Business Times

Fitch says no impact on StanChart’s national rating owing to CB fine

Fitch Ratings Lanka has said that Standard Chartered Bank (SCB), Sri Lanka branch's 'AAA(lka)' National Long-term rating have been unaffected by the recent Rs 27 billion fine imposed by the Department of Exchange Control of the Central Bank (CB) of Sri Lanka on March 16 for alleged violation of Exchange Control laws. “The Outlook on the rating is Stable,” the rating agency said.

As SCB (Sri Lanka) is a branch and part of the same legal entity as Standard Chartered Bank, London, there is no 'ring fencing' of the liabilities of the local branch, Fitch said, adding” therefore, SCBSL's rating reflects the financial strength of SCB, which is rated higher than Sri Lanka's Sovereign Foreign Currency Issuer Default Rating of 'B+' with a Positive Outlook”.

It said SCB entered into oil hedging contracts with the state owned Ceylon Petroleum Corporation (CPC), while covering its positions with back to back transactions with SCB. Although CPC suspended payments to counterparties on these contracts at end 2008, SCB repatriated dues of Rs 12.3 billion to its London office until April 2009 to honour its back to back arrangements. The branch ceased to make further payments on these transactions in May 2009, following instructions from the Controller of Exchange (CoE). All dues from CPC were transferred to SCB in June 2010, and payments already made by SCB to its head office were reversed.

Fitch said the fine imposed by the CB is in relation to these payments to SCB, which the CB alleges are capital account transfers as per the Exchange Control Act No. 24 of 1953. “Foreign exchange releases for capital account transactions, require prior approval from the Controller of Exchange. SCB has submitted a written appeal to the Minister of Finance contesting the fine and is awaiting a response,” the statement said. Although the quantum of the fine is higher than the equity of the local branch (Rs 15.9 billion), Fitch believes that timely support would be made available from SCB, in the event it is required, in order to meet depositor and creditor obligations and all regulatory requirements, given that SCB is a branch,” the statement said.

This support is however dependent on any regulatory restrictions or delays in remitting money into Sri Lanka, none of which is envisaged at the moment. SCB has continued to show its willingness to support the local branch, as demonstrated by the transfer of the CPC’s past due exposure to SCB in June 2010 in order to maintain local capital adequacy requirements, Fitch said. CPC and SCB are currently in the midst of legal proceedings in a London court with relation to repayment of dues from CPC.

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