"At the same time, we affirmed our short-term issuer credit rating on the bank at 'B'. The outlook on the long-term issuer credit ratings is stable.
"The downgrade of BSP mirrors a similar rating action on PNG due to the government's growing fiscal deficits and rising debt levels. We expect the adverse effects of the Covid-19 pandemic to significantly weaken the country's growth prospects for 2020, resulting in a corresponding weakening of the government's fiscal and debt balances," the Global Ratings report said.
The report says BSP has substantial exposure to the PNG government and the domestic economy. About 65% of BSP's loan portfolio is domiciled in PNG and the government accounts for about a quarter of BSP's total credit risk exposure.
This is an edited version of the report:
Further deterioration in the sovereign's creditworthiness could weigh significantly on BSP's asset quality, capitalisation, and overall stand-alone credit profile (SACP). In addition, the PNG government is BSP's only material provider of foreign currency; further foreign exchange shortages or restrictions could weaken BSP's ability to meet foreign currency obligations as and when they arise.
Absent any further deterioration in the PNG sovereign's credit profile, we believe BSP is adequately placed to absorb increased credit losses, due to the Covid-19 outbreak and containment measures, within its earnings.
We consider that BSP's dominant market share gives the bank a price-maker position in PNG's lending and deposit markets, allowing it to maintain consistently high profitability, which should help BSP absorb losses and maintain internal capital generation through the Covid-19 pandemic. As a result, we assess that BSP's SACP remains unchanged at 'B+'.
The stable outlook on BSP principally reflects the stable outlook on our sovereign rating on PNG, as we believe BSP is exposed to risks of operating in PNG that we do not fully capture in our assessment of the bank's SACP. Therefore, we assess the issuer credit rating on BSP as 'B-', in line with our assessment of the PNG sovereign rating and two notches below BSP's SACP of 'b+'. We consider that our current issuer credit rating on BSP could absorb some deterioration in the bank's stand-alone creditworthiness.
Further deterioration in PNG's sovereign creditworthiness could place downward pressure on our ratings on BSP. As BSP's largest borrower, a deterioration in PNG's credit profile could weigh significantly on BSP's asset quality, capitalisation, and overall SACP. Our ratings on BSP could also face downward pressure if sovereign credit stress limited the availability of foreign exchange to PNG's domestic nongovernment organisations, including BSP, such that they could face material challenges fulfilling foreign currency obligations.
We believe BSP has limited prospects of an upward rating movement in the next year, partly because any improvement in the bank's SACP, by itself, would not result in an upgrade if our sovereign rating remains unchanged. We expect to improve our long-term issuer credit rating on BSP if there is an improvement in the PNG sovereign's credit quality