FINANCIAL CHRONICLE – Fitch Ratings has confirmed the National Long-Term Rating for People’s Bank of Sri Lanka at ‘AA-(lka)’ with a stable outlook, reflecting its robust financial position and the challenges posed by the country’s weak credit profile.
The agency noted that the weak credit standing of the sovereign significantly impacts the bank’s operating environment (OE) score, which is rated ‘ccc+’. This situation arises from the bank’s considerable exposure to the domestic economy and its reliance on government securities and lending to the public sector, thereby linking its performance closely to the financial health of the state.
Fitch anticipates that increasing interest rates and high credit costs will negatively affect People’s Bank’s profitability in the short to medium term.
The following is a detailed statement:
Fitch Affirms People’s Bank of Sri Lanka at ‘AA-(lka)’; Outlook Stable
Fitch Ratings – Colombo/Singapore: Fitch Ratings has affirmed the National Long-Term Rating of People’s Bank (Sri Lanka) at ‘AA-(lka)’, maintaining a Stable Outlook.
Key Rating Drivers
Financial Strength Influences Rating: The National Long-Term Rating of People’s Bank reflects its substantial financial capabilities, which are heavily influenced by its exposure to the sovereign’s poor credit profile, currently rated ‘CCC+’ in terms of Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDR). People’s Bank stands as the second-largest bank in Sri Lanka in terms of assets and deposits, with a predominantly domestic focus in its operations.
Sovereign Credit Profile Affects Operating Environment: The ongoing weakness in the sovereign’s credit profile continues to guide the assessment of the bank’s operating environment score at ‘ccc+’. This score indicates significant exposure to domestic economic conditions and a considerable stake in sovereign debt through government securities and public sector lending, connecting the bank’s fortunes to the state’s fiscal health. Fitch predicts that while the operating environment may remain generally supportive, external challenges could impose pressures on the domestic landscape and overall sector performance.
Reduction in State Exposure: The potential negative impacts on economic conditions may hinder People’s Bank’s ability to generate business and profits, similar to its competitors. The bank’s exposure to state lending has notably decreased to just over 15% of gross loans by the end of 2025, down from nearly 45% prior to the crisis, which is viewed as a positive credit development. The shift towards private-sector lending, especially in retail, has resulted in pawning becoming a prominent loan product, with its share increasing to approximately 19% of gross loans by the end of the first quarter of 2026, up from 17% at the close of 2024, highlighting the growing concentration risk.
Risk Profile Driven by Sovereign Exposure: The bank’s risk profile is significantly affected by its substantial exposure to sovereign debt, which accounts for nearly half of its assets at the end of the first quarter of 2026. More than three-quarters of this exposure consists of local currency-denominated treasury bills and bonds. Fitch expects this portion to decrease in the near to medium term as private sector lending expands. However, the increasing focus on pawning, while beneficial for asset quality and profitability, raises concerns about sensitivity to fluctuations in collateral prices.
Loan Quality Risks: The assessment of People’s Bank’s asset quality is closely tied to the creditworthiness of the sovereign due to the bank’s extensive sovereign exposure. The ratio of gross impaired (stage 3) loans decreased to 14% by the end of 2025, down from 17.6% in 2024, with further improvement noted in the first quarter of 2026 attributed to loan growth rather than genuine asset quality enhancement. Fitch foresees renewed pressures on loan quality as economic conditions tighten, although some temporary improvements may arise from successful restructuring efforts of impaired state-related loans.
Profitability Challenges: Fitch predicts that rising interest rates and higher credit costs will adversely impact People’s Bank’s profitability in the near to medium term. Credit costs increased to 17.0% of pre-impairment operating profit in the first quarter of 2026, up from 14.8% in 2025. This trend reflects the close relationship between People’s Bank’s earnings and the broader economic and interest rate cycles in Sri Lanka. The operating profit to risk-weighted asset ratio improved to 6.6% by the end of the first quarter of 2026, compared to 6.1% in 2025, supported by wider net interest margins and low risk-weight density.
Capitalization Concerns: People’s Bank’s capitalization remains susceptible to sovereign and operating environment risks. The common equity Tier 1 (CET1) ratio was reported at 12.0% at the end of the first quarter of 2026, excluding profits from that quarter, a decrease from 12.8% in 2025, which is weaker compared to similarly rated private banks. Fitch anticipates that the CET1 ratio will stabilize around 12%-13% in the near to medium term as earnings retention outpaces balance sheet expansion. The capital encumbrance, estimated at about 71% of CET1 capital by the end of 2025, is also lower than that of its peers, increasing the bank’s exposure to capital impairment risks.
External Risks Affect Funding: Fitch believes that People’s Bank’s access to foreign currency funding is sensitive to external challenges and the sovereign’s credit profile. The bank’s loan-to-deposit ratio slightly increased to 66% by the end of the first quarter of 2026, up from 64% in 2025 and 62% in 2024, as excess liquidity was utilized for lending, but it remains below that of its private sector competitors. A substantial increase towards the pre-crisis levels of 80%-90% is not anticipated.
Rating Sensitivities
Factors That Could Result in a Negative Rating Action or Downgrade: People’s Bank’s National Rating is vulnerable to shifts in the bank’s creditworthiness relative to other Sri Lankan institutions. A downgrade in its National Rating is most likely to occur due to a decline in Sri Lanka’s sovereign rating, which would impact the bank’s operating environment. Additionally, any deterioration in the bank’s key credit metrics beyond Fitch’s baseline expectations compared to peers could apply downward pressure on the National Rating, which is fundamentally driven by its financial strength, independent of sovereign rating changes.
Factors That Could Lead to a Positive Rating Action or Upgrade: The National Rating of People’s Bank is also sensitive to changes in its creditworthiness relative to other Sri Lankan issuers. While an upgrade is limited in the near term due to the current assessment of the sovereign rating and operating environment, an improvement in the sovereign’s rating could potentially lead to an upgrade of the bank’s National Rating.
People’s Bank holds a 1.78% equity stake in Fitch Ratings Lanka Ltd. No shareholder, apart from Fitch, Inc., is involved in the daily rating operations or credit reviews conducted by Fitch Ratings Lanka. (Colombo/August 3, 2026)
