Banking sector shares gained significantly during the past two weeks as investors showed a high interest in this sector with industry analysts saying the post conflict era will see it set for substantial growth prospects.
They noted that with further reduction in policy interest rates, the interest margins of the banking sector could be expected to improve. “With the reduction in policy rates, the borrowing costs (cost of funds) for banks could come down. So in the short term it could widen their interest margins and therefore improve the profits (the numbers would differ from bank to bank),” a NDB Stockbroker Ltd analyst said.
Another analyst noted that when interest rates fluctuate, the banks will benefit. “This will help them to maintain relatively high interest rate spreads and increase it. This would result in increasing interest margins,” Srimal Liyanage, Head of Research Lanka Securities said.
However the first analyst said that gradually the banks will have to reduce their lending rates as well, in which case the margins would decrease.
Some bankers said that the issue right now is that the lending appetite of the banks is still not that high and they might not get the full benefit of the reduced policy rates.
Geeth Balasuriya, Manager Research at Acuity Brokers said that initially with the volatility in rates there might be a temporary improvement in margins but medium/long term margins are likely to get narrower. “However the slightly lower interest margins will be compensated with the expected recovery in lending. In other words much higher loan growth would continue to strengthen banking bottomlines over the medium term if rates continue to fall and remain at those levels,” he said.
A banker noted that one of the positive factors for certain banks would be the reduction in yields of treasury bonds (along with the reduction in policy rates) which would result in capital gains.
Mr. Balasuriya said that at the moment most banks enjoy interest margins of around 5% and in some cases even higher than this. “However when the existing volatility in rates come to an end the interest margins of banks could decline to around 4.5% and banks are likely to be more aggressive on lending with competitive margins.”
The NDB analyst said the current post war scenario could be seen as a development period, which could increase the demand for debt (for development work) which should improve the performance of banks. “The issue is the increasing non-performing loans (due to the economic downturn scenario we experienced with high inflation and interest rates). However the pressure on non performing loans would come down by the latter part of the year as the inflation and interest rates are declining.” |
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