Feb 10, 2014 (LBO) - Sri Lanka's banks could benefit from a regulatory move for consolidation, despite heightened short term risks, Standard & Poor's, a rating agency said.
Sri Lanka's central bank is pushing banks and finance companies to merge, to reduce the total number in operation and make remaining ones bigger.
"We believe Sri Lanka's plan to consolidate its banks could have positive implications for the industry over the long term with the creation of fewer but larger and stronger players," Standard & Poor's credit analyst Deepali Seth-Chhabria said in a statement.
"But much depends on whether regulations will strengthen the banks and whether their capital, operations, and risk management will improve along with this consolidation."
S&P said consolidation could improve efficiency and ease the supervisory burden.
"However, banks may not get the full benefits of a merger without employee rationalization or redeployment," S&P said.
"Also, the transition could be bumpy and lead to difficulties in integration.
"In our view, raising capital to meet the proposed minimum capital levels could also be difficult for some of the smaller banks, pushing them toward consolidation.
"Moreover, the government's large fiscal deficit could limit its ability to inject capital into the banks it owns."
Seth-Chhabria said the agency had a 'stable' outlook on the banking sector.
S&P expects loan growth to pick up after a lull in 2013. But asset quality and profits are likely to be subdued with non performing loans expected to rise further in 2014 (but slower than in 2013).
A cap on penal interest rates on overdue loans, additional taxes and credit costs are likely to reduce return on average assets, S&P said.
We expect managing credit costs to remain a challenge for banks, given high NPLs and low coverage (reported loan loss reserves as a proportion of gross NPLs are at a decade's low of 34 percent.)," S&P said.
"Nevertheless, we view such performance as typical of emerging economies."
Sri Lanka's central bank is pushing banks and finance companies to merge, to reduce the total number in operation and make remaining ones bigger.
"We believe Sri Lanka's plan to consolidate its banks could have positive implications for the industry over the long term with the creation of fewer but larger and stronger players," Standard & Poor's credit analyst Deepali Seth-Chhabria said in a statement.
"But much depends on whether regulations will strengthen the banks and whether their capital, operations, and risk management will improve along with this consolidation."
S&P said consolidation could improve efficiency and ease the supervisory burden.
"However, banks may not get the full benefits of a merger without employee rationalization or redeployment," S&P said.
"Also, the transition could be bumpy and lead to difficulties in integration.
"In our view, raising capital to meet the proposed minimum capital levels could also be difficult for some of the smaller banks, pushing them toward consolidation.
"Moreover, the government's large fiscal deficit could limit its ability to inject capital into the banks it owns."
Seth-Chhabria said the agency had a 'stable' outlook on the banking sector.
S&P expects loan growth to pick up after a lull in 2013. But asset quality and profits are likely to be subdued with non performing loans expected to rise further in 2014 (but slower than in 2013).
A cap on penal interest rates on overdue loans, additional taxes and credit costs are likely to reduce return on average assets, S&P said.
We expect managing credit costs to remain a challenge for banks, given high NPLs and low coverage (reported loan loss reserves as a proportion of gross NPLs are at a decade's low of 34 percent.)," S&P said.
"Nevertheless, we view such performance as typical of emerging economies."
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