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Sector - Banking and Financial Institutions

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  • Sector - Banking and Financial Institutions

    The amendments to Finance Act further propose to slap a 7 per cent ‘Debt Repayment Levy’ on financial institutions that will be charged for every month commencing from the date of commencement of the act, on the value addition attributable to the supply of financial services by these institutions.

    Basically, VAT line will go by another 7%. Hope am correct.

  • #2
    Any major reasons for mixed earnings growth in the sector for the quarter ending June 2018?
    Last edited by MrGrowth; 08-18-2018, 09:37 AM.


    • #3
      SL banks backed for regional expansion

      Sri Lankan banks have the stability and capacity to expand regionally and would be supported by progressive regulations from the Central Bank, assured a top official this week, but this would be coupled with the monetary authority stepping up action on non-compliance to improve the regulatory environment.

      Speaking at a CT CLSA Securities event to launch a report on banking fundamentals, Central Bank Deputy Governor C. J. P. Siriwardana praised the sector and insisted it was stable and well-regulated.

      Sri Lanka’s banking sector currently consists of 33 banks, of which 26 are licensed commercial banks, including 13 foreign banks and seven licensed commercial banks. Of these, six are systematically important banks maintaining assets over Rs. 500 billion each, accounting for 72% of the banking sector in the country. Out of the six systematically important banks, four banks were worth over Rs. 1 trillion and the remaining two are also poised to become Rs. 1 trillion-worth banks.

      “So, in the future, we will call them the Trillion Bank Club,” Siriwardana said.

      However, he warned that banks are likely to face growing challenges from shifting market dynamics and new technology, and advocated that they prepare assertively.

      “But, we must not forget that the operating environment of the banking sector is more challenging now. The banking sector has continually supported economic growth by promoting financial inclusion in the country. This continues to be the priority of the Government and the Central Bank,” he said.

      Commending the collective effort of banks in raising capital to meet Basel III standards, Siriwardana stressed that it indicated their ability to operate at a more advanced level.

      “Our banks have raised capital, locally and internationally, to comply with Basel III, and this new development reflects their potential to fund large projects and mobilise funds for the international market at competitive interest rates. Additional capital requirement for the entire banking sector under Basel III was Rs. 120 billion and the companies were able to raise this amount. This means that our banks have the capacity to raise money more efficiently both in the local and international markets.”

      Touching upon International Financial Reporting Standards (IFRS), and IFRS 9 compliance, he noted banks are expected to provide loan losses based on the expected credit loss, instead of the existing incurred loss approach to facilitate timely recognition of credit losses.

      “However, the Central Bank will permit the cap under this regulation to be staggered over a three year period. Our aim is to safeguard banks, creditors and depositors. We are very cautious in this area and the monetary board advice is to take immediate action on non-compliance issues shown by any banks or non-bank finance companies.”

      Currently, the Central Bank is focusing on the avenues to impose and reinforce the regulatory and supervisory roles on corporate governance and ethics, customer care and fintech, block chain and cyber security.

      “We need to be encouraged to tap into the growth potential of the financial sector, especially in the regional market. Today, our domestic banks operate in several regions and six banks are operating outside of Sri Lanka. We encourage them to expand further.”

      “According to the International Banker’s Journal, the four Sri Lankan banks were ranked among the top 1000 banks. Ten years ago, we only had one bank and today, we have four. We are also seeing growing interest from foreign banks to establish their branches in Sri Lanka and this year, one of the top Chinese banks started their operations in Colombo. We want to see more banks joining the Sri Lankan banking system to steer the economic activities of the country in the future.”

      The banking sector continued to dominate the financial sector accounting for over 60% of assets for the financial sector and its performance has remained robust. Total assets of the banking sector is estimated to reach Rs. 12 trillion by end-2018, and sharing about 80% of Sri Lanka’s GDP. Deposits as a percentage of total assets is 75%, and capital adequacy of the banking sector under Basel III has maintained a healthy level of about 16% on average and has strengthened when compared to end-2017, Siriwardana noted.

