Moody’s downgrades BOC, HNB, Sampath after Sri Lanka sovereign rating cut

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By Editor_1
AFP
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COLOMBO– Moody’s Investors Service has 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 after a cut in Sri Lanka’s sovereign rating.  It also downgraded the banks’ long-term local currency deposit ratings to Caa1 from B2, and the Baseline Credit Assessment (BCA) of BOC to caa1 from b3, and those of HNB and Sampath to caa1 from b2.

“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,” the rating agency said in a statement, warning that itexpects 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 rating agency also forecast the banks’ profitability would  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, it added.

Moody’s said it had also lowered Sri Lanka’s Macro Profile – a key input to the banks’ Baseline Credit Assessment – to ‘Weak-‘ from ‘Weak’, to reflect the deterioration in the operating environment.

While noting that the rating outlooks, where applicable, were stable, Moody’s said Tuesday’s rating actions conclude the review for downgrade that was initiated on April 20, 2020, and follow its downgrade on September 28 of Sri Lanka’s sovereign rating to Caa1 from B2, with a stable outlook.

The downgrade of the BCAs of BOC, HNB and Sampath was driven by the downgrade of Sri Lanka’s sovereign rating, Moody’s explained in a statement, noting that in particular, the coronavirus outbreak has weighed on Sri Lanka’s already weak economy and has weakened the government’s fiscal position.

Moody’s said it incorporates a high or very high level of government support in the long-term deposit ratings of the three banks, but warned  that this does not lead to any rating uplift because the banks’ BCAs are already at the same level as the sovereign rating.

However, Moody’s said it will subsequently withdraw the ratings of BOC for its own business reasons.

-ENCL

Editor_1
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