Sri Lanka banks vulnerable to property market downturn: Fitch

ECONOMYNEXT – Sri Lankan banks are vulnerable to a property market downturn given increased lending to the sector and a weak ability to absorb losses, Fitch Ratings has said in a new report.

Fitch Ratings said it sees Australia and New Zealand as most exposed to property stress, while Sri Lanka, Mongolia and Vietnam face elevated risk due to low loss-absorption buffers.

“Accommodative monetary and economic policies should support the sector, but can also aggravate leverage,” the new report on the exposure of Asia-Pacific banks to property risks said.

“We believe regulatory oversight alongside macro-prudential policies should contain the direct effect of a residential property downturn on banks, especially in developed markets where loss-absorption buffers tend to be higher.”

The report said there was rising risk in India and Sri Lanka.

“Property sector-related risks in India and Sri Lanka could be understated due to indirect exposures and limited data transparency. Both countries, especially Sri Lanka, have exhibited strong property loan growth in recent years.

“This, coupled with their low loss-absorption buffers, makes these banks susceptible to a property market downturn.”

The risk would be higher for countries where loss-absorption buffers are lowest such as Sri Lanka, Mongolia and Vietnam, Fitch Ratings said, noting however that household debt remains low in some emerging markets, being around 10 percent of GDP in Sri Lanka.

“Sri Lanka experienced sharp increases in commercial and residential property loan growth of 41 percent and 26 percent respectively, from end-2014 to March 2019,” the report said.
“Yet the country has not introduced macro-prudential measures to limit banking sector exposure to property. Exposure is still small, though, compared with other banking systems in APAC.”

Nevertheless, Fitch Ratings said, a prolonged and significant weakness in the construction and property sector could have an adverse impact on banks, given their low loss-absorption buffers.

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There has been an increase in bad loans, restructured and rescheduled loans at Fitch-rated banks, although this is not unexpected in light of the weak operating conditions, reflecting a challenging macroeconomic environment.
(COLOMBO, 17 Sep, 2019)