Fitch affirms Standard Chartered, Sri Lanka at ‘AAA’; Outlook stable

Monday, 17 March 2025 03:30 - - {{hitsCtrl.values.hits}}

Fitch Ratings has affirmed Standard Chartered Bank, Sri Lanka’s (SCBSL) National Long-Term Rating at ‘AAA (lka)’. The Outlook is stable.

Fitch listed the following as key rating drivers:

nRobust parental support: SCBSL’s National Long-Term Rating is supported by Fitch’s expectation of a high likelihood of support from the head office, Standard Chartered Bank (SCB, A+/Stable/a), if necessary, although this is subject to any regulatory limits on remittances to Sri Lanka. This expectation stems from SCBSL’s position as a branch of SCB, making it part of the same legal entity.

SCB’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 one of the strongest among Fitch-rated domestic entities. Consequently, SCBSL’s rating is at the highest end of Sri Lanka’s National Rating scale.

nStrong linkages: The high probability of support is reinforced by the alignment of SCBSL’s and the group’s strategic objectives and their robust operational integration. SCBSL’s small size, at only about 0.1% of SCB’s total assets, implies that support, if needed, would not be a burden to the head office.

nCapital buffers remain high: The branch’s core capitalisation metric – the regulatory common equity Tier 1 (CET1) ratio – remained high at 33.2% at end-3Q24 (end-2023: 36.0%). We estimate the post-audit CET1 ratio would have been 40% upon the inclusion of profit for 9M24. We expect capital buffers to remain robust despite a potential resumption in profit repatriation from 2025, similar to peers, and the growth in risk-weighted assets as the loan book expands.

nHigh liquidity: We believe SCBSL’s liquidity remains robust, although levels may drop in 2H25 as it pursues loan growth in line with its conservative risk appetite. The branch continues to place a portion of its excess foreign-currency liquidity at SCB’s other foreign branches while its Sri Lankan rupee liquidity is increasingly maintained in government securities, following the country’s debt optimisation. Loans were 33% of assets while other liquid placements accounted for 55% at end-3Q24, which covered nearly all its deposits. Profitability to moderate: We expect profitability to moderate in the medium term because of narrower net interest margins, and a normalisation in fees and trading gains as market conditions stabilise amid the lower interest rate environment. However, non-recurring impairment reversals could support profit in 2025.

SCBSL’s operating profit/risk-weighted assets remained high at 13.5% at end-3Q24 (14.4% in 2023). This was due to healthy net interest margins (end-3Q24: 7.3%, end-2023: 6.9%) given the increased allocation to government securities, healthy fee income, and impairment reversals.

nGradual asset-quality improvement: SCBSL’s Stage 3 loan ratio improved to 6.2% by end-3Q24, from 11.7% at end-2023, a trend that is likely to continue in the near to medium term. This improvement was largely due to the growth in the loan book, while the stock of Stage 3 loans also declined. Loan-loss allowances/gross loans decreased to 8.4% by end-3Q24 (14.9% at end-2023). However, the decrease in Stage 3 loans kept provision coverage adequate at 136% of impaired loans.