Fitch Ratings has placed the National Long-Term Ratings of 12 Sri Lankan non-bank financial institutions (NBFIs) on Rating Watch Negative (RWN).
The entities are:Finance and Leasing Companies:Bimputh Finance PLC (Bimputh),CBC Finance LTD (CBCF),Central Finance Company PLC (CF),Fintrex Finance Limited (Fintrex),HNB Finance PLC (HNBF),LB Finance PLC (LB),Mercantile Investments and Finance PLC (MIF),People’s Leasing & Finance PLC (PLC),Sarvodaya Development Finance Limited (SDF),Senkadagala Finance PLC (Senka),Siyapatha Finance PLC (Siyapatha) Securities and the Asia Securities (Pvt) Ltd (ASPL).
The RWN reflects heightened downside risks to the NBFIs’ credit profiles amid increased economic and financial-market volatility in Sri Lanka. This risk is exacerbated by the deteriorating sovereign credit profile (Long-Term Foreign-Currency Issuer Default Rating (IDR): C, Long-Term Local-Currency IDR: CCC) and the ensuing risks to the stability of the financial system.
Fitch will review the National Ratings of financial-institution subsidiaries of Sri Lankan corporates that are not included above separately, if needed.
The NBFIs’ credit profiles are being pressured by Sri Lanka’s challenging operating environment, with significant near- to medium-term downside risk presented by the weakening sovereign credit profile. This could further impair the economy and weigh on financial market performance, raising downside risks to NBFIs’ asset quality and earnings. Fitch also believe that finance and leasing companies may be more susceptible to interest- rate risk in the current rising interest rate environment, as their mostly fixed-rate loans reprice more slowly than their liabilities.
Fitch view NBFIs’ funding and liquidity conditions as tied to the funding and liquidity positions of Sri Lanka’s banks, due to direct funding and deposit relationships as well as the banking sector’s importance to the domestic financial system. Fitch believe that any signs of funding or liquidity stress in the banking sector would carry contagion risks for NBFIs. In particular, any restrictions on banks’ ability to service their obligations are likely to be extended to finance and leasing companies, while entities that rely on local banks to hedge their foreign-currency obligations may be subject to counterparty risk on these exposures.