Fitch expects moderately higher loan growth in Sri Lanka in 2021
COLOMBO: Fitch Ratings expects the economic fallout from the coronavirus pandemic and the weakening sovereign credit profile to continue to weigh on the Sri Lankan banking sector in 2021.
“We expect banks’ ability to generate new business and revenue to be broadly similar to that experienced in 2020, with significant downside risks,” Fitch Ratings said.
“Sri Lankan banks entered 2020 with their credit profiles already under pressure following a long period of poor economic growth due to adverse weather conditions, political turmoil and the 2019 Easter attacks.”
Fitch expects Sri Lanka’s real GDP to contract by 6.7 percent in 2020 before expanding by 4.9 percent in 2021, albeit off a low base.
“Our forecasts are subject to a high degree of uncertainty regarding the evolution of the pandemic globally and in Sri Lanka.
“The operating environment (OE) score for Sri Lankan banks has been progressively lowered alongside the downgrade of the sovereign rating, which is a key factor in our assessment of the banks’ OE, given the strong linkage between the sovereign credit profile and the banks’ operating conditions.
“This linkage further strengthens during periods of stress. Fitch expects state banks to gain more market share in the near to medium term as their asset growth outpaces the sector due to increased state lending. Muted growth among the private banks has resulted in their market shares declining marginally in 9M20.
“We expect Sri Lankan banks to face significant risks to underlying asset quality once relief measures are phased out. However, these risks will not be apparent in reported performance in the near term.”
Fitch expects moderately higher loan growth in 2021, driven by increased private-sector credit demand.
“We estimate that Fitch-rated banks’ operating profit/risk-weighted assets will fall sharply in 2020 as a result of increased credit costs and muted lending. However, we expect most banks to remain profitable, except for CBL. Fitch believes that pressure on Sri Lankan banks’ capital buffers is mostly manageable. Muted lending prospects are likely to be outpaced by earnings retention, which should provide stability to common equity Tier 1 (CET1) ratios, despite the earnings pressure and credit weakening.
“Domestic funding should broadly remain intact with banks continuing to benefit from a deposit influx driven by lower consumption and possible flight to quality. This, together with subdued credit growth, should lower banks’ loans/deposits ratios in 2020, but we expect a slight pick-up in 2021 as credit growth resumes.”
“We believe that liquidity pressure from the extension of the loan moratorium to March 2021 should be mostly manageable for the Fitch-rated banks due to their high liquidity coverage ratios and the central bank’s continued accommodative monetary stance.”