Sri Lanka Banking Sector_Final

Sri Lankan Banking SectorUpdate

Rukshana Thalgodapitiya,

Vice President

26 February 2015

1www.fitchratings.com

Outlooks for 2015Stable Rating and Sector Outlook for Sri Lanka

Outlook on Sri Lankan banking sector revised to Stable in 2015

• More supportive operating conditions expected

• Deterioration in key credit metrics have largely bottomed out

• Banks to continue to face challenges

Ratings Outlook remains Stable

• All Sri Lankan banks have a Stable ratings outlook

• Growth potential supportive of bank performance

• Operating environment rated risks factored into Viability Ratings


Sensitivities

Positive

• Structural changes that can enhance the resilience of balance sheets

• Sustained improvement in the operating environment

Negative

• Capital Impairment risks

Sovereign rating


Public Ratings of Sri Lankan banks assigned by Fitch

Source: Fitch

LT IDR / Outlook

Viability Rating

Support Rating

Support Floor

National Rating / Outlook

National Savings Bank BB- / Stable na 3 BB- AAA(lka) / Stable

Bank of Ceylon BB- / Stable b+ 3 BB- AA+(lka) / Stable

DFCC Bank B+ / Stable b+ 4 B AA-(lka) / Stable

National Development Bank B+ / Stable b+ 4 B AA-(lka) / Stable

People's Bank (Sri Lanka) AA+(lka) / Stable

Commercial Bank of Ceylon AA(lka) / Stable

Hatton National Bank AA-(lka) / Stable

Sampath Bank AA-(lka) / Stable

Seylan Bank A-(lka) / Stable

Nations Trust Bank A(lka) / Stable

Pradeshiya Sanwardhana Bank BBB+(lka) / Stable

Pan asia Banking Corporation BBB(lka) / Stable

Union Bank of Colombo BB+(lka) / Stable

Sanasa Development Bank BB+(lka) / Stable


• Larger and mature banks have a clear competitive advantage being best placed to leverage

opportunities due to their established franchises

• Mid sized banks need to find a niche or clear competitive advantage

• Small banks face challenges in sustaining and developing their franchises

Competitive landscape

0

5

10

15

20

25

BO

C

CO

MB

DF

CC

HN

B

ND

B

NS

B

PB

SA

MP

FY10 FY11 FY12 FY13 1HFY14

Market Share – by Loans

(%)

0

5

10

15

20

25

BO

C

CO

MB

DF

CC

HN

B

ND

B

NS

B

PB

SA

MP

FY10 FY11 FY12 FY13 1HFY14

Market Share – by Deposits

(%)

Source: Fitch, Banks


Possible pick up in lending

Source: Central Bank of Sri Lanka (CBSL), Fitch

• Loan growth slowed in 2014 partly on account of the drop in credit for gold- backed lending

• Some pick- up in lending possible in 2015

-5

0

5

10

15

20

25

30

35

2009 2010 2011 2012 2013 2014E 2015F

Loan growth(%)


Underlying sector trends

-20

-10

0

10

20

30

40

50

Agri

cultu

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Fis

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Ma

nufa

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To

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Infr

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FY13 1H14(%)

Sector Wise Growth

Source: Major Sri Lankan Banks Source: Major Sri Lankan Banks

0

5

10

15

20

25

30

Agri

cultu

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Fis

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Ma

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To

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FY13 1H14(%)

Sector Wise Composition


Pressure on asset quality from gold- backed lending expected to diminish

0

50,000

100,000

150,000

200,000

250,000

FY12 FY13 1HFY14

Total NPL Pawning related NPL(LKRm)

Source: Major Sri Lankan banks

• Sector NPL ratio rose sharply mainly due to delinquencies from pawning (gold- backed lending)

• Incremental risk to asset quality from pawning related NPLs likely to abate


Downside risks remain

• Provision coverage has reduced even during periods of strong credit growth

• Potential risks to asset quality remain but impact expected to be manageable

0

10

20

30

40

50

60

0

1

2

3

4

5

6

7

8

2011 2012 2013 2Q14

Reported NPL ratio (LHS)Adjusted NPL ratio (LHS)Total Provision Coverage / NPLs (RHS)(%)

0

1

2

3

4

5

-5

0

5

10

15

20

25

30

35

2008 2009 2010 2011 2012 2013 3Q14

Loan Growth (LHS)

Total Loan Loss Reserve / Loans (RHS)(%)


Adjustment pertains to estimated performing rescheduled loans Source: Central Bank of Sri Lanka (CBSL)


Profitability less healthy on an adjusted basis


• Thinner NIMs have been a key challenge to pre - provision operating profitability. Bottom line

profitability has been impacted by higher impairment charges.

• Modest improvement in profitability expected.

• Reported credit costs fairly low. Stressed credit costs would dampen sector profitability

considerably.

0

0.5

1

1.5

2

2.5

3

2011 2012 2013 3Q14

ROA Adjusted ROA

(%)


Stressed credit costs for major Sri Lankan banks

0

1

2

3

4

5

6

BOC COMB DFCC HNB NDB NSB PB SAMP

(% of loans)

Credit Costs Tolerance 2013

Current Credit Cost Stressed Credit Cost

Source: Banks, Fitch


Risk weighted assets for major Sri Lankan banks


• Risk weighted assets total assets lowest among the major state banks

0102030405060708090


FY12 FY13 1HFY14(%)

Risk weighted assets/Total assets


Adjusted capital ratios weaker


• Regulatory capital adequacy ratios have benefitted from 0% risk weights on certain exposures

• Adjusted capital ratios of major state banks much weaker

• Higher capital buffers at Sri Lankan banks justified

0

5

10

15

20

25


Capital ratios as at June 2014Tier 1 Regulatory Capital Ratio Equity/ Total Assets Adjusted Tier 1 Capital Ratio(%)


Stable Funding Structure

0

10

20

30

40

50

0102030405060708090

100

2008 2009 2010 2011 2012 2013 3Q14

Loans / Deposits (LHS) CASA(RHS)(%)

Source: Central Bank of Sri Lanka (CBSL)

• Deposits are likely to remain the main source of funding for Sri Lankan banks

• Pressure on loans /deposits have eased


Increase in share of borrowings in funding structure

• Share of funding from borrowings has been increasing as banks have been turning more frequently

to the capital markets for funding.

• The share of foreign currency denominated borrowings been steadily increasing.

02468101214161820

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 3Q14

FCY borrowings/ Total borrowings(LHS)

LCY borrowings/Total borrowings(LHS)

Total Borrowings /Total Assets (RHS)

Borrowings

0

5

10

15

20

25

30

2009 2010 2011 2012 2013 3Q14

FCY loans/Loans

FCY Deposits and Borrowings/ Total Depositsand Borrowings

Foreign currency lending and funding

Source: Central Bank of Sri Lanka (CBSL), Fitch Source: Central Bank of Sri Lanka (CBSL), Fitch


Financial Sector Consolidation

• Should improve the credit profile of financial institutions, strengthen franchises, and

reduce supervisory burden

• Beneficial to the sector in the long term

• Credit-neutral in the short to medium term


People in pursuit of answers


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Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings

are inherently forward-looking, embody assumptions and predictions that by their nature cannot be

verified as facts, and can be affected by future events or conditions that were not anticipated at the

time a rating was issued or affirmed.

The information in this presentation is provided “as is” without any representation or warranty.

A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not

address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned.

A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its

agents in connection with a sale of securities.

Ratings may be changed or withdrawn at any time for any reason in the sole discretion of

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a recommendation to buy, sell, or hold any security.

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Sri Lanka Banking Sector_Final

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