Fitch Ratings – Colombo – 22 Mar 2024: Fitch Ratings Lanka has affirmed Standard Chartered Bank, Sri Lanka’s National Long-Term Rating at ‘AAA(lka)’. The Outlook is Stable.
KEY RATING DRIVERS
Strong Parental Support: Standard Chartered Bank, Sri Lanka’s (SCBSL) National Long-Term Rating is underpinned by Fitch’s expectation of a high probability of support from the head office of Standard Chartered Bank (SCB, A+/Stable/a), if required, subject to any regulatory constraints on remittances into Sri Lanka. This expectation is driven by SCBSL’s status as a branch of SCB, and therefore a part of the same legal entity.
SCB’s Long-Term Issuer Default Rating (IDR) is significantly higher than Sri Lanka’s Long-Term Local-Currency IDR of ‘CCC-‘, and the branch’s support-driven credit profile is among the strongest of the Fitch-rated domestic entities. This results in SCBSL’s rating being at the highest end of Sri Lanka’s National Rating scale.
Strong Linkages: The high probability of support is underpinned by the alignment of SCBSL’s and the group’s strategic objectives and their strong operational integration. SCBSL’s small size, at only about 0.1% of SCB’s total assets, implies that support, if needed, would not be a burden to the head office.
Capital Buffers to Remain High: The branch’s core capitalisation metric – the regulatory common equity Tier 1 (CET1) ratio – improved to 25.5% by end-3Q23 (end-2022: 22.5%) due to the reduction in risk density as its loan book contracted by 13% during 9M23. We expect capital buffers to remain robust despite a potential resumption in profit repatriation from 2024, as seen among peers, and the growth in risk-weighted assets as the loan book expands.
Notable Balance Sheet Liquidity: We believe SCBSL will continue to focus on liquidity preservation until the completion of Sri Lanka’s external debt restructuring exercise and pursue loan growth thereafter, in line with its conservative risk appetite. The branch deposits excess foreign-currency liquidity at SCB’s other foreign branches and Sri Lankan rupee liquidity is maintained with the Central Bank of Sri Lanka and other domestic banks. Loans comprised only 20% of assets while other liquid placements accounted for 78% at end-3Q23, which covered all of its deposit obligations.
Profitability to Moderate: We expect profitability to moderate in the medium term because of lower net interest margins and trading gains owing to a stabilisation in market conditions and lower interest rates. However, non-recurring impairment reversals could support profits in 2024. SCBSL’s operating profit/risk-weighted assets increased to 11.5% by end-3Q23, higher than the 7.5% in 2022. This was due to healthy net interest margins (end-3Q23: 6.6%, end-2022: 6.4%) given the high interest rate environment, trading gains due to the volatile and illiquid FX market, and lower impairments.
Asset Quality to Gradually Improve: SCBSL’s Stage 3 loans ratio improved to 9.8% by end-3Q23, from 14.6% at end-2022 – a trend that is expected to continue in the near to medium term. Prudential provisioning in light of the adverse economic conditions resulted in loan loss allowances/gross loans increasing to 20.6% by end-3Q23, from 14.4% at end-2022.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
SCBSL’s National Rating is most likely to be downgraded on material changes to Fitch’s expectation of support from SCB, such as a change in the branch’s legal status or the branch being divested. A further downgrade of the sovereign’s Long-Term Local-Currency IDR or other developments that affect the branch’s ability to service its obligations could also lead to a multiple-notch downgrade of SCBSL’s National Rating.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
There is no rating upside for the National Long-Term Rating, as it is already at the highest point on the scale.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
SCBSL’s rating is linked to SCB’s Long-Term IDR, based on its legal status as a branch of SCB.
