Credit demand in banks to rise by first quarter of next year
View(s):In the current low interest rate environment, Sri Lanka’s credit demand would pick-up in the second half of this year and gather momentum in the first quarter of next year, according to industry analysts.
“Despite the low interest rates and competition in the industry banks would maintain Net Interest May (NIMs) of about 4 per cent. With pawning by end of this year the asset quality will improve and also the cost/income ratios to go south with the moderation of the network expansion,” Softlogic Stockbrokers has said in a report. It said the consolidation in the financial sector would further strengthen the sector where by it will be able to better support the future growth of the country and improve its ability to withstand internal and external stocks.
Expand their pie
Currently state banks account for about 43 per cent of the commercial banking assets followed by nearly 22 per cent by Commercial Bank and HNB. Over the years state banks have lost market share to the private banks (which earlier controlled about 50 per cent of the assets) and this trend would continue, the report said.
“Despite pressure on interest spreads in the industry, private sector commercial banks recorded healthy interest margins, given timely re-pricing of their funding products (primarily deposit products) and shift in the deposit mix towards low cost CASA (current and savings account ratio) deposits which enabled them to reduce their funding costs at a faster pace than lending rates. With lower interest rates coupled with the asset growth we believe interest margins would see marginal reductions and will be sustained near 4-4.5 per cent in the long run.”
Asset growth slowed down in 2013 to 16 per cent largely due to the lower credit demand and reduction in the value of pawning portfolios which impacted the industry loan growth where it only grew to 10 per cent in 2013. According to the report, lower credit demand can be attributable to relatively higher interest rates and most of the corporate raising alternative funding (debt) during 2013. “The loan growth was slower than expected in the first quarter of this year, but the loan demand would pick up from the second half of this year led by small and medium enterprise loans followed by the corporate and finally the retail sector in the first quarter of next year.”
At the outset overall banking sector asset quality was dragged due to the collapse in global gold prices, resultant impact on the pawning portfolios and the slower than expected overall loan growth, the report said, adding that with stabilizing gold prices and higher precautions on pawning related advances would bring down the NPL ratio to 4.5 per cent in 2014.
During 2012 banks were giving out 80-85 per cent (loan/value) of the gold value as pawning loans (which would act as a buffer if gold prices decline). However the steep fall in gold prices has resulted in loan value dropping beyond the collateral value which has posted a bad loan risk to the banks which has relatively high exposure to pawning, the report said. During 2013 the system lost some Rs. 100 billion in value on gold loans and almost all the banks have taken a decision to auction the gold and cut their losses. “The banks have considerably reduced the loan to value ratio to 60-65 per cent enabling a higher cushion against future gold price reductions. Therefore banks would be able to fully clear their books by end of this year.”
Deposit flows continue
Despite the reducing deposit rates funds continued into flow to the banking system recording a growth of 16 per cent in deposits during 2013. “The deposit flow would continue in this pace in the medium term where people still use deposits as their main saving/investment product. In this competitive interest rate environment banks would opt to increase borrowings (mostly foreign) as a funding source than deposits. Further deposit growth would be further strengthened in 2014E and 2015E with a shift of deposits from relatively high risk finance companies,” the report said.
The banking sector remained very liquid in 2013 given the lower credit demand and growing deposits and borrowings. The liquid asset ratio (statutory minimum of 20 per cent) improved to 38 per cent in 2013 as against 31 per cent in 2012. The excess funds were mainly invested in treasury bills, bonds and development bonds. Banking sector remains well capitalized as at end 2013 where the Tier I Capital Adequacy Ratio (CAR) is at 13.7 percent (regulatory limit 5 per cent) whilst the total CAR is at 16.3 percent (regulatory limit 10 per cent).