Fitch places Bank of Ceylon on Rating Watch Negative

Wednesday, 13 April 2022 00:23 - - {{hitsCtrl.values.hits}}

Fitch Ratings said yesterday it has placed Bank of Ceylon’s (BOC) Long-Term Foreign-Currency Issuer Default Rating (IDR) of ‘CC’, Long-Term Local-Currency IDR of ‘CCC’, and Viability Rating (VR) of ‘cc’ on Rating Watch Negative (RWN).

BOC's Government Support Rating of ‘No Support’ has been affirmed. Fitch has also placed BOC's National Long-Term Rating of ‘AA-(lka)’ on RWN.

Fitch said the RWN on BOC's VR and IDRs has been driven by heightened near-term downside risks to Sri Lankan banks, including BOC, from constrained access to foreign currency funding and indications of stress experienced by banks in the system as result.

This risk is exacerbated through the sovereign's credit profile (Sri Lanka: Long-Term Foreign Currency IDR of ‘CC’ and Long-Term Local-Currency IDR of ‘CCC’) and ensuing risks to the stability of the financial system.

Fitch believes mounting currency stress is increasing the likelihood of restrictions being imposed on BOC's ability to service obligations in foreign currency and the local currency in the event of a sovereign default, or if confidence erodes before that default event.

BOC's Long-Term Local-Currency IDR takes into consideration that the risk of local currency restrictions being imposed is lower than that of foreign-currency restrictions should the sovereign move towards default.

“We have lowered BOC's business profile score to ‘ccc’/negative, from ‘b-’/negative, given the bank's vulnerability to increased risks in the Sri Lankan market that would hurt its ability to generate and defend business volume.

“The score also takes into account BOC's dominant domestic market position as Sri Lanka's largest bank, accounting for around 20% of sector assets. The negative outlook captures the pressure on BOC's business profile stemming from the OE and, ultimately, the sovereign,” Fitch said.

“We lowered BOC's risk profile to ‘cc’/negative, from ‘ccc’/negative, to reflect the bank's exposure to the sovereign and broader public sector, in particular those denominated in foreign currency – which elevates its risk profile.

“This includes its significant exposure via loans, off-balance-sheet transactions, and securities, exposing the bank to the sovereign's repayment capacity and liquidity position. The negative outlook reflects downside risk to BOC’s risk profile from the OE and the sovereign,” it added.

Fitch also said BOC's asset-quality score has been lowered to ‘cc’/negative, from ‘ccc’/negative, to reflect the likely deterioration of corporate and household balance sheets in increasingly challenging macroeconomic conditions and the significant exposure to the sovereign and broader public sector. The negative outlook reflects our view of downside risk to the asset-quality score from its exposure to the sovereign and the OE. BOC's earnings and profitability score has been revised down to ‘ccc+’/negative from ‘b-’/negative.

This captures the higher risks to earnings and profitability, and the increased possibility of the bank becoming structurally unprofitable for a sustained period. The negative outlook on the score is due to the downside risk from potential economic fallout, Fitch added.