S&P revises Sri Lankan banks view to negative

S&P said it revised its outlooks on DFCC Bank and National Savings Bank to negative from stable. At the same time, S&P affirmed the B long-term issuer credit ratings on both these Sri Lankan banks.

“We revised the outlooks on DFCC and NSB to negative following the revision in the sovereign rating outlook on Sri Lanka to negative from stable because of rising fiscal and external imbalances in the country,” said S&P in a press release.

“We consider it unlikely that Sri Lankan financial institutions would be immune to increasing credit pressures on the sovereign and the broader operating environment. We reflect these risks in our view that the economic risk trend and industry risk trend for Sri Lanka’s banking sector has become negative,” S&P said.

The weak operating environment could manifest in various forms and make the banks more susceptible to exogenous shocks. It may lead to rising credit risk in Sri Lanka, particularly if the country’s economic growth is lower than our current base-case expectations. It may also lead to lack of investor confidence in the banking system and hurt banks’ prospects of raising external debt. The funding profile of the system may also deteriorate, leading to increased competition for funds. All of these factors could affect banks’ profitability, and therefore the competitive dynamics of the banking system, the agency said.

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