Fitch places HDFC and SMIB on Rating Watch Positive pending acquisitions

• Ratings action after Govt. proposal for Bank of Ceylon to acquire HDFC, People’s Bank to acquire SMIB 
• Notes HDFC’s eroding competitiveness in the housing loan segment, driven predominantly by EPF-backed loans, and deteriorating loan and deposit market share
• SMIB profitable, yet capital below the regulatory minimum of Rs. 7.5 b; shortfall estimated at Rs. 2-3 b 

Fitch Ratings has placed Housing Development Finance Corporation Bank of Sri Lanka’s (HDFC) National Rating of ‘BB+(lka)’ and State Mortgage & Investment Bank’s (SMIB) National Rating of ‘BB(lka)’ on Rating Watch Positive (RWP). HDFC’s rating was previously on a Negative Outlook.

The rating action follows the announcement by the Government on 11 November that the Cabinet of Ministers granted approval for the proposal to transfer all the State-owned shares of HDFC and SMIB to Bank of Ceylon (BOC; CCC+/AA-(lka)/Stable) and People’s Bank (Sri Lanka) (PB; AA-(lka)/Stable), respectively. The modalities and resolution of the intended acquisitions are not yet known.

“The RWP reflects Fitch’s view that the acquisitions of HDFC and SMIB by BOC and PB, respectively, would result in HDFC and SMIB benefitting from a very high likelihood of support from their new owners,” Fitch said in a statement. 

Fitch will reflect this likelihood of support via support-driven national ratings upon the completion of each transaction. Fitch expects to resolve the RWP upon closing of the transaction, and the resolution is likely to take longer than Fitch’s normal Rating Watch resolution horizon of six months.

The ratings agency has revised its Outlook on HDFC’s National Rating to Negative from Stable on 15 August to reflect potential deterioration in its standalone credit profile relative to similarly rated peers, due to regulatory restrictions on deposit mobilisation and selected lending products. These restrictions have dampened HDFC’s competitive position in the housing loan segment, which is driven predominantly by Employees’ Provident Fund (EPF)-backed loans, and its loan and deposit market share.

SMIB’s capital position remains below the regulatory minimum capital requirement of Rs. 7.5 billion. The shortfall is estimated at around Rs. 2-3 billion based on the June 2025 financials. 

“SMIB is profitable, while we believe that earnings retention alone will be insufficient to meet this shortfall in the near to medium term.” Fitch said. Fitch reviewed SMIB’s ratings with no rating action on 8 September 2025. 

Commenting on factors that could, individually or collectively, lead to negative rating action/downgrade, Fitch said: “We would remove the ratings from RWP if the acquisition does not proceed (which is not our base case). In such an instance, we would be likely to affirm SMIB’s ratings at the current standalone-driven rating levels.

For HDFC, we may affirm the ratings at the current standalone-driven rating levels and reassign the Negative Outlook on the National Rating if regulatory restrictions remain in force which continue to pose risks to its business model and overall credit profile.

However, Fitch would also consider a downgrade in HDFC’s National Rating at the time of removing the RWP, if HDFC experiences material deterioration in its franchise due to a sustained loss of competitiveness in the housing-loan segment, particularly in EPF-backed loans. Negative rating action could also stem from persistent deterioration in HDFC’s financial profile, notably if capital levels fall below the regulatory minimum of Rs. 7.5 billion and remains unaddressed for an extended period. In addition, widening asset-liability mismatches arising from the bank’s inability to access funding could trigger a downgrade”.

On factors that could, individually or collectively, lead to positive rating action/upgrade, the ratings agency said: “We would be likely to remove the RWP and upgrade HDFC’s and SMIB’s National Ratings, which would then be based on Fitch’s view of the strength of extraordinary support from their new shareholders, following completion of the transaction. This could lead to a multiple-notch upgrade for HDFC and SMIB, given the shareholder strength. That said, Fitch would be likely to maintain a difference of several notches between the ratings of acquirers and the acquirees due to the latters’ limited strategic importance to the new owners”.

SMIB has a 1.78% equity stake in Fitch Ratings Lanka Ltd. No shareholder other than Fitch, Inc. is involved in the day-to-day rating operations of, or credit reviews undertaken by, Fitch Ratings Lanka.