Fitch Ratings has stated that any improvement in Sri Lanka’s sovereign credit profile will have a positive impact on the country’s banks. This is because there is a strong connection between the financial health of the government and the operating conditions of banks. The current credit score of Sri Lankan banks is closely tied to the local-currency credit profile of the sovereign, as these banks have a significant exposure to the domestic economy and government securities.
It is expected that an improvement in Sri Lanka’s credit profile will help alleviate pressures on the banks that are related to the sovereign. This will be beneficial in terms of both financial and non-financial assessments. Fitch will update the national ratings of local issuers following a sovereign rating change to reflect changes in relative rankings. The agency last recalibrated the Sri Lankan national rating scale in 2023 after a downgrade of the sovereign’s Long-Term Local-Currency IDR.
The ratings of locally incorporated banks are based on their standalone credit profiles, with the exception of Cargills Bank PLC, which is driven by expectations of extraordinary shareholder support. State-owned D-SIBs do not receive support in the ratings due to the sovereign’s limited ability to provide extraordinary support. However, an improvement in the sovereign’s financial flexibility could lead to a reevaluation of state support.
Sri Lanka is nearing completion of its foreign-currency debt restructuring, which is expected to ease challenges faced by banks and improve their financial profiles. With better external sector flows and efforts by banks to preserve liquidity, pressures on funding and liquidity have eased. It is anticipated that banks will once again have access to foreign-currency wholesale funding once the sovereign’s creditworthiness is restored.
