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Rating Outlook
Strong Credit Growth: Fitch Ratings expects the earnings of Sri Lankan banks to continue to benefit from strong lending prospects in the post-civil war period (since 2009). Real GDP is forecast by the agency to increase by 8% per annum in 2012, driving strong credit demand. Licensed commercial banks, accounting for about 45% of financial system assets, are in Fitch's view the best placed to meet this demand. The agency expects a policy response from the authorities to rein in credit demand should inflation increase.
Manageable Asset Quality: Fitch remains concerned about the Sri Lankan banking system's ability to manage a sustained level of above-average loan expansion. Sri Lanka's Macro Prudential Index (MPI) – an indicator of potential stress in the banking system – was revised to '3' (high) from '1' (low) in December 2011. The knock‐on effects of a still uncertain global economic environment could affect asset quality. However, the agency believes that asset quality may not immediately deteriorate to the levels reached in 2008 and 2009.
Sustained Healthy Profitability: Fitch expects net interest margins (NIMs) to continue to come under pressure due to intensifying competition. The agency believes that healthy profitability could continue to be delivered in 2012, supported by strong loan demand, manageable credit costs and reduced taxes.
Increased Non-Deposit Funding: Fitch believes that loans/deposits ratios (LDRs) will continue to increase to 85%-90%. The agency notes that heightened competition and diminishing liquidity are being reflected in rising interest rates on deposits. Supported by their domestic franchises, deposits will remain the main source of funding for Sri Lankan banks, although strong lending could result in a rising share of non-deposit funding.
Capital Planning Important: Fitch believes that the capital ratios of Sri Lankan banks could come under pressure through continued strong credit growth. The agency recognises that capital conservation to maintain an adequate buffer is important in light of loan growth levels, credit concentrations, the just adequate level of loan-loss reserve coverage and exposure to macroeconomic volatilities.
Strong Credit Growth: Fitch Ratings expects the earnings of Sri Lankan banks to continue to benefit from strong lending prospects in the post-civil war period (since 2009). Real GDP is forecast by the agency to increase by 8% per annum in 2012, driving strong credit demand. Licensed commercial banks, accounting for about 45% of financial system assets, are in Fitch's view the best placed to meet this demand. The agency expects a policy response from the authorities to rein in credit demand should inflation increase.
Manageable Asset Quality: Fitch remains concerned about the Sri Lankan banking system's ability to manage a sustained level of above-average loan expansion. Sri Lanka's Macro Prudential Index (MPI) – an indicator of potential stress in the banking system – was revised to '3' (high) from '1' (low) in December 2011. The knock‐on effects of a still uncertain global economic environment could affect asset quality. However, the agency believes that asset quality may not immediately deteriorate to the levels reached in 2008 and 2009.
Sustained Healthy Profitability: Fitch expects net interest margins (NIMs) to continue to come under pressure due to intensifying competition. The agency believes that healthy profitability could continue to be delivered in 2012, supported by strong loan demand, manageable credit costs and reduced taxes.
Increased Non-Deposit Funding: Fitch believes that loans/deposits ratios (LDRs) will continue to increase to 85%-90%. The agency notes that heightened competition and diminishing liquidity are being reflected in rising interest rates on deposits. Supported by their domestic franchises, deposits will remain the main source of funding for Sri Lankan banks, although strong lending could result in a rising share of non-deposit funding.
Capital Planning Important: Fitch believes that the capital ratios of Sri Lankan banks could come under pressure through continued strong credit growth. The agency recognises that capital conservation to maintain an adequate buffer is important in light of loan growth levels, credit concentrations, the just adequate level of loan-loss reserve coverage and exposure to macroeconomic volatilities.
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