      “However, we have seen marginal increase of non-performing loans this year from 3% to 3.33%, mainly due to weather-related factors that have impacted on the sector over the last one-and-a-half years. Statutory Regulatory Asset Ratio of the domestic banking unit has remained over 30% this year, liquidity coverage was also maintained at around 151%, well above the required 90%.”


      • #4
        LT investors need to look beyond the current volatility.
        1. Can SAMP maintain higher earnings QoQ.
        2. Can NDB maintain same higher growth we have witnessed last Quarter.
        3. Will Seylan Bank attract any takeover hostility.

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        "The best values today are often found in the stocks that were once hot and have since gone cold"


        • #5
          Will update the earnings comparatives today.
          "The best values today are often found in the stocks that were once hot and have since gone cold"


          • #6
            Historically, there had been volatility for the financial stocks as well. All types of volatility and corrections have created some big losers, millionaires and billionaires. The most important thing is ability to find out their future earnings, growth and making sure that they are going to generate cash. Doing your own research is very important as investors have lost lot of money by following others.

            One thing is for sure: markets will keep changing and only companies that ahead of the market will stay competitive and progress to the next level.
            Last edited by MrGrowth; 10-13-2018, 04:45 AM.


            • #7
              Although Fitch maintained negative outlook for Sri Lankan banks, it has given stable outlook for the following banks. While being a conservative bank,NSB has become the best bank in Sri-Lanka.

              Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of the following Sri Lanka-based banks:

              - National Savings Bank (NSB) at 'B+'; Outlook Stable
              - Bank of Ceylon (BOC) at 'B+'; Outlook Stable
              - DFCC Bank PLC at 'B+'; Outlook Stable

              Fitch has also affirmed the National Long-Term Ratings of the following banks:

              - NSB at 'AAA(lka)'; Outlook Stable
              - BOC at 'AA+(lka)'; Outlook Stable
              - DFCC at 'AA-(lka)'; Outlook Stable
              - People's Bank (Sri Lanka) at 'AA+(lka)'; Outlook Stable
              - Commercial Bank of Ceylon PLC (CB) at 'AA(lka)'; Outlook Stable
              - Hatton National Bank PLC (HNB) at 'AA-(lka)'; Outlook Stable
              - National Development Bank PLC (NDB) at 'A+(lka); Outlook Stable
              - Sampath Bank PLC at 'A+(lka)'; Outlook Stable
              - Seylan Bank PLC at 'A-(lka)'; Outlook Stable


              • #8
                Sri Lanka bank bad loans could double; pharma, construction pressured: HNB chief

                Oct 25, 2018

                ECONOMYNEXT - Tighter international accounting rules could result in Sri Lanka banks doubling provisioning for non-performing loans in 2018 which will erode profits already impacted by sluggish economic growth, listed Hatton National Bank's Managing Director Jonathan Alles has said.

                "I would almost think impairments are going to double this year and that is going to have a huge impact on profitability," Alles told a business forum organized by Asia Securities, a Colombo-based equities brokerage.

                Under IFRS 9 banks will be required to assess future cash flows of their lending portfolios, unlike in the past where banks measured credit profiles of borrowers based on historic accounting records.

                "Regulator and auditors will test our lending portfolios for anything weak, so it will be challenging for us to maintain certain portfolios that we manage carefully now

                "IFRS 9 puts restrictions and pressure on us and non-performing loans ratios will rise because of this and not only because borrowers are failing to service their loans".

                Central Bank Governor Indrajit Coomaraswamy said Non-performing loans had already risen to 3.5 percent from a low of 2.5 percent last year, but it was below historical trends.

                Weak economy

                Weaknesses in macro fundamentals have seen banking sector non-performing loans increase with particular sectors more affected than others.

                "Some of the receivables due from the construction industry are not coming in as expected, pharmaceuticals are facing tight margins, the trading industry has huge receivables, and agriculture has been having real difficulty over the last few years," Alles said.

                Alles said banks have taken measures to stem the non-performing loans growth and as a result credit growth could slow down in the short to medium term.

                "You'll see loan growth probably slowing down a little bit in order that we reverse this situation because what you don't want is the banking industry showing signs of weakness," he said.

