Fitch Ratings Lanka last week affirmed Standard Chartered Bank (SCB) Sri Lanka branch's National Long-term rating at 'AAA(lka)' last week despite adverse public views over SCB’s involvement in the oil hedging contracts with the Ceylon Petroleum Corporation (CPC).
A Fitch Ratings press release said the outlook is stable and that the rating reflects the financial strength of Standard Chartered Bank PLC of which Sri Lanka’s SCB is a branch and part of the same legal entity.
Fitch stated that the hedging contracts were drawn up under ISDA documentation standards and the Sri Lanka branch was a signatory in keeping with regulatory requirements. In Q408 the CPC suspended payments on these contracts pending an inquiry by the Monetary Board of Sri Lanka into the legality of these contracts. SCB has classified these dues, about Rs 18 billion until the expiration of contracts in July 2009, for capital adequacy purposes as non-performing assets; as such the bank's total and core capital adequacy ratios fell to 11.3% and 10.7% respectively at Q109.
The full impact on SCB capital position is yet to be seen as both SCB and CPC are currently in the midst of legal proceedings in relation to this payment. Fitch notes that in the event the outcome of these proceedings results in a non-payment or the court decision is preceded by an increase in provisioning, the capital base of SCB would not be sufficient in withstanding a write-down of these dues.
Nevertheless, Fitch is of the view that timely support would be available from SCB to meet creditor and depositor obligations, if required.