Fitch Ratings placed 13 state and private banks in Sri Lanka under watch for possible downgrade (rating watch negative) due to forex shortages in the banking system.
Domestic banks’ foreign-currency funding and liquidity positions are prone to sudden changes amid already weak creditor sentiment. Loan and deposit dollarisation for the sector was at 18% of total loans and 17% of total deposits at end-2021.
“Sri Lanka’s operating environment remains challenging and our negative outlook on the score reflects the significant near- to medium-term downside risk presented by the weakening sovereign credit profile, as spillover effects could damage the country’s economic performance,” Fitch said in an April 2022 announcement. “This has led us to revise our 2022 outlook on the banking sector to ‘Deteriorating’, from ‘Neutral’.”
Fitch said that macroeconomic challenges are likely to be greater than initially anticipated which could result in a sharp deterioration in asset quality and impaired profitability metrics that expose the banks to capital deficiencies.
The rating watch negative which came in April 2022 reflects heightened near-term downside risk stemming from constrained access to foreign-currency funding and the resulting indications of stress experienced by the banks in the system, Fitch said in a statement.
“This risk is exacerbated by the sovereign’s credit profile (LongTerm Foreign-Currency Issuer Default Rating (IDR): CC, Long-Term Local-Currency IDR: CCC) and the ensuing risks to the stability of the financial system,” the rating agency said.
The 13 banks on Rating Watch Negative (RWN) are People’s Bank, Commercial Bank of Ceylon PLC, Hatton National Bank PLC, Sampath Bank PLC, National Development Bank PLC, DFCC Bank PLC, Seylan Bank PLC, Nations Trust Bank PLC, Pan Asia Banking Corporation PLC, Union Bank of Colombo PLC, Amana Bank PLC, SANASA Development Bank PLC, and Housing Development Finance Corporation Bank of Sri Lanka (HDFC).
Fitch had also placed state banking giant Bank of Ceylon on RWN.
“We believe mounting currency stress increases the likelihood of restrictions being imposed on banks’ ability to service their obligations in foreign currency – excluding HDFC, as the bank, does not have any outstanding foreign-currency obligations – and the local currency in the event of a sovereign default, or prior, should confidence deteriorate,” Fitch said.
Fitch noted that it aimed to resolve the RWN in the next six months, depending on the evolution of the banks’ funding and liquidity positions, which could result in multiple notch downgrades.