Banks kick into fresh credit cycle while carrying lower provisions - Capital Trust Research  

Margins narrow on declining rates, but higher volumes from loans to support top-line 

• Profitability of licensed commercial banks at Rs. 37.73 bn in July - September quarter of 2024
• September quarter profit predominantly attributed to  sharp decline in provisions made for possible loan defaults
• During the period, banking sector became the single largest contributor to CSE turnover, contributing 35%  

Sri Lanka’s banks have kicked into a new cycle of credit supported by lower and declining interest rates and the broad based growth in the economy while the lower impairments from improving borrower profiles have mostly helped them to report higher bottom-lines in the foregoing September quarter, Capital Trust Research said in a sector review released this week. 

The research house measured the profitability of the licensed commercial banks at Rs. 37.73 billion in the July - September quarter in 2024 which was a 10.6 percent growth from the same period in 2023. 

Measured on a quarterly basis however, the profits in the September quarter were up by only a modest 2.4 percent from the June quarter. 

Capital Trust Research attributed the September quarter profit predominantly to the sharp decline in provisions they made for possible loan defaults as they generated, “confidence in borrowers’ debt serviceability”, than a year ago due to aforementioned lower rates and the growing economy, which have been seeing broadening out lately into many sectors. 

All banks have reported declines in their provisions by between 56 percent and 181 percent, reflecting the significant role played by provisions in the banks’ profitability in the last few years, in its way down as well as 
its way up. 

The banks set aside massive amounts from their profits for both possible loan defaults and also for likely losses from investments in International Sovereign Bonds (ISBs) until the end of last year or the first quarter of this year by some. 

As the banks were reassured with a potential deal on the ISBs this September which is going to see lower haircuts on their bond investments, the banks did not make anymore provisions and instead expect provision reversals resulting in 2025 after the bond exchange is over, possibly by the end of this year, effectively bringing the foreign debt restructuring to a close.

This optimism combined with the beginning of a fresh credit cycle sent the banking sector shares higher substantially with some counters rallying by over 50 percent since the announcement of the provisions deal on bond restructuring on September 19, 2024.

In fact the banking sector became the single largest contributor to the turnover in the Colombo Stock Exchange by contributing 35 percent during this period, reflecting the sector’s sway over the market, the research house said. 
However, it was lately seen the rally broadening out beyond the banks to other sectors as well in a healthy sign as investors grew more confident and reassured of the lower rates and the growing economy. 

The Central Bank at their last policy meeting for the year on November 27 effectively cut its policy rate by 50 basis points by setting its newly introduced Overnight Policy Rate at 8.00 percent. 

The analysts at the research house showed that bulk of the credit growth took place in the September quarter out of the first nine months, reflecting the, “re-opening their lending spigots wide open during 3Q’CY24”.