Fitch Ratings has affirmed Standard Chartered Bank, Sri Lanka’s (SCBSL) National Long-Term Rating at ‘AAA(lka)’. The Outlook is Stable.
Key Rating Drivers
Robust Parental Support: SCBSL’s National Long-Term Rating is supported by Fitch’s expectation of a high likelihood of support from the head office, Standard Chartered Bank (SCB, A+/Stable/a), if necessary, although this is subject to any regulatory limits on remittances to Sri Lanka. This expectation stems from SCBSL’s position as a branch of SCB, making it 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 one of the strongest among Fitch-rated domestic entities. Consequently, SCBSL’s rating is at the highest end of Sri Lanka’s National Rating scale.
Strong Linkages: The high probability of support is reinforced by the alignment of SCBSL’s and the group’s strategic objectives and their robust 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 Remain High: The branch’s core capitalisation metric – the regulatory common equity Tier 1 (CET1) ratio – remained high at 33.2% at end-3Q24 (end-2023: 36.0%). We estimate the post-audit CET1 ratio would have been 40% upon the inclusion of profit for 9M24. We expect capital buffers to remain robust despite a potential resumption in profit repatriation from 2025, similar to peers, and the growth in risk-weighted assets as the loan book expands.
High Liquidity: We believe SCBSL’s liquidity remains robust, although levels may drop in 2H25 as it pursues loan growth in line with its conservative risk appetite. The branch continues to place a portion of its excess foreign-currency liquidity at SCB’s other foreign branches while its Sri Lankan rupee liquidity is increasingly maintained in government securities, following the country’s debt optimisation. Loans were 33% of assets while other liquid placements accounted for 55% at end-3Q24, which covered nearly all its deposits.
Profitability to Moderate: We expect profitability to moderate in the medium term because of narrower net interest margins, and a normalisation in fees and trading gains as market conditions stabilise amid the lower interest rate environment. However, non-recurring impairment reversals could support profit in 2025.
SCBSL’s operating profit/risk-weighted assets remained high at 13.5% at end-3Q24 (14.4% in 2023). This was due to healthy net interest margins (end-3Q24: 7.3%, end-2023: 6.9%) given the increased allocation to government securities, healthy fee income, and impairment reversals.
Gradual Asset-Quality Improvement: SCBSL’s stage 3 loan ratio improved to 6.2% by end-3Q24, from 11.7% at end-2023, a trend that is likely to continue in the near to medium term. This improvement was largely due to the growth in the loan book, while the stock of stage 3 loans also declined. Loan-loss allowances/gross loans decreased to 8.4% by end-3Q24 (14.9% at end-2023). However, the decrease in stage 3 loans kept provision coverage adequate at 136% of impaired loans.
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 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.
