Lankan banks stable - Fitch
Fitch Ratings said that its outlook for the majority of Sri Lankan
banks is stable, underpinned by improved earnings prospects due to
post-war growth in the domestic economy as well as the government’s
capacity to support the banking system. However, rapid loan growth will
test the banks’ risk management systems and funding profiles.
A significant revision of government economic policy, macroeconomic
shocks, or rapid lending that undermine liquidity, earnings or asset
quality and lead to significant capital impairment could be negative for
the outlook and/or ratings of Sri Lankan banks. Conversely, structural
changes such as improvements to risk management and enhanced capital
buffers could be positive for the outlook and/or ratings.
Real GDP growth should drive strong credit demand and licensed
commercial banks are best-placed to meet this demand. However, Fitch
expects a policy response from the authorities to rein in credit demand
should inflation increase significantly.
Fitch questions the Sri Lankan banking system’s ability to manage
above-average loan expansion on a sustained basis.
However, the agency believes that any deterioration in asset quality
may not be as severe as that seen in 2008 and 2009.
Fitch expects net interest margins to remain under pressure from
However, the agency believes this could be mitigated by strong loan
demand, manageable credit costs and lower effective taxes to allow
continued robust profitability in 2012.
Fitch notes that heightened competition and diminishing liquidity are
being reflected in rising interest rates on deposits. While the agency
expects deposits to remain the main source of funding for Sri Lankan
banks, strong lending could result in a rising share of non-deposit
Capital ratios could come under pressure from continued strong credit
growth. Fitch believes that capital planning to maintain an adequate
buffer is important in light of loan growth levels, credit
concentrations, loan loss reserve coverage and exposure to macroeconomic