Fri, 29 Mar 2024 Today's Paper

Higher credit costs and taxes to put banking sector profitability under pressure: Moody’s

By

2 September 2019 12:10 am - 0     - {{hitsCtrl.values.hits}}

A A A

 

 

  • Moody’s maintains negative outlook for Sri Lanka’s banking sector
  • Forecasts SL’s GDP growth to slow to 2.6% in 2019 from 3.2% in 2018
  • Says fundamental risks to SL’s economy remain significant given its twin deficits


Higher credit costs amid worsening asset quality and higher taxes are set to impact the profitability of Sri Lanka’s banking sector negatively, according to a new report by Moody’s Investors Service.


“ …weakening asset quality is keeping credit costs high and in turn pressuring profitability,” the report said.


“Credit costs will continue to rise from a multi-year low as asset quality weakens. In addition, credit costs will be structurally higher under SLFRS 9, which is based on a forward-looking expected credit losses model as opposed to an incurred loss approach previously,” it added. Non-performing loans (NPLs) of Sri Lankan banks have jumped since 2017 due to weather-related disruptions to the economy and a constitutional crisis in October last year.


The interest rates increases, which are now slowly coming down, have also weakened borrowers’ debt affordability.


The rating agency also pointed out that the Debt Repayment Levy (DRL), a 7 percent value-added tax on financial services that took effect in October last year, will raise the effective tax rate on the banks over 50 percent, thereby impacting their profitability.


DRL will remain until December 2021.


Moody’s maintains a negative outlook for Sri Lanka’s banking sector, which is driven by weak operating conditions and deteriorating asset quality.


“Weak economic growth will in turn result in deteriorating asset quality, also on the back of excessive credit growth in recent years,” Moody’s Analyst Tengfu Li said. 


Moody’s forecasts Sri Lanka’s GDP growth to slow down to 2.6 percent in 2019 from 3.2 percent in the previous year due to the drop in tourist arrivals following the Easter Sunday attacks.
The rating agency however said the current moderated loan growth will ease funding pressure on banks while keeping their capitalization stable. 


Moody’s also pointed out that fundamental risks to Sri Lanka’s economy remain significant given its twin trade and budget deficits

and the government’s higher external debt reliance.

“Political risks could also resurface, with presidential and parliamentary elections scheduled for late 2019 and 2020, and previous bouts of political instability having triggered significant capital outflows and currency depreciation,” the rating agency noted. 


Finally, Moody’s expects the government’s capacity to support banks to be limited, given its large amounts of external debt and contingent liabilities.

 


Order Gifts and Flowers to Sri Lanka. See Kapruka's top selling online shopping categories such as Toys, Grocery, Kids Toys, Birthday Cakes, Fruits, Chocolates, Clothing and Electronics. Also see Kapruka's unique online services such as Money Remittence,Astrology, Courier/Delivery, Medicine Delivery and over 700 top brands. Also get products from Amazon & Ebay via Kapruka Gloabal Shop into Sri Lanka

  Comments - 0

Order Gifts and Flowers to Sri Lanka. See Kapruka's top selling online shopping categories such as Toys, Grocery, Kids Toys, Birthday Cakes, Fruits, Chocolates, Clothing and Electronics. Also see Kapruka's unique online services such as Money Remittence,Astrology, Courier/Delivery, Medicine Delivery and over 700 top brands. Also get products from Amazon & Ebay via Kapruka Gloabal Shop into Sri Lanka

Add comment

Comments will be edited (grammar, spelling and slang) and authorized at the discretion of Daily Mirror online. The website also has the right not to publish selected comments.

Reply To:

Name - Reply Comment





Order Gifts and Flowers to Sri Lanka. See Kapruka's top selling online shopping categories such as Toys, Grocery, Kids Toys, Birthday Cakes, Fruits, Chocolates, Clothing and Electronics. Also see Kapruka's unique online services such as Money Remittence,Astrology, Courier/Delivery, Medicine Delivery and over 700 top brands. Also get products from Amazon & Ebay via Kapruka Gloabal Shop into Sri Lanka

VAT increase: SOUNDs death knell for publishers, readers

Though the Government imposed VAT (Value Added Tax) on vegetables and other e

How female change-makers are driving Sri Lanka’s energy saving platform

Saving energy has become more of a responsibility than a habit in today’s c

A dull Ramadan awaits Muslims amidst the Soaring Cost of Living

In the coming days, Muslims across the world will welcome the Holy Month of R

New wildlife underpass to curtail HEC

As of February 2024, Sri Lanka lost another 38 elephants as a result of the H