EconomyNext – Profit margins of Sri Lanka’s banks appear to have bottomed out last year and look set to recover in 2015, as credit and consumer demand picks up given low interest rates, a new report said.
First Capital Equities said they expect the banking sector of the Colombo Stock Exchange to have a "favourable phase" during 2015-18 with improving credit growth in line with economic growth and to provide an 18 percent average return for 2015.
Economic growth of seven percent will help banks to boost lending, mainly driven by growth in Small and Medium Enterprise and construction segments alongside development in trade, value-added apparel and tourism sectors.
"We also expect lending growth flowing in through growth in consumer demand," the stock brokers said in a report on the outlook for the banking sector.
"We expect credit growth to pick up to 18-20 percent in 2015 while credit growth is expected to continue at 18 percent through to 2018," the report said.
"Credit growth is likely to be ignited by the low interest rate regime in the country and an improvement in the credit to GDP ratio which is likely to reach 35% by 2018 versus the current 29 percent."
First Capital Equities expects bank profit margins to be around 3.5 percent.
"The struggling banking sector margins are likely to have bottomed out in 2014 as we expect a recovery in the margins (which) in the medium term is likely to be maintained at 3.5 percent."
Enhancement in CASA (Current and Savings deposits as a percentage of total deposits) and re-pricing of Fixed Deposits are likely adjust cost of funding downwards, improving the margins.
Overseas operations of banks will also support growth, the report said.
The banking sector’s asset quality will also improve through more diversified lending, First Capital Equities said.
"We expect sector non-performing loans to decline with improving economic conditions and expected larger recoveries in selected banks.
"Further diversification in loan books may further assist banks to lower their exposure by expanding the risk appetite."