Fitch lowers the default rating of long-term foreign currency issuers of the BOC

0

COLOMBO (New 1st); Fitch Ratings, the credit rating agency, downgraded the Bank of Ceylon’s (BOC) long-term foreign currency issuers (IDR) default rating to “CC” from “CCC”.

In a press release, Fitch said the rating does not feature Outlook due to high volatility at that rating level, in accordance with Fitch rating definitions. Fitch also downgraded BOC’s Viability Rating (VR) to “cc” from “ccc”, and confirmed the long-term local currency IDR to “CCC”.

BOC’s long-term national rating of “AA- (lka)” was not included in this review.

In accordance with the updated bank rating criteria, we have assigned a Government Support Rating (GSR) of ‘no support’ to BOC and removed the support rating and the support rating floor, as they are no longer relevant to our coverage following the publication of our updated Bank Rating Criteria on November 12, 2021.

MAIN RATING FACTORS
IDR and SUSTAINABILITY RATING

The rating actions follow Fitch’s downgrade of Sri Lanka’s long-term foreign currency IDR to “CC” instead of “CCC” and the assertion of the long-term IDR in local currency of Sri Lanka. Sovereign to “CCC” on December 17, 2021. See Long-Term Fitch Sri IDR Downgrades in Lankan Foreign Currency to “CC”.

The degradation of the long-term IDR in foreign currency of BOC is due to the degradation of its VR. The deterioration of the VR reflects the risks weighing on the bank’s autonomous solvency, in particular due to its financing in foreign currencies and its liquidity position.

The VR is lower than the implicit score of “ccc +” because we believe that the funding and liquidity profile of BOC, which we rate as “cc” / negative, has a greater influence on the VR than the weighting suggests. . This reflects our perception of the increased risks to the stability of BOC’s foreign currency funding and liquidity resulting from the deterioration of the state’s foreign currency credit profile.

Funding in foreign currencies and increased liquidity risks could result in more difficult access and an increase in the cost of financing in foreign currencies. We believe there is a greater possibility that restrictions will be placed on BOC’s ability to honor its foreign currency obligations in the event of a sovereign default, fueling the negative outlook on the factor score. The dollarization of funding remained moderate over 9M21 and comes mainly from foreign currency deposits, which represent 23% of total deposits.

We maintain the operating environment (OE) score at “ccc” / negative, as the long-term degradation of the sovereign’s foreign currency IDR has not significantly weakened our view of the OE. The score already incorporates Sri Lanka’s weak economic environment and sovereign profile, which may limit the bank’s operational flexibility. The negative outlook on the OE score reflects the significant short to medium term downside risk presented by the weakening sovereign credit profile, as the spillover effects could impact economic performance. We expect the economy to grow in 2022, albeit at a slower pace of 2.0%, compared to an estimated 3.6% in 2021.

We reassessed BOC’s corporate profile score to “b-” / negative, from “b +” / stable, given the low profitability of operations and the potential impact on the bank’s ability to generate and defend a volume of business. The score is higher than the VR and OE scores, as it takes into account BOC’s dominant position in the domestic market as the largest bank in Sri Lanka, accounting for around 20% of the sector’s assets. The negative outlook reflects the potential pressure on BOC’s business profile from the OE and ultimately from the sovereign.

We have kept BOC’s risk profile at “ccc” / negative, as we believe the score already takes into account BOC’s expanded exposure to the sovereign sector and the broader public sector through increased exposure of the portfolio of loans to the State and to public entities. Our assessment also takes into account BOC’s investments in government securities, particularly those denominated in foreign currencies, at 6.7% of assets at the end of 2020. The negative outlook reflects the risk of a fall in the risk profile of the EO and the bank. weakness of the state.

We kept BOC’s asset quality score “ccc” / negative, which already takes into account the weakness of the EO and the bank’s risk appetite. BOC’s bad loan ratio of 9.8%, based on Phase 3 loans to 9M21 (2020: 10.3%), continued to benefit from strong loan growth and regulatory forbearance. The negative outlook reflects our view on the downside risk of asset quality ratings from exposure other than loans in the form of foreign currency securities issued by the government.

