Fitch maintains Sri Lanka’s HDFC Bank’s ‘BB+(lka)’ National Rating on Watch Negative

Fitch Ratings has maintained the Rating Watch Negative (RWN) on Housing Development Finance Corporation Bank of Sri Lanka’s (HDFC) National Long-Term Rating of ‘BB+(lka)’.

The RWN on HDFC’s National Long-Term Rating reflects potential for deterioration in the bank’s creditworthiness relative to other entities on the Sri Lankan national ratings scale, given the heightened stress on the bank’s funding and liquidity. The risk is exacerbated by the sovereign’s credit profile (Long-Term Foreign-Currency Issuer Default Rating [IDR]: RD, Long-Term Local-Currency IDR: CCC [UCO]) and the ensuing risks to the stability of the financial system.

“We also believe that the sharp rise in inflation, depreciation of the local currency, and other economic stresses can distort the bank’s underlying financial position in the current operating environment.”

Fitch expects HDFC funding and liquidity profile to be exposed to dislocations in funding markets and high volatility in local-currency markets as a result of the weakened sovereign profile. The bank’s liquidity was stretched, as reflected in its loan/customer deposit ratio, which increased to 93.6% by end-1H22 from 87.5% at end-2021 due to high deposit withdrawals. Additionally, HDFC’s high asset and liability mismatches, reflecting its longer-tenor loan book and short-tenor deposit base, could also intensify the bank’s liquidity risk.

“Our assessment of Sri Lankan banks’ operating environment (OE) reflects the pressure on the banks’ already-stressed credit profiles following the sovereign’s default on its foreign-currency obligations. It also captures the rapid deterioration in the broader economy, including increased interest rates, very high inflation, and acute currency depreciation. The economic stress has limited HDFC’s operational flexibility.”