Liquidity in SL’s banking system expected to tighten in medium term
By Hiran H.Senwiratne-December 8, 2015
The current level of liquidity in Sri Lanka’s banking system is adequate with the statutory liquidity ratio in the domestic book at 36 per cent, Moody’s Investors Service reported.
"The liquidity in Sri Lanka’s banking system should tighten over the outlook horizon, as we are expecting annual loan growth of around 20 percent, faster than deposit growth of 16 percent in the banking sector, Moody’s Vice President and Senior Credit Officer Srikanth Vadlamani said.
"As a result, banks’ funding profiles will be under pressure, as they need to increase their dependence on more expensive sources of borrowing, including foreign-currency borrowings, he revealed in Moody’s annual outlook update for Sri Lanka’s banking system, titled "Banking System Outlook — Sri Lanka: Continued Growth Drives Stable Outlook"
Sri Lanka’s banking sector is hit by higher taxes, cessation of leasing business and the government guarantee on finance company deposits, Asia Securities (Private) Limited said.
According to an analysis carried out into the post-budget impact on banks by Asia Securities, the tax revisions alone will have a bottom-line impact of 8 to 14 percent on the earnings of the banking sector.They take a negative view on the commercial banking industry with the changes introduced in the 2016 budget proposals.
However, Sri Lanka’s continued GDP growth is driving the stable outlook for Sri Lanka’s banking system, Moody said in its latest report.
"While seeing some slowdown compared to the growth rates seen in 2013-14, GDP growth in Sri Lanka should remain healthy at 6.7 percent over 2015-16. And an accommodative monetary policy should support this growth outlook, it said.
"In addition, greater participation from private sector in investments, compared to what was seen over the past few years, should provide an impetus to loan growth, Vadlamani said.
Asset quality of Sri Lankan banking system has improved over the past 18 months, with the gross non-performing loan ratio coming down to 4.3 percent in June 2015 from 5.6 percent in December 2013.
Problems in the pawning sector — the key reason for the pick-up in nonperforming loans in the recent past — have been addressed.
At the same time, banks’ underwriting standards have been fairly tight over the past two years, as reflected in loan growth of only 14 percent over 2013-14.
Moody’s says profitability will remain stable over the next 12-18 months, despite moderate pressure on net interest margins.
On the one hand, net interest margins will remain under pressure, primarily due to the low interest rate environment. On the other hand, banks will benefit from positive operating leverage as loan growth picks up, leading to an improvement in their cost-to-income ratios.
Some banks will also benefit from lower credit costs as the higher credit costs associated with pawning NPLs may no longer be required.
