Bank Trend

Sri Lanka banks to grow loans 14-pct in 2014, outlook stable: Moody's July 03, 2014 (LBO) - Sri Lanka's bank credit is estimated to grow 14 percent in 2014 and outlook for the sector is 'stable' with bad loans to also stabilize this year, Moody's, a rating agency said."…[A] pipeline of infrastructure projects is expected to boost economic growth, together with an accommodative monetary policy," Srikanth Vadlamani, Vice President and Senior Analyst at Moody's said in a statement.

"In such an environment, loan growth will rebound and asset quality will stabilize.

"Our stable outlook for the Sri Lankan banking system is also consistent with our stable outlook on the Sri Lankan government's B1 rating."

According to official data Sri Lanka's economy is growing at 7 percent, one of Asia's fastest rates.

Sri Lanka is recovering from a balance of payments crisis triggered energy subsidies financed with bank loans which were ultimately accommodated by central bank credit (printed money) in the course of sterilizing foreign exchange sales.

The corrective action led to a sharp rise in interest rates, a depreciation of the exchange rate and energy price hikes. The weakened exchange rate also helped kill domestic spending power.

Bad loans in banks also rose, compounded by a gold price fall, which led to widespread defaults in gold-backed loans known as pawning.

"We note that lending standards have tightened and, given that these loans have a tenure of only around 12 months, we expect NPLs in this segment to start stabilizing from around the third quarter of 2014," Vadlamani said.

Moody's looked at how creditworthiness will evolve over the next 12-18 months.

It viewed the operating environment as 'stable', asset quality and capital as 'stable', funding and liquidity as 'stable', profitability and efficiency as 'stable' and systemic support as 'stable'.

"Our analysis estimates 14 percent loan growth this year and we do not view this as excessive," Vadlamani said.

"Instead, the key risk to the outlook for economic growth is Sri Lanka's high current account deficit and a resulting reliance on external debt capital flows."

"This structural weakness exposes the economy and currency to shifts in investor sentiment."

Meanwhile Moody's says recent falls in interest rates for Sri Lankan debt sold abroad indicates "high confidence" of foreign investors in the economy.

Sri Lanka has a current account deficit due to a net surplus coming through the financial account, led by government borrowings which push up the trade deficit.

Private borrowings abroad which have recently increased as well as foreign direct investments also help boost imports and the current account deficit.

During balance of payments trouble, when the Central Bank injects billions of dollars worth of rupee liquidity (about two billion US dollars worth during the last BOP crises in 2011/2012) to sterilize forex sales, domestic credit and spending pushes the current account deficit even higher.

Moody's rates Sri Lanka's Bank of Ceylon and Hatton National Bank which accounted for about 30 percent of system assets in March 2014. The 10 largest banks together represent 87 percent of banking system assets, the rating agency said.

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