Fitch upgraded the national long-term ratings of Sri Lanka's Union Bank of Colombo Plc to BBB-(lka) from BB+(lka) and of Cargills Bank Ltd. to A-(lka) from BB(lka), with stable outlooks.

The rating agency said May 23 that it affirmed the national long-term ratings of Amãna Bank PLC at BB(lka), Nations Trust Bank Plc at A(lka), Pan Asia Banking Corp. Plc at BBB-(lka), SANASA Development Bank PLC at BB+(lka) and Housing Development Finance Corp. Bank of Sri Lanka at BB+(lka). The outlook on Amãna Bank is positive, while the outlooks on the other banks are stable.

The ratings actions follow Fitch's review of Sri Lanka's small- and mid-sized bank peer group. The rating agency maintained a negative outlook on Sri Lanka's banking sector as it expects challenging operating conditions to persist in 2019.

The upgrade of Union Bank of Colombo's ratings reflects its risk profile, which has improved in the past few years, as well as its small franchise and still-high exposure to vulnerable customer segments, Fitch said. The upgrade of Cargills Bank's rating reflects Fitch's expectation that the bank is likely to receive extraordinary support from its parent CT Holdings PLC in times of need.

Fitch said it expects the Sri Lankan banks' ratings to be hampered by their high-risk appetites as they pursue above-sector loan expansion in the medium term, which will pressure their already-thin capital buffers. It also expects credit risks to linger in 2019 due to the banks' exposure to the more susceptible customer segments amid domestic and external challenges.