Fitch Ratings says SL’s largest banks most susceptible to sovereign risk

Fitch Ratings has published a special report today (01), stating that it believes Sri Lanka’s largest banks are the most susceptible to heightened sovereign risk due to their greater exposure to foreign-currency denominated government securities and, in some cases, weak capital positions.

This exposure for Fitch-rated banks stood at around 6.4% of total assets and 78% of total equity at end-2020.

“For every 10% reduction in the value of foreign-currency denominated government securities, we calculate that the large banks’ common equity Tier 1 ratios would have dropped by 18-219bp as at end-2020. Some smaller banks may appear to be relatively unscathed by such an exposure, but they would not be immune to any spillover effects of sovereign stress,” the report said.

Bank Ratings Constrained by Sovereign: We expect bank ratings to remain constrained by, and closely linked to, our assessment of the Sri Lanka sovereign, which has a ‘CCC’ Long-Term Local-Currency Issuer Default Rating, due to the strong correlation between the sovereign and bank credit profiles.

“This stems from the banks’ significant direct exposure to the sovereign, largely via their government-security holdings as well as to the wider domestic economy and local financial markets through their Sri Lanka-centric operations,” the report said.