ECONOMYNEXT - Fitch Ratings said it was maintaining a negative outlook for Sri Lanka's banking sector on slower growth in credit and profitability, with bad loan provisioning to increase on sluggish economic growth and disposable incomes falling.
"Fitch Ratings maintains a negative banking-sector outlook for Sri Lanka in 2018 as operating conditions should remain challenging, which could put mild pressure on performance during the rest of 2018 and possibly 2019," the ratings agency said in a statement Wednesday.
Nevertheless, performance of banks under Fitch's coverage remained fairly stable through 2017 and the first quarter of 2018. Their credit profiles are likely to remain broadly intact, the ratings agency said.
Sri Lankan banks have raised Tier 1 capital of 66 billion rupees and Tier 2 capital of 45 billion rupees since 2017 ahead of the full implementation of Basel III in 2019.
Further capital-raising is likely in 2018, although much of the shortfall was bridged in 2017.
"Higher credit costs could continue to hamper profitability in 2018. Credit costs rose in 1Q18, although pre-provision operating profitability buffers could still absorb the higher credit costs," Fitch said.
Fitch Ratings statement on the banking sector follows:
-Steady Profiles, Challenging Environment-
The performance of Sri Lankan banks under Fitch Ratings’ coverage remained fairly stable through 2017 and 1Q18, and we expect their credit profiles to remain broadly intact.
However, Fitch Ratings maintains a negative banking-sector outlook for Sri Lanka in 2018 as we expect operating conditions to remain challenging. This is likely to put mild pressure on performance during the rest of 2018 and possibly 2019.
-Capital Raising to Continue-
The implementation of Basel III in 2017 prompted Sri Lankan banks to raise capital, leading to improved capitalisation across most banks.
Fitch believes that large state commercial banks are the most likely to need further capital, as they are vulnerable to dividend demands from the state and their ability to raise capital may be constrained.
Sri Lankan banks have raised Tier 1 capital of LKR66 billion and Tier 2 capital of LKR45 billion since 2017 ahead of the full implementation of Basel III in 2019.
This includes LKR10 billion of equity by the large state-licensed commercial banks. Further capital raising is likely in 2018 although much of the shortfall was bridged in 2017.
-NPL Risks Remain-
Absolute NPLs for the sector rose by 25% in 1Q18 on the back of difficult operating conditions, with relatively slow economic growth and pressure on disposable income. The gross NPL ratio for the sector had risen to 3.0% by 1Q18 from 2.5% at end-2017.
There has also been an increase in rescheduled loans in 2017 and in 1Q18 across Fitch-rated banks, indicating on-going pressure on asset quality. However, we do not expect a significant increase in NPL ratios in 2018.
-Moderate Credit Growth Likely-
Loan growth for the sector picked up to 4.6% in 1Q18, but Fitch expects credit expansion to be kept in check due to the authorities’ focus on managing inflationary pressure and risks from any fiscal slippages.
Sector loan growth had also moderated in 2017 to 16.1% (2016: 17.5%, 2015: 21.1%), due mainly to the deceleration in private-sector credit demand as measures to tighten monetary policy in 2016 and 2017 took effect.
-Moderate Profit Growth-
The net profit growth for Fitch-rated banks in 2017 dropped to 10% from 25% in 2016 amid higher credit costs and taxes, although there was considerable improvement at the pre-impairment level. Higher credit costs could weigh on sector ROA in 2018.
-Stable Funding and Liquidity-
Deposits are likely to remain the main source of funding (83% of total funding at 1Q18) for Sri Lankan banks.
The share of current and savings accounts (CASA) for the sector had decreased to 34% of total deposits from 37% at end-2016 due to the shift to term deposits on account of higher interest rates. The loans/deposit ratio for the sector had eased slightly to 87% by 1Q18.
-SLFRS 9 Impact-
The implementation of SLFRS 9 in 2018 presents an additional challenge for Sri Lankan banks. The shift could add more pressure to capitalisation through a possible significant one-off adjustment, and drive a structural increase in normalised credit costs.
