27 April 2020 12:13 am
First Capital Research said their projections point to a decline in Sri Lanka’s banking sector profits in 2020, the third consecutive year in a row, gives rise to a rare phenomenon seen in two decades as the sector is seen capitulating in front of the worst health crisis, which has transcended into an insurmountable economic challenge in the modern history.
The research firm slashed private sector credit growth by more than half to 6 percent for 2020 as moratoriums may avert banks from expanding loans while the general demand for loans will also stay muted amid weak economic growth.
At the same time the research house expects the non-performing loans to spike to 7.2 percent of the total sector loans in reversal from their year earlier estimates when the new coronavirus was hardly seen as a threat to Sri Lanka and the economy set to accelerate from both the monetary and fiscal stimulus and the optimism from the Presidential election.
In January First Capital forecast a 14 percent growth in private sector credit and 19 percent growth in banking sector earnings for two years to 2021.
Now all the numbers on banking sector earnings point back to a level seen in 2015 or even lesser. In effect, during the three years to 2020 the banking sector appeared to have been unravelling and undoing the gains made during 2015 and 2016 riding on a wave of artificially low interest rates, which resulted in unsustainably high level of credit growth.
Those two to three years created massive spurt in assets—both immovable and movable—residential and commercial, luxury and semi-luxury buildings mushroomed in the metropolis and suburbs and the number of cars people drove more than doubled from 3.0 million to over
8.0 million.
Also prices escalated as easy credit created unfettered consumerism; people needed more money for consumption and banks were competing with each other to lend them more to meet their requirements.
Unfortunately during this period, ethics didn’t matter; social and environmental degradation continued unabated until everything came to a grinding halt two months ago with COVID-19 arriving at Sri Lanka’s shores.
Banking sector earnings fell 5 percent and 12 percent in 2018 and 2019 respectively, and First Capital forecast the 13 percent decline in sector earning in 2020 before registering 18 percent increase in 2021.
The banking sector in total recorded Rs.86 billion in earnings and the projections showed that it could only briefly eclipse that in 2020.
Even the 13 percent decline in sector earnings is based on the assumption of the economy growing by 2.4 percent in 2020, which is First Capital’s base case.
But other two scenarios point to a recession between 0.2 percent and 4.8 percent, in which case the impact on the banking sector earnings could be
much intense.
Despite the measures by the Monetary Board to provide some respite for the banks to stay afloat, the research house is of the belief that the profitability would take ‘a massive beating’.
First Capital Research therefore downgraded the banking sector to ‘hold’ from ‘buy’.