Banks challenged by uncertain interest rates, rising inflation

Sri Lankan banks are facing challenging times owing to uncertain interest rates and rising inflation.

“The past nine months have seen volatility in domestic interest rates coupled with near double digit inflation.

This has posed a challenge to defend interest margins and also will continue to threaten the quality of retail credit,” says Hatton National Bank (HNB) Managing Director Rajendra Theagarajah. His comments came when the bank announced its results for the nine months to September 2007 in which it reported a 39 percent hike in pre-tax profits to Rs 2,676 billion.

Theagarajah said relentless focus on balancing business growth with profitability, improving productivity, managing costs, and enhanced asset quality has contributed towards this performance despite an increasingly inflationary domestic environment which also was faced with extreme volatility in interest rates.

Net interest generated from interest bearing assets has increased by 41% while non interest income showed a growth of 23%. Net income including foreign exchange, commission, income and investment income grew by 27% during the 9-month period led by a surge in foreign exchange trading which grew by 51%.While recognising the impact of domestic inflation on expenses, Theagarajah – in his statement -- stressed the need for increased focus on managing cost through better internal efficiencies. Provisioning for bad and doubtful advances has shown a sharp increase of 81% to Rs 733 million. Of this, Rs 206 million related to General Provision mainly on account of the new regulatory directions issued by the Central Bank.

Post Tax profits of the bank were Rs 1,747 million, up 28 percent when compared with the same period in 2006.

Total assets grew by Rs 30 billion to Rs 227 billion while the deposit base of the bank increased by 13 percent to reach Rs 168 billion.