Sri Lanka’s banking sector thrives in 2024: Softlogic Stockbrokers

• Analysts expect further gains in 2025
• Majority of banks showcased YoY growth in NII
• Net profit to equity holders saw significant YoY growth
• Banks declared record-high Rs.46.2bn worth of dividends for 2024
• Highlights banks remained adequately capitalised and well above regulatory requirements for their Tier I and Tier II ratios as of end-2024

By Nishel Fernando

Sri Lanka’s banks marked an exceptional year in 2024, primarily driven by the impairment reversals on the Sri Lanka International Sovereign Bonds (SLISBs), despite also incurring the net losses from the restructuring of the SLISBs, according to Softlogic Stockbrokers.

Notably, the banks maintained strong balance sheets, supported by the expanding loan portfolios and a growing deposit base. However, the net interest income (NII) remained under pressure, due to the impact of the declining interest rates.

The majority of banks showcased a year-on-year (YoY) growth in NII, except for HNB, Seylan Bank, DFCC and Union Bank of Colombo, while the impairment charges declined across all banks.

The net profit to the equity holders saw a significant YoY growth, with Commercial Bank leading at 160.8 percent YoY. Total assets and loan books of all banks expanded, with the loan books of most banks growing at a faster pace than the total deposit base.

“Effective balance sheet management and improved lending of all the banks helped offset the significant losses from the SLISBs, while most of the banks recorded exceptional bottom-line improvements in 2024,” Softlogic Stockbrokers said.

Commercial Bank recorded the highest earnings in 2024, with its profit surging to Rs.55.1 billion through strong NII growth, impairment reversals, timely deposit repricing, a solid CASA base and reduced interest expenses that allowed loan book expansion. This was followed by HNB, Sampath Bank and NTB.

The banks declared a record-high Rs.46.2 billion worth of dividends for 2024, driven by strong financial performance, marking one of the highest-ever payouts for a financial year.

Given that the banking sector declared notable dividends in 2024, Softlogic Stockbrokers expects that some portion of this could probably be reinvested back into the stock market, potentially driving further growth momentum.

Despite the low-interest rate regime, the NII for several banks in 2024 strengthened on a YoY basis, driven by faster growth in loan portfolios. On a YoY basis, most banking sector counters experienced a NII growth, with Commercial Bank leading at 36.7 percent, recording a NII of Rs.118.1 billion.

“Amidst a significant reduction in interest income, due to the declining interest rate regime, the interest expenses experienced a comparatively steeper decline, supporting positive NII growth for some banks amidst the timely repricing done on their deposit base,” Softlogic Stockbrokers noted.

On the flip side, some banks, including HNB, DFCC, Seylan Bank and Union Bank of Colombo, recorded a YoY drop in NII.

Meanwhile, the banks recorded net losses from external debt restructuring, following the successful conclusion of the ISB restructuring process in December last year. As of end-2023, HNB’s SLISB holding balance was 10 percent of total assets, leading to a total loss of Rs.49.5 billion, after the finalisation of restructuring, while Commercial Bank’s exposure was 7 percent of total assets, resulting in a loss of Rs.45.1 billion.

The net losses from the restructuring of the SLISBs were mainly based on the haircuts applied and day-one losses. The banks with higher exposure to the SLISBs consequently recorded greater losses, following the finalisation of the restructuring.

Meanwhile, Commercial Bank maintained its leading position with the highest asset base of Rs.2.9 trillion in 2024, followed by HNB and Sampath Bank. The majority of banks experienced a YoY growth in their total asset base, with Sampath Bank recording the highest growth of 15.7 percent. On the other hand, SDB recorded a decline in assets YoY in 2024.

“Majority of the listed banking sector peers observed a growth in their total assets as of end-2024, mainly driven by a notable enhancement in their loan books, amidst the prevailing low-interest-rate regime,” Softlogic Stockbrokers said.

Commercial Bank maintained the largest loan book, valued at Rs.1.4 trillion, among the listed banking sector peers, followed by Sampath Bank and NTB in 2024.

Softlogic Stockbrokers expects the banking counters to expand loan books, supported by the sustained low interest rates. Further, private sector credit demand is expected to grow in segments such as home loans, leasing, credit cards, import loans and green energy loan schemes.

Meanwhile, all banks except for SDB saw YoY growth in their deposit base, despite a low-interest-rate environment, while Sampath Bank recorded the highest growth at 16.5 percent YoY.

“The banks have seen a significant recovery in their deposit base, despite the low interest rates, led by improved CASA ratios. Nevertheless, the increased WHT on interest of 10 percent (compared to 5 percent before) may pose a challenge in further strengthening the deposit base going forward, amidst the lower interest rates,” Softlogic Stockbrokers said.

With the gradual recovery in Sri Lanka’s economic sentiment, the majority of listed banking peers observed a further improvement in asset quality, with the stage three loans ratio gradually trending downward during 2024.

Most banks continued to maintain a provision cover above 50 percent. Despite having a very moderate ISB exposure in terms of total assets, Seylan Bank held the highest provision cover in the listed space.

“Majority of the listed banks have continued to focus on maintaining a sound provision cover in 2024, giving the indication that the banks are fully focused on precautionary measures to cover any potential losses that may arise from any other source,” Softlogic Stockbrokers noted.

Meanwhile, Amana Bank and Commercial Bank thrived with a sound CASA ratio above 38 percent in 2024, while HNB, Sampath Bank, NTB, and Seylan Bank managed to maintain the CASA ratio above the industry average in 2024.

“Majority of the banking sector peers managed to further attract more low-cost deposits from the current and savings accounts relative to their total deposits, in order to counteract the impacts of reduced interest income,” Softlogic Stockbrokers said.

Meanwhile, Softlogic Stockbrokers highlighted the banks remained adequately capitalised and well above the regulatory requirements for their Tier I and Tier II ratios as of end-2024. NTB maintained the highest Tier I ratio in the listed banking space, while HNB held the highest total capital ratio as of end-2024.

“Given that it is vital to maintain sound capital buffers in order to cover any potential losses while meeting the regulatory requirements, all banks have been able to meet the requirements,” it added.