Singapore, October 31, 2019 -- Moody's Investors Service has affirmed the long-term/short-term
local currency deposit ratings of Bank of Ceylon (BOC), Hatton National
Bank Ltd. (HNB) and Sampath Bank PLC at B2/NP.
At the same time, Moody's has affirmed the long-term
foreign currency issuer ratings and long-term/short-term
foreign currency deposit ratings of these three banks at B2 and B3/NP
respectively.
Moody's has also affirmed the Baseline Credit Assessments (BCAs)
and adjusted BCAs of the three banks at b2. As a result,
Moody's has affirmed their local and foreign currency Counterparty
Risk Ratings (CRRs) and Counterparty Risk Assessments (CR Assessments)
at B1/NP and B1(cr)/NP(cr), respectively.
Moody's has maintained the rating outlooks of the banks at stable.
RATINGS RATIONALE
Moody's has affirmed the ratings and assessments of the three Sri
Lankan banks because they have adequate capital buffers against the backdrop
of deteriorating asset quality and profitability. Moreover,
these banks have stable funding and liquidity which support their standalone
credit profiles.
The asset quality of the banks is deteriorating mainly because of weaknesses
in the agriculture and construction segments and dampened consumer sentiment,
against the backdrop of a challenging operating environment in the country.
Moody's expects some problems in the tourism-related exposures
once the debt moratorium ends in July 2020.
As a result, Moody's expects the banks' profitability
to remain strained by elevated credit costs, higher taxes and muted
loan growth. Moody's also expects that the recent central
bank's mandated cut to the lending rates will add pressure to net
interest margins, further straining bank profitability.
For BOC, Moody's notes downward pressure on its standalone
credit profile stemming from its weaker asset quality and profitability.
BOC's annualized return on assets (ROA) declined to 0.6%
in the first half of 2019 from 0.8% in 2018.
BOC's capitalization is also modest, with a common equity
tier 1 (CET1) ratio of 10.7% at the end of June 2019.
Nevertheless, Moody's expects that the bank will maintain
stable capital ratio by lowering dividend payouts. Slow credit
growth will also support its capitalization.
HNB and Sampath maintain adequate capital buffers against rising credit
risk, as measured by their CET1 ratios of 13.0% and
13.7%, respectively, as of 30 June 2019.
Nevertheless, their ROAs has also deteriorated to 0.9%
each in the first half of 2019 from 1.7% and 1.3%,
respectively, in 2018.
For the three banks, their weakening asset quality and profitability
are balanced by their good funding and liquidity, as underpinned
by their strong deposit franchises, with sizeable market shares
in system deposits.
Moody's does not have any particular governance concern for the
three Sri Lankan banks, and does not apply any corporate behavior
adjustment to the banks. Moody's views their risk management framework
as consistent and commensurate with their risk appetite.
AFFIRMATION OF LONG-TERM RATINGS
Moody's government support assumptions for the three banks are driven
by the systemic importance of these banks, as well as the government's
track record of supporting the banking system.
Moody's incorporates a very high level of government support in
the ratings of BOC, given its 100% ownership by the Government
of Sri Lanka (B2 stable) and dominant share of system loans and deposits.
Moody's incorporates a high level of government support in the ratings
of HNB and Sampath, based on their significant market shares of
system loans and deposits.
Nevertheless, given that the adjusted BCAs of these banks are already
at the same level as the sovereign rating, their long-term
local currency deposit and foreign currency issuer ratings do not benefit
from any uplift due to government support.
The B3 long-term foreign currency deposit ratings of the banks
are constrained by Sri Lanka's foreign currency deposit ceiling.
WHAT COULD MOVE THE RATING UP
An upgrade of the banks' long-term ratings is unlikely,
because the ratings are already at the same level as the sovereign rating,
and the sovereign rating outlook is stable.
WHAT COULD MOVE THE RATING DOWN
A downgrade of the sovereign rating would result in a downgrade of the
banks' long-term ratings.
Moody's could also downgrade the banks' BCAs if there is a
material deterioration in solvency factors, such as asset quality
or capital. Tighter liquidity and increased reliance on market
funding could also lead to a downgrade of the BCA.
The principal methodology used in these ratings was Banks published in
August 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Bank of Ceylon, headquartered in Colombo, reported total assets
of LKR2.28 trillion at 30 June 2019.
Hatton National Bank Ltd., headquartered in Colombo,
reported total assets of LKR1.14 trillion at 30 June 2019.
Sampath Bank PLC, headquartered in Colombo, reported total
assets of LKR962 billion at 30 June 2019.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Alka Anbarasu
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Graeme Knowd
MD - Banking
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
