Fitch Ratings this week upgraded Bank of Ceylon’s (BOC) Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CC’, from ‘RD’ (Restricted Default).
It said the rating does not carry an Outlook because of the high volatility at this rating level, in line with Fitch’s rating definitions.
At the same time, Fitch has also upgraded BOC’s Viability Rating (VR) to ‘cc’, from ‘f’ and its Short-Term IDR to ‘C’, from ‘RD’ and affirmed BOC’s Government Support Rating of ‘no support’ (ns).
BOC’s Long-Term Local-Currency IDR of ‘CCC’/Rating Watch Negative (RWN) and National Long-Term Rating of ‘A(lka)’/RWN was not considered in this review.
Fitch said Foreign-Currency Overdues Met: The upgrade of BOC’s VR and its Foreign-Currency and Short-Term IDRs reflects BOC’s improved foreign-currency liquidity position since June 2022, which has enabled the bank to become current on its foreign-currency obligations to non-government creditors.
That said the bank’s foreign-currency funding and liquidity profile remain stretched, with inflow of foreign currency being mostly limited to remittances and export proceeds. The bank’s access to foreign-currency funding remains constrained by the weakened credit profile of the Sri Lanka sovereign (RD).
The bank’s funding and liquidity score of ‘cc’ also reflects its tight local-currency funding and liquidity position, which is currently more manageable than its foreign-currency position, supported by BOC’s strong domestic franchise and its ability to access liquidity from the Central Bank.
The current operating environment (OE) score of ‘ccc-’/negative reflects our view that a probable default on the sovereign’s domestic debt and ensuing risks to the broader economic environment could exacerbate risks to banks’ already stressed credit profiles.
This follows the sovereign’s default on foreign-currency instruments and would further hinder banks’ operational flexibility. The negative outlook reflects downside risks to OE stemming from a significant deterioration in the macroeconomic environment.
“We have maintained BOC’s capitalisation and leverage score at ‘cc’ to reflect our view that a potential restructuring of the sovereign’s domestic debt, in addition to a possible haircut on foreign-currency securities, could have a significant effect on the bank’s solvency.
This takes into account its large holdings of sovereign securities of nearly eight times of its common equity Tier 1 (CET1) capital at end-3Q22. The bank could then require recapitalisation to restore viability in the absence of further regulatory forbearance,” Fitch said.
