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Banking sector loan to deposit ratios seen falling
With the Central Bank selling millions of dollars on a daily basis to prop-up the rupee which is under pressure to depreciate given the severe import demand, the loan to deposit ratios of the country’s banks are falling as these dollar sales drain liquidity from the market.
The Central Bank has been buying government securities from the banking system in order to inject rupee liquidity into the market and ease the mounting pressure on interest rates, but this has only helped to keep the import demand unchanged.
Fitch Ratings in report issued last Friday said it believed that the loans to deposits ratios (LDRs) will continue to increase to 85 percent to percent. "The agency notes that heightened competition and diminishing liquidity are being reflected in rising interest rates on deposits. Supported by their domestic franchises, deposits will remain the main source of funding for Sri Lankan banks, although strong lending could result in a rising share of non-deposit funding."
"The LDR of the Sri Lankan Banking sector is likely to increase amid strong loan expansion ahead of that of deposits. Fitch notes that the LDRs of those banks that have less mature deposit franchises are fast approaching 100 percent or more, and believes that the major banks that have strong franchises are better positioned to compete for customer deposits as liquidity diminishes. Overall for the sector, the agency expects the LDR to be in the range of 85 percent to 90 percent in 2012, with an increasing share of non-deposit funding required to fund growth.
"The system’s foreign-currency LDR has remained lower than its local-currency LDR. Banks have generally been more cautious on foreign-currency lending which is generally funded by foreign-currency deposits. While liquid assets held largely in the form of government securities are gradually channelled into lending, Fitch notes that banks will still need to comply with minimum regulatory liquid asset ratios of 20 percent of its total liabilities (excluding liabilities to the central bank and shareholders)," the ratings agency said.
"The Sri Lankan banking sector experienced strong loan growth of about 24 percent (annualised) in 6M11 and Fitch forecasts loan growth to remain above 25 percent in 2012 supported by strong economic growth. The loans to GDP ratio increased marginally in H111 to 36 percent from 35 percent at end-2010, which is still below the 41 percent average from 2006-2008," it said.
Earlier this year we reported that pressure on the balance of payments and rupee interest rates were likely to continue.
HSBC Head of Global Markets Sri Lanka Sachith Perera said the stress in the balance of payments experienced towards the latter part of 2011 would continue this year as well as the trade account deficit continues to expand on higher import demand.
"This does not mean that there is overconsumption in the domestic market, rather we see the import of investment and intermediary goods increasing, a necessary evil to fuel the post-conflict infrastructure development that is taking place. How often does a country find itself in a situation where it is just after a thirty year conflict? The challenge however is not to stretch short term capacity for such expansion," Perera said speaking to The Island Financial Review.
While calling for a bit more flexibility on the exchange rate regime, Perera said a tightening of interest rates were necessary to curb imported demand with domestic consumption not posing any concerns at this point.
US$ 1.56 billion was sold by the Central Bank during the four month period July to October 2011. According to dealers, a further US$ 1 billion had been sold the rupee was depreciated by 3 percent in November 21. By end November 2011 reserves stood at US$ 6.2 billion, down 30.6 percent from US$ 8.1 billion in July.
These dollar sales was seen draining rupee liquidity with interest rates coming under pressure in recent months, feature of an economy heading towards a balance of payments crisis, economists point out.
According to our calculations, for the past one and a half months, the Central Bank has pumped in a total of almost Rs. 300 billion to ease the rupee liquidity tightening which was caused by the dollar sales.
The Central Bank’s holding of Treasury bills increased to US$ 180 billion this year from near zero in July 2011 as banks sold down their holdings in order to raise liquidity requirements.
According to Fitch, the country’s banks would have to look to other means apart from deposits in order to meet credit demand.
The Central Bank has been urging banks to borrow from international capital markets.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=44207
With the Central Bank selling millions of dollars on a daily basis to prop-up the rupee which is under pressure to depreciate given the severe import demand, the loan to deposit ratios of the country’s banks are falling as these dollar sales drain liquidity from the market.
The Central Bank has been buying government securities from the banking system in order to inject rupee liquidity into the market and ease the mounting pressure on interest rates, but this has only helped to keep the import demand unchanged.
Fitch Ratings in report issued last Friday said it believed that the loans to deposits ratios (LDRs) will continue to increase to 85 percent to percent. "The agency notes that heightened competition and diminishing liquidity are being reflected in rising interest rates on deposits. Supported by their domestic franchises, deposits will remain the main source of funding for Sri Lankan banks, although strong lending could result in a rising share of non-deposit funding."
"The LDR of the Sri Lankan Banking sector is likely to increase amid strong loan expansion ahead of that of deposits. Fitch notes that the LDRs of those banks that have less mature deposit franchises are fast approaching 100 percent or more, and believes that the major banks that have strong franchises are better positioned to compete for customer deposits as liquidity diminishes. Overall for the sector, the agency expects the LDR to be in the range of 85 percent to 90 percent in 2012, with an increasing share of non-deposit funding required to fund growth.
"The system’s foreign-currency LDR has remained lower than its local-currency LDR. Banks have generally been more cautious on foreign-currency lending which is generally funded by foreign-currency deposits. While liquid assets held largely in the form of government securities are gradually channelled into lending, Fitch notes that banks will still need to comply with minimum regulatory liquid asset ratios of 20 percent of its total liabilities (excluding liabilities to the central bank and shareholders)," the ratings agency said.
"The Sri Lankan banking sector experienced strong loan growth of about 24 percent (annualised) in 6M11 and Fitch forecasts loan growth to remain above 25 percent in 2012 supported by strong economic growth. The loans to GDP ratio increased marginally in H111 to 36 percent from 35 percent at end-2010, which is still below the 41 percent average from 2006-2008," it said.
Earlier this year we reported that pressure on the balance of payments and rupee interest rates were likely to continue.
HSBC Head of Global Markets Sri Lanka Sachith Perera said the stress in the balance of payments experienced towards the latter part of 2011 would continue this year as well as the trade account deficit continues to expand on higher import demand.
"This does not mean that there is overconsumption in the domestic market, rather we see the import of investment and intermediary goods increasing, a necessary evil to fuel the post-conflict infrastructure development that is taking place. How often does a country find itself in a situation where it is just after a thirty year conflict? The challenge however is not to stretch short term capacity for such expansion," Perera said speaking to The Island Financial Review.
While calling for a bit more flexibility on the exchange rate regime, Perera said a tightening of interest rates were necessary to curb imported demand with domestic consumption not posing any concerns at this point.
US$ 1.56 billion was sold by the Central Bank during the four month period July to October 2011. According to dealers, a further US$ 1 billion had been sold the rupee was depreciated by 3 percent in November 21. By end November 2011 reserves stood at US$ 6.2 billion, down 30.6 percent from US$ 8.1 billion in July.
These dollar sales was seen draining rupee liquidity with interest rates coming under pressure in recent months, feature of an economy heading towards a balance of payments crisis, economists point out.
According to our calculations, for the past one and a half months, the Central Bank has pumped in a total of almost Rs. 300 billion to ease the rupee liquidity tightening which was caused by the dollar sales.
The Central Bank’s holding of Treasury bills increased to US$ 180 billion this year from near zero in July 2011 as banks sold down their holdings in order to raise liquidity requirements.
According to Fitch, the country’s banks would have to look to other means apart from deposits in order to meet credit demand.
The Central Bank has been urging banks to borrow from international capital markets.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=44207
