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First Capital joins others in painting gloomy outlook for country’s banking sector

15 Jul 2022 - {{hitsCtrl.values.hits}}      

  • Warns earnings compression from asset quality pressure could dent capital and liquidity 

First Capital Research (FCR) joined the list of those who painted a gloomy outlook for the banking sector in the remainder of 2022, which could extend to 2023, as both debt restructuring and the deepest economic contraction are expected to reverberate through the sector, inflicting pain on earnings and thereby its capitalisation levels. 


In a sector report, the FCR analysts are of the view that profitability could be hurt from the rising loan delinquencies amid worsening macro-economic conditions, compounded by the incremental impairments coming from their holdings of foreign currency denominated government securities, in turn causing capital deficiencies in the sector. 
While in the short term banks may be able to ride out the tough times by drawing down from their additional capital buffers, analysts forecast that banks may be compelled to resort to more capital raising in the medium term to make up for the deficiencies caused by the above two events and the constrained profitability expected from the muted growth in new loans. 

“Impaired profitability is likely to create pressure on capital adequacy ratios of the bank demanding capital raising in the future”, FCR said. 


Fitch Ratings earlier cautioned of potential toll on capitalisation levels of the four big lenders – Bank of Ceylon, People’s Bank, Commercial Bank and Hatton National Bank – from asset quality pressures coming from both their domestic lending portfolios and the investments in foreign currency denominated financial assets. 


However, FCR said Commercial Bank, Hatton National Bank together with Sampath Bank and National Development Bank have adequate capital buffers to withstand the near term shock. 


As a result, FCR analysts maintained a ‘Buy’ rating on the four private lenders while downgrading the banking sector to ‘Hold’. 


On liquidity, banks are facing heightened stress on their foreign currency liquidity since they lost access to cross border funding after the sovereign debt default while they also run the risk of facing rupee liquidity stresses from the rising defaults and the less than expected rupee deposits.

 
Despite the all-time high rates, bankers are competing for rupee deposits with limited success as hyperinflation is eroding the real value of people’s moneys and savings.