Sri Lanka: Sri Lanka Finance Profile 2012
2012/04/04
Sri Lanka Finance Profile 2012
Banking Sector To Remain Defensive While lending activity has picked up in Sri Lanka, we expect commercial banks to remain relatively defensive heading into 2011. Over the longer term, the industry needs a significant injection of capital in order to fully cater to the country's growing financial needs. This process will require the government to liberalise the banking sector, encourage consolidation and reduce the punitive tax rates that are in force. Lending activity in the Sri Lankan banking sector showed signs of improvement in H110 and we expect this trend to continue in H210 as the monetary authorities and the government take steps to support economic growth. In stark contrast to the central banks in the rest of the region, the Central Bank of Sri Lanka (CBSL) has remained firmly in monetary easing mode in recent quarters, with its 50 basis points (bps) interest cut on August 20 taking the reverse repo rate down to a five-year low of 9.00%. This easing cycle has helped drive down borrowing costs, as reflected by the 850bps fall in the weighted average lending rate to 10.37% over the past 12 months. This has encouraged commercial banks to expand credit to the private sector. After a lull in Q409, client loans have started to pick up again, growing by of 6.5% year-on-year (y-o-y), or 10.4% on a month-on-month annualised 3mma basis, in May 2010. These growth figures chime with our view that client loans will rise by 9.5% to LKR1,308bn by the end of 2010.
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