ECONOMYNEXT –Sri Lanka’s banks are easy targets for higher taxes which is hurting profitability and discouraging foreign investors from buying banking stocks, said S. Renganathan, Chief Executive at listed Commercial Bank of Ceylon.
"Repeatedly taxing banks is a challenge. If we add more taxes that will impact earnings and Sri Lanka banks would be less attractive to investors," Renganathan said at a recent forum ‘Financial Sector Investment Conference’ organised by Asia Securities, a Colombo-based stock brokerage.
For foreign funds, Sri Lanka’s banking stocks are a favourite entry point to Colombo’s equities market, he said.
"We want to attract these funds at a time foreign investors are interested in other markets, but if we add more taxes…their confidence in the banking sector and equity markets will weaken," Renganathan said.
"We keep hearing at many forums that banks always make profits, but any country that’s growing (needs) banks that are doing well. If banks are not doing well then there is something wrong in that economy," he said.
Banks are taxed at the highest rate of 28 percent.
The new Inland Revenue Act of 2017 removed several exemptions like interest income from US dollar bonds and professional and SME loans.
There is also a 2 percent Nations Building Tax.
The government was proposing a 7 percent debt recovery levy which would increase the financial value added tax from 15 percent to 22 percent.
In the 2018 budget, the government also proposed a transaction tax of 20 cents tax for every 1,000 rupees, but banks were not allowed to recover this from their customers.
However, the two proposals hang in the balance with Sri Lanka locked in a constitutional crisis.
-Banking sector challenges-
Banking profits are expected to take a hit with new, tighter rules on non-performing loans coming in to affect.
Under IFRS 9 banks will be required to assess future cash flows of their lending portfolios, unlike in the past where banks measured credit profiles of borrowers based on historic accounting records.
As a result, according to Jonathan Alles, Chief Executive at listed Hatton National Bank, bad loans provisioning could double for banks.
Banking sector non-performing loans had already risen to 3.5 percent from a low of 2.5 percent last year on sluggish economic growth and weak consumption, but it was below historical trends.
Capital requirements for Sri Lankan banks have also increased due to the implementation of Basel III in July 2017.
"The banks have bridged most of the capital shortfall in 2017, but an additional 19 billion rupees of capital will be required by some large banks to meet full compliance by 2019," Fitch Ratings has said.
Listed bank reported a combined profit of 65.41 billion rupees in the June quarter, up 21 percent from a year earlier. (COLOMBO, 01 November 2018)