Fitch affirms Citibank N.A. Colombo Branch at ‘AAA’; Outlook Stable

Fitch Ratings has affirmed Citibank N.A. Colombo Branch’s (CitiSL) National Long-Term Rating at ‘AAA(lka)’. The Outlook is Stable.

CitiSL’s rating reflects Fitch’s expectation of a high probability of support from the head office – Citibank N.A. (Citi, A+/Stable/a), if required, subject to any regulatory constraints on remitting money into Sri Lanka, given its status as a branch of Citi, making the branch a part of the same legal entity. Fitch’s opinion of a high probability of support also stems from the alignment of CitiSL’s objectives and strong operational integration with Citigroup. The small size of the branch, at only 0.01% of Citi’s total assets, implies that support would not be material to Citi.

Citi’s Long-Term Issuer Default Rating (IDR) is significantly higher than Sri Lanka’s Long-Term Local-Currency IDR of ‘CCC-’, and the branch’s support-driven credit profile is among the strongest of rated domestic entities. This results in CitiSL’s rating being at the highest end of the National Rating scale for Sri Lanka.

CitiSL’s balance sheet remains conservatively managed, with the primary focus on ensuring robust liquidity buffers. Liquid assets, comprising government securities, balances and placements within the broader Citigroup accounted for 65% of assets with a further 11% of assets being placed with the Central Bank of Sri Lanka. These liquid assets covered CitiSL’s entire deposit base. 

Elevated liquidity buffers are also reflected in its high all-currency liquidity coverage ratio of 522% at end-2023.

The branch’s selective exposures, which are limited to top-tier local and multinational corporates, have helped CitiSL to weather the asset-quality pressures that are evident in the sector. CitiSL continues to maintain zero non-performing loans, although the bank had a large share of loans being classified as stage 2 loans (89% at end-2022) to reflect the significant increase in credit risk driven by the sovereign’s default on its foreign-currency obligations.

Fitch expects CitiSL to sustain above-average capital ratios despite the restarting profit repatriation. The branch resumed sending profit to its parent in 2023, remitting all of its 2022 profits, following a three-year hiatus caused by the dollar shortage in Sri Lanka. Excluding its 2023 profits, the branch recorded a common equity Tier 1 (CET1) capital ratio of 26.3% at end-2023. “We expect this ratio to rise by over 10pp given the strong profitability in 2023. Fitch expects CitiSL to maintain CET1 ratios above 20% over the medium term,” Fitch added.

The branch’s 2023 profitability was the strongest in its history. Operating profit/risk-weighted assets rose to 25.6% by end-2023 (end-2022: 12.4%), supported by wider net interest margins (NIM), net gains from available for sale investments, revaluation gains and impairment reversals. Fitch expects profitability to normalise in the near to medium term as NIMs narrow on lower interest rates while reduced volatility in interest rates and exchange rate could suppress other income.