Acquisitions of small Sri Lanka banks neutral to BOC’s and PB’s Ratings: Fitch

Fitch Ratings said on Wednesday that the proposed transfers of state-owned shares of Housing Development Finance Corporation Bank of Sri Lanka (HDFC) to Bank of Ceylon (BOC) and of State Mortgage & Investment Bank (SMIB) to People’s Bank (PB) are unlikely to affect the acquirers’ ratings.

“The limited scale of the targets relative to the large state banks, and expectations around capital support, underpin our view,” Fitch said in a statement

The government announced cabinet approval on November 11 to transfer all direct and indirect state holdings in HDFC and SMIB to BOC and PB, respectively. The purchase consideration, structure and timeline have not been disclosed. Fitch will assess final terms when they are available, including any consolidation method and timing.

“We do not expect material changes to BOC’s and PB’s consolidated credit profiles from these transfers. HDFC and SMIB are small relative to their acquirers and the sector, accounting for 1%-1.5% of the acquirers’ bank-level assets. HDFC and SMIB also have low risk densities due to their large exposure to Employees’ Provident Fund (EPF) backed loans, which are zero risk-weighted, limiting incremental risk-weighted assets. The impact on the acquiring banks’ consolidated asset-quality metrics is also likely to be immaterial despite HDFC’s and SMIB’s significantly weaker asset-quality metrics than industry peers, as the acquirees are relatively small. EPF‑backed loans carry a high impaired‑loan ratio, but these are periodically settled by the Central Bank of Sri Lanka, reducing loss severity,” the statement said.