Topic: Performance of the Sri Lankan banking sector
Speaker: Nimesha Jayakody – Senior Product Lead
Video length – 11:47 mins
00:18: How have the interest being fluctuating over the past couple of months?
- From around 2013 interest rates in Sri Lanka were falling almost until the end of 2015.
- In response to the growing worry of excessive credit growth, the Central Bank started taking some policy measures from last year.
- Stemming from that we are now operating in an environment with relatively higher interest rates
01:00: How did loans perform last quarter? Any specific loan categories you want to talk about?
- As a result of the measures taken by CBSL there are signs that private sector credit is slowing down. In line with that, the loan growth in local private banks during 2nd quarter of 2017 also slowed down compared to the previous 3 quarters.
- Another reason for this slowdown is that Banks have become more selective with regard to their lending
- With regard to specific loan categories, A recent Fitch Ratings report mentioned that construction is the single largest sector that the Sri Lankan banks are exposed to and by the end of 2016, the segment accounted for around 17.5% of their total lending
- However by analysing the quarterly financial statements it’s not very easy to give a view as to whether this trend has continued in 2017 as the loan values to this segment could be included in broader loan categories.
- Another category to look at is the leasing category. In the 2016 budget last November, the Central Bank tightened the maximum loan to value ratios so the lending institutions couldn’t lend as much for vehicle leasing compared to earlier periods.
- However in 1st half of 2017, we are still seeing some growth in the loan volumes under this category but at a much slower rate.
04:26: How have the loan repayments been last quarter?
- One key metric that we look at to understand how healthy a bank’s loans is the non-performing loans (NPL) ratio. NPL is a loan on which a borrower is not making any interest payments or repaying principal amount they had borrowed for a certain period of time. The NPL ratio is simply the value of these loans as a percentage of the total loans. Lower the ratio, better it is for a bank.
- For some time in the past few years we saw the NPL ratios improving.
- A key reason for this was the gradual reduction in pawning facilities starting from around 2014 which back then used to be a source of high NPLs. Now the effects of that is slowly going away.
- However, during the most recent quarters pawning activity had picked up and many banks reported a higher NPL ratio
- Another reason for higher NPLs in 2nd quarter of 2017 were the floods and droughts that affected a lot of people’s ability to repay what they had borrowed.
06:05: How was the profitability of the sector in the 2nd quarter of 2017?
- Overall, the banking sector achieved a higher level of profits compared to the previous quarter
- A core reason was the improvement in banks’ net interest margin, where the core income source for a bank is the interest income.
- In addition, total operating cost had only increased marginally and the staff cost had reduced during the quarter, along with the portion of taxes they paid.
07:20: Any comments about the future strategic plans of banks?
- One thing banks are looking at is the technology developments and automation efforts to make it more convenient for customers and to possibly reduce operating costs in the long run.
08:06: How have recent regulations affected the banking sector?
- One key regulation that the banks need to adhere to is the BASEL III requirements; an international regulatory framework for banks where they set minimum levels of capital that banks should hold given a set of criteria.
- BASEL III is being implemented in Sri Lanka in 3 stages and banks had to meet the requirements under the first stage by 1st of July this year. Looking at the quarterly financial statements, all banks had met these minimum requirements.
- The next hurdle date is set for 1st of January 2018. Some banks will definitely have to raise capital through rights issues and other ways to bring their capital to the expected levels.
09:10: Were any new banking products introduced to the market recently?
- Banks are trying to increase the level savings deposits they have since they carry a lower cost of interest to them compared to fixed deposits. So there have been several new savings deposit schemes being introduced especially for women.
09:37: How will the banks perform in the medium term?
- When trying to understand how the banking sector will perform, the movement of interest rates becomes quite important. Frontier Research expects broader market rates to go down further within the next months before they start picking up again during the 2nd half of 2018. Usually the bank interest rates start moving in a similar direction but with a delay.
- There is still a window in the short term for the banks to hold on to relatively healthy net interest margins. If the banks manage their deposits and lending portfolios tactically they could still perform sufficiently well for the remainder of 2017.
- There is some uneasiness in the sector about NPLs and it’s possible that it wouldn’t improve within the year. We shouldn’t completely rule out the possibility of a real estate sector bubble either which can affect the banking sector significantly.
- Overall in my view the banks will perform moderately well like they had done so far this year, but they need to drive performance very carefully so as not to compromise their long term stability.
- This I believe is very important because, if banks, which are one of the most connected sectors in the economy, weaken most other sectors/industry will start feeling it too.
Source: Frontier Blog