Fitch Ratings will review the National Ratings assigned to the issues of Tier 2 debt of Sri Lankan banks and non-bank financial institutions (NBFIs) following the publication of its updated Bank Rating Criteria on 28 February 2020. Fitch’s ratings approach for the ratings of subordinated debt of NBFIs follows the rationale outlined in the Bank Rating
Criteria as NBFIs are prudentially regulated under a similar framework as banks. As a result, there is likely to be revisions to the ratings of subordinated debt of issuers with Sri Lankan National Ratings.
The updated Bank Rating Criteria better reflects continuing developments in bank resolution, notably developments in bank resolution plans, the build-up of bail-in debt buffers that protect more senior creditors and their implication for default risk and recovery prospects for different senior and junior liability classes.
The baseline notching for banks’ subordinated (Tier 2) debt changes to two notches below the anchor rating, from the previous approach of one or two notches, to reflect the heightened risk of significant losses for this debt class in the event of default in a liquidation scenario.
Fitch currently rates national scale subordinated (Tier 2) issue ratings of Sri Lankan banks and NBFIs one notch below the respective National Long-Term Rating. Fitch will assess these issue ratings on an instrument-by-instrument basis. The ratings could be downgraded to the baseline of two notches below the anchor, unless conditions under the new criteria for no additional notching prevail. For example, one notch will still be possible where loss severity risk is mitigated by thick
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