Profits would suffice for banking sector funding as loan growth eases: Moody’s

• Banks raised Rs.66bn in fresh shareholder funds and Rs.45bn in debentures
• Latest data seen by Mirror Business show weakness in banking sector profits 

Sri Lankan banks until recently were going after fresh capital, and the capital market was inundated with a slew of debt and equity issues as the banks were trying to keep abreast with the burst in private credit growth. 

However, now that the demand for new loans is significantly easing, banks too are shifting to a lower gear as internal capital generation is likely to suffice to fund their growth. 

Sri Lankan banks ramped up capital-raising activities since July 2017 in view of the full implementation of BASEL III regulations. The banks raised Rs.66 billion in fresh shareholder funds and Rs.45 billion in debentures bridging much of the capital required to meet these regulatory requirements.  “With a slowdown in loan growth, internal capital generation will be sufficient to cover loan growth”, Moody’s Investors Service said in a banking sector outlook released, last week. 

Moody’s maintains a ‘Negative’ outlook on Sri Lankan banks due to macroeconomic risks and deteriorating asset quality. 

The rating agency’s assertion that internal capital generation or the profits would suffice to fund the growth comes at a time when the Sri Lankan banks are demonstrating some weaknesses in their profits.

Mirror Business last week showed that banking sector after-tax profits for the first eight months increased by only Rs.300 million against the same period in 2017. 
The banking sector recorded after-tax profits of Rs.86.9 billion for the eight months on an interest income of Rs.716.4 billion. 

Several factors such as higher credit costs, taxes and cautious approach on new lending amid rising non-performing loans have taken toll on the sector’s performance in 2018. 

The rating agencies both Moody’s and Fitch expect the situation to persist through 2019. 

However a positive factor emanating from the slowdown in loans is the strengthening of the liquidity buffers of the sector. 

The Loan-to-Deposit Ratios (LDR) or amount of loans in comparison to total deposit liability of the banking sector has shown a decline lately indicating the improving liquidity profiles of the banks.  Moody’s cites the deceleration in local currency loan growth as a reason for the development. However, the foreign currency LDRs has been high at around 100 percent.  Sri Lankan banks are required to set aside a liquidity buffers sufficient to 20 percent of its total deposit liability at any given time, which is a mandatory regulatory requirement.  “Liquid assets consist mainly of high-quality cash and government securities. Rated banks’ liquid assets averaged more than 30 percent of tangible banking assets as of March 2018”, Moody’s said.