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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Regarding news article: "Bank profits to tumble this year?"

Regarding news article: "Bank profits to tumble this year?"

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anubis


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
This is regarding the following news article:

http://www.nation.lk/edition/biz-news/item/3162-bank-profits-to-tumble-this-year?.html

Excuse me for posting this article in this section, but I think it's worth discussing about. I'm not good with the jargon of words they have used in that article, is it that the CB has put a limit on how much loans banks could give out? (Thereby limiting the main income of banks)

I'm also baffled about one conflicting argument made in that article, at one point it says:

"The Central Bank in its latest monetary policy review for February 2012 had decided to direct commercial banks to moderate their credit disbursements so that the overall credit growth in 2012 will not exceed 18 per cent of their respective loan book outstanding at the end of 2011..."

So, this means banks would be able to grow their loans up to maximum of 18% of their current (2011) loans. But then the article says:

“It will definitely affect the profitability of the sector for this year. But, a level playing field may be created because each bank irrespective of their size would have to moderate their lending to this specified limit”

How can there be a "level playing field"? Bigger banks have bigger loan books, so their 18% growth will be much higher than small banks having smaller loan books.

I think I have misunderstood something very basic. Does "credit disbursements" refer to something other than giving away loans? scratch I tried to find some definitions but did not get a clear picture.

It would be great if someone can enlighten us! Cool

Cheers!

troy

troy
Moderator
Moderator
You are correct with credit disbursements. Its non other than giving loans.

For example take BOC. (these unpublish data only to educate forum members)

loan book passed 55o Bn at Dec 2011 at YoY growth of more than 34%.( By large CPC is the main player)

Private credit growth was fueled by Pawning ( net over 60 Bn within the year), term loans (cannt remember but net might be around 10-15 Bn) and leasing (net 8 Bn for 2011).

CBSL is trying to address specifcaly the growth in pawning and leasing (+ other consumption loans) to reduce inflation by introducing 18% credit ceiling. however banks can disburse up to 23% if they fund that extra 5% by foreign funds.( CBSL released February Monetary Policy review report).
Only few main banks will be able to secure foreign funds/debts. BoC is in the process of a bond issue to international market.

So where is this level playing field?? There's no such fields in this world. Main Banks will obviously outperform small banks by volume and % wise with this 18/23% story... lol!

anubis


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@troy, thanks a lot for the explanation.

We should be very careful about these journalists as well as those "senior analysts" giving opinions to such articles. Basic O/L mathematics would be enough to figure out the conflicting argument made in this article.

As you pointed out, there can be no such "level playing field" with these rules. On the other hand, these rules will restrict the growth of smaller banks since they cannot grow beyond 18% of their existing loan books (same rule applies to larger banks, but they have much larger loan books!!).

Cheers!

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