Fitch says State banks' capital vulnerable despite profit gains

Expects loan-book expansion, especially in higher-risk private-sector lending, is expected to pressure capital positions Anticipates sovereign exposures to moderate in medium term as private-sector lending grows, but State exposure remains key factor in banks' overall risk profile

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• Expects loan-book expansion, especially in higher-risk private-sector lending, is expected to pressure capital positions

• Anticipates sovereign exposures to moderate in medium term as private-sector lending grows, but State exposure remains key factor in banks' overall risk profile

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.