Decline in interest rates brings in Rs.7.7bn windfall for banks holding treasuries

While descending interest rates are generally considered a bane for banks, the same phenomenon acted as a blessing for the sector bringing in billions worth of capital gains on government treasuries they held, potentially offsetting any negative impacts on their top line.  

According to latest data available up to end-August, the banking sector made a mammoth Rs.7.7 billion as capital gains on treasury bonds they held compared to Rs.3.4 billion reported in the corresponding period last year. 
While the accumulated gains for the nine-month period aren’t yet available as a block figure, the interim financial reports of the banks also confirmed this phenomenon. 

The outsize capital gains on treasury bonds was possible due to the increase in investments in government securities during this year compared to the same period in 2019. 

Banks and other funds added massive amounts of treasury bills and bonds into their investment portfolios this year as the corona pandemic stalled loan growth, leaving them with liquidity far more than what is required by the regulator.

The massive build-up of deposits in the system caused by the lockdowns and limited spending options by the consumers also forced the banks to park these extra funds with government bills and bonds until demand is generated for loans.

Sri Lanka’s banks have emerged largely unscathed from the economic toll brought in by the pandemic, as they reported healthy profits during the September quarter reflecting the economic rebound and higher disbursement of loans in the quarter. 

The government backed re-finance schemes, payment holidays on loans, reprieve on capital and liquidity, revised instructions on identifying the loss provisions against stressed loans and the bank’s own robust risk management systems helped them to remain resilient, defying the worst nightmares predicted for the country’s banking sector.

Meanwhile, banking sector equity risk also was minimal during the period as banks’ exposure to the equity market was Rs.10.4 billion—accounting for only 0.1 percent and 1.4 percent of total assets and investments held for trading as at end August 2020.