Lankan banks see profit margins falling in 2008

Sri Lankan banks have raised serious concerns about profit margins saying it will decrease due to the high interest rate and rising inflation situation in the country.

HNB Chairman Rienzie Wijetilleke in his annual review has noted that the country was badly impacted by oil price likes which resulted in 'continued inflationary trends.' aggravated due to relatively 'indecisive monetary policies,' while countries such as India and China and the smaller economics despite facing similar oil shocks managed to weather the situations without affecting growth levels or such inflationary situations.

He said Sri Lanka is paying three times what India is paying for any article or item, because their currency is thrice stronger. "But it was almost the same as ours. This has become so because we do not have practical application of consistent policies."
Wijetilleke said that inflationary trends will affect HNB customer lending portfolio. "We realise the spiralling cost of living factor is providing to be one of the most challenging obstacles facing us in the coming year," he noted.

He said that managing liquidity risk in a milieu of increasing interest rates poses numerous challenges such as difficulties in repricing assets, the deterioration in value of asset positions and in raising low cost demand and saving deposits. "From the perspective of our borrowing customers, the inability to pass on the incremental cost to the customers' results in profit margins being squeezed and consequently affects HNB's asset quality," he noted.

Zulficar Zavahir, CEO NTB told The Sunday Times FT that with the current high inflation - high interest rate scenario all banks will face difficulties this year. "Our cost of funds will increase and then the cost of lending will follow suit. Then the demand for loans will decrease," he explained. He added, "We are hoping the government will bring down the interest rates within the second half of the year. High interest rates and high taxes cannot work," he stressed, adding that if interest rates continue to remain as such, the banks' margins will fall.

Commercial Bank has also highlighted high interest rates and high inflation as concerns. "These two factors resulted in a marginal increase in our non-performing loans (NPL's). We were also forced to increase our provisions for the condominium sector because of the increased potential for losses, given the sluggishness of the market. This was a main contributory factor for the increase in our total provisions to Rs.1.777 billion, probably the highest ever in the bank's history," Amitha Gooneratne, Managing Director, Commercial Bank has noted in his review for 2007. He has said that 2007 was a difficult year and 2008 may turn out to be even more challenging. "Our challenge in 2008 will be to maintain consistency amidst high volatility," he has noted.

Commercial Bank Chairman Mahendra Amarasuriya in his annual review has said that net interest margins are expected to shrink this year as liquid funds become scarce in the market. "Banks will have to increasingly concentrate on enhancing their non-interest income component to maintain profitability," he has said, noting that mobilising deposits in a high inflationary environment will be a challenge. "Although high interest time deposits and attractively structured savings deposits schemes are among the options, the disposable income available for savings in the hands of the people will be less due to the high cost of living," he has pointed out.

Amarasuriya has said the steady increase in the taxation during the past few years has increased the challenges for banks.