Fitch downgrades operating environment for Sri Lankan banks

The Outlook on Sri Lanka's Long-Term iDR is Negative, as is the outlook on the OE score. The change in the OE score followed a revision in the outlook on the score to negative from stable in January 2020, which came on the heels of a revision in the Outlook on Sri Lanka’s ‘B’ sovereign rating to Negative from Stable in December 2019.

These actions show that the OE score for banks is usually constrained by the sovereign rating. The OE score change also reflects Fitch's assessment that the risk of doing business in Sri Lanka could rise in the medium term.

The current OE assessment factors in the pressure arising from the coronavirus pandemic and the possibility of further risk if the pandemic worsens or lingers. The assigned OE score is consistent with the implied score for Sri Lankan banks, which is at the lower end of the ‘b’ range.

Fitch also considers qualitative aspects when assigning the OE score, such as the sovereign rating, macroeconomic stability, size and structure of the economy, economic performance, the level and growth of credit, financial market development, regulatory and legal framework and international operations.

Fitch’s Macro Prudential Risk Indicator (MPI) of 2 for Sri Lanka indicates that there is moderate vulnerability to potential stress in the banking system and the broader economy.