Non-bank lenders return to enhanced performance in 3Q

• Sector improves asset quality though still at low double-digit levels 
• Return on equity nearly doubles from a quarter earlier on higher earnings 
• Capital and liquidity improve despite solid growth in assets 
• Loans return to growth territory after contracting for five consecutive quarters 

In what seemed to be a reversal from a long spell of weak performance, Sri Lanka’s non-bank finance sector came out with some improved financial performance in the September quarter, as reflected from a variety of indicators, although it remains still too early to determine if the years-long troubles facing the industry are behind them. 
The sector comprising of licensed finance and specialised leasing companies reported higher growth, earnings, liquidity, capital adequacy and improved asset quality, although the latter moved only a little and still remains at levels of distress.   
For instance, the gross non-performing loans (NPLs) ratio, a key gauge of the asset quality, was reported at 12.83 percent, little eased from 13.04 percent in the June quarter but still stands well above over four and half-year lows of 4.89 percent reported in March 2017.
The sector’s brewing asset quality troubles reached double-digit levels of 10.59 percent by the end of 2019, before coming to a head in June 2020, when the ratio hit 14.14 percent, due to the pandemic-induced hardships on borrows. 
However, the asset quality performance in the most recent period diverged between the licensed finance and specialised companies, as the former managed to reduce its NPL ratio to 12.66 percent, from 12.99 percent in June but the latter’s worsened to 19.30 percent, from 15.03 percent in June, reflecting the continuing troubles facing the leasing clients.  

Meanwhile, in a positive development, the sector returned to growth during the September quarter, after shrinking in size for five quarters in a row. The sector has long been beset by the anaemic growth for years before the pandemic crushed and sent it to shrink for five quarters starting from March 2020. 
According to data, the net loans and advances of the sector rose to Rs.1.08 trillion, from Rs.1.05 trillion but still below the pre-pandemic levels of Rs.1.10 trillion. 
This helped the industry to deliver some robust profits and thereby double its shareholder returns within a span of a quarter. 
The sector reported after tax profits of Rs.14.7 billion for the six months to September 2021, several multiples of Rs.2.2 billion and Rs.4.8 billion in the comparable periods in 2020 and 2019. 
The elevated earnings spell in the September quarter helped the sector to deliver a 11.17 percent return on equity, nearly double the 5.95 percent worked out three months ago. 
The sector interest margins also expanded during the period to 8.17 percent, from 6.76 percent a year ago, as the broader financial sector benefitted from the widening spreads during the September quarter from the low interest rates, which pushed the funding cost down. 
Despite the growth in assets during the quarter, the sector managed to increase its liquidity levels and strengthened its capital adequacy buffers. 
For instance, the liquidity measured by the liquid asset-to-total assets ratio rose from 8.30 percent to 10.16 percent between June and September, while both core and total capital ratios rose from 15.62 percent and 16.98 percent to 15.91 percent and 17.53 percent, respectively. 
The regulatory forbearance measures on liquidity and the capital reprieve afforded to the broader banking and non-banking sector at the onset of the pandemic by the Central Bank helped the two sectors to successfully navigate the potential pressures that could have stemmed from the economic fallout of the pandemic.