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How will Non Performing Loans (NPL's) affect the Valuations of Banking Sector shares?

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God Father

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Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

How will Non Performing Loans (NPL's) affect the Valuations of Banking Sector shares?  Scree351

The economic downturn in 1Q 2023 hit badly the banking sector as the NPL ratio has elevated to 12.9% from the 4Q 2022 11.5%. The moratorium offered during the pandemic era ends n Jan 2023 and many sectors are still struggling which has put banks in trouble. According analysts Banking Sector NPL's are currently in excess of 18% and expected to rise to 40% if no action taken by the banks or Central Bank of Sri Lanka (CBSL) to restructure bad and irrecoverable debts and loans owed to small to medium enterprises.

Above table also indicate the future Capital requirement of Sri Lanka Banks in the event of write off of 10% Non Performing Loans (NPL’s).

How will Non Performing Loans (NPL's) affect the Valuations of Banking Sector shares?  Img_2910

How will Non Performing Loans (NPL's) affect the Valuations of Banking Sector shares?  Ivmw0o10

https://charts.lk/d/649410e547aaa8aa508fe7ea



Last edited by God Father on Sat Aug 12, 2023 1:48 pm; edited 2 times in total

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Total non-performing loans of all banks reach Rs 1.4 trillion.

While revealing that the total value of non-performing loans of all 30 banks functioning in Sri Lanka currently is Rs 1.4 trillion, the State Minister of Finance Ranjith Siyambalapitiya today assured that steps would safeguard the economy.

Knowledgeable analysts estimate Siyambalapitiya's figure as only touching the tip of the iceberg, and that the actual figure will be at least double that figure.

Also,.since the GDP growth figures were negative 8.4%, 11.8%, 12.4%, & 11.5% in 2Q2022, 3Q2022, 4Q2022, & 1Q2023, respectively, it's a clear indication that the NPLs are bound to increase further over the next 4 quarters at least.

In the circumstances, Banks' liquidity and safety is bound to suffer considerably, and that is evident by the fact that the Central Bank has been compelled to slash its Statutory Reserve Ratio by 50% to provide some support to the beleaguered (under seige) and vulnerable banking sector.

Unless some serious infusions of liquidity is injected into the banks in the next few months, Sri Lanka may face an unprecedented banking crisis.

No amount of sweeping the crisis under the carpet by the Government and Central Bank will make this problem disappear.

Why Banks have to make higher provisions for Non Performing Loans (NPL's) during 2023?

❎ According to Circular 02 of 2022 issued by CBSL on 2 July 2022, All recovery action by the Banks were deferred until 31st December 2022. As a result most commercial banks have deferred making provisions for Non Performing loans until the said deadline of 31st December 2022.

How will Non Performing Loans (NPL's) affect the Valuations of Banking Sector shares?  Scree352

https://cbsl.gov.lk/sites/default/files/cbslweb_documents/laws/cdg/bsd_circular_no_2_of_2022_e.pdf

❎ Directive No 13 of 2021, issued by the CBSL on 14th September 2021 provide a guideline for the classification of Non Performing loans. Accordingly Banks have provide can differ the provisioning between  90 - 360 days depending of the classifications.
✖Special Mention Cases: 90- 180 Days
✖Substandard Loans: 180 -270 Day
✖Doubtful Debit: 270-360 Days
✖Loss: 360 Days

How will Non Performing Loans (NPL's) affect the Valuations of Banking Sector shares?  Scree353

https://cbsl.gov.lk/sites/default/files/cbslweb_documents/laws/cdg/Banking_Act_Directions_No_13_of_2021.pdf

❎ Finance Business Act direction No 1 of 2020 issued by CBSL provide a guideline for minimum Specific Provisioning requirement relating to Non Performing Loans (NPL's) based on classifications.

How will Non Performing Loans (NPL's) affect the Valuations of Banking Sector shares?  Scree354

https://cbsl.gov.lk/sites/default/files/cbslweb_documents/laws/cdg/Finance_Business_Act_Direction_No_1_of_2020_e.pdf

Banking Sector expected take a heavy beating in Oct/Nov with the Quarterly Earnings release.
Reasons.
- High Tax Impact on Earnings
- High on Performing Loan (NPL) Impact on Earnings
- Interest Rate Impact on Earnings
- Increasing administrative costs and impact on Earnings
- DDO Impact on ISB's and resultant losses
- Impairment due to Downgrading of the Domestic Debt
- Proposal for consolidation/amalgamation and its impact to shareholders.

