Alpen Capital (ME) Limited has announced publication of its report on Sri Lanka banking and non-banking financial institutions (NBFI) sector report for the year 2021. The report highlights resilience and competitiveness of both the sectors despite challenges exacerbated by the pandemic, with new and emerging opportunities to capitalize on.
Reporting on Sri Lanka’s banking sector, Alpen Capital listed a number of opportunities including growth in deposits as customers moved away from risky institutions towards quality-assured products. Strategic acquisition of finance companies and smaller banks, and accelerated digitalization also paves the way for further growth. These provide opportunity for Sri Lankan banks to reduce operating costs, grow low-cost fund base and drive strategic investments going forward, the report found.
However, there is risk of rising non-performing loans at expiration of debt moratoriums, whilst the downgrade in Sri Lanka’s sovereign credit rating could also bring challenges to banks with high exposure to foreign currency denominated debt. Alpen Capital noted credit growth to the private sector was moderate in 2020 at 6.5%, despite the deposit base of banks showing strong growth.
Profitability of banks was adversely impacted by lower interest margins and high impairment costs. The Central Bank of Sri Lanka responded with several measures to ease pressure on banks and the economy including monetary policy easing, debt moratoriums and easing of capital and liquidity measures.
Alpen Capital in its report presents a detailed overview of the Sri Lankan Economy and its Banking and NBFI sectors. The report aims to provide an overall understanding of the sectors to investors, investment funds and companies looking for lucrative and viable investment opportunities in Sri Lanka. While banks and finance companies have faced challenges recently, as flagged by rating agencies, both sectors remain competitive with many emerging prospects, the report finds.
The Sri Lankan Banking and NBFI Sector: Outlook and Opportunities report by Alpen Capital was launched at a webinar on Thursday, 15th July. The session included a panel discussion featuring the Chairperson of the Monetary Board Advisory Audit Committee of the Central Bank of Sri Lanka, Dr. Ranee Jayamaha, Chairman Sri Lanka Banks’ Association, Lakshman Silva, and Peter England, CEO of RAK Bank, UAE.
The report finds the NBFI sector severely challenged since the Easter Attacks of 2019, and key business lines such as leasing remain impacted due to macro measures adopted by government in face of the pandemic. Despite ongoing challenges, most institutions were well capitalized during the latest financial year, with consolidation remaining a key priority of the government, Alpen Capital reports.
It found opportunities in agriculture, fisheries and livestock sectors backed by consumer and state interest, whilst digitalization has improved reach to customers. Industry consolidation could dampen performance in the medium-term, the report found, whilst lack of diversity in funding sources make them more vulnerable to a liquidity crunch.
“Despite the complex set of challenges encountered by the Sri Lankan economy in 2020, the country continues to offer viable opportunities for global investors. The various measures taken by the Central Bank of Sri Lanka have been instrumental in mitigating the impact of the pandemic on the economy as well as the banking and NBFI sectors. We have been actively advising our clients amidst these challenging times and have successfully arranged over USD 300 Mn for banks and finance companies since the onset of the pandemic,” says Dilip Samanthilaka, Senior Director, Alpen Capital.
“Sri Lanka, like most other economies, has had to cope with a host of economic challenges due to the disruption caused by the COVID-19 pandemic amongst the global financial markets. However, the banking and NBFI sectors remain one of the largest and most promising sectors for the country. In spite of the current foreign currency debt obligations, the government has managed to boost reserves by securing project financing through various multilateral and bilateral channels. We believe that efforts of the government to ease pressure and consolidations within the sector will bring greater stability to the sectors going forward,” says Sharmin Karanjia, Senior Director, Alpen Capital.
The report also quotes several Chief Executives and Directors of banks and NBFIs in Sri Lanka, who also point to a possible rise in non-performing loans, plus, pricing of foreign currency funding. They noted increased investments and foreign exchange inflows will assist the country to improve its macro fundamentals, whilst growing vaccination against Covid-19 will boost domestic economic activity.
In its analysis, Alpen Capital notes the Sri Lankan economy contracted sharply by 3.6% in 2020 due to pressures led by Covid-19. However, the country recorded the smallest trade deficit since 2010, following regulatory measures to control imports of non-essential goods. The country’s current account has recorded a smaller deficit, at 1.3% of GDP in 2020, led by a fall in tourism earnings by 73.5%. However, this was largely offset by an increase in remittance inflows by 5.8%, the first of its kind since 2017.
Debt repayment obligations remain one of the key challenges for the economy with a debt to GDP ratio of 101% at the end of 2020. This caused multiple credit rating agencies such as Fitch to downgrade the country’s long-term foreign currency ratings to CCC in 2020.
Reserves have been boosted this year by securing project financing through various multilateral and bilateral channels, as well as swap facilities under the South Asian Association for Regional Cooperation (SAARC) currency framework, and the People's Bank of China and planned IMF SDR allocation. In June 2021, Fitch Ratings has reaffirmed Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'CCC' and believes these resources will enable Sri Lanka to meet its remaining debt maturities through the rest of this year.
Please click here to access Alpen Capital’s latest report on Sri Lankan Banking and NBFI Sector.