Sri Lanka’s BASEL III debt instruments get initial ratings from Fitch

Fitch Ratings yesterday rated three of the BASEL III compliant corporate bonds, convertible into equity as the Sri Lankan banks begin to raise funds to ramp up their capital through BASEL III sub debt for the first time.

As Sri Lankan banks began to gradually raise their capital according to the new BASEL III rules that came into effect from July 1, 2017, the issuers announced BASEL III compliant instruments in the form of subordinated debentures, convertible into equity upon the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka. Fitch Ratings yesterday assigned its first Sri Lanka BASEL III sub debt ‘A’ rating, issued by Sampath Bank PLC.

Sampath Bank earlier announced a Rs.6.0 billion subordinated debenture carrying a fixed coupon and maturing in five years to support its loan book expansion and strengthen its Tier II capital base.

The instrument is designed in such a way that it is convertible into equity.

“Fitch has not differentiated the notching on the proposed notes from the notching on Sampath’s legacy Tier II notes. This is because we assume that the authorities would step in late, moving the point of non-viability close to liquidation. The legacy Tier II notes will taper off by end-2021,” the rating agency said.

The instrument rating reflects its weaker capitalization and higher risk appetite relative to peers, which counterbalance its growing franchise and satisfactory asset quality.

Sampath has a National Long-term Rating of ‘A+’ with a ‘Negative’ outlook as the rating agency expects the capitalization to further deteriorate as a result of higher loan growth.

“We expect the rights issue along with retained profits to boost the Tier I ratio to over 9 percent by end-2017 (8.5 percent at bank level at end-june 2017).

In addition, the proposed Basel III Tier II debt would increase the total capital ratio to over 13 percent by end2017 (12.2 percent at end-june 2017). The bank has to meet the regulatory Tier I and total capital ratios of 8.875 percent and 12.875 percent by end-2017.

These requirements will be raised to 10 percent and 14 percent by end-2018, respectively,” Fitch added.

Meanwhile, Fitch also assigned ‘A-’ to Nations Trust Bank PLC’S BASEL III sub debt issue of Rs.3.5 billion carrying fixed coupons and having a maturity of five years.

Similarly, Fitch also assigned the ‘BBB+’ rating to Seylan Bank PLC’S sub debt up to Rs.10 billion, which is also BASEL III compliant.