Lankan Banks likely to face increased challenges on macro front-Fitch | Daily News

Lankan Banks likely to face increased challenges on macro front-Fitch

Fitch Rating says that Sri Lankan Banks are likely to face increased challenges on the macro front.

The recent political crisis in Sri Lanka has heightened uncertainties regarding the policy outlook, with the IMF delaying discussions regarding the programme as a result. Fitch also predicts that Sri Lanka is due to enter an election cycle.

In addition, the country has large external debt-refinancing needs from 2019-2022 amid tighter global monetary conditions, with heightened domestic political instability raising refinancing risks. The resulting macroeconomic implications could dampen prospects for banks.

“We believe credit risks will linger in 2019, as reflected in a rise in rescheduled loans across banks alongside a surge in NPLs in 2018. Pressures should remain manageable alongside banks’ increased focus, although a higher-than-expected level of loan impairments can lead to a re-assessment of these trends,” Fitch stats.

Capital-raising could continue in 2019 among banks that plan to/need to strengthen capital buffers, but banks could face execution risks – given the macro instability. The impact of the implementation of SLFRS 9 is likely to be modest, and the effect on regulated capital ratios is likely to be spread out.

“Fitch maintains our negative outlook, based on our expectations for operating conditions to remain difficult. Economic expansion has remained muted, and this is also likely to be the case in 2019. 

Sri Lanka faces numerous additional challenges on both the domestic and external fronts, which are likely to affect banks’ performance through 2019, mainly on asset quality.”

Fitch expects bank credit profiles to remain broadly intact, although it is possible that some modest pressure will be brought to bear on the ratings of some banks in the absence of sufficient buffers against risks. Meanwhile Fitch has a stable ratings outlook on all Asia-Pacific (APAC) emerging-market banking systems, which is unchanged from a year ago. Where Issuer Default Ratings (IDRs) are underpinned by Viability Ratings (VRs), we view the banks’ loss-absorption buffers as generally sufficient to weather rising pressures in 2019. Around half of Fitch-rated banks in APAC emerging markets have IDRs predicated on expectations of third-party support – whether sovereign or institutional.

Some individual bank intrinsic profiles remain under pressure (such as in markets where we have a negative sector outlook), but where any rating outlooks are still stable, they would likely reflect external support and mirror that of the supporting entities.


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