Moody's says that the operating environment for banks in Sri Lanka will remain healthy and that asset quality and profitability will be stable over the next 12 to18 months, offsetting some moderate deterioration in funding and liquidity.
In their Banking Sector Outlook for Sri Lanka, Moody's says the GDP growth rates in Sri Lanka will remain robust. "We expect annual growth of 6.7% over 2015-16."
An accommodative monetary policy supports the growth outlook.
In addition, investments are likely to have more participation from the private sector, compared with the public-sector-led approach of the past few years, a shift which should provide an impetus to loan growth.
The gross nonperforming loan (NPL) ratio has improved over the past 18 months, coming down to 4.0% in September 2015 from 5.6% in December 2013.
Problems in the pawning sector the key reason for the pick-up in NPLs 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 only moderate loan growth in 2013-14 even as the economy was growing rapidly."
"On the one hand, net interest margins (NIMs) will remain under pressure, primarily due to the low interest rate environment. On the other hand, have Sri Lankan banks have already made significant investments in their branch networks and personnel in recent years, so faster loan growth will lower their cost-to-income ratios. Some banks will also benefit as elevated credit costs associated with pawning NPLs are no longer required, "the report further states.
The current level of liquidity in the system is adequate with the statutory liquidity ratio in the domestic book at 36%. However, liquidity should tighten over the outlook horizon, as we expect annual loan growth of around 20%, faster than deposit growth of 16%.
This should put pressure on the banks' funding profiles as they will need increase their dependence on more expensive sources of borrowing, including foreign-currency borrowings.
"Sri Lanka has a track record of providing systemic support to banks when needed and we assume that such support would be forthcoming, if required. Sri Lankan banks need to comply with Basel III capital norms, as well as liquidity coverage ratio (LCR) norms, from January 2016 onwards."
In their Banking Sector Outlook for Sri Lanka, Moody's says the GDP growth rates in Sri Lanka will remain robust. "We expect annual growth of 6.7% over 2015-16."
An accommodative monetary policy supports the growth outlook.
In addition, investments are likely to have more participation from the private sector, compared with the public-sector-led approach of the past few years, a shift which should provide an impetus to loan growth.
The gross nonperforming loan (NPL) ratio has improved over the past 18 months, coming down to 4.0% in September 2015 from 5.6% in December 2013.
Problems in the pawning sector the key reason for the pick-up in NPLs 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 only moderate loan growth in 2013-14 even as the economy was growing rapidly."
"On the one hand, net interest margins (NIMs) will remain under pressure, primarily due to the low interest rate environment. On the other hand, have Sri Lankan banks have already made significant investments in their branch networks and personnel in recent years, so faster loan growth will lower their cost-to-income ratios. Some banks will also benefit as elevated credit costs associated with pawning NPLs are no longer required, "the report further states.
The current level of liquidity in the system is adequate with the statutory liquidity ratio in the domestic book at 36%. However, liquidity should tighten over the outlook horizon, as we expect annual loan growth of around 20%, faster than deposit growth of 16%.
This should put pressure on the banks' funding profiles as they will need increase their dependence on more expensive sources of borrowing, including foreign-currency borrowings.
"Sri Lanka has a track record of providing systemic support to banks when needed and we assume that such support would be forthcoming, if required. Sri Lankan banks need to comply with Basel III capital norms, as well as liquidity coverage ratio (LCR) norms, from January 2016 onwards."
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