Asset quality of Sri Lankan banks may deteriorate this year: S&P

SINGAPORE - Sri Lankan banks are likely to be under greater strain in 2017, says ratings agency Standard & Poor’s. "We expect overall asset quality in Sri Lanka's banking system to weaken, partly fuelled by the banks' aggressive loan growth over the past two years, says S&P Global ratings credit analyst, Deepali Seth-Chhabria.

“But the country's favourable economic growth prospects should help limit the deterioration in both NPL ratios and profitability."

S&P expects loan growth in Sri Lanka to see low-to-mid-teen percentage figures in 2017, and estimates that the reported nonperforming loan (NPL) ratio will rise to about 3.0%-3.2% over the next year from about 2.6% as of December 31, 2016.

The NPL ratio has improved for the past three years, due to removal of nonperforming gold-backed lending from the books, the agency says. “Now that the positive impact of the removal is fully played out, the NPL trend could reverse.

“We expect the industry's loan growth to slow following steps by the central bank of Sri Lanka to control growth. However, if loan growth remains high, the banks' already-declining capital levels could drop further. This may further reduce the buffers required to absorb the pain that could come from worsening asset quality.

“We believe the funding profile of the banking system has also deteriorated somewhat, and note that the proportion of borrowing to the overall funding base has slightly risen.

“In view of these risks and the negative outlook on the sovereign credit rating on Sri Lanka (B+/Negative/B), our ratings on banks and finance companies in Sri Lanka continue to have negative outlooks.”  www.standardandpoors.com (ATI).