Moody's downgrades ratings of three Sri Lankan banks

Moody's Investors Service has downgraded the long- term local currency deposit and foreign currency issuer ratings of Bank of Ceylon ( BOC), Hatton National Bank Ltd ( HNB) and Sampath Bank PLC to B2 from B1.

At the same time, Moody's has downgraded the long- term foreign currency deposit ratings of the same three banks to B3 from B2 and affirmed the shortterm local and foreign currency deposit ratings of the banks at NP, the rating agency said in a media release.

Moody's has revised the rating outlooks of the banks, where applicable, to stable from negative.

The rating actions follow the downgrade of Sri Lanka's sovereign rating to B2 from B1 on November 20 and the change in the sovereign's rating outlook to stable from negative on the same date.

“Moody's expects that the recent political and financial market developments in Sri Lanka will weigh on the country's already weak GDP growth. In addition, tightening external financial conditions and domestic political instability are resulting in capital outflow and placing increasing pressure on the exchange rate and foreign exchange reserves. The Sri Lankan rupee has depreciated about 13 per cent over the past 12 months ( 9 per cent over the last three months) to 176.7 to the US dollar as of November 16,” it said.

Moody's expects that, after years of strong credit growth, the weakening operating environment will have a negative impact on the banks' asset quality and profitability, as seen by the system- wide nonperforming loan ratio increasing to 3.6 per cent as of August 2018 versus 2.5 per cent in December 2017.

Moody's has kept the government support assumptions for the three Sri Lankan banks unchanged, driven by the systemic importance of these banks, as well as the government's record of sup- porting the banking system.

“Furthermore, Moody's believes that there is a high level of dependency between the creditworthiness of rated Sri Lankan banks and the sovereign, because of the domestic nature of their operations and their significant direct and indirect exposures to domestic sovereign debt relative to their capital bases,” the release added.

As a result, Moody's incorporates a very high level of government support in the ratings of BOC, given its 100 per cent ownership by the government and dominant share of system loans and deposits. And, Moody's incorporates a high level of support in the ratings of HNB and Sampath, given their significant market shares of system loans and deposits.

The downgrade of the long- term for- eign currency deposit ratings of the three Sri Lankan banks to B3 from B2 is driven by the lowering of the sovereign ceilings. In the sovereign rating action, Sri Lanka's foreign currency deposit ceiling was lowered to B3 from B2.

“An upgrade of the banks' long- term ratings is unlikely, because the ratings are already at the same level as the sovereign rating, and the sovereign rating outlook is stable. A downgrade of the sovereign rating would result in a downgrade of the banks' long- term ratings,” Moody’s said.

The BOC reported total assets of Rs. 2,145 billion at end September, Sampath Bank reported total assets of Rs. 926 billion at end September and HNB reported total assets of Rs. 1,090 billion at end September.

Moody's expects that the recent political and financial market developments in Sri Lanka will weigh on the country's already weak GDP growth.