The Sri Lankan banking sector is to see a reversal of most of the negatives experienced during last three years, and will usher in an era of prosperity with the pick-up in private sector credit growth, improving asset quality and rising returns.
The research arm of the First Capital Equities (Pvt) Limited (FC Research) expects the banking sector to have favourable four years from 2015 to 2018 with improving credit growth in line with the GDP growth.This will also be complemented by margin (Net Interest Margins) i mprovements through enhancing Current Account Savings Account (CASA) mix and t he growth stemming from overseas operations.
The research house stated the banks with regional presence might benefit from growing economic conditions in the regions.“We expect above 7 percent GDP growth to support lending mainly driven by growth in SME and construction segments alongside developments in trade, value added apparel and tourism sectors.
We also expect lending growth flowing in through growth in consumer demand,” FC Research said in a sector report released in first week of January.
After two years of post-war excessive credit growth which peaked 34.5 percent in 2011, Sri Lanka’s private sector credit growth has been falling year after year. In 2014, private credit growth grew by 7.5 percent, the Central Bank said a fortnight ago.However, FC Research expects the credit growth to pick up between 18-20 percent in 2015 and to average at 18 percent by 2018 due to low interest rates. The credit to GDP ratio is likely to reach 35 percent by 2018 versus current 29 percent.
However, growing inflationary fears due to increasing money supply as a result of promised giveaways and concessions to be delivered by the 100-day unity government, might compel t he Central Bank’snew monetary board to tighten the monetary policy, undermining expected pace of growth in banking credit.
Nevertheless, the up tick in business confidence over the promised good governance and rule of law by the new regime which will open a more free business environment devoid of political affiliations could have a positive impact, triggering more demand for credit for investment and consumption.
Meanwhile, it is also believed t hat banking sector margins have now bottomedout and will show a recovery. FC Research expects the margins in the medium term to be maintained at 3.5 percent.Further the negative outcomes of the weakened asset quality due to faster credit growth seen during 2010 and 2011 and the recent pawning debacle are expected to be improved due to better economic conditions amid others.
“Further diversification in loan books may further assist banks to lower their exposure by expanding risk appetite,” the report noted.With the falling NIMs and the rising capital requirements, it was earlier expected the banking sector NIMs to come under pressure going forward with returns (RoEs) becoming less attractive relative to other sectors in the economy.