Remarkable 2010 for Sri Lankan banking industry

Prasad Polwatte and Asanka Liyanage

As the effects of the financial crisis permeated into the Sri Lankan economy, a noticeable indolence in the financial services sector was evident throughout 2009.

This was further aggravated as repercussions of financial fall-outs in the local industry were disclosed in the early part of 2009.

Domestic financial markers that were somewhat volatile at the commencement of 2009 became more liquid and steady in the second half of 2009 and first half of 2010.

The Government’s post war economic development policies were lenient on the monetary system and led to a declining inflationary pressures situation in financial market. Resumption of capital inflows due to reduced risk and improved investor sentiment has given a positive shock to the banking industry.

This article compares and contrasts the performance of lincensed Commercial Banks (LCBs) for 2009 and 2010. Both public and private LCBs overall performance was comparatively higher in 2010 compared to the 2009.

All of the key performance indicators showed positive growths in 2010. Summary of Key Performance Indicators of 2010 and 2009 of Leading LCBs are presented in Table 1.

Financial markets were more stable with improved liquidity and declines in interest rates from the beginning of 2010. The exchange rates remained more stable. Equity prices have surged upwards during the year.

The banking sector sustained its earnings via an increase in investment income from government securities and equities.

Almost all banks moved to long-term investments rather than short-term investments. On the other hand they encourage short-term borrowings as it was less costly than the long-term borrowings.

Overall drop apart from DFCC bank can be seen in total revenue compared to 2009 in 2010. The main reason was the average drop in interest income by 10 percent to 15 percent in almost all LCBs.

In the case of DFCC bank the results of 2010 included profit relating to the sale of Bank’s shareholding in Commercial Bank of Ceylon PLC (CBC).

Sale of Commercial Bank shares have contributed Rs 5,282 million to DFCC Bank’s profit.

The main reason for the drop in interest income of all LCBs was the drop in lending rates from 15 percent 18 percent to 9.29 percent - 9.76 percent range in 2010

Even though an increasing trend was visible in the growth in Advance portfolio of the banks (Approximately 20 percent - 30 percent) but the interest income had dropped mainly due to the decrease in Average Weighted Prime Lending Rates (AWPLR).

On the other hand LCBs concentrated on Government securities specially Treasury bills, of which interest rates were decreased by considerable percentage. Details are as follows: A material decrease in interest expense was shown in 2010 to 2009. (Averagely 20% to 30% drop in all banks).

The decrease in the Average Weighted Deposit Rates (AWDR) was the main factor for this interest cost reduction. It is clearly evident in the following table.

The deposit growth in 2010 (nearly 10 percent- 20 percent) has not proportionately increased the interest cost in LCBs due to the drop in AWDR.

On the other hand banks were unable to attract more deposits since short-term deposit interest rates were less attractive and customers tend to switch for more attractive investments such as Capital/Money markets.

2010 can be considered as a remarkable year to increase LCBs profits. Apart from NDB and PABC all other banks have recorded an increase in their profit after tax in 2010 compared to 2009 (Nearly 50 percent to 100 percent).

The same increase can also be notified in Net Asset Per Share, EPS, ROE and ROA. Further, two State banks were able to sustain their market share on deposits and advances with slight increase.

This year is also a blooming year for all banks since the government has given several encouragements in its budget proposal. They are:

* Reduction of Corporate Tax from 35 percent to 28 percent and reduction of Nation Building Tax (NBT) will improve profitability of most listed companies

* Reduction of Financial Services VAT (FS VAT) from 20 percent to 12 percent. However such institutions are expected to create an investment fund that can be utilized to grant attractive credit facilities including long-term loans at a lower rate of interest.

* Removal of debit tax will also have a positive impact on LCBs deposit growth.

The ban king sector is continuously seeking opportunities in the North and East for market exposure. On the other hand the CBSL is of the view that further decrease in interest rates in the future is possible and the banking sector should take into account the amount of customer deposits that can be overlooked due to further decrease in the interest rates. LCBS will face great challenges in 2011 to sustain it level of performance of 2010.