Fitch maintains Negative outlook on Lankan banks as operating challenges persist

Fitch Ratings this week maintained its negative outlook on Sri Lankan banks as the operating conditions continue to be difficult against a challenging macro-economy which will weigh on banks’ performance in the short to medium term.

The non-performing loans have already risen to multi year highs and the rating agency, which affirmed the credit rating on none Sri Lankan banks last week expected the pressure on the asset quality to stay into 2019.

Sri Lanka’s banking sector asset quality gradually fell to 3.4 percent by the end of July from 2.50 percent in December 2017, the Central Bank data showed.

Fitch also observed an increase in the re-scheduled loans across Fitch rated banks.

“There has also been an increase in rescheduled loans across Fitch-rated banks, indicating that pressure on asset quality is likely to extend into 2019”, the rating agency said.

The Central Bank data showed a substantial increase in the rescheduled loans in the recent past as borrowers struggle to service their facilities when their incomes get squeezed from tight policy.

The growth in the re-scheduled loans has accelerated from around 5.0 percent in November 2017 to almost 65 percent by end July 2018.

The Central Bank is largely expected to raise its benchmark interest rates today to stem the fall in the rupee against the dollar and tame excessive growth in credit which later leads to non-performing loans.

Meanwhile, Sri Lankan banks have been raising capital to meet Basel III regulations that come into effect in full on January 1, 2019.

However, Fitch is of the view that the impact on banks’ regulatory capital ratios from the adoption of Sri Lanka Financial Reporting Standards (SLFRS) 9 in 2018 to be modest.

“Banks’ credit profiles should remain broadly intact, supported by improved capital buffers, although macroeconomic risks will continue to dampen performance, especially on the credit quality front. There could be modest pressure on the ratings of some banks if they fail to maintain sufficient lossabsorption buffers”, the rating agency added.

Affirming National Savings Bank’s national long term rating at AAA with a Stable outlook, Fitch said it believes the state support for NSB stems from its policy mandate of mobilizing retail savings and investing them in government securities.

Fitch expects support for Bank of Ceylon and People’s Bank to stem from their high systemic importance, quasisovereign status, role as key lenders to the government and full state-ownership.

BOC and People’s Bank have ‘AA +’ rating with Stable outlooks.

Meanwhile, at Commercial Bank, where Fitch maintains a rating at ‘AA’ rating, the rating agency expects its asset quality under pressure following an increase in gross non-performing loan ratio to 2.4 percent in June from 1.9 percent in 2017. Further, the NPL ratio at HNB deteriorated to 2.9 percent from 2.3 percent in 2017 after non-payment of one large loan facility in 2017 which accounts for 0.5 percent of its gross loans.

Meanwhile, at Sampath Bank, the NPL ratio rose to 3.0 percent from 1.6 percent in 2017 and the bank’s asset quality pressure may persist due to the bank’s exposure to more susceptible segments such as consumer/retail and Sme/midsized corporate segments.

Fitch has ‘A+’ rating on Sampath Bank with a Stable outlook.