Fitch says State banks’ capital vulnerable despite profit gains
- CNL Reporter
- April 28, 2025
- Business News
- Fitch
- 0 Comments
Fitch Ratings yesterday noted that it anticipates that Sri Lanka’s State banks will continue to report weaker regulatory capital ratios than systemically important private banks, despite significantly higher profitability. This disparity is primarily attributed to a substantial portion of State banks’ earnings being directed into a special reserve, which is excluded from capital adequacy calculations.
In a non-rating action commentary it stated, the Central Bank of Sri Lanka has required banks to establish a special reserve to mitigate settlement risks of restructured foreign-currency exposures to the State (CCC+), including both loans and step-up sovereign bonds. “This reserve, set at 15% of the outstanding exposure, is effective for six months from end-2024, post which we expect continued regulatory risk mitigation that has an impact on capital,” it added.
State banks Bank of Ceylon (BOC; CCC+/AA-(lka)/Stable) and People’s Bank (Sri Lanka) (PB; AA-(lka)/Stable) allocated 72% of their combined profit or 2.2% of combined risk-weighted assets to this special reserve at end-2024. “.
The special reserve for State banks stems mainly from their foreign currency-denominated loans, formerly to a State-owned entity, at around 15% and 7% of their combined loans and assets, respectively, of which, over two-thirds sits with BOC.
