Sri Lanka banks’ negative outlook remains with rising bad loans: Fitch

ECONOMYNEXT- Ratings agency Fitch said Sri Lanka’s negative banking sector outlook is likely to remain in the short-term due to a continued rise in bad loans and subdued economic growth.

“Fitch Ratings’ 2019 negative banking-sector outlook for Sri Lanka reflected our expectations of continued pressure on banks’ financial profiles due to the challenging operating conditions,” a Fitch report said.

“These trends have become more apparent in banks’1H19 results, and are likely to remain in the short-term.”

Growth has become sluggish in the first half of 2019 (1H19) at 2.6 percent, putting pressure, Fitch said.

Bad loans had risen by 39 percent in 1H19 and at a faster 46 percent in the first eight months of 2019. In 1H18 bad loans had risen 64 percent.

The bad loan ratio was 4.8 percent in 1H19, up from 3.4 percent at end 2018.

Although this was below the peak of 5.6 percent in 2013 which was driven by defaults in gold-backed loans, the rescheduled loans have also been rising recently, showing that asset qualities could stay weak, Fitch said.

Bad loans are rising after a rapid growth in loanbooks between 2015 and 2018, Fitch said.

“The deterioration in asset quality broadly reflects the difficult operating conditions and the aftermath of high loan growth.”

“This has been exacerbated by the Easter Sunday attack, which prompted the Central Bank of Sri Lanka (CBSL) to offer concessions to the tourism sector in the form of a moratorium until March 2020,” Fitch said.

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Banks have become conservative, with loan growth contracting 0.5 percent in 1H19, reflecting weak borrower sentiment and economic activities, the ratings agency said.

“We believe loan growth could remain muted, particularly until the upcoming election cycle has concluded in 2020.”

“The lending rate cap imposed recently by CBSL on rupee-deonominated loans extended by Sri Lankan banks may not support an improvement in lending in the short-term.”

“Net interest margins are likely to contract on account of the lending rate cap, but the extent of the impact will depend on several variables, including the composition of individual bank’s loan portfolios,” Fitch said.

Overall, loans are mostly taken for consumption, followed by construction, and retail and wholesale trade.

Fitch rated banks account for 90 percent of assets in the banking sector.

Banking profits had fallen in 1H19, and capital raising is facing risks due to some issuances being undersubscribed, Fitch said.

All banks are meeting minimum capital requirements, and pressure on funding and liquidity has eased, Fitch said. (Colombo/Nov13/2019)

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