Fitch downgrades Bank of Ceylon to ‘CCC’ on sovereign downgrade

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By Editor_1
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COLOMBO – Fitch Ratings on Tuesday (8) announced it had downgraded Bank of Ceylon’s (BOC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to ‘CCC’, from ‘B-‘, in the wake of a similar downgrade on November 27 and  its  assessment of the operating environment.  It said the ratings do not carry an outlook because of the potentially high volatility at this rating level, in line with Fitch’s rating definitions, but noted it had downgraded BOC’s Viability Rating to ‘ccc’ from, ‘b-‘, and had revised the Support Rating Floor to ‘No Floor’, from ‘B-‘.

Fitch said BOC’s National Long-Term Ratings were not considered in the review.

Noting that BOC’s Long-Term IDR is driven by the bank’s intrinsic strength, as expressed by its Viability Rating, Fitch said the ratings were constrained by the sovereign IDR.

“We believe the operating environment (‘ccc’/negative) continues to have a high influence on bank ratings, as it affects the level of risk of doing business and banks’ financial and non-financials rating factors. Our assessment reflects that risks are skewed to the downside given the sovereign’s weakened credit profile and the impact of the coronavirus pandemic,” it said.

Expecting the GDP to contract by 6.7% in 2020 and to begin recovering in 2021 by 4.9%, partly driven by the low-base effect, Fitch said its forecasts are subject to a high degree of uncertainty regarding the evolution of the pandemic globally and in Sri Lanka. The downgrade and negative outlook on risk appetite and most of the financial profile factors, it said, reflect the downside risks to borrowers’ credit worthiness and the stability of the bank’s financial metrics stemming from the operating environment.

Fitch said it had lowered BOC’s risk appetite score to ‘ccc’/negative to reflect heightened risk from its significant exposure to the sovereign and non-State exposures that could be susceptible to deteriorating operating conditions.

“We believe the bank’s exposure to State and State-related entities could rise in the near to medium term, as it may be asked to take the lead in supporting businesses and individuals affected by the pandemic,”  the ratings body said, noting BOC’s loans rose by 25% in 9M20; a much higher increase than the sector average of 10% and that of private-sector peers.

BOC’s asset quality score of ‘ccc’/negative, Fitch said, was aligned with its risk appetite score and reflects the rating body’s expectation of higher impairment ratios. It also reflects Fitche’s belief that the bank’s asset quality may come under more pressure than that of domestic peers.

“We expect underlying asset-quality stress to build from already elevated levels despite relief measures, such as restructuring under loan-repayment moratoriums, which have largely halted the recognition of credit impairment thus far,” Fitch said, adding that it had lowered BOC’s earnings and profitability score to ‘b-‘/negative, despite higher-than-sector loan expansion, as pre-provision operating profit may not be able to provide sufficient headroom if credit costs outpace income growth.

Fitch said it  also lowered BOC’s funding and liquidity score to ‘b-‘/negative due to rising challenges in accessing and pricing foreign-currency funding, even though BOC is likely to benefit from its State linkages and entrenched domestic deposit franchise for local-currency funding. BOC has the largest foreign-currency deposit base in Sri Lanka and has significant foreign-currency denominated non-deposit funding.

Fitch also noted that it had  maintained the bank’s capitalization and leverage score at ‘b-‘/negative, reflecting the heightened constraints on accessing capital given the State’s weak ability to provide support should BOC’s capital need to be replenished, since it is a fully State-owned bank. “BOC’s exposure to the State sector bolsters its reported ratios, which are mostly risk-weighted at 0%. Still, its core capitalisation remains thin, and its capital buffers may reduce further if it uses its capital-conservation buffer of 1%, as permitted by the Central Bank of Sri Lanka under the country’s pandemic-related relief measures,” Fitch cautioned.

Fitch said the revision of the Support Rating Floor to ‘No Floor’ and the affirmation of the Support Rating of ‘5’ reflect its opinion that extraordinary sovereign support for the bank cannot be relied upon, explaining, “We believe the sovereign’s ability to provide extraordinary support is severely constrained by its weakened financial flexibility, the size of the banking sector relative to the economy and high vulnerability to large banking system losses in the downturn, despite a high propensity for the sovereign to extend support to its bank.”

-ENCL

 

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