State banks' capital vulnerable despite profit gains: Fitch Ratings

Fitch Ratings expects Sri Lanka's state banks to continue to report weaker regulatory capital ratios than systemically important private banks, despite significantly higher profitability.

- Fitch Ratings

This is due mainly to a large portion of state banks' profits being allocated to a special reserve, which is not included in capital adequacy calculations.

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.