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Thursday April 18th, 2024

Bad loan provisions erode Sri Lanka banks’ profit amid looming domestic debt restructuring

ECONOMYNEXT – Sri Lanka’s listed banks have seen a drastic fall in this year’s September quarterly earnings as bad loan provisions mainly for International Sovereign Bonds (ISBs)  hit their top line, reports showed, amid worries of a possible domestic debt restructuring.

Sri Lanka declared sovereign debt default on April 12 and since then the island nation has stopped repaying foreign loans through bilateral partners and ISBs. Analysts and financial experts have warned of a banking sector collapse if banks are asked to go for a domestic debt restructuring.

In the third quarter ended in September 2022, most top tier banks have reported bad loan
provisions of over 70% compared to the corresponding period in 2021 as they have made provisions mainly for government held ISBs and dollar denominated Sri Lanka Sovereign Bonds (SLDBs).

Banks have made impairments up to 25-30% for ISBs and around 20% for SLDBs, two analysts confirmed.

“Banks will be able to manage an external haircut marginally keeping capital adequacy at a minimum,” Udeeshan Jonas, Chief Strategies at Capital Alliance told EconomyNext.

Profits in Commercial Bank, which holds $108.63 million worth of ISBs and $152.19 million worth of SLDBs, slipped 7.5 percent to 6 billion rupees in the September quarter, mainly due to bad loan provision.

Bad loan provisions jump

The impairment rose 292% to 17 billion rupees in the quarter from a 4 billion rupees in the corresponding period in 2021, the quarterly report showed.

The bank stated in its report that a ‘substantial portion’ of the impairment charges is on
Government Securities denominated in Foreign Currency.

Commercial Bank has invested 197.08 billion rupees in the Treasury Bond portfolio including 55.47 billion rupees in SLDB and 39.6 billion rupees in ISBs.

Sampath Bank’s September quarter profits plunged 86 percent to 316 million rupees, down from 2.2 billion rupees in the same quarter a year ago. Its impairment charges for the period rose 288.5 percent to 20.6 billion rupees from 5.3 billion rupees in the corresponding quarter.

The Bank provided 9.04 billion rupees against ISBs and 935 million rupees against SLDBs for the September quarter.

Sampath Bank in its September quarter earnings said the decision was taken after Sri Lanka’s sovereign rating was degraded by Fitch Ratings in May 2022 to ‘Restricted Default’ from ‘Near Default’ and the current debt restructuring actions taken by the Government.

The Bank’s cumulative impairment provision for SLDBs and SLISBs stood at 21.6 billion rupees by the end of September.

Hatton National Bank (HNB) too has made similar provisions.

Its total impairment rose 309 percent to 20.6 billion rupees in the quarter compared to 5 billion rupees in the same quarter in 2021. However, HNB’s interest income boosted the profit for the period by 55 percent to 5 billion rupees.

HNB noted in its report that it has accumulated 60 billion rupees’ impairments for the first nine months, an increase of 438 percent compared to the same period in the previous year.

Of the 60 billion rupees, 41 billion rupees had been for investments in foreign currency denominated government securities held by the Bank.

40% haircut?

“I think they are getting ready for a 40 percent haircut on sovereign bonds and development bonds.

They have done up to 25-30 percent at the moment,” a top analyst who wants to remain anonymous told EconomyNext.

The outstanding government debt owed to the commercial banks stood at 3.9 trillion rupees by end 2021, the Central Bank data showed.

The state owned Bank of Ceylon said it has set aside “a considerable level of impairment provisions  for its investment in International Sovereign Bonds and Development Bonds”. However, the bank, the largest in the country by the asset base, did not give more details.

Amid all these provisions for external debt, analysts say the government should avoid all means of a local haircut as it will have a damming effect on the already weak financial sector that could lead to an overall collapse.

“The local debt is fairly large even if 5% is touched, it will go below minimum capital,” Jonas said.

“A domestic haircut is never good and they should avoid it by all means. But, there are other methods such as maturity extensions and coupon reductions,” another analyst said.

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  1. Athula rajapakshe says:

    Your article by hamza on 28 Dec 22.clearly show our banks exposure to ddr

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  1. Athula rajapakshe says:

    Your article by hamza on 28 Dec 22.clearly show our banks exposure to ddr

Sri Lanka’s discussions with bondholders constructive: State finance minister

ECONOMYNEXT – Sri Lankan authorities continue to engage all debt restructuring negotiations in good faith, within principles of equitable treatment among creditors, and with maximum transparency within the norms of such negotiations, State Minister of Finance, Shehan Semasinghe has said.

“It is standard practice, when a representative group of bondholders is formed, to entertain confidential discussions with such group and its appointed advisors. In the case of Sri Lanka, the Ad Hoc Group of Bondholders represents holders controlling more than 50% of the bonds, which make them a privileged interlocutor for Sri Lanka,” Semasinghe said on X (twitter).

“It is well understood that given the price sensitive nature of the negotiations, and according to market regulations, discussions with the Group and its advisors are to be conducted under non-disclosure agreements. This evidently restricts the ability of the Government to unilaterally report about the substance of the discussions.

“The cleansing statement, which was issued on the 16th of April, at the conclusion of this first round of confidential discussions with members of the Group, aims at informing the Sri Lankan people, market participants and other stakeholders to this debt restructuring exercise, about the progress in negotiations. It provides the highest possible level of transparency within the internationally accepted practices in such circumstances.

“As informed in this statement, confidential discussions held in recent weeks with bondholders’ representatives proved constructive, building on the restructuring proposals presented by both parties. During the talks both sides successfully bridged a number of technical issues enabling important progress to be made. Sri Lanka articulated key remaining concerns that need to be addressed in a satisfactory manner.

“The next steps would entail further consultation with the IMF staff regarding assessments of the compatibility of the latest proposals with program parameters. Following these consultations, we hope to continue discussions with the bondholders with a view to reaching common ground ahead of the IMF board consideration of the second review of Sri Lanka’s EFF program.”

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Sri Lanka rupee weakens at 301.00/302.05 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 301.00/302.05 to the US dollar in the spot forex market on Tuesday, from 299.00/10 on Tuesday, dealers said. Bond yields were broadly steady.

A bond maturing on 15.12.2026 closed stable at 11.30/35 percent.

A bond maturing on 15.09.2027 closed at 11.90/12.05 percent up from 11.95/12.00 percent.

A bond maturing on 15.12.2028 closed at 12.10/20 percent down from 12.10/15 percent.

A bond maturing on 15.07.2029 closed at 12.25/40 percent.

A bond maturing on 15.03.2031 closed at 12.30/50 percent. (Colombo/Apr17/2024)

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Sri Lanka Treasury Bill yields down across maturities

ECONOMYNEXT – Sri Lanka’s Treasuries yields were down across maturities at Wednesday’s auction with the 3-month yield moving down 7 basis points to 10.03 percent, data from the state debt office showed.

The debt office sold all 30 billion rupees of 3-month bills offered.

The 6-month yield fell 5 basis points to 10.22 percent, with 25 billion rupees of bills offered and 29.98 billion rupees sold.

The 12-month yield dropped 4 basis points to 10.23 percent with 18.01 billion rupees of bills sold after offering 23 billion rupees. (Colombo/Apr17/2024)

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