Fitch Ratings has revised down the National Long-Term Rating of National Development Bank PLC (NDB) from ‘A(lka)’ to ‘A-(lka)’, with a Negative Outlook. Additionally, the agency has lowered the rating for NDB’s Basel III-compliant subordinated debentures from ‘BBB+(lka)’ to ‘BBB(lka)’.
Key Factors Influencing the Rating
The downgrade is primarily attributed to an incident of fraud that has adversely affected NDB’s credit profile when compared to its similarly rated counterparts. Fitch believes this situation has strained the bank’s capitalization and profitability metrics. Furthermore, it highlights weaknesses in the internal risk management systems of the bank.
The Negative Outlook indicates uncertainties linked to the ongoing investigation into the fraud and its potential ramifications on the bank’s operations, which may include alterations to its business and risk profiles.
Details of the Fraud Incident
On April 2, 2026, NDB disclosed that the fraud involved certain employees and external parties. By April 6, 2026, the bank estimated the financial impact of the fraud to be around LKR 13.2 billion, representing approximately 1.3% of its total assets as of March 31, 2026.
Declining Financial Health
Fitch estimates that the gross losses associated with the fraudulent activities will approximate 2.3% of NDB’s risk-weighted assets by the end of 2025. This situation is expected to lower the bank’s core profitability ratio of operating profit to risk-weighted assets to below 2%, lagging behind that of its peers. While a recovery in profitability is anticipated in the medium term, the fraud incident will likely hinder the bank’s ability to meet its profitability targets.
Additionally, the case is expected to decrease NDB’s common equity Tier 1 ratio by about 1.1 percentage points, down from the reported 12.9% at the end of 2025. Although this will still comply with regulatory capital requirements, the reduced buffers may limit the bank’s financial agility and its capacity to absorb losses. It is also expected that the Central Bank of Sri Lanka will continue the suspension of cash dividends until the bank improves its capital position.
Funding and Liquidity Challenges
As of the end of 2025, NDB’s loan-to-deposit ratio (LDR) was 91%, which is comparable to its peers, and its liquidity coverage ratio across all currencies was reported at 209%. However, if the LDR continues to rise significantly due to challenges in deposit mobilization, it may diminish the bank’s liquidity compared to its peers.
Potential Rating Changes
NDB’s National Rating could be sensitive to fluctuations in its creditworthiness relative to other Sri Lankan entities. Should the bank’s capital buffers further deteriorate or if liquidity pressures arise, Fitch may consider a downgrade. Furthermore, negative actions could occur if regulatory penalties or corrective measures significantly hinder the bank’s earnings, brand reputation, or financial flexibility, or if the operational issues raised by the fraud are not addressed swiftly and effectively.
Conversely, if NDB can restore and uphold its capital buffers to levels comparable to its peers, and effectively mitigate the control deficiencies revealed by the fraud, Fitch may revise the Outlook to Stable. A Stable Outlook would indicate a reduced risk of harm to the bank’s brand and business structure.
Additional Debt and Issuer Ratings
NDB’s subordinated debt, compliant with Basel III and denominated in Sri Lankan rupees, is rated two notches below the bank’s National Rating. This rating adjustment reflects Fitch’s expectations regarding potential losses associated with this type of debt and the anticipated recovery rates in the event of default. There are no additional rating adjustments for non-performance risks, as the bonds do not include features for loss absorption in going-concern scenarios.
Debt Rating Sensitivities
The rating of the debt will move in accordance with any changes to the bank’s national rating.
Source: Financial Chronicle Biz English | Sri Lanka Business News.
