Lankan banks dominated by public-sector - Fitch

Fitch Ratings Lanka has released a special report on Sri Lanka banking sector that highlights the structure, performance, trends and other developments pertaining to the sector.

The agency notes that the Sri Lankan banking sector is concentrated and dominated by public-sector banks that accounted for about half of sector assets at end of 2010. The six large banks identified as systemically important accounted for 64% of sector assets at end of 2010.

Sri Lankan banks experienced a surge in lending in 2010 and through 2011. In the absence of significant financial disintermediation, bank loans remain the dominant financial intermediary.

Further, the level of credit penetration remains low, indicated by loans/GDP of about 36% at H111.

Fitch believes that lending to SMEs is likely to increase in the current economic environment, although this could present challenges in terms of risk management.

Sri Lankan banks benefit from a substantial share of customer deposit funding, reflecting their strong domestic franchises. Deposits have historically funded over 70% of bank assets.

Tier 1 and total capital adequacy ratios for the sector decreased to 13.4% and 14.9%, respectively, at end-H111. Recognising the need for stronger capitalisation, Fitch notes that some banks raised Tier 1 and Tier 2 capital in H211.

In the agency’s opinion, key challenges facing the Sri Lankan banking sector include managing asset quality and accessing capital in the face of rapid expansion, enhancing risk management capabilities, implementing changes in accounting standards in line with international norms, and managing the impact of global market instability.

Fitch rates 19 banks in Sri Lanka, including 11 local licensed commercial banks, three foreign bank branches, and five licensed specialised banks.

The report, entitled ‘The Sri Lankan Banking Sector’, is available at www.fitchratings.com, or by clicking on the link above.