Moody’s down­grades BOC, HNB and Sam­path Bank in line with sovereign rat­ing

Daily Mirror (Sri Lanka) - - MIR­ROR BUSI­NESS -

▪ „Says banks have sig­nif­i­cant credit ex­po­sure to the sovereign via G-secs ▪ „Ex­pects banks’ as­set qual­ity to worsen no­tably as a re­sult of coro­n­avirus dis­rup­tions ▪ „Says prof­itabil­ity will also de­te­ri­o­rate largely be­cause of higher credit costs

Moody’s In­vestors Ser­vice yesterday down­graded the long-term for­eign cur­rency de­posit ratings of Bank of Cey­lon (BOC), Hat­ton Na­tional Bank PLC (HNB) and Sam­path Bank PLC to Caa1 from B3, and the banks’ long-term lo­cal cur­rency de­posit ratings to Caa1 from B2, fol­low­ing Mon­day’s sovereign rat­ing down­grade to Caa1 (CCC+ equiv­a­lent) with sta­ble out­look.

At the same time, Moody’s has down­graded the Base­line Credit As­sess­ment (BCA) of BOC to Caa1 from B3, and those of HNB and Sam­path to Caa1 from B2. The rat­ing out­looks, where ap­pli­ca­ble, are sta­ble.

“The down­grade of the BCAS of BOC, HNB and Sam­path is driven by the down­grade of Sri Lanka’s sovereign rat­ing. The three banks have sig­nif­i­cant credit ex­po­sure to the sovereign through their hold­ings of govern­ment se­cu­ri­ties and lend­ing to the do­mes­tic econ­omy, which is it­self cor­re­lated to sovereign cred­it­wor­thi­ness,” Moody’s said.

Moody’s has also low­ered Sri Lanka’s Macro Pro­file—a key in­put to the banks’ Bcas—to re­flect the de­te­ri­o­ra­tion in the oper­at­ing en­vi­ron­ment.

In par­tic­u­lar, the coro­n­avirus out­break has weighed on Sri Lanka’s al­ready weak econ­omy and has weak­ened the govern­ment’s fis­cal po­si­tion, the rat­ing agency noted.

Moody’s ex­pects the banks’ as­set qual­ity to worsen sig­nif­i­cantly as a re­sult of coro­n­avirus dis­rup­tions, although the in­crease in prob­lem loans will not be ev­i­dent un­til 2021 be­cause of reg­u­la­tory for­bear­ance mea­sures, in­clud­ing a mora­to­rium on loan re­pay­ments.

“The banks’ prof­itabil­ity will also de­te­ri­o­rate largely be­cause of higher credit costs and a com­pres­sion in net in­ter­est mar­gins fol­low­ing suc­ces­sive pol­icy rate cuts by the Cen­tral Bank. The banks’ cap­i­tal and fund­ing will, how­ever, re­main as key strengths,” the rat­ing agency noted. Moody’s in­cor­po­rates a high or very high level of govern­ment sup­port in the long-term de­posit ratings of the three banks. How­ever, this does not lead to any rat­ing boost be­cause the banks’ BCAS are al­ready at the same level as the sovereign rat­ing.

Mean­while, Moody’s said it has de­cided to with­draw the ratings of BOC for its own busi­ness rea­sons.

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