Banking sector resilient despite challenges - First Capital | Daily News


Banking sector resilient despite challenges - First Capital

Banking sector showed resilience despite the challenges while maintaining higher liquidity ratios, through cautious lending said First Capital in their Banking Sector Outlook event organized at Cinnamon Grand last week.

The profitability of the banking sector was hampered during the last couple of years primarily by the economic slowdown, increase in taxes and implementation of Basel III requirements and adoption of SLFRS 9.

“However now we are witnessing an upward curve in the banking sector.”

Post an era of fiscal tightening and country is once again on track towards building a period of robust growth. “Pick up in economic activities and confidence will provide fertile bedrock for the growth in private credit, thereby positively affecting the banking sector.”

Previous regulation on Basel III capped the credit growth by imposing capital requirements on banks. However, recently CBSL introduced multi-factor model in determining DSIBs while providing more leeway with regard to capital requirements of banks.

Moreover, cost to income(C/I) is expected to be a critical factor in the future in improving the profitability of banks and many banks have already started to embrace the digital technology over brick and mortar methods. Banks in the industry started to significantly invest in the digital initiatives to fortify digital leadership.

“With the recovery in economic activity and improved private credit, we expect an upward trend in the banking sector while getting a breathing space after hefty taxes. Considering the short- midterm positive impact, we upgrade our outlook on the banking sector from HOLD to a ‘BUY’.”

Moreover, recently introduced CBSL regulation on capital adequacy is expected to provide more leeway for the mid to large banking segment supporting credit expansion. Furthermore, sector has a heavy focus on cost management via digitization and automation which is expected to reduce C/I ratio and enable to improve the bottom line. We expect the capital rich banks to capture market share with the support of new digital platforms and automation measures while the overall credit is expected to grow at a moderate pace of 14%.

“Accordingly, we expect overall earnings of the banking sector to grow at a CAGR of 19% in 2019E-21E.”

Airing their views on trend trends First Capital says that Sri Lanka has entered a phase which is dominated by mobile applications. “The figures attest to the degree to which digital banking has become a viable alternative to brick and mortar banking. The growth of the internet, mobile, and communication technology suggest that Sri Lanka has enormous opportunities for digitalization of its processes.”

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