Alpen Capital says Sri Lanka’s banking and NBFI sector resilient despite challenges

Alpen Capital Senior Directors Dilip Samanthilaka (left) and Sharmin Karanjia 

• Comprehensive report on Sri Lanka’s financial services sector 

Leading UAE-based investment banking advisory firm, Alpen Capital, in its Banking and Non-Banking Financial Institutions (NBFI) Sector, Sri Lanka report 2021 notes both sectors remain competitive despite challenges exacerbated by the pandemic, with new and emerging opportunities to capitalise on. The report of 15 July, finds that Sri Lanka’s banking and NBFI sector has shown resilience in dealing with the crisis. 

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 digitalisation also paves the way for further growth. These provide opportunity for Sri Lankan banks to reduce operating costs, grow low-cost fund base and drive strategic investments going forward, the report found. 

However, the risk of rising non-performing loans alongside downgrades 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. The Central Bank of Sri Lanka responded with several measures to ease pressure on banks and the economy including monetary policy easing, debt moratoriums and easing of capital and liquidity measures. 

The Sri Lankan Banking and NBFI Sector: Outlook and Opportunities report by Alpen Capital was launched at a webinar on Thursday, 15 July. The session included a panel discussion featuring Central Bