April, 17, 2018
Renown English-language monthly magazine among world’s leading investors, focused on business and finance, Euromoney in a special report had recently outlined that Sri Lanka is a over-banked market and is ripe for a shake up.
A report written by Elliot Wilson highlights that “There are the banks that began life as development outfits before switching to commercial lending such as National Development Bank, Islamic finance specialists - Amana Bank and lenders run by big conglomerates such as Cargills Bank. This over-banked market is ripe for a shake-up.” The report further states that new regulatory and accounting requirements, tougher competition and disruptive technology will force Sri Lanka’s banks to find cost savings and tap local markets for fresh capital.
According to the report the domestic banking sector is starting the countdown to consolidation, thanks to new capital and accounting rules, higher costs and increased competition. “The island’s cosy banking sector is heading for a long overdue shake-up” reports further goes in to explain adding that being a frontier economy of US $ 87 billion, with moderate growth and just 21 million people, Sri Lanka has far too many banks.
Accordingly Customers have a choice of 25 commercial lenders, seven specialists and 47 non-banks, whilst the bigger players include state-owned Bank of Ceylon (BoC) and People’s Bank, as well as private-sector lenders Sampath Bank and Hatton National Bank (HNB). The report adds that smaller or struggling lenders that cannot – or will not – do so may well find themselves swept away, analysts warn, by a wave of much-needed consolidation. It notes that the Central Bank of Sri Lanka (CBSL) had said that all licensed lenders would have to meet new minimum capital standards, in line with Basel III guidelines, while any systemically important lender with more than Sri Lankan Rs. 500 billion ( US$3.2 billion) in assets must raise its capital adequacy ratio to 14% from 10% by January 1, 2019. The report further outlines that Six lenders currently meet that threshold, notably BoC and People’s Bank, the two largest domestic lenders by assets, and Commercial Bank of Ceylon PLC (ComBank).
“All other licensed lenders would need to increase their ratios to 12.5% from 10%. Some have been stocking up ahead of the storm” reports adds in its review.
Recently Sampath Bank completed the country’s first Basel III-compliant debenture in December 2017, raising Sri Lankan Rs. 6 billion; it plans to raise another Sri Lankan Rs. 7.5 billion worth of tier-two capital this year. The report further points out that, meanwhile a new levy, likely to come into force at some point after April 2018, will impose a 0.2% tax on every financial transaction, costing the sector up to Sri Lankan Rs. 150 billion a year. The other main challenge is one that banks face everywhere. New IFRS9 standards set out by the International Accounting Standards Board require banks to set aside provisions for future losses, not just losses already reported. Banks will be forced to “look more carefully at the loans they are disbursing, and to decide from the outset whether they need to provision against them,” the report notes quoting a Sri Lankan Banking Analyst who expects first-time provisions could be up to 20% higher, so that could be a challenge.