Fitch says Lankan banks facing pressure on credit profiles

Fitch Ratings warned yesterday that pressure on banks’ financial profiles due to challenging operating conditions - as reflected in the 2019 negative banking-sector outlook for Sri Lanka - became more apparent in the banks’ 1H19 results.

The sector’s non-performing loans (NPLs) continued to rise rapidly, up 39% in 1H19 (64% in 2018) and 46% for 8M19. 

The deterioration in asset quality reflects the challenging operating conditions, the aftermath of high loan growth, and the impact of the Easter Sunday attack in April 2019. The gross NPL ratio for the sector continued to rise, to 4.8% in 1H19 from 4.2% at end-1Q19 and 3.4% at end-2018. In addition, the stock of rescheduled loans has also been growing, indicating that asset quality could continue to remain weak.

The sector’s loan growth is muted, after strong loan expansion during 2015-2018. It rose by only 1.3% in 8M19, reflecting weak borrower sentiment and subdued economic activity. Fitch believes loan growth could remain muted, particularly until the upcoming election cycle has concluded in 2020. The loan/deposit ratio for the sector decreased to 87% by end-1H19 from 91% at end-2018, indicating that funding and liquidity pressure has eased.

After-tax profit for Fitch-rated banks in 1H19 dropped, with net income of Rs. 41 billion (1H18: Rs. 56 billion; 2018: Rs. 114 billion), amid slower loan growth, increased credit costs and higher effective taxes. Recent capital-raising has faced execution risks, with issuance being undersubscribed. Still, further capital issuance is planned for 2H19 and capital raisings are likely to continue due to ongoing capital needs. Basel III capital standards came into full effect in 2019, with banks being able to comply with the minimum requirements.