Banking sector remains sound with comfortable capital and liquidity

•  Earnings and return on equity remain at multi-year highs 

Sri Lanka’s banking sector continued to plough ahead in 2021, successfully navigating the pandemic-induced vagaries and other macro economic challenges to deliver robust growth, sound earnings, healthy capital and adequate liquidity levels. 

According to the latest industry data available through December 2021, the licensed banking sector comprising of both commercial and specialised lenders remained well capitalised with both their Tier I and Total capital adequacy ratios at 13.2 percent and 16.5 percent respectively compared to 12.9 percent and 16.2 percent in the third quarter. 

The two ratios at the licensed commercial banking sector, which is more prominent and larger based on assets,were at 13.2 percent and 16.7 percent respectively compared to 12.9 percent and 16.3 percent in the third quarter. 

At the beginning of the year, the two ratios stood at 13.3 percent and 16.6 percent respectively. 
This was in relation to the regulatory minimums of 9.00 percent and 13.0 percent respectively in the case of systematically important domestic banks. For others this was at 8.5 percent and 12.5 percent respectively. 
The stronger earnings and the fresh capital raised by some banks helped the sector to end the year with robust capital ratios. 

The cumulative earnings for 2021 of the licensed commercial banking sector were at Rs.441.2 billion, substantially improved from Rs.290 billion in 2020. This reflected that the banks were greatly benefitted from the higher growth recorded in the loans amid ultra low interest rates and the margin expansion through the year. 

Fee incomes also contributed greatly to the earnings in 2021. 

Commercial banks gave a record Rs.811 billion in private sector credit in 2021 recording around 13.5 percent growth over the previous year. 

Meanwhile, the return on equity, the mostly watched shareholder ratio was recorded at 13.8 percent, but slipped from 14.5 percent at the end of the third quarter in 2021. 

The commercial banking sector also remains well liquid with its statutory liquid asset ratio of the domestic banking system standing at 30.9 percent compared to a regulatory minimum of 20 percent. 

Parsing of the key financial performance indicators of the licensed commercial banking sector underscores the strength and soundness of the sector, but the growth and profits could decelerate in 2022 due to the rapid increase seen in interest rates and the potential effects on the asset quality. However the stretched margins could still support higher earnings of the sector.