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Asset base to support GDP growth:

Banking stocks highest gainers

Banking sector stocks were the highest gainers in the resurging Colombo Bourse in the second half of 2009, a report on the local banking sector said. The Bartleet Mallory Stock Brokers report on local banking sector said Year on Year (YoY) profit growth of around 3 percent and net interest margins of 4.6 percent saw Sri Lanka’s banking sector ride out the slowdown in the domestic economy due to the global financial crisis with a healthy and even improved performance by many banks by third quarter of 2009.

Sri Lanka is pushing to double GDP per capita to around US$ 4,000 by 2014. According to the Central Bank, a banking sector asset base of nearly US$ 25 to 30 billion will be required to support this growth.

Banking Industry
* 23 licensed commercial banks

* 15 specialized banks

The sector will see increased supervision from the Central Bank including perhaps frequent market adjustments using repo rates and statutory reserve requirements.

This could be a positive move in the long run if it serves to create stability in the sector and prevent systemic shocks when large banks or banking intermediaries fail, the report said.

The Report said the sector will see reduced lending from foreign banks and increased reliance on domestic funding.

Despite the adverse economic climate in late 2008 and 2009 many of the banks have kept the momentum on net interest income upto 3Q 2009 giving a good indicator of being able to at least sustain 2008 earnings.

The sector performed well in second half 2009 and most banks can be expected to record healthy net profit after tax growth for FY09 report said. In a small market of less than Rs 2,000 bn, with 23 Commercial Banks and 15 specialized banks, securing market growth is vital.

A larger part of the banking sector has focused on urban and corporate markets and traditional banking products.

At present more than 45 percent of the market share of loans and advances is held by State sector banks. However private banks are making good inroads into these markets with innovative products and much higher service levels.

With the large investment required for infrastructure development it will become inevitable for the Government to further open up infrastructure projects to the private sector.

The local banking sector will find an opportunity to participate in these projects. Consolidation is the way forward for the Sri Lankan banking sector with a need to boost its asset base to take advantage of the upcoming development opportunities.

Banks to watch out for are those where management is forward thinking and empowered to mix traditional banking with strong inroads into fee based products and project based lending, it further said.

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