Sri Lanka Fitch rates banks better than expected, bad loans – 9.1%


ECONOMYNEXT – Sri Lankan banks performed better than initially expected amid stimulus measures and regulatory easing, Fitch Ratings reported, although weak sovereign credit and the coronavirus have crippled the operating environment.

Bad loans at Fitch-rated banks fell to 9.1 percent from 9.7 percent, but were expected to rise to 10.5 percent when regulation ended.

The growth in loans to state-owned banks was driven by government-linked lending.

“The performance of Sri Lankan banks has been better than the initial expectations of Fitch Ratings, supported by measures of support and leniency,” the rating agency said.

“However, we believe that risks to performance and the operating environment remain due to pressures from Covid-19 and the sovereign credit profile.”

Sri Lanka printed large amounts of money, injecting rupee reserves into banks, allowing them to lend money in excess of collected deposits, causing a balance of payments deficit.

The full text of the statement is reproduced below:

Measures to stimulate and mitigate the effects of the pandemic

State banks stimulate credit growth: Weaker demand for private loans and a weaker appetite for new loans led most banks’ lending growth in 2020 to fall below the historical average year-on-year from 2017 to 2020.

However, higher government and state-owned enterprise borrowing led the Bank of Ceylon (BOC, AA- (lka) / Stable) and People’s Bank (Sri Lanka) (PB, AA- (lka) / Stable) to drive growth lending to the sector in 2020 and Q1 21.

A possible resumption of economic activity in 2H21 could lead to a moderately higher growth in loans in the sector, depending on the development of the pandemic.

Asset quality is better than expected: The aggregate ratio of impaired loans for Fitch-rated banks declined slightly to 9.1% in Q1 21 (2020: 9.7%, 2019: 9.5%) as increased economic activity encouraged payments to borrowers.

However, we expect it to fall to around 10.5% by the end of 2021 as the regulatory relief measures are lifted. We estimate that at least 18% of loans from banks rated by Fitch were subject to a moratorium at the end of 2020 (1H20: 26%).

The cost of the loan will remain high: Operating profit / risk weighted average (RWA) of Fitch-rated banks improved sharply in 1Q21 to 3.9% (2020: 2.3%), boosted by state-owned banks, which benefited from faster credit growth along with lower interest rates. deposit rates.

We expect lending costs in 2021 to be at least as high as in 2020 due to a more pronounced deterioration in asset quality, although margins could rise as a result of further revision of deposit interest rates and potentially higher loan growth of about up to 15%.

Deteriorating capital buffers of state-owned banks: The pressure on capital buffers BOC and PB has increased along with the rapid growth of loans and a higher share of outstanding loans / Tier 1 ordinary capital (CET1) compared to peers.

Regulatory relief allowing banks to use their buffers to preserve capital helped PB maintain a bank tier 1 ratio (end-2020: 9.5%) above the regulatory minimum of 8.5%. Both BOC and PB decided to increase their Tier 1 capital through an additional Tier 1 issue.

Adequate liquidity: The ratio of loans to customer deposits in 1Q21 for most banks reversed the downward trend in 2020 as loan portfolios expanded, but growth nevertheless remained moderate. The liquidity position of state-owned banks is weaker than that of their private banks, reflecting higher credit growth.

The share of foreign currency (FC) funding in total funding fell to 21% by the end of 2020 (2019: 23%) due to reduced borrowing from FC. We expect that banks’ access to financial resources in terms of pricing will remain problematic in 2021.

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