Moody’s revises three SL bank outlooks to negative
Moody’s Investors Service has affirmed the long-term ratings of three banks in Sri Lanka (B1 negative). Moody’s has also revised their ratings outlooks to negative from stable.
The affected banks are
Bank of Ceylon, Hatton National Bank Ltd, and Sampath Bank PLC. The baseline credit assessments (BCAs) and Adjusted BCAs of the three banks were affirmed at B1.
The rating actions follow the affirmation of Sri Lanka’s B1 sovereign rating, and the change in outlook on the sovereign rating to negative from stable on 20 June 2016.
The counterparty risk assessments (CRAs) of the three banks were affirmed at Ba3(cr)/NP(cr).In Moody’s view, the operating conditions for Sri Lanka’s banks have weakened because of lower-than- expected policy effectiveness.
As a result, Moody’s has changed Sri Lanka’s Macro Profile to “Moderate -”from “Moderate”. The credit ratings on the three banks were affirmed and their outlooks changed to negative because Moody’s affirmed Sri Lanka’s B1 sovereign rating and changed its outlook to negative from stable on June 20, 2016.
The ratings and outlooks of banks typically follow the ratings and outlooks of their respective governments if the banks’ ratings are positioned at the same level as capped by the sovereign rating.
The fiscal consolidation path targeted by the authorities and outlined in the IMF program is ambitious; sustaining such efforts will challenge the government’s institutional capacities and might affect GDP growth over the short term. The decrease in score for Sri Lanka’s Macro Profile has had no impact on the BCAs of the three Sri Lankan banks.
Moody’s has affirmed the b1 BCAs and b1 Adjusted BCAs of the three banks.
For Bank of Ceylon, its b1 BCA was affirmed owing to the bank’s broadly stable asset quality with a 3.8% problem loans ratio at end-March 2016, as well as Moody’s expectation that its profitability will increase because of lower loan loss provisions and improved margins.
For Hatton National Bank Ltd., its BCA was affirmed because of the bank’s moderate capital adequacy position with a TCE ratio of 10.3% at end-March 2016. In addition, it has healthy profitability with a return on average assets of 1.8% for 1Q 2016. The BCA also captures the bank’s tight liquidity profile as seen in the high loans-to-deposits ratio of 98% at end-March. The bank’s asset quality improved in 2015 and early 2016, with problem loans of 2.4% as of the same date.
Moody’s notes that the bank’s rapid credit growth of 26% in 2015 could mask asset quality challenges because a large proportion of loans is unseasoned.
The BCA of Sampath Bank PLC was affirmed because of the bank’s healthy asset quality; a problem loans ratio of 1.64% at end-2015 and problem loans coverage of 111%. Similar to Hatton National Bank, Sampath Bank reported very high loan growth of 24% in 2015, which could mask asset quality challenges. Profitability remains key credit strength of the bank, with its return on average assets over the last three years averaging at 1.23%.
The bank’s capital levels are low, with a TCE ratio of 6.9% end-2015.
The Counterparty Risk Assessments of the three banks were affirmed because
of the respective affirmation of these banks’ Adjusted BCAs.
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