Banks face daunting task of capital raising ahead of regulatory reforms: Fitch

• Fitch estimates large banks in total require an additional US $ 120mn capital
• Out of the shortfall,  State banks account for a bigger chunk of 72%

Some of Sri Lanka’s large banks still face an uphill task beefing up their capital levels in sync with the global regulatory norms as the country’s Rs.11 trillion banking sector braces for stringent set of rules from next year. According to Fitch Ratings, Sri Lanka’s banks, which are few months away from the full implementation of BASEL III, are still sitting on a US $ 120 million or Rs.19 billion capital hole. 

Higher minimum capital requirements under BASEL III are coming into effect from January 2019 and the International Financial Reporting Standard (IFRS) 9 on measurement of loan loss provisions, which came into effect in 2018, erodes some capital buffers of banks due to higher loss provisions. 

“Sri Lanka has moved faster than the other two markets in adopting international regulatory standards; it began implementing Basel III in 2017, and is scheduled to introduce IFRS9 in 2018. 

Fitch estimates some large banks will, in total, require an additional US $ 120 million of capital to meet full compliance by 2019”, the rating agency said in their newest note on Asia’s frontier market reforms and their impact on banks. 

Fitch said out of the Rs.19 billion shortfall, State banks account for a bigger chunk of 72 percent. 

After raising as much as Rs.42 billion in equity and Rs.11 billion in BASEL III compliant sub-debt in 2017, some of the large private lenders are still raising capital to stay on top of the elevated capital levels without hampering their growth targets for the year. 

If any shortfall remains by the year end, they will make that up with the retained earnings. 

Meanwhile, the three state lending giants, Bank of Ceylon, People’s Bank and National Savings Bank may perhaps meet the January deadline by capitalizing their earnings for the year as they remain few of the biggest profit earning state enterprises in the country. 

However, Fitch Ratings didn’t say if their accumulated profits would suffice in satisfying the regulatory capital or the government would have to infuse funds if there is any shortfall. 

Meanwhile, the rating agency is of the belief that the country’s banks are likely to face more challenging operating environment than the other two frontier Asian economies rated by them i.e. Mongolia and Vietnam. 

If the operating conditions become even more challenging, the rating agency said that could place modest pressure on ratings unless sufficient loss absorption buffers are maintained. 

Sri Lanka’s banks will start reporting their second quarter results from next week onwards and the analysts expect most banks to report higher earnings on the back of some good growth in loans, though their asset quality may have been hit by unfavourable economic conditions.