Deposit-taking institutions safe – ComBank CEO
Commercial Bank (ComBank) CEO Sanath Manatunge was of the view that entities with deposit-taking liabilities would not be pressured into taking large haircuts on their long-term government securities. Manatunge said that entities without liabilities against their long-term assets would be able to take some degree of haircut.
Manatunge said, “For the last three months we were really worried but now we are quite confident,” He said this on April 13. The current market rates on long-term government securities hovering above 25% are above the Average Weighted Prime Lending Rate (AWPLR). When questioned on whether the bank was taking a long (buy and hold) position on government securities, Manatunge noted that the bank was actively making arbitrage trades on the differential.
Manatunge said, “The AWPLR is around 20%. We are making trades and making money on the difference. We are both buying and selling.” Manatunge was of the view that the Central Bank in its debt-raising strategy would not be issuing long-term securities for the next few months. This comes as the inflation trajectory set out by the Central Bank and the actual realized inflation in recent months has been far below the return on debt in recent auctions. As of December 2021, ComBank had Rs 234 billion in Treasury Bonds accounted for under Fair Value through Other Comprehensive Income. However, as of December 2022, this amount has decreased significantly to Rs 15 billion.
On the other hand, the bank had Rs 262 billion in Treasury Bonds accounted for under Amortized Cost as of December 2021. This amount has increased substantially to Rs. 536 billion in December 2022. On the reclassification of the instruments, the bank made an accounting gain of Rs. 26.4 billion through Other Comprehensive Income.
ComBank as the largest Privately held deposit-taking institution in the country plays a pivotal role in credit allocation throughout the economy. In Manatunge’s letter to the shareholders he notes, ‘Lending efforts had to be prudently curtailed while the neediest sectors were prioritised, ensuring that there were continuous credit facilities for those hardest hit by the economic hardships. Specifically, we strived to support the pharmaceutical, agricultural, and export-oriented sectors, and specially assisted SMEs to sustain their operations in the interest of supporting daily life and faster recovery of economic activities.’ Since the beginning of the crisis, the bank has convened its Assets and Liabilities Committee more frequently with meetings happening twice a day on certain occasions. If the bank was provided with a healthy balance sheet it would lend to growth sectors of the economy.
In his letter Manatunge noted, ‘Against the above backdrop, we are determined to address issues relating to rebalancing the balance sheet, creating a culture of capital-based decision-making, divisional capital allocation, and aligning systems and processes to ensure a higher level of governance and cost-effective growth on a priority basis.’ TP