The american financial services company Standard & Poors assigns Srilanka's banking industry's rating 'group 8'.
Here's the full text of their publication dated 19th June 2012:
Sri Lanka Banking System Assigned Group '8' Banking Industry Country Risk Assessment
Publication date: 19-Jun-2012 17:45:19 HKT
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OVERVIEW
We are assigning the Sri Lanka banking system to our group '8' BICRA.
We are also assigning our economic risk score of '8' and an industry risk
score of '7'.
BICRA ACTION
On June 19, 2012, Standard & Poor's Ratings Services assigned Sri Lanka to its
Banking Industry Country Risk Assessment (BICRA) group '8'. At the same time,
we assigned an economic risk score of '8' and an industry risk score of '7'.
RATIONALE
We have reviewed the banking sector of Sri Lanka (Democratic Socialist
Republic of) (B+/Stable/B). The BICRA groups summarize our view of the risks
that a bank operating within a particular country and banking industry faces
relative to those in other banking industries. They range from group '1' (the
lowest risk) to group '10' (the highest risk). Other notable countries in
BICRA group '8' are Nigeria, Tunisia, and Kazakhstan.
Our economic risk score of '8' for Sri Lanka reflects a "very high risk"
assessment of economic resilience and credit risk in the economy, and a "high
risk" assessment of economic imbalances, as our criteria define those terms.
Our assessment of economic resilience reflects Sri Lanka's status as a
low-income economy, as measured in terms of its per capita GDP, and the
inefficiencies in the economy. Nevertheless, Sri Lanka's economic growth
prospects have improved following the end of the civil war and subsequent
shift in the government's focus toward boosting the economy and diversifying
sources of growth.
Our assessment of economic imbalance factors in the recent pickup in growth of
private sector credit. The central bank's recent directive to apply a ceiling
to the credit growth of banks should help to partially curb this risk.
Nevertheless, in our view, Sri Lanka's economic imbalances could increase if
credit growth continues at the current pace. Sri Lanka's external position,
which we consider to be moderately vulnerable, also affects the country's
economic imbalance. Our assessment of Sri Lanka's external position reflects
the country's weak external liquidity, and moderately high and increasing
external debt.
Our view of credit risk in Sri Lanka takes into account moderate private
sector debt in the context of low income levels, relaxed lending practices and
underwriting standards, as well as a weak payment culture and rule of law. The
use of cash flow analysis for underwriting is limited in Sri Lanka, and some
exposures are concentrated. Moreover, risk management practices are evolving,
in our view.
Our industry risk score of '7' for Sri Lanka is based on our opinion that the
country faces "very high risk" in its institutional framework, "high risk" in
its competitive dynamics, and "intermediate risk" in its system-wide funding.
We view the banking regulations in Sri Lanka as somewhat weaker than
international standards. Governance and transparency of banks are weak by
global standards. Sri Lanka adopted a standardized approach of Basel II in
2008, with capital requirements higher than global requirements. The key
regulations for banks seem sufficient. However, finance companies are less
regulated, in our view. This is despite the December 2008 collapse of a
finance company triggering a run on a bank in that group.
Under the existing legislation, banks in Sri Lanka are subject to on-site
examinations by the banking sector regulator at least once every two years. We
believe the frequency of on-site supervision may not be sufficient for the
regulator to quickly detect risk build-ups. Moreover, we see a potential
conflict of interest in the central bank's role. In addition to policy
formulation and supervision of banks, the monetary board of the central bank
also oversees Employees' Provident Fund investments. The fund is a large
investor in Sri Lankan banking stocks.
The banking sector's risk appetite is "moderate," in our view. Loan growth is
high. However, banks in Sri Lanka are mostly engaged in traditional lines of
business and most of their earnings come from traditional fund-based
businesses.
Sri Lanka's large number of banks relative to the small economy has not led to
any significant instability in the competitive environment. However, the
following factors have led to market distortions: (1) a significant market
share (about 50%) of government-owned banks in the sector; (2) directed
lending requirements toward the agriculture sector; and (3) differential use
of administrative controls; e.g. a recent cap on loan growth is applicable
only to banks.
Sri Lanka's large proportion of highly stable core customer deposits support
system-wide funding. Such deposits reduce banks' dependence on external debt.
Nevertheless, we believe access to alternative domestic funding sources is
limited because the domestic debt capital market is narrow and shallow.
In our view, the Sri Lankan government has a "supportive" tendency towards
private sector banks. We believe that the government is committed to
maintaining financial system stability and market confidence. The government
has a record of supporting banks during periods of financial stress by
encouraging market-led solutions. For instance, in the case of Ceylinco Group,
the banking sector regulator stepped in and dissolved the board of directors
of group entity, Seylan Bank PLC, and supported the sale of Seylan Merchant
Leasing PLC.
