Fitch places HDFC and SMIB on Rating Watch Positive pending acquisitions

Ratings action after Govt. proposal for Bank of Ceylon to acquire HDFC, People's Bank to acquire SMIB; Notes HDFC's eroding competitiveness in the housing loan segment, driven predominantly by EPF-backed loans, and deteriorating loan and deposit market share; SMIB profitable, yet capital below the regulatory minimum of Rs. 7.5 b; shortfall estimated at Rs. 2-3b

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FITCH Ratings has placed Housing Development Finance Corporation Bank of Sri Lanka's (HDFC) National Rating of 'BB+(lka)" and State Mortgage & Investment Bank's (SMIB) National Rating of 'BB(lka)' on Rating Watch Positive (RWP). HDFC's rating was previously on a Negative Outlook.

The rating action follows the announcement by the Government on 11 November that the Cabinet of Ministers granted approval for the proposal to transfer all the State-owned shares of HDFC and SMIB to Bank of Ceylon (BOC; CCC+/AA-(Ika)/Stable) and People's Bank (Sri Lanka) (PB; AA-(Ika)/Stable), respectively. The modalities and resolution of the intended acquisitions are not yet known.

"The RWP reflects Fitch's view that the acquisitions of HDFC and SMIB by BOC and PB, respectively, would result in HDFC and SMIB benefitting from a very high likelihood of support from their new owners," Fitch said in a statement. Fitch will reflect this likelihood of support via support-driven national ratings upon the completion of each transaction. Fitch expects to resolve the RWP upon closing of the transaction, and the resolution is likely to take longer than Fitch's normal Rating Watch resolution horizon of six months.