Acquisitions of Small Sri Lanka Banks Neutral to BOC’s and PB’s Ratings

Fitch Ratings says the proposed transfers of state-owned shares – of Housing Development Finance Corporation Bank of Sri Lanka (HDFC, BB+(lka)/Rating Watch Positive) to Bank of Ceylon (BOC, CCC+/AA-(lka)/Stable) and of State Mortgage & Investment Bank (SMIB, BB(lka)/Rating Watch Positive) to People’s Bank (Sri Lanka) (PB, AA-(lka)/Stable) – are unlikely to affect the acquirers’ ratings. The limited scale of the targets relative to the large state banks, and expectations around capital support, underpin our view.

The government announced cabinet approval on 11 November 2025 to transfer all direct and indirect state holdings in HDFC and SMIB to BOC and PB, respectively. The purchase consideration, structure and timeline have not been disclosed. Fitch will assess final terms when they are available, including any consolidation method and timing.

We do not expect material changes to BOC’s and PB’s consolidated credit profiles from these transfers. HDFC and SMIB are small relative to their acquirers and the sector, accounting for 1%-1.5% of the acquirers’ bank-level assets. HDFC and SMIB also have low risk densities due to their large exposure to Employees’ Provident Fund (EPF) backed loans, which are zero risk-weighted, limiting incremental risk-weighted assets. The impact on the acquiring banks’ consolidated asset-quality metrics is also likely to be immaterial despite HDFC’s and SMIB’s significantly weaker asset-quality metrics than industry peers, as the acquirees are relatively small. EPF‑backed loans carry a high impaired‑loan ratio, but these are periodically settled by the Central Bank of Sri Lanka, reducing loss severity.

If a purchase consideration is involved, Fitch’s base-case expectation is that the government will inject capital at least equal to the transaction price into the acquirers, such that capital ratios at BOC and PB are unaffected. This would be consistent with the state’s record of being willing to support the banking sector when policy actions create capital needs. Absent such offsetting injections, any cash consideration could reduce the acquirers’ already modest buffers.

Capital buffers at BOC and PB are already under pressure from large exposures to the sovereign across loans and non-loan assets. These exposures attract capital deductions of 4% and 2% of BOC’s and PB’s risk-weighted assets, respectively, that the banks cannot include in regulatory capital, constraining loan growth relative to large private banks and weakening capital metrics compared with similarly rated peers. BOC was recently required by the regulator to maintain a further 1% buffer over its total capital ratios. BOC’s and PB’s bank-level common equity Tier 1 ratios were 12.0% and 11.6%, respectively, compared with similarly rated peers’ 13.4%-16.7%.

BOC’s and PB’s national ratings reflect their superior domestic franchises that support their funding profiles, counterbalanced by weaker financial profiles relative to the domestic systemically important private banks.

Fitch will monitor disclosures of the transaction structure, valuation and any capital measures. A deviation from the expected capital support, or a materially larger consolidation impact on risk-weighted assets than we anticipate, could influence our assessment.

The Rating Watch Positive placed on HDFC’s and SMIB’s national ratings reflects our view that these banks would potentially benefit from a very high likelihood of support from their new owners. Please refer to the rating action commentary published on 21 November 2025, Fitch Places HDFC's and SMIB's National Ratings on Rating Watch Positive on Proposed Acquisition, for the key rating drivers and sensitivities.