Fitch Ratings has maintained People's Bank's national long-term rating at 'AA-(lka)' with a stable outlook, though the agency warns that Sri Lanka's weak sovereign credit profile and rising interest rates pose challenges to the bank's profitability.
Fitch Ratings affirmed Sri Lanka's People's Bank with a national long-term rating of 'AA-(lka)' and a stable outlook on Monday, citing the bank's strong intrinsic financial position despite headwinds from the country's broader economic challenges. As the nation's second-largest bank by assets and deposits, People's Bank remains substantially exposed to the domestic economy, with operations that are overwhelmingly concentrated within Sri Lanka.
The ratings agency attributed the stable outlook to People's Bank's financial strength, while noting that the bank's operating environment score of 'ccc+' reflects Sri Lanka's weak sovereign credit profile. Fitch emphasized that the bank's significant exposure to government securities and public-sector lending creates a direct link between institutional performance and state financial health. The agency expects the operating environment to remain broadly supportive, though external pressures may affect domestic conditions and sector performance.
Fitch identified several medium-term challenges facing the institution. Rising interest rates and elevated credit costs are expected to constrain profitability in the near to medium term, with credit costs reaching 17.0% of pre-impairment operating profit in the first quarter of 2026, compared to 14.8% in 2025. The bank's capital position also remains vulnerable, with the common equity Tier 1 ratio standing at 12.0% in early 2026, weaker than private-sector counterparts. Additionally, Fitch noted growing concentration risk in pawning products, which comprised nearly 19% of gross loans by the first quarter of 2026, up from 17% at the end of 2024.
On a positive note, People's Bank has significantly reduced its exposure to state lending to slightly above 15% of gross loans by end-2025, down from nearly 45% before the previous crisis. This diversification toward private-sector lending, particularly retail pawning, is viewed as credit positive. However, Fitch cautioned that potential economic deterioration could pressure loan quality, though some improvements may follow successful restructuring of impaired state-related loans.
