No impact to Citibank and Standard Chartered ratings

Fitch Ratings Lanka has said Citibank N.A.-Colombo Branch (CITISL) and Standard Chartered Bank, Sri Lanka Branch’s (SCBSL) ‘AAA(lka)’ National Long-term ratings are not affected by the Supreme Court’s ruling suspending payments due from Ceylon Petroleum Corporation (CPC), on hedging agreements entered into with the foreign banks operating in Sri Lanka.

Given that CITISL and SCBSL are both branches and part of the same legal entities as Citibank N.A. and Standard Chartered Bank (SCB) there is no ‘ring fencing’ of the liabilities of the two local branches. As such, the ratings reflect the financial strength of Citibank N.A. (‘A+’/Stable) and SCB (‘A+’/Stable) respectively.

Both of which, are rated higher than Sri Lanka’s Sovereign foreign currency Issuer Default rating of ‘B+’/Stable’.

On November 28, the Supreme Court stated that it was of the opinion that the hedging agreements between CPC and the above mentioned banks were not entered into under lawful authority.

All payments due from CPC have been suspended by the order of the Supreme Court until the final hearing and determination, which is expected to take place in February 2009. An investigation is currently being carried out by the Monetary Board of the Central Bank of Sri Lanka, in conjunction with the Commission to Investigate Allegations of Bribery or Corruption (Bribery Commission) with regard to the adherence to due process in the entering of these agreements; the findings of which are also expected to be presented at the final hearings in February 2009.

As per regulatory requirements, both branches were signatories to the transactions and have covered their positions through back to back transactions with their respective head offices.

The local branches are however exposed to counterparty settlement risk. While the final court decision will not be known until early 2009, Fitch’s view is that timely support would be made available to CITISL and SCBSL from their respective head offices to meet their depositor and creditor liabilities in the event such support is needed; given that they are both branches and part of the same legal entities as Citibank N.A. and SCB respectively.

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.

The Outlook on CITISL and SCBSL’s national ratings is stable.