The Basel III capital shortfall could widen through the impact of SLFRS 9, although the impact on regulatory capital ratios is likely to be spread out across several periods.
"Fitch Ratings maintains a negative banking-sector outlook for Sri Lanka in 2018 as operating conditions should remain challenging, which could put mild pressure on performance during the rest of 2018 and possibly 2019," the ratings agency said in a statement Wednesday.
Nevertheless, performance of banks under Fitch's coverage remained fairly stable through 2017 and the first quarter of 2018. Their credit profiles are likely to remain broadly intact, the ratings agency said.
Sri Lankan banks have raised Tier 1 capital of 66 billion rupees and Tier 2 capital of 45 billion rupees since 2017 ahead of the full implementation of Basel III in 2019.
Further capital-raising is likely in 2018, although much of the shortfall was bridged in 2017.
"Higher credit costs could continue to hamper profitability in 2018. Credit costs rose in 1Q18, although pre-provision operating profitability buffers could still absorb the higher credit costs," Fitch said.
Fitch Ratings statement on the banking sector follows:
-Steady Profiles, Challenging Environment-
The performance of Sri Lankan banks under Fitch Ratings’ coverage remained fairly stable through 2017 and 1Q18, and we expect their credit profiles to remain broadly intact.
However, Fitch Ratings maintains a negative banking-sector outlook for Sri Lanka in 2018 as we expect operating conditions to remain challenging. This is likely to put mild pressure on performance during the rest of 2018 and possibly 2019.
-Capital Raising to Continue-
The implementation of Basel III in 2017 prompted Sri Lankan banks to raise capital, leading to improved capitalisation across most banks.
Fitch believes that large state commercial banks are the most likely to need further capital, as they are vulnerable to dividend demands from the state and their ability to raise capital may be constrained.
Sri Lankan banks have raised Tier 1 capital of LKR66 billion and Tier 2 capital of LKR45 billion since 2017 ahead of the full implementation of Basel III in 2019.
This includes LKR10 billion of equity by the large state-licensed commercial banks. Further capital raising is likely in 2018 although much of the shortfall was bridged in 2017.
-NPL Risks Remain-
Absolute NPLs for the sector rose by 25% in 1Q18 on the back of difficult operating conditions, with relatively slow economic growth and pressure on disposable income. The gross NPL ratio for the sector had risen to 3.0% by 1Q18 from 2.5% at end-2017.
There has also been an increase in rescheduled loans in 2017 and in 1Q18 across Fitch-rated banks, indicating on-going pressure on asset quality. However, we do not expect a significant increase in NPL ratios in 2018.
-Moderate Credit Growth Likely-
Loan growth for the sector picked up to 4.6% in 1Q18, but Fitch expects credit expansion to be kept in check due to the authorities’ focus on managing inflationary pressure and risks from any fiscal slippages.
Sector loan growth had also moderated in 2017 to 16.1% (2016: 17.5%, 2015: 21.1%), due mainly to the deceleration in private-sector credit demand as measures to tighten monetary policy in 2016 and 2017 took effect.
-Moderate Profit Growth-
The net profit growth for Fitch-rated banks in 2017 dropped to 10% from 25% in 2016 amid higher credit costs and taxes, although there was considerable improvement at the pre-impairment level. Higher credit costs could weigh on sector ROA in 2018.
-Stable Funding and Liquidity-
Deposits are likely to remain the main source of funding (83% of total funding at 1Q18) for Sri Lankan banks.
The share of current and savings accounts (CASA) for the sector had decreased to 34% of total deposits from 37% at end-2016 due to the shift to term deposits on account of higher interest rates. The loans/deposit ratio for the sector had eased slightly to 87% by 1Q18.
-SLFRS 9 Impact-
The implementation of SLFRS 9 in 2018 presents an additional challenge for Sri Lankan banks. The shift could add more pressure to capitalisation through a possible significant one-off adjustment, and drive a structural increase in normalised credit costs.
The Basel III capital shortfall could widen through the impact of SLFRS 9, although the impact on regulatory capital ratios is likely to be spread out across several periods.
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