Sri Lanka NPLs seen peaking around 13-pct, some sectors hit up to 30-pct

Friday December 1, 2023 1:17 pm
ECONOMYNEXT – Sri Lanka’s non-performing loans after the latest currency crisis is showing signs of having peaked but some sectors are hit worse than others with problem loans dating back from Coronavirus moratoria, a banking official said.

Hotels, transport and arts and entertainment sectors had bad loans of 30 to 20 percent, while the overall level was lower.

There is a marginal set of borrowers whose loans had been re-structured at high rates, whose loans could turn bad if no action is taken.

“The good news is that our NPLs have now kind of slowed down,” Bingumal Thewarathanthri, who is chairman of Sri Lanka Banks’ Association, told the Sri Lanka Economic Summit 2023.

“It was 13.6 percent. Now it is hovering around 13.1, 13.2 percent. The net is down to 7.2 from 7.8 percent. Very clearly we have come to the end of this process.”

Thewarathanthri said Sri Lanka’s NPLs were low around 2.5 percent in 2017.

“NPLs came down but suddenly went up in 2018 and 2019 because credit to private sector was double digit when the economy was growing at low single digits,” he said.

Sri Lanka’s NPLs started to inch up from before the Coronavirus crisis amid money printed to mist-target rates, which tend to drive mal-investments, analysts have said.

The inevitable currency collapse which follows, destroys purchasing power, on top of stabilization measures to stop the external drain, making businesses fail and drive up bad loans.

Some Sectors More Affected

Meanwhile, Thewarathanthri said, Sri Lanka’s bad loans hit 15.8 percent in 1999, and that level was not reached in the current crisis.

But some sectors are more badly affected than others

“In terms of sectors, tourism NPLs are 33 percent,” he said. “Very clearly some of the tourism sector enterprises will not recover. You can clearly see the stress in that sector.

“Transport and logistics is 30 percent. Disposable incomes have come down, less consumption, the sector is impacted. Some of our clients who went down during covid will never recover, sadly.

“Interestingly arts and entertainment is also close to 20 percent. Again, when disposable income goes down there is an impact to arts and entertainment. You first eat.”

Moratorium

After the Easter Sunday blast, hotels were given relief. In 2020 more broad-based relief was given and extened.

“There are no standard moratoriums going forward,” Thewarathanthri said. “Banks are fully aware of who is in stress and there is a lot of restructuring happening as we speak.

There were three types of enterprises, that took moratoriums.

“Some took the moratoriums and somehow paid,” Thewarathanthri said. “They disposed some assets, they took cost action, they understood the size of the business what is possible, what is not possible.

“I would say close to half were actually have gone ahead and done that.”

“There is a good 20 percent I would say who had taken the moratorium and done other things.
They thought they can buy time and wait and they did not have to settle these loans. They are in stress. These firm with no cashflow are lobbying for more moratoriums.

There was a third sector which took moratoriums who were unable to settle due to due to inadequate cashflows.

Some hotels had recovered close to 80 percent of pre-Covid level but were not fully recovered, but were managing to service the debt.

Many loans of the loans were restructured in the recent past at “very high rates”, which the banks had to look at again.

“That component I think all of us in the banking community will have to take a look at that component and see what more can be done,” he said.

“If there is no cashflow there is no payment. Period. We can celebrate the NPLs have come to the bottom but you never know. If that portfolio goes bad, that’s a good portfolio going bad.

“The promoters are good, the business models are good. But sadly the cashflows are not supporting. So that individual banks are actively looking at them and supporting them.”

Global Picture

Several other countries which had currency troubles are also hit.

Ghana, a country which defaulted, amid a severe currency crisis, has about 20 percent bad loans.

Bad loans in Bangladesh, which is going through ‘external stress’ was 10 percent, Thewarathanthri who is also Chief Executive of Sri Lanka’s Standard Chartered Bank said.

“There is stress in the banking systems post-Covid,” he said. “Central banks have done moratoriums. There is stress in the banking systems coming out of the moratoriums as well.

“What we have seen is actually larger companies have taken market share … and grown.”

Similar trends were seen in Sri Lanka, he said.

“SME turnovers are down by 7 to 30 percent in Asia. Some of our SMEs have completely gone down.” (Colombo/Dec01/2023)

https://economynext.com/sri-lanka-npls-seen-peaking-around-13-pct-some-sectors-hit-up-to-30-pct-142097/

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