The Central Bank has kicked off an asset quality review of the country’s banking sector to identify possible stresses in different pockets of banks’ balance sheets as they provide enormously on possible bad loans and other financial asset losses in 2022 with the final stretch of moratoria expiring early this year.
Despite remaining stable and resilient, Lankan banks are undergoing their most challenging operating conditions in their history with growth and profits faltering amid rising non-performing loans and capital risks.
Central Bank Deputy Governor Yvette Fernando recently said nine banks that have been identified as having asset quality stress will be reviewed soon.
Fitch Ratings warned that Sri Lanka’s banks are likely to face continued asset-quality pressure in 2022, as rising macroeconomic stresses stemming from the sovereign credit profile pose a threat to borrowers’ repayment capacity, alongside the conclusion of most relief measures in 2021.
“We believe Sri Lankan banks face added asset-quality pressure from their Government securities holdings, particularly those denominated in foreign currency which accounted for around 6.5% of Fitch-rated banks’ total assets at end-9M21,” the rating agency noted.
The Deputy Governor also said the review of the banks will be conducted in a phased manner. “We will review six banks in the first phase and another three banks thereafter,” Fernando added.
In April, Fitch Ratings again placed the National Long-Term Ratings of 13 Sri Lankan banks on Rating Watch Negative (RWN).
The banks include; People’s Bank, Commercial Bank of Ceylon PLC, Hatton National Bank PLC, Sampath Bank PLC, National Development Bank PLC, DFCC Bank PLC, Seylan Bank PLC, Nations Trust Bank PLC, Pan Asia Banking Corporation PLC, Union Bank of Colombo PLC, Amana Bank PLC, SANASA Development Bank PLC and Housing Development Finance Corporation Bank of Sri Lanka.
“We are looking at each bank for the potential risk that they could face going forward in rising NPLs, interest rate impact and exchange rate impact and if they are going to have any pressure on capital and liquidity,” said the Central Bank Governor. Nandalal Weerasinghe.
“Going forward that’s why one of the exercises we are doing is the ‘Asset Quality Review’, for us to understand the kind of stress the banks are going to face in the future. Based on the work we do with the banks, we can come out with recommendations on how to deal with that situation,” he said.
The Sri Lankan banking sector is witnessing record provisions against possible bad loans and other financial asset losses stemming from their exposure to sovereign bonds, which has undermined their profitability to a greater extent.
The risk of domestic debt restructuring remains an overhang, which could add enormous pressure on the capital Weerasinghe declined to comment on the possibility of a domestic debt restructuring claiming it’s too premature.
Meanwhile, a large number of borrowers are also falling behind their loan repayments after the interest rates rose at least three times from where they were before the economic crisis, with the Central Bank raising the key policy rates at a record pace to tamp down runaway prices.
