ECONOMYNEXT – Sri Lanka’s loan growth will pick up “moderately” in 2021, with state banks contributing with bad loans rising but bank can no longer rely on extraordinary state support, after a credit downgrade to ‘CCC’, Fitch Ratings said.
“Fitch expects moderately higher loan growth in 2021, driven by increased private-sector credit demand,” the rating agency said in a report.
“We still expect state banks, driven by lending to the state or state-related entities, to account for a sizeable share of the incremental lending, though lower than in 2020.
“We expect banks’ ability to generate new business and revenue to be broadly similar to that experienced in 2020, with significant downside risks.”
In the nine months to September 2020, loans at Fitch rated banks had grown 11.4 percent with the two large state banks accounting for 83 percent of loans.
Central Bank data shows that private credit grew 6.4 percent in the 12-months to October, SOE credit 27 percent and credit to government 56.2 percent.
Fitch is forecasting growth to pick up to 4.9 percent in 2021 after contracting 6.7 percent in 2020.
The Coronavirus pandemic and the weakening sovereign credit profile will weigh on banks with the operating environment downgraded to ‘CCC’ after the sovereign rating cut in December.
Ratings of Sri Lana banks, except Cargills Bank were now driven by their standalone strength, with sate support no longer relied upon..
“Fitch believes that extraordinary sovereign support cannot be relied upon for any bank, including the two large state banks – Bank of Ceylon (BOC) and People’s Bank (PB), mainly due to the state’s sharply weakened ability to provide support, even though its propensity to support remains unchanged,” the agency said.
“The state’s weak credit profile also affects domestic banks’ ratings, including on the national rating scale.
Banks would find it more difficult to raise foreign currency funding
The share of state banks had risen marginally up to September. Amid high growth of 22 percent the combined impaired loan ratio of the two state banks had fallen to 9.8 percent in September from 10.4 percent in December 2019.
“The pressure on asset quality was more evident for private banks, whose impaired-loan ratio increased to 10.1% from 8.8% at end-2019,” Fitch said.
About 26 percent of Fitch rates loans were under moratorium. A clearer picture of bad loans are likely to emerge in 2021 when moratoriums ended. (Colombo/Dec18/2020)