                Hatton National Bank has considerable exposure to small and medium businesses and also engages in micro finance.

                "We are feeling the pressure because the cost of recovery is higher at those levels.

                We understand the difficulties our customers are going through, and we are giving them more time to settle their loans," Alles said.

                However, auditors and regulators are not too concerned about the difficult times and continue to apply the norms, he said.

                IFRS 9 will force banks to revisit their lending policies, even to larger corporates.

                "Bank will have to raise the bar on credit standards. A knee-jerk reaction to IFRS 9 could be more cautious lending leading to lower credit growth" Alles said. (COLOMBO, 25 October 2018)
                "The best values today are often found in the stocks that were once hot and have since gone cold"


                • #9
                  As per CBSL, NPL were much higher before. All these screaming getting undue publicity and unfortunately with minimal interest in markets, these news further scare away investors

                  Non-performing loans in the banking sector had gone up from 2.5 per cent in mid-last year to 3.5 per cent, following earlier credit growth and successive drought.
                  In 2009, NPLs were 8.8 per cent and in 2014, NPLs were 6.2 per cent. “The financial system did not collapse in 2009 nor in 2014, so there is no way the financial system could collapse now,” Coomaraswamy pointed out.



                  • #10
                    Sri Lanka banks in 'perfect storm', buying opportunity: report

                    Oct 25, 2018

                    ECONOMYNEXT - Sri Lanka's banking sector is caught in a 'perfect storm' with margins expected to tighten due to weak credit growth, rising non-performing loans, increasing regulatory costs and higher taxes, an equities research report said.

                    "On one hand, weak economic growth and austerity measures enforced by the government have led to a moderation of credit growth, while opex headwinds and rising impairment cost due to elevated non-performing loans will bear down on industry profitability," Asia Securities, a Colombo based brokerage said in a banking sector report.
                    But depressed prices show a buying opportunity, with larger banks, such as Commercial Bank, Sampath bank and Hatton National Bank, likely to see the first investor interest after negative sentiment clears, the report said.
                    "Here's a fact, Sri Lanka's banking sector is forecast to generate the highest returns on equity of all the comparable banking sector's in the in the region," Asia Securities chief Dumith Fernando said at an investor forum organised by Asia Securities.
                    "Here's another fact, Sri Lanka's banking sector as measured by price to book, price to earnings multiples, is the cheapest sector of all the regions, trading at the lowest valuations since the end of the war," he said.
                    According to Asia Securities, implementation of Basel III capital requirements and increasing provisioning for non-performing loans under IFRS 9 are expected to slow-down growth for Sri Lankan banks.
                    "We believe the dip in asset quality will run its course until the second half of 2019, but take comfort in the fact that the banks have taken prudent measures to arrest the situation," Asia Securities said.
                    However, the higher capital and liquidity requirements from Basel III will leave the industry more stable and sturdier to weather future credit events, it said.
                    "One risk to our view, and an important one for investors, is the impact of government policy on the industry."
                    "The debt repayment levy, for example will lead to an 8.5 percent drop in profitability across our covered banks, if implemented in the current form, and was partially the reason for the dip in industry valuations since August 2018," Asia Securities said.
                    Excerpts of Asia Securities' banking sector report are as follows:
                    Asset quality deterioration is a cyclical trend; systemic risks not seen: Credit cycles typically have a strong linkage with economic cycles, and the Sri Lankan services sector (both banks and non-bank financial institutions) is currently in the midst of a cyclical asset quality deterioration phase. However, the current phase is less intense than the last one in 2013/14.
                    Banks are seen taking a more prudent approach to manage the situation, and with tighter capital and liquidity regulations being implemented, there does not seem to be a major risk to the system. In the short run, however, this would create earnings headwinds in the next few quarters.
                    Loan growth to moderate to about 15 percent in 2018-2020: Following three years of strong credit growth which averaged 18.8 percent, licensed commercial banks are expected to enter into an era of structurally low credit growth as credit supply tightens and demand weakens.
                    On one hand, higher capital requirements from the last Basel III implementation would encourage banks to be more measured in lending.
                    Alongside this, the implementation of IFRS 9 (locally enacted as SLFRS 9) would lead to higher impairment books for each loan disbursed (given the shift to an 'expected credit loss' model).
                    As a result, banks are expected to be more cautious on managing lending exposure, further slowing down credit disbursement.
                    On top of this, sluggish economic growth momentum courtesy of high oil prices, a weakening currency and large government debt repayments falling due in 2019-21 are expected to moderate credit demand to some extent.
                    On the other hand, private banks are expected to take up a higher share of the lending from the undercapitalized state banks.
                    "While tightening regulatory conditions seem to constrict growth, we strongly believe that the banking system will emerge more stable as a result," Asia Securities said.
                    SME lending remains a key opportunity; retail lending to be sluggish until 2019: SMEs remain the backbone of the economy, contributing to about 52 percent of GDP growth according to the Ministry of Finance.
                    Unsurprisingly, banks have been heavily focusing on this segment for the past few years. With more upside left to fill SME lending penetration, banks would continue to focus on this segment. However, SMEs are more susceptible to economic cycles than their larger counterparts, the corporate sector.
                    A large part of the of the non-performing loans increases this year was driven by cash flow stresses in the SME segment, and his would lead the banks to step up their risk-assessment with SME lending.
                    "Consumer loan-affordability remains weak, on the back of austerity measures implemented by the government, and we argue that the key consumer-related products (housing loans, vehicle loans and credit cards) would not see material growth until the second half of 2019" Asia Securities said.
                    Interest rates show upward bias, but signs of liquidity pressure weighing on NIMs (net interest margins): The central bank in April 2018 signaled the end of (the) policy tightening era with a 25bps cut in the Standard Lending Facility Rate (SLFR).
                    However, the six months that followed saw a strengthening US dollar and subsequent capital outflow from government securities and the equity market, rising LIBOR pushing up government refinancing cost and elevated oil prices burdening the trade balance.
                    "Consequently, we see upward pressure on policy rates, but consider this likely in the first half of 2019, if the negative externalities intensify," the report said.
                    While rising interest rates generally bode well for banks given the asset-liability structure, there is some pressure on deposit rates in the market as the cost of borrowing (both locally and internationally)—a sizeable source of funding for local banks—is increasing.

