankan rupee-denominated Basel III-compliant subordinated debentures to ‘A(EXP)(lka)’ from ‘BBB+(EXP)(lka)’, in line with the anchor rating upgrade.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The assigned senior and subordinated debt ratings will move in tandem with the banks’ National Long-Term Rating.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

CBL’s National Long-Term Rating is driven by support from its ultimate parent, CT Holdings PLC.