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Sri Lanka: Banking Sector Stability?

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God Father

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Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

Sri Lanka: Banking Sector Stability? Img_1810


The banking sector’s stability in 2022 and 2023 can be summarized with the following points:

2022 Stability Overview:

Despite challenges such as declining credit quality, liquidity pressures, low profitability, and deteriorating capital levels, the banking sector remained stable.

The sector maintained growth and broadly complied with prudential requirements.

Banks accounted for 61.9% of total financial sector assets at the end of 2022.

Credit growth decelerated due to tight monetary policy and challenging macroeconomic conditions.

Deposits were the main funding source, with a notable decrease in foreign currency borrowings due to sovereign rating downgrades and a standstill announcement.

Sri Lankan Banking Sector:

The Sri Lankan banking sector is integral to the country’s financial intermediation, holding a significant share of the financial sector with 61.9% of total assets as of the end of 2022.

The sector showed resilience with adequate capital and liquidity buffers.

Challenges included the Easter Attacks in 2019, the COVID-19 pandemic, and adverse macroeconomic developments.

A robust crisis management framework was deemed important for the sector.

2023 Performance and Stability:

Liquidity ratios increased significantly due to investments in government securities.

Utilization of the Standing Lending Facility by banks reduced significantly.
Profitability improved with reduced new impairment charges, though this could affect future profitability.

Capital adequacy improved due to a decline in risk-weighted assets.
The banking sector faced challenges in asset quality and efficiency, with increasing Stage 3 Loans Ratios and rising operating expenses.

Banking Soundness Index (BSI):

The BSI indicated an improvement in the overall soundness of the banking sector at the end of Q3 of 2023 compared to the same period in 2022.

Liquidity, market risk, capital adequacy, and profitability sub-indices improved, while asset quality and efficiency sub-indices deteriorated.
Credit and Risk Factors:

Credit expansion in Q3 of 2023 was driven by Domestic Systemically Important Banks (D-SIBs).

The banking sector’s credit concentration risk remained high, with significant exposure to six main sectors.

Stage 3 Loans Ratios indicated higher default risks in some sectors.

Economic and Policy Measures:

The successful implementation of the IMF-EFF program was seen as crucial for economic recovery and financial sector resilience.

Policy measures adopted to ensure financial stability are detailed in Chapter 5 of the report.

Public Sector and Monetary Policy:

Rising public sector borrowing requirements put pressure on market interest rates.

Excessive public sector financing could lead to inflation, undermining the effectiveness of tight monetary policy.

Remedial measures were suggested to reduce public sector reliance on bank financing.

Non-Banking Financial Institutions (NBFIs) and Non-Financial Corporate (NFC) Sector:

NBFIs reported a higher NPL ratio than the banking sector, indicating lower credit quality.

The NFC sector saw a decline in creditworthiness, affecting the credit quality of financial institutions.

High-interest rates discouraged new credit facilities.

The Central Bank implemented policy measures to support financial stability, including the proactive build-up of Capital Conservation Buffer (CCoB) and D-SIBs Buffer.

This summary provides a detailed overview of the banking sector’s stability, reflecting both the challenges faced and the resilience demonstrated during 2022 and 2023.

Source: www.lankabizz.net

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