Sri Lankan banks operating environment (OE) assessment and total credit profiles will be supported by any enhancement in the sovereigns credit profile (Long-Term Foreign-Currency IDR: RD, Long-Term Local-Currency IDR: CCC-) following a finished debt restructuring, says Fitch Ratings.This is due to the strong link between sovereign financial health and banks operating conditions.
Our company believe this would be positive for the National Ratings of Fitch-rated big Sri Lankan banks albeit based on their creditworthiness relative to other Sri Lankan issuers, the rating firm said.Sri Lankan banks present OE rating of ccc-/ stable is connected closely to the sovereigns local-currency credit profile, offered their predominant exposure to the domestic economy and federal government securities (local-currency treasury instruments: 33.4% of possessions and foreign currency instruments: 3.4% at end-1H24) and lending to the wider public sector.The sovereign exposure tends to be greater among the big banks, and state-owned enterprise (SOE) exposure is mostly at the 2 state-owned D-SIBs.
We expect an improvement in Sri Lankas credit profile to alleviate sovereign-related pressures on the banks, which is likely to be credit positive in regards to our monetary and non-financial assessments.As per Fitchs National Scale Rating Criteria, the beginning point to obtain a national score is an evaluation of the companies credit quality on the international score scale, which may be reassessed following a sovereign ranking change.In such instances, Fitch will upgrade the nationwide rankings of affected local providers to show modifications in relative rankings following the sovereign score change.Fitch last recalibrated the firms Sri Lankan national rating scale on 12 January 2023 to reflect modifications in the relative creditworthiness amongst Sri Lankan providers following the downgrade of the sovereigns Long-Term Local-Currency IDR to CC from CCC.The ratings of in your area incorporated banks, leaving out Cargills Bank PLC (A(lka)/ Negative) which is driven by our expectation of extraordinary shareholder assistance, are based on their standalone credit profiles.
We do not factor assistance into the rankings on the two state-owned D-SIBs, despite their strong state linkages, provided the sovereigns constrained capability to provide remarkable support.However, a sustained enhancement in the sovereigns financial versatility might cause a reconsideration of state support, the declaration said.Sri Lanka is close to completing its foreign-currency financial obligation restructuring.
A successful result, in line with the proposed structure for regional shareholders, would be most likely to substantially decrease the challenges dealt with by banks, enhancing their financial profiles, Fitch Ratings said.Pressures on foreign- and local-currency financing and liquidity have actually relieved considerably due to better external sector flows and the banks efforts to preserve liquidity.
We expect banks to restore access to foreign-currency wholesale funding, following the repair of the sovereigns creditworthiness.Source: Fitch Ratings-- Agencies