“Sri Lanka, like most other economies, has had to cope with a host of economic challenges due to the disruption caused by the COVID-19 pandemic among the global financial markets. However, the banking and NBFI sectors remain one of the largest and most promising sectors for the country,” says Senior Director, Alpen Capital.
“In spite of the current foreign currency debt obligations, the government has managed to boost reserves by securing project financing through various multilateral and bilateral channels. We believe that efforts of the government to ease pressure and consolidations within the sector will bring greater stability to the sectors going forward.”
Reporting on Sri Lanka’s banking sector, Alpen Capital listed a number of opportunities including growth in deposits as customers moved away from risky institutions towards quality-assured products. “Strategic acquisition of finance companies and smaller banks, and accelerated digitalization also paves the way for further growth. These provide an opportunity for Sri Lankan banks to reduce operating costs, grow low-cost fund base and drive strategic investments going forward, the report found.”
However, there is risk of rising non-performing loans at expiration of debt moratoriums, whilst the downgrade in Sri Lanka’s sovereign credit rating could also bring challenges to banks with high exposure to foreign currency denominated debt. Alpen Capital noted credit growth to the private sector was moderate in 2020 at 6.5%, despite the deposit base of banks showing strong growth. Profitability of banks was adversely impacted by lower interest margins and high impairment costs.
“Despite the complex set of challenges encountered by the Sri Lankan economy in 2020, the country continues to offer viable opportunities for global investors. The various measures taken by the Central Bank of Sri Lanka have been instrumental in mitigating the impact of the pandemic on the economy as well as the banking and NBFI sectors,” Dilip Samanthilaka, Senior Director, Alpen Capital said.
“We have been actively advising our clients amidst these challenging times and have successfully arranged over USD 300 Mn for banks and finance companies since the onset of the pandemic.”
The report finds the NBFI sector severely challenged since the Easter Attacks of 2019, and key business lines such as leasing remain impacted due to macro measures adopted by the government in face of the pandemic.
It found opportunities in agriculture, fisheries and livestock sectors backed by consumer and state interest, whilst digitalization has improved reach to customers. Industry consolidation could dampen performance in the medium-term, the report found, whilst lack of diversity in funding sources make them more vulnerable to a liquidity crunch.
The report also quotes several Chief Executives and Directors of banks and NBFIs in Sri Lanka, who also point to a possible rise in non-performing loans, plus, pricing of foreign currency funding. They noted increased investments and foreign exchange inflows will assist the country to improve its macro fundamentals, whilst growing vaccination against Covid-19 will boost domestic economic activity.
In its analysis, Alpen Capital notes the Sri Lankan economy contracted sharply by 3.6% in 2020 due to pressures led by Covid-19. However, the country recorded the smallest trade deficit since 2010, following regulatory measures to control imports of non-essential goods. The country’s current account has recorded a smaller deficit, at 1.3% of GDP in 2020, led by a fall in tourism earnings by 73.5%. However, this was largely offset by an increase in remittance inflows by 5.8%, the first of its kind since 2017. Debt repayment obligations remain one of the key challenges for the economy with a debt to GDP ratio of 101% at the end of 2020.
The launch included a panel discussion featuring the Chairperson of the Monetary Board Advisory Audit Committee of the Central Bank of Sri Lanka, Dr Ranee Jayamaha, Chairman Sri Lanka Banks’ Association, Lakshman Silva, and RAK Bank, UAE CEO Peter England.