Singapore, November 20, 2018 -- Moody's Investors Service has downgraded the long-term local
currency deposit and foreign currency issuer ratings of Bank of Ceylon
(BOC), Hatton National Bank Ltd. (HNB) and Sampath Bank PLC
(Sampath) to B2 from B1.
At the same time, Moody's has downgraded the long-term
foreign currency deposit ratings of the same three banks to B3 from B2.
And, Moody's has affirmed the short-term local and
foreign currency deposit ratings of the banks at NP.
Moody's has also downgraded the Baseline Credit Assessments (BCAs)
and adjusted BCAs of the three banks to b2 from b1.
As a result, Moody's has downgraded the banks' long-term
local and foreign currency Counterparty Risk Ratings (CRRs) to B1 from
Ba3, and their long-term Counterparty Risk Assessments (CRAs)
to B1(cr) from Ba3(cr).
In addition, Moody's has affirmed the banks' short-term
CRR of NP and short-term CRA of NP(cr).
And, Moody's has revised the rating outlooks of the banks,
where applicable, to stable from negative.
The rating actions follow the downgrade of Sri Lanka's sovereign rating
to B2 from B1 on 20 November 2018, and the change in the sovereign's
rating outlook to stable from negative on the same date. To reflect
the deterioration in the operating environment, Moody's has
also lowered Sri Lanka's Macro Profile to "Weak" from
"Weak+". The rating action on Sri Lanka's
sovereign rating is discussed in greater detail in Moody's press
release dated 20 November 2018:
https://www.moodys.com/research/Moodys-downgrades-Sri-Lankas-ratings-to-B2-changes-outlook-to--PR_391459
RATINGS RATIONALE
WEAKENING OPERATING ENVIRONMENT WILL PUT PRESSURE ON BANK ASSET QUALITY
AND PROFITABILITY
Moody's expects that the recent political and financial market developments
in Sri Lanka will weigh on the country's already weak GDP growth.
In addition, tightening external financial conditions and domestic
political instability are resulting in capital outflow and placing increasing
pressure on the exchange rate and foreign exchange reserves. The
Sri Lankan rupee has depreciated about 13% over the past 12 months
(9% over the last three months) to 176.7 to the US dollar
as of 16 November 2018.
Moody's expects that, after years of strong credit growth,
the weakening operating environment will have a negative impact on the
banks' asset quality and profitability, as seen by the systemwide
nonperforming loan ratio increasing to 3.6% as of August
2018 versus 2.5% in December 2017.
To reflect the deterioration in the operating environment, Moody's
has lowered Sri Lanka's Macro Profile to "Weak" from
"Weak+", which in turn led Moody's to downgrade
the BCA and adjusted BCA of BOC and Sampath to b2 from b1. In the
case of HNB, its BCA and adjusted BCA of b2 is constrained by Sri
Lanka's sovereign rating.
DOWNGRADE OF LONG-TERM RATINGS
Moody's has kept the government support assumptions for the three Sri
Lanka banks unchanged, driven by the systemic importance of these
banks, as well as the government's record of supporting the
banking system. Furthermore, Moody's believes that
there is a high level of dependency between the creditworthiness of rated
Sri Lankan banks and the sovereign, because of the domestic nature
of their operations and their significant direct and indirect exposures
to domestic sovereign debt relative to their capital bases.
As a result, Moody's incorporates a very high level of government
support in the ratings of BOC, given its 100% ownership by
the government and dominant share of system loans and deposits.
And, Moody's incorporates a high level of support in the ratings
of HNB and Sampath, given their significant market shares of system
loans and deposits.
Nevertheless, given that the adjusted BCA of these banks is already
at the level of the sovereign rating, their long-term local
currency deposit and foreign currency issuer ratings do not benefit from
any uplift due to government support. At the same time, HNB's
adjusted BCA and long-term deposit and issuer ratings are constrained
by Sri Lanka's sovereign rating of B2, given HNB's significant
exposure to the Sri Lankan government; a situation which is common
in relation to other Sri Lankan banks.
The downgrade of the long-term foreign currency deposit ratings
of the three Sri Lankan banks to B3 from B2 is driven by the lowering
of the sovereign ceilings. In the sovereign rating action,
Sri Lanka's foreign currency deposit ceiling was lowered to B3 from
B2.
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.
Nevertheless, Moody's could downgrade the banks' BCAs
if there is a material deterioration in solvency factors, such as
asset quality or capital. Increased reliance on market funding
or a lower level of liquidity would also add downward pressure on their
BCAs.
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 LKR2,145 billion at 30 September 2018.
Sampath Bank PLC, headquartered in Colombo, reported total
assets of LKR926 billion at 30 September 2018.
Hatton National Bank Ltd., headquartered in Colombo,
reported total assets of LKR1,090 billion at 30 September 2018.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead rating analyst and the Moody's legal entity that has issued
the ratings.
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.
Tengfu Li
Analyst
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