                    "We do not see significant pressure on lending rates, and on balance, see signs of NIMs trending down, albeit modestly".
                    Profitability face short term headwinds; large banks better positioned to take the hit:Asia Securities said it sees the largest impact coming from high impairment charges, which saw a surge of 144 percent from a year earlier during the first half of 2018.
                    While this figure includes some prudential-impairments taken by the banks, the continued tepid economic conditions would lead to elevated credit costs in in 2018 (forecast at about 80bps).
                    In addition, IFRS 9 implementation is expected to push up credit costs structurally to about 50bps per annum in 2019-2021, versus an average of 40bps 2015-17.
                    Market has aggressively discounted the sector; key picks are COMB, HNB, SAMP and NTB: Within the listed licensed commercial banks, our coverage of nine banks has seen their stock prices decline by about 20 percent on average.
                    Following this, the sector now trades at a price to book value multiple of 0.7x estimated for 2018 and 0.6x estimated for 2019, with the valuation overhang bearing down on the more stable banks as well.
                    "We believe COMB (0.8x book value estimated for 2019), HNB (0.7x) and SAMP (0.6x) offer more attractive entry points at these levels, and once the negative sentiment clears, will see first-investor interest as they offer better liquidity and stable fundamentals in the long run," Asia Securities said. (COLOMBO, 25 October 2018)

                    "The best values today are often found in the stocks that were once hot and have since gone cold"


                    • #11
                      So far results from sector looks positive or managed to keep flat despite NPLs piling up. Many thought results will show negative as many reports warned of a grim picture/impending crisis. PLC-BFN-LFIN-NDB-UBL all done OK and SEYB - PABC flat results. If the sector performed this good despite past Qtr was bad, with some political change and Economy show promise growth (due to election spending-schemes like gamperaliya etc) banks will reverse the NPL at faster pace in coming Qtrs. So watch out for Banks having larger NPL as i expect they will shine early 2019


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