“Following the big banks, the smaller banks also expanded their branch networks and made substantial capital expenditures. But as opposed to this increase in overheads, the small banks may not see significant growth in their interest incomes due to the Central Bank’s credit restrictions. Loans are the main revenue drivers for commercial banks,” a banking sector analyst said.
The Central Bank in February advised commercial banks to take steps to ensure that their overall credit growth in 2012 would not exceed 18 percent of banks’ respective loan book outstanding at the end of 2011.
The banking regulator also said that credit growth of up to 23 percent will be allowed for those banks which finance the excess of up to 5 percent of the credit growth from the funds mobilized from overseas.
Most of the analysts Mirror Business talked to pointed out that the big commercial banks are unlikely to see any impact of the credit ceiling due to the size of their loan books and foreign funding lines they have already secured.
The June interim results of Pan Asia Bank (PABC) and Union Bank of Colombo (UBC) that were released to the Colombo Stock Exchange saw that their profitability had dropped quite significantly as a result of eroding interest incomes and steep rises in interest expenses.
UBC net profit for the June quarter (2Q12) fell 61 percent year-on-year (YoY) to Rs.27.4 million, while PABC’s bottom line fell 24 percent YoY to Rs.154 million.
UBC’s interest income only grew 9 percent YoY as opposed to a 52 percent YoY increase in interest expenses, while PABC’s net interest income rose 57 percent YoY to Rs.1.63 billion against a 98 percent YoY rise in interest expenses.
The year-to-date loan growth of UBC stood at 15 percent, while total deposits for the six months grew 12 percent. PABC’s net loans and advances for the six months ending in June had gone up 18 percent, while deposit grew at a slower pace of 17 percent.
However, according to CT Smith Stockbrokers’ banking sector analyst, Sanjeewa Fernando, the drop in profitability of smaller banks would most likely to be a temporary hiccup.
“If this cap was not there, then the smaller banks would have lent more, probably posting credit growths exceeding 30 percent, which could be unhealthy in the long run for the entire banking system and to the country’s economy. But now, with this cap on credit, these banks are likely to end up at better liquidity positions in the next two quarters, if they mobilize deposits aggressively,” Fernando explained.
He also noted that a credit cap was required at the time it was imposed as credit growth of commercial banks stood at as high as 34 percent, last year.