Reuters logo
Fitch: Basel III Increases Capital Pressure for Sri Lankan Banks
June 7, 2017 / 3:31 AM / 6 months ago

Fitch: Basel III Increases Capital Pressure for Sri Lankan Banks

(The following statement was released by the rating agency) LONDON, June 06 (Fitch) Sri Lankan banks are likely to come under increased capital pressure from Basel III-related requirements that take full effect at the start of 2019, Fitch Ratings says. We expect most banks will have to raise capital to meet the higher requirements, particularly if they are pursuing rapid growth. The sector's capital needs could be exacerbated by deteriorating asset quality following aggressive lending in 2015/2016 to more vulnerable segments, such as retail and SMEs, the effects of the recent floods and weak internal capital generation. Our negative outlook on the Sri Lankan banking sector reflects these pressures, although banks have coped with the deterioration in the operating environment and loan book growth could keep non-performing loan ratios around current levels. Capitalisation is thin at state banks due to substantial dividend pay-outs. In 2016, the three largest state banks (National Savings Bank, Bank of Ceylon and People's Bank (Sri Lanka)) paid 76% of their profits as dividends. Their capital levels are vulnerable to dividend demands from the state, and continued high pay-outs in the absence of capital infusions could leave them struggling to meet regulatory capital requirements. Rapid loan growth by the private banks exceeding their rate of internal capital generation has weakened capital ratios. The sector's average Tier 1 capital ratio declined to 11.4% at end-2016 from 13.0% at end-2015, following high loan growth of 21.1% and 17.5% in 2015 and 2016, respectively, despite several contractionary monetary policy measures. The central bank increased policy rates in March 2017 in its latest attempt to curtail credit growth. Some large private listed banks have already announced capital-raising plans to support balance-sheet expansion in the next two years, but it may be challenging for the sector as a whole to raise large amounts given market conditions. The Central Bank of Sri Lanka issued the new local capital requirements related to the global Basel III regulatory framework in late 2016. Sri Lankan banks will have to maintain common equity Tier 1 (CET1) of at least 7.0% of risk-weighted assets (RWAs), Tier 1 capital of at least 8.5% and total capital (CET1, additional Tier 1 and Tier 2 capital) of at least 12.5% by the start of 2019, compared with 10% under the current regime. Domestic systemically important banks (D-SIBs) will have to hold an additional buffer of 1.5% of RWAs. The central bank has said that banks with more than LKR500 billion of assets will be designated as D-SIBs and six banks meet this criterion. <iframe allowfullscreen src="// _scores?src=embe d" title="Sri Lanka Banks - Capital Ratios" width="750" height="476" scrolling="no" frameborder="0"> Pre-2017 Tier 2 capital instruments will be eligible to be included as Tier 2 capital under the new rules, subject to a 20% discount each year. At end-2016, approved Tier 2 capital amounted to LKR132 billion among Fitch-rated banks. Sri Lankan banks may start issuing Basel III-compliant debt instruments once clarification on the tax treatment of interest from listed debt securities is obtained. The government proposed removing this tax relief in its November 2016 budget, but a final decision has not been made. The central bank's new rules introduce a 20% risk-weighting for foreign currency lending to the government and a risk-weighting based on loan/values (LTVs) for gold-backed lending (20% for LTVs of 70%-100%; 100% for LTVs over 100%), which will put further pressure on banks' capital positions. Until now, these assets have benefited from zero risk-weightings. Contact: Jeewanthi Malagala, CFA Analyst Financial Institutions + 94 11 254 1900 Fitch Ratings Lanka Ltd 15-04, East Tower, World Trade Centre Colombo 1, Sri Lanka Sugath Alwis, CFA Analyst Financial Institutions + 94 11 254 1900 David Prowse Senior Analyst Fitch Wire +44 20 3530 1250 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below