We have kept BOC’s profit and profitability score at ‘b-‘ / negative, reflecting high risk due to increased earnings volatility in a difficult OE environment, although we do not consider BOC becomes structurally unprofitable for an extended period. Operating income / risk-weighted assets recovered to 3.8% in 9M21, after falling to 2.0% in 2020 following a sharp increase in loan impairment charges. The negative outlook on the score is due to the downside risk in the potential economic fallout from any sovereign currency debt restructuring that may arise.

We have lowered BOC’s capitalization and leverage score to “ccc” / negative, from “b-” / negative, because we believe that BOC may require a capital injection if sovereign stress intensifies and ‘it must absorb a discount on its exposure to government securities denominated in foreign currencies. This is in conjunction with the increased constraints on access to capital, given the weak capacity of the sovereign to provide support in times of need to replenish BOC capital. The negative outlook reflects the risk of declining capitalization and leverage in a scenario of heightened sovereign stress.

We have confirmed BOC’s long-term local currency IDR, as it takes into consideration that the risk of imposing local currency restrictions is lower than that of foreign currency restrictions if the sovereign were to default. It reflects our perspective on the sovereign’s current and likely access to local currency financing, and the treatment conforms to Fitch’s criteria in certain circumstances when both the VR and the sovereign rating are at very low levels. The bank has so far maintained access to local currency liquidity, notably through the Central Bank of Sri Lanka, indicating a lower probability of default on local currency bonds.

GOVERNMENT SUPPORT RATING

The GSR reflects our assessment that there is no reasonable assumption of future government support. We believe that the sovereign’s ability to provide extraordinary support is severely limited, as evidenced by sovereign rating, sovereign financial flexibility and the size of the banking sector relative to the economy, despite a strong propensity of the sovereign to extend support. to the bank because of its great systemic importance and its full state ownership.

SENSITIVITY ASSESSMENT

Factors which could, individually or collectively, lead to a negative rating action / downgrade:

IDR and SUSTAINABILITY RATING

BOC’s IDR would most likely be lowered if there was additional pressure on the sovereign rating resulting from a default event. This could lead to the imposition of foreign currency restrictions, hampering the BOC’s ability to meet its foreign currency obligations, or a significant erosion of its capital buffers in the event of a significant discount on sovereign debt.

GOVERNMENT SUPPORT RATING

The rating is already at its lowest level and therefore presents no downside risk.

Factors which could, individually or collectively, lead to a positive rating action / improvement:
IDR and SUSTAINABILITY RATING

BOC’s ratings are constrained by the sovereign rating. We do not anticipate any developments that could lead to positive rating action in the short term, unless the downward pressure on the sovereign rating eases.

GOVERNMENT SUPPORT RATING

The GSR is constrained by the sovereign rating. An upward revision is possible, provided that the sovereign’s ability to provide support improves significantly. However, we do not expect this in the short to medium term.

VR ADJUSTMENTS

The assigned VR is lower than the implied VR, reflecting a negative adjustment of the weakest link in BOC’s funding and liquidity, which has a larger impact on the VR than the weighting suggests.

BOC holds a 1.78% stake in Fitch Ratings Lanka Ltd. No shareholder other than Fitch, Inc. is involved in the day-to-day rating operations of Fitch Ratings Lanka Ltd.

BEST / WORST CASE ASSESSMENT SCENARIO

The international credit ratings of financial institutions and covered bond issuers have a best-case rating upturn (defined as the 99th percentile of rating transitions, measured in a positive direction) by three notches over a horizon. three-year rating; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in the negative direction) of four notches over three years. The full range of best and worst case credit scores for all rating categories is from “AAA” to “D”. Best and worst case credit scores are based on historical performance. For more information on the methodology used to determine industry specific best and worst case credit scores, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR THE ESSENTIALLY MATERIAL SOURCE CITED AS THE MAIN RATING DRIVER

The main sources of information used in the analysis are described in the applicable criteria.

ESG CONSIDERATIONS

BOC has an ESG relevance score of “4” for the governance structure due to the concentration of ownership, with 100% state ownership and several transactions with state-owned and related parties. in the state. This has a negative impact on the credit profile and is relevant for ratings in conjunction with other factors.

Unless otherwise specified in this section, the highest level of ESG credit relevance is a score of “3”. This means that ESG matters are credit neutral or have minimal impact on the credit of the entity, either by their nature or by the way they are managed by the entity. For more information on Fitch’s ESG relevance scores, visit www.fitchratings.com/esg

Share.

Comments are closed.