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Bad times are over with Banking Sector

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1Bad times are over with Banking Sector Empty Bad times are over with Banking Sector Wed Jul 26, 2023 3:34 pm

ONTHEMONEY


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

Hi all,

Considering the key positive developments in the Sri Lankan banking industry, there are indeed some lucrative investment potentials. 

Significantly oversold share prices of Banks since 2019~2020 opening a large share price upside potential.

Bad times are over with Banking Sector Ada76e96-5673-40d1-a8cc-f81f20808587


Significant Gains from Treasury Bonds: The gains from investing in Government securities, especially Treasury Bonds, at a yield rate above 27%~28%, suggest attractive returns for investors. This could positively impact banks that have capitalized on this opportunity, such as Nations Trust Bank (NTB) and DFCC Bank as per market sources. High returns from these securities could boost banks' profitability and shareholder value significantly.

Absence of impairment charges: The large/partial provisions made to cover possible haircuts due to default in SLSB and SLDB indicates an improvement in the overall credit quality of these assets after the DDO. Lower provisioning requirements enhance the banks' financial performance and strengthen their balance sheets.

NPA Reduction and Recovery: The reduction in Non-Performing Assets (NPA) during a low-interest-rate cycle (NPA and AWPLR has a positive correlation) and the significant reversals in provisions made on loan book, especially from the recovery in the tourism sector, are positive signs to improve asset quality. It suggests that the banks are effectively managing their asset quality and risk exposures.

Estimated Loan Growth: Anticipated loan growth from 4Q23 due to relaxation in imports targeting the X-mas season where importers are compelled to enhance working capital requirements due to USD/LKR depreciation from Rs 200~Rs 340, and low-interest-rate pressure set by the Central Bank of Sri Lanka (CBSL) can boost banks' lending activities. This may lead to increased interest income due to volume growth leading to potential revenue growth for banks.

Removal of "Country Default Status": The removal of "country default status” continuously highlighted by the President of Sri Lanka and the state Minister of Finance could lead to credit rating improvements for the country. This can have a positive impact on banks' borrowing costs and enable them to access international funding at more favorable terms.

Low-Cost Funding Lines: The potential to borrow low-cost funding lines with a country rating upgrade, where recently DFCC Bank secured with its accreditation by the Green Climate Fund (GCF), can provide a competitive advantage for DFCC Bank to offer more attractive interest rates and potentially gain market share from competitors.

Announcement Policy Interest Rate Cuts in 2H23: If the announced policy interest rate cuts are implemented by CBSL, it can further push interest rates towards further to lower levels. Lower interest rates can stimulate economic activity and increase demand for credit, benefiting the banking industry. 

As investors, conduct thorough research on individual banks, their financial health, risk management practices, and competitive positioning prior to decision making. Stay up-to-date with the latest economic and market developments to make well-timed investment choices. 


Good Luck

ONTHEMONEY


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

Bad times are over with Banking Sector Img_2910

3Bad times are over with Banking Sector Empty Re: Bad times are over with Banking Sector Wed Jul 26, 2023 11:09 pm

DeepFreakingValue

DeepFreakingValue
Manager - Equity Analytics
Manager - Equity Analytics

- Non Performing Loans (NPL's) currently in excess of 12% and actually 28% and likely to reach 40% if no restructuring.
- Capital inadequacy and requirement to infuse fresh T1 & T2 capital.
- Proposed Bank Amalgamation in September 2023
(Amalgamation generally result in loss of value to share holders)
- FX Crisis: Banks are short of FX due to ISB  conversion

Banking Crisis is not over yet! Take your Profits and Exit! Banking shares will be cheaper in future!

ONTHEMONEY


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

DeepFreakingValue wrote:- Non Performing Loans (NPL's) currently in excess of 12% and actually 28% and likely to reach 40% if no restructuring.
- Capital inadequacy and requirement to infuse fresh T1 & T2 capital.
- Proposed Bank Amalgamation in September 2023
(Amalgamation generally result in loss of value to share holders)
- FX Crisis: Banks are short of FX due to ISB  conversion

Banking Crisis is not over yet! Take your Profits and Exit! Banking shares will be cheaper in future!
Hi Deepfreeking Value,

Thank you for your inputs and views

I economically counter the following allegations in the Sri Lankan Banking industry is as follows:

Non-Performing Loans (NPLs):

To address the issue of high NPLs, Banks already on proactive risk management and effective credit assessment processes together with CBSL. This includes identifying high-risk borrowers early on and closely monitoring their creditworthiness. 

Furthermore, Banks actively engage with existing borrowers facing financial difficulties and explore restructuring options. Restructuring loans can help struggling borrowers meet their repayment obligations and prevent them from falling into the NPL category.


Most of the Banks set up specialized NPL management units to handle distressed assets efficiently.

Also, the below Graph explains how NPA and AWPR behavior historically(from 2009 to 2017). It has a positive correlation where LOW interest rates result decreasing NPA and Vise Versa. Hence, a repetition of similar cycle is highly likely with a lag period.
Bad times are over with Banking Sector Img_2911



Capital Adequacy:

Firstly, There is NO need to explore avenues for raising Tier 1 (T1) and Tier 2 (T2) capital as the hair cut risk on domestic Government securities is NO more a risk. Only ISB’s are exposed for a hair cut where COMB and HNB having the largest exposure from private Banks.

Secondly, banks now optimize their asset and liability management to enhance capital efficiency. By deploying capital more effectively and managing risk-weighted assets, they can improve their capital ratios without a significant increase in absolute capital.

Moreover, the Banks aggressively collected Bonds(NTB and DFCC as per market sources) would be further improving the T1 capital due to trading gains from Bonds

Bank Amalgamation:

Can you please share the official announcement about a Bank amalgamation to happen by this September!

Temporary FX shortages:

Banks had SLDB , $ asset  cover of their USD liabilities. Now they get LKR bonds for their SLDB . Now no more USD assets. So banks are buying USD from the market to cover their position

This challenge isn’t a challenging one for Banks due to high growth in Tourism Industry and Remittances. Additionally Exporters are also contributing. The government is offering incentives to overseas workers to encourage foreign currency earnings and remittances, which can contribute to boosting FX reserves going ahead.

Moreover, encouraging foreign direct investments in the country can bring in additional foreign exchange inflows and help strengthen FX reserves(ex- CSE inflows and proposed promotions in India at the request of Indian PM to SL President)

In conclusion, the allegations are almost addressed in the Sri Lankan Banking industry and results should speak in upcoming quarters which should regain its economic resilience and regain investor confidence.

Good Luck

Do not consider this as an advice or a recommendation to buy/sell or hold

God Father and Amarapala like this post

ResearchMan

ResearchMan
Manager - Equity Analytics
Manager - Equity Analytics

By buying a single company at dirt cheap when others are selling I got an opportunity to get exposure to banking(one Major shareholder of DFCC,COMB) food,hotels and diversified sector.Apart from their core business, they also do  portfolio management. One thing volatility  cannot be ruled out for any sector. 

6Bad times are over with Banking Sector Empty Re: Bad times are over with Banking Sector Wed Aug 02, 2023 11:01 pm

ONTHEMONEY


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

Bad times are over with Banking Sector Cbf3e511

ONTHEMONEY


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

Hi all,

*CBSL reduces the Statutory Reserve Ratio*

CBSL decreases SRR by 200bps. Accordingly, the SRR will be at 2%. 

This move is expected to inject liquidity, totalling 200bn rupees to the domestic money market and encourage further downward reduction in market lending rates. 

_CAL Research_

So, positive developments are working to improve Banking sector

Good Luck

ADVENTUS likes this post

8Bad times are over with Banking Sector Empty Re: Bad times are over with Banking Sector Fri Aug 11, 2023 10:11 pm

ONTHEMONEY


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

Hi all

Please find the results of Banks published up to now

Bank June Q Profit6M Profit6M EPS
COMBRs 3.9BRs 8.2BRs 6.07
NTBRs 3.3BRs 6.1BRs 19.14
SEYBRs 1.4BRs 2.5BRs 4.06
PABCRs 0.6BRs 0.9BRs 2.09

Thanks

Note - Not a BUY/SELL or HOLD Recommendation

ADVENTUS likes this post

ONTHEMONEY


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

Bad times are over with Banking Sector Img_3010

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