ECONOMYNEXT – Sri Lankan banks have seen a surge in provisioning for bad loans with the adoption of a new accounting rule but have been able to manage its capital impact, Fitch Ratings said.
The ability of banks to handle the shift to Sri Lanka Accounting Standard, ‘SLFRS 9’, was due to capital infusions ahead of full implementation of Basel III, satisfactory profitability buffers and the four-year phasing-in period, the ratings agency said in a new report.
Sri Lanka adopted SLFRS 9 on 1 January 2018, but banks were permitted to follow the older accounting standard, SLAS 39, in calculating credit costs until end-2018.
The local regulator has allowed banks to spread the one-time impact of SLFRS 9 implementation over four years for the purpose of calculating regulatory capital ratios.
“This reduces pressure on banks to raise capital over and above the equity they have already raised in preparation for full implementation of Basel III on 1 January 2019,” Fitch Ratings said.
The banks raised 50 billion rupees in 2017 and 24 billion rupees in 2018.
Twelve of the 16 local Fitch-rated banks have now disclosed the day-one impact of SLFRS 9 in their 2018 financial statements, based on their end-2017 balance-sheet position.
“Their aggregate opening loan loss allowances increased by 32 billion rupees, or 27 percent, from the end-2017 position,” Fitch said.
“This translates to a reduction in their regulatory capital ratio of about 50bp-60bp on average.”
Fitch Ratings said that 11 of the 12 banks could have met the Basel III capital ratio requirements in full at 1 January 2019, even without the permitted capital benefit from deferring the SLRFS 9 impact.
“Bank of Ceylon (BOC) had the highest one-time impact from SLFRS 9 among the domestic systemically important banks,” Fitch Ratings said.
“The impact of 0.9 percent of risk-weighted assets would have reduced its Tier 1 capital ratio below the 10 percent minimum requirement for domestic systemically important banks, if applied in full to its Fitch-estimated end-2018 capital ratio.”
Fitch Ratings estimates that the day-one impact of SLFRS 9 may also reduce People’s Bank’s Tier 1 ratio to just under 10 percent, based on its analysis of disclosures at the end of the thirs quarter of the 2018 financial year.
“However, the four-year phase-in should help to keep both BOC and People’s Bank just above the minimum regulatory ratio,” the report said.
“We believe that banks that need or choose to strengthen capital buffers will continue to raise capital in 2019. However, they could face execution risks given the macro instability.”
Fitch Ratings said it expects asset quality to remain under pressure, as reflected in a rise in rescheduled loans and a surge in non-performing loans in 2018.
“We expect asset-quality pressures to remain manageable but we will reassess the trends if loan impairments significantly exceed our expectations.”
(COLOMBO, March 21, 2019-SB)