Sri Lankan banks’ ratings under pressure as operating conditions weaken

Fitch Ratings, releasing its latest report yesterday (20), said it has revised down the operating environment (OE) score for Sri Lankan banks to ‘B-’ from ‘B’ after the sovereign rating was downgraded to ‘B-’ in April 2020. The Outlook on Sri Lanka’s Long-Term Issuer Default Rating (IDR) is Negative, as is the outlook on the OE score. The downgrading was done in May. The change in the OE score followed a revision in the outlook on the score to Negative from stable in January, which came on the heels of a revision in the Outlook on Sri Lanka ‘B’ sovereign is rating to Negative from Stable in December 2019. “These actions show that the OE score for banks is usually constrained by the sovereign rating. The OE score change also reflects Fitch’s assessment that the risk of doing business in Sri Lanka could rise in the medium term. The current OE assessment factors in the pressure arising from the coronavirus pandemic and the possibility of further risk if the pandemic worsens or lingers,” the ratings agency said. The assigned OE score is consistent with the implied score for Sri Lankan banks, which is at the lower end of the ‘B’ range. This reflects a GDP per capita of around $ 4,000 and a 48.2 percentile ranking under the World Bank’s Ease of Doing Business index for 2019. Fitch also considers qualitative aspects when assigning the OE score, such as the sovereign rating, macroeconomic stability, size and structure of the economy, economic performance, the level and growth of credit, financial market development, regulatory and legal framework and international operations. Fitch’s Macro Prudential Risk Indicator (MPI) of 2 for Sri Lanka indicates that there is moderate vulnerability to potential stress in the banking system and the broader economy.  

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