The DFCC Bank green bond has received a significant ‘BBB+’ rating from Fitch, marking a notable step for Sri Lanka’s sustainable finance landscape. The decision reinforces market confidence as the bank prepares to raise LKR 10 billion through its GSS+ issuance.
DFCC Bank green bond secures strong Fitch rating, boosting sustainable finance confidence
DFCC Bank’s green bond initiative has taken a decisive leap forward after Fitch Ratings assigned an expected National Long-Term Rating of ‘BBB+(EXP)(lka)’ to its proposed Basel III-compliant subordinated issuance. This strategic move, aimed at raising LKR 10 billion, signals the bank’s growing commitment to environmentally and socially responsible financing while strengthening its capital position. The rating also highlights a broader trend in Sri Lanka’s financial sector, where sustainable instruments are gaining momentum despite ongoing economic challenges.
According to Fitch, the proposed green, social and sustainable (GSS+) bond issuance will be structured as a subordinated, unsecured instrument with maturities of five, seven and 10 years. These multiple tenures are designed to appeal to a diversified pool of investors while providing the bank with long-term funding stability. Once issued, the bonds will be listed on the Colombo Stock Exchange, allowing broader market participation and enhancing transparency.
DFCC Bank intends to allocate the proceeds toward strengthening its Tier 2 capital base, a crucial element under Basel III guidelines. Tier 2 capital supports a bank’s overall resilience and its capability to absorb losses during periods of financial stress. By bolstering this layer of capital, DFCC improves its ability to expand its lending portfolio, particularly in areas aligned with green, social and sustainable objectives. These include renewable energy projects, environmentally responsible infrastructure, and initiatives that support social upliftment, all of which are increasingly important in Sri Lanka’s economic development strategy.
A notable structural feature of the bonds is the inclusion of a non-viability clause. Under this requirement, the bonds would convert into ordinary voting shares if triggered by the Central Bank of Sri Lanka’s Governing Board. Such clauses are a standard component of Basel III instruments globally and ensure that banks have predefined mechanisms to absorb losses in periods of distress. While the presence of this clause increases investor risk relative to senior debt, it also reflects evolving global standards for financial sector resilience.
Fitch based its expected rating on DFCC Bank’s existing National Long-Term Rating of ‘A(lka)/Stable’, assigning the subordinated bonds two notches below this anchor. This notching reflects the typical loss-severity expectations associated with subordinated debt, where recovery prospects are lower compared to senior obligations. Fitch also noted that the proposed notes do not contain going-concern loss-absorption features, meaning no additional notching for this risk category is required.
The rating agency reaffirmed that DFCC’s National Long-Term Rating remains an accurate reflection of the institution’s standalone credit strength. This rating considers the bank’s risk profile, asset quality, capital adequacy and competitive position within the domestic banking landscape. Fitch most recently reviewed DFCC’s ratings, with no action taken, on 8 September 2025. The agency has recalibrated several Sri Lankan bank ratings in recent years to reflect shifts in the broader financial system.
As with any expected rating, the final assessment will depend on Fitch receiving final documentation that aligns with what has already been reviewed. Should the bank’s broader National Long-Term Rating be upgraded or downgraded in the future, the green bond’s rating would adjust accordingly. A downgrade would reflect heightened risk or deterioration in DFCC’s financial position, while an upgrade would signal improved stability and performance.
This issuance marks a critical milestone for Sri Lanka’s sustainable financing movement, which has steadily grown over the past few years. As global investors increasingly prioritise environmental, social and governance (ESG) standards, banks are expanding their portfolios to include green and socially oriented instruments. DFCC Bank has positioned itself at the forefront of this transition, previously engaging in renewable energy and socially-focused lending initiatives. The new green bond reinforces this trajectory, providing a financial mechanism to scale up support for impactful projects.
For the market, Fitch’s ‘BBB+’ expected rating offers reassurance about the bank’s capacity to meet its obligations under the new instrument. While subordinated debt naturally carries higher risk than senior credit, the rating indicates sufficient stability and a balanced risk profile. Investors who prioritise sustainability will likely view this issuance as an opportunity to participate in a growing segment of the financial market while supporting long-term national development aims.
Overall, the DFCC Bank green bond represents a blend of financial strengthening and sustainable ambition. If finalised, it will support the bank’s regulatory capital needs, enable environmentally aligned lending, and further embed Sri Lanka into global ESG-aligned capital markets. The Fitch assessment also signals that even amid a challenging economic environment, credible institutions continue to pursue innovative financing instruments that reflect modern banking priorities.