Sri Lankan banks eye growth, M&A and capital-raising

Top executives from Sri Lankan banks told the Asian Investment Conference of Credit Suisse in Hong Kong yesterday they were hopeful mergers and acquisitions would begin soon in the country’s financial sector, they were considering raising capital in the international markets and that they expected rapid loan growth to continue.

The three leading executives from Sri Lanka’s private sector agreed that the time had come for consolidation among Sri Lanka’s 22 commercial banks.

“The ground situation is very ripe for such activity to take place,” said Amitha Gooneratne, Managing Director of Commercial Bank of Ceylon. He added: “Two institutions getting together, and strengthening their capital, would really augur well for the industry and country.”

The panellists observed that challenges to M&A transactions remained, however. They noted that any takeover must be approved by the board and management of the target company, while no general offer can be made without regulatory approval.

Describing M&A as “difficult in reality,” Gooneratne said: “I would like to see a situation in which a general offer can be accepted by a board and referred to shareholders.”

Rajendra Theagarajah, Managing Director and CEO of Hatton National Bank, said that rapid loan growth during Sri Lanka’s post-war economic resurgence meant Sri Lankan banks should consider the international markets as a source of additional capital. “There will be a need for increased engagement with investor groups,” he said.

Theagarajah also said that Sri Lankan banks should be looking at following the sovereign into the international bond market. He said there was an opportunity to “showcase our own balance sheets and own strengths and see what we could do…in the international fixed income markets.”

He added that he believed the Republic of Sri Lanka may step up its international bond issuance. “If there could be a slight improvement…in the international credit rating, then they may use the international markets a bit more,” said Theagarajah. Loan growth has been accelerating in Sri Lanka since the end of the government’s conflict with the Liberation Tigers of Tamil Eelam (LTTE) in May 2009. Gooneratne said Sri Lankan banks had achieved average loan growth of 22% to 24% in 2010.  “During the last few months we have seen credit grow much faster than deposit growth,” said Aravinda Perera, the Deputy Managing Director of Sampath Bank, adding that this kind of growth could not continue without a correction in interest rates.

In spite of growing balance sheets, Perera pointed out that asset quality at Sampath Bank had not deteriorated. “We have achieved this growth while maintaining or improving our asset quality,” he said, noting that his bank’s nonperforming asset ratio was 4%. The panellists said they expected opportunities to grow in sectors including infrastructure, tourism, telecoms and industrial sectors like rubber.

While interest rates have been falling since the end of the war, the panellists said they expected rates to increase as a result of inflation rising to the 6%-7% area. But they said this would hold opportunities for lenders. “Banks are better poised to make higher returns in a higher interest rate scenario,” said Perera.