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Investing.com -- Fitch Ratings has changed the outlook on Housing Development Finance Corporation Bank of Sri Lanka (HDFC) to Negative from Stable, while affirming its National Long-Term Rating at ’BB+(lka)’.
The outlook revision reflects potential deterioration in HDFC’s credit profile compared to similarly rated peers due to restrictions imposed by the Central Bank of Sri Lanka on deposit mobilization and certain lending products, according to the bank’s 2024 annual report.
These regulatory restrictions have weakened HDFC’s competitive position in the housing loan segment, particularly in Employees’ Provident Fund (EPF)-backed loans, affecting both loan and deposit market share. In response, the bank has increased focus on other retail products like leases and pawning.
HDFC’s asset quality metrics rank among the weakest in the Sri Lankan banking system, with an impaired-loan ratio reaching nearly 52% at the end of the first half of 2025, up from 48.6% in 2024 and 43.4% in 2023. Approximately half of these impaired loans come from EPF-backed housing loans.
The bank’s funding options are limited by curbs on deposit mobilization, forcing HDFC to rely more on bank borrowings to fund loan growth. This is likely to increase the loan-to-deposit ratio from current levels of 82.7% as of the first half of 2025.
While liquidity currently remains reasonable, with bank placements and government securities covering about 44% of total deposit liabilities, Fitch believes prolonged deposit mobilization restrictions could challenge HDFC’s ability to raise term funding.
The rating agency noted that negative rating action may occur if HDFC experiences sustained loss of competitiveness in the housing loan segment or if capital levels fall below the regulatory minimum requirement of LKR7.5 billion for an extended period.
Fitch may revise the outlook back to Stable if the risk of credit profile deterioration diminishes after regulatory restrictions are lifted.
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