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Banks face asset-quality pressure after the end of Covid relief   

 Sri Lankan 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, says Fitch Ratings.

Fitch-rated banks’ stage 3 (impaired) loans ratio has remained broadly unchanged since 2019 (9M21: 9.4%, 2019: 9.5%), as relief measures prevented deterioration in lending quality.

 However, asset-quality pressure was evident in elevated loan-impairment charges and a rising share of stage 2 loans in gross loans. The share of loans under moratorium at Fitch-rated banks declined, estimated at 10% of gross loans at end-September 2021 (end-1H20: 26%).

Fitch expects Sri Lanka’s economic performance to weaken in 2022, forecasting growth to slow to 2.0%, although downside risks to forecasts remain. Stage 3 loans are likely to increase in 2022 but a sharp rise in the ratio may not be apparent due to robust loan growth. Credit costs are likely to remain high, although below 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.

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