SRR hike could eat into banking sector margins: research

28 January 2016 02:46 am - 0     - {{hitsCtrl.values.hits}}

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The banking sector margins and the profits could come under pressure due to the increase in the reserve requirement by the Central Bank, which came into effect from January 16, a research by a Colombo-based stock brokerage said. 

The reserve requirement increase carried out by way of raising the Statutory Reserve Ratio (SRR) by 150 basis points has already mopped up as much as Rs.50 billion from the domestic money markets. 
According to Asia Securities Head of Research Kanishka Perera, the hit on the net profit of the banking sector due to SRR hike could range between 2.5 percent to 5.1 percent. 
However, Perera’s observation is in conflict with what the banking sector has already experienced in the past, as the higher interest rates augurs well for the banks to expand their margins and thereby their profits. 
Perera argued that if the banks carry larger fixed rate corporate loans, which cannot be re-priced at a time of rising interest rates, the net interest margins (NIMs) could come under pressure because the banks’ funding cost goes up with the rising interest rates. 
In a scenario where liquidity is drying up and the interest rates are rising, the banks are compelled to offer higher rates for deposits to fund their lending growth, which will narrow their margins. 
“If we assume that the corporates have got fixed rate debt, the pressure should fall on banks,” Perera said.  
“In the first place, the (impact of) SRR, which is going to mop up liquidity, the banks will have to compete to get more money (through deposits) to lend. On the other end (with) the fixed rate debt (loans and advances) we are going to see bit of a NIM squeeze coming in the banking sector,” Perera added.  
Soon after the December monetary policy, the banks have already raised their lending rates by between 100 to 200 basis points and are heavily competing with one another for deposits, offering very attractive rates. 
Data shows that the banking sector NIMs have narrowed to 3.6 percent by end of September 2015 from 4.6 percent in 2010, 4.2 percent in 2011 and 4.1 percent in 2012. In 2013 and 2014 however, the NIM stood at 3.5 percent, slightly above the September figure. 
Meanwhile, the former banker and now the advisor to the Public Enterprise Development Ministry, Nihal Welikala, observed that Sri Lanka’s private sector banks’ NIMs are higher than their state sector counterparts and overall Sri Lanka’s banking sector NIMs are higher than their regional counterparts. 
Since the Budget 2016 slapped industry with higher taxes, the banking sector counters were seen losing significantly and this was further exacerbated by the SRR hike and emerging market sell-offs. 
“What we have seen during the last few days is that most of banking stocks, we have seen a broad sell-off. But we feel there’s still more room to fall because the market is not pricing in the NIMs squeeze,” Perera added. 
According to Perera, the sell-offs were mainly due to the emerging market sales by international investors as well as frontier funds’ year-end sales. 
Banking is the largest sector in the Colombo Stock Exchange with a market capitalization of Rs.700 billion or 24 percent of the entire market as of December 31, 2015. 
Banking is the preferred sector by most investment funds as the sector is more liquid than the others. 
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