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Sri Lanka Banking Sector_Final
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Transcript of Sri Lanka Banking Sector_Final
Sri Lankan Banking SectorUpdate
Rukshana Thalgodapitiya,
Vice President
26 February 2015
1www.fitchratings.com
Outlooks for 2015Stable Rating and Sector Outlook for Sri Lanka
Outlook on Sri Lankan banking sector revised to Stable in 2015
• More supportive operating conditions expected
• Deterioration in key credit metrics have largely bottomed out
• Banks to continue to face challenges
Ratings Outlook remains Stable
• All Sri Lankan banks have a Stable ratings outlook
• Growth potential supportive of bank performance
• Operating environment rated risks factored into Viability Ratings
2www.fitchratings.com
Sensitivities
Positive
• Structural changes that can enhance the resilience of balance sheets
• Sustained improvement in the operating environment
Negative
• Capital Impairment risks
Sovereign rating
3www.fitchratings.com
Public Ratings of Sri Lankan banks assigned by Fitch
Source: Fitch
LT IDR / Outlook
Viability Rating
Support Rating
Support Floor
National Rating / Outlook
National Savings Bank BB- / Stable na 3 BB- AAA(lka) / Stable
Bank of Ceylon BB- / Stable b+ 3 BB- AA+(lka) / Stable
DFCC Bank B+ / Stable b+ 4 B AA-(lka) / Stable
National Development Bank B+ / Stable b+ 4 B AA-(lka) / Stable
People's Bank (Sri Lanka) AA+(lka) / Stable
Commercial Bank of Ceylon AA(lka) / Stable
Hatton National Bank AA-(lka) / Stable
Sampath Bank AA-(lka) / Stable
Seylan Bank A-(lka) / Stable
Nations Trust Bank A(lka) / Stable
Pradeshiya Sanwardhana Bank BBB+(lka) / Stable
Pan asia Banking Corporation BBB(lka) / Stable
Union Bank of Colombo BB+(lka) / Stable
Sanasa Development Bank BB+(lka) / Stable
4www.fitchratings.com
• Larger and mature banks have a clear competitive advantage being best placed to leverage
opportunities due to their established franchises
• Mid sized banks need to find a niche or clear competitive advantage
• Small banks face challenges in sustaining and developing their franchises
Competitive landscape
0
5
10
15
20
25
BO
C
CO
MB
DF
CC
HN
B
ND
B
NS
B
PB
SA
MP
FY10 FY11 FY12 FY13 1HFY14
Market Share – by Loans
(%)
0
5
10
15
20
25
BO
C
CO
MB
DF
CC
HN
B
ND
B
NS
B
PB
SA
MP
FY10 FY11 FY12 FY13 1HFY14
Market Share – by Deposits
(%)
Source: Fitch, Banks
5www.fitchratings.com
Possible pick up in lending
Source: Central Bank of Sri Lanka (CBSL), Fitch
• Loan growth slowed in 2014 partly on account of the drop in credit for gold- backed lending
• Some pick- up in lending possible in 2015
-5
0
5
10
15
20
25
30
35
2009 2010 2011 2012 2013 2014E 2015F
Loan growth(%)
6www.fitchratings.com
Underlying sector trends
-20
-10
0
10
20
30
40
50
Agri
cultu
re &
Fis
hin
g
Ma
nufa
ctu
ring
To
uri
sm
Tra
nspo
rt
Co
nstr
uctio
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Tra
ders
Ne
w E
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Fin
ancia
l &
Bu
sin
ess S
vcs.
Infr
astr
uctu
re
Oth
er
Serv
ices
Oth
er
Cu
sto
me
rs
FY13 1H14(%)
Sector Wise Growth
Source: Major Sri Lankan Banks Source: Major Sri Lankan Banks
0
5
10
15
20
25
30
Agri
cultu
re &
Fis
hin
g
Ma
nufa
ctu
ring
To
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sm
Tra
nspo
rt
Co
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Tra
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Ne
w E
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Fin
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l &
Bu
sin
ess S
vcs.
Infr
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uctu
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Oth
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Serv
ices
Oth
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Cu
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FY13 1H14(%)
Sector Wise Composition
7www.fitchratings.com
Pressure on asset quality from gold- backed lending expected to diminish
0
50,000
100,000
150,000
200,000
250,000
FY12 FY13 1HFY14
Total NPL Pawning related NPL(LKRm)
Source: Major Sri Lankan banks
• Sector NPL ratio rose sharply mainly due to delinquencies from pawning (gold- backed lending)
• Incremental risk to asset quality from pawning related NPLs likely to abate
8www.fitchratings.com
Downside risks remain
• Provision coverage has reduced even during periods of strong credit growth
• Potential risks to asset quality remain but impact expected to be manageable
0
10
20
30
40
50
60
0
1
2
3
4
5
6
7
8
2011 2012 2013 2Q14
Reported NPL ratio (LHS)Adjusted NPL ratio (LHS)Total Provision Coverage / NPLs (RHS)(%)
0
1
2
3
4
5
-5
0
5
10
15
20
25
30
35
2008 2009 2010 2011 2012 2013 3Q14
Loan Growth (LHS)
Total Loan Loss Reserve / Loans (RHS)(%)
Source: Central Bank of Sri Lanka (CBSL), Fitch
Adjustment pertains to estimated performing rescheduled loans Source: Central Bank of Sri Lanka (CBSL)
9www.fitchratings.com
Profitability less healthy on an adjusted basis
Source: Central Bank of Sri Lanka (CBSL), Fitch
• Thinner NIMs have been a key challenge to pre - provision operating profitability. Bottom line
profitability has been impacted by higher impairment charges.
• Modest improvement in profitability expected.
• Reported credit costs fairly low. Stressed credit costs would dampen sector profitability
considerably.
0
0.5
1
1.5
2
2.5
3
2011 2012 2013 3Q14
ROA Adjusted ROA
(%)
10www.fitchratings.com
Stressed credit costs for major Sri Lankan banks
0
1
2
3
4
5
6
BOC COMB DFCC HNB NDB NSB PB SAMP
(% of loans)
Credit Costs Tolerance 2013
Current Credit Cost Stressed Credit Cost
Source: Banks, Fitch
11www.fitchratings.com
Risk weighted assets for major Sri Lankan banks
Source: Banks, Fitch
• Risk weighted assets total assets lowest among the major state banks
0102030405060708090
BOC COMB DFCC HNB NDB NSB PB SAMP
FY12 FY13 1HFY14(%)
Risk weighted assets/Total assets
12www.fitchratings.com
Adjusted capital ratios weaker
Source: Banks, Fitch
• Regulatory capital adequacy ratios have benefitted from 0% risk weights on certain exposures
• Adjusted capital ratios of major state banks much weaker
• Higher capital buffers at Sri Lankan banks justified
0
5
10
15
20
25
BOC COMB DFCC HNB NDB NSB PB SAMP
Capital ratios as at June 2014Tier 1 Regulatory Capital Ratio Equity/ Total Assets Adjusted Tier 1 Capital Ratio(%)
13www.fitchratings.com
Stable Funding Structure
0
10
20
30
40
50
0102030405060708090
100
2008 2009 2010 2011 2012 2013 3Q14
Loans / Deposits (LHS) CASA(RHS)(%)
Source: Central Bank of Sri Lanka (CBSL)
• Deposits are likely to remain the main source of funding for Sri Lankan banks
• Pressure on loans /deposits have eased
14www.fitchratings.com
Increase in share of borrowings in funding structure
• Share of funding from borrowings has been increasing as banks have been turning more frequently
to the capital markets for funding.
• The share of foreign currency denominated borrowings been steadily increasing.
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0
20
40
60
80
100
120
2009 2010 2011 2012 2013 3Q14
FCY borrowings/ Total borrowings(LHS)
LCY borrowings/Total borrowings(LHS)
Total Borrowings /Total Assets (RHS)
Borrowings
0
5
10
15
20
25
30
2009 2010 2011 2012 2013 3Q14
FCY loans/Loans
FCY Deposits and Borrowings/ Total Depositsand Borrowings
Foreign currency lending and funding
Source: Central Bank of Sri Lanka (CBSL), Fitch Source: Central Bank of Sri Lanka (CBSL), Fitch
15www.fitchratings.com
Financial Sector Consolidation
• Should improve the credit profile of financial institutions, strengthen franchises, and
reduce supervisory burden
• Beneficial to the sector in the long term
• Credit-neutral in the short to medium term
16www.fitchratings.com
People in pursuit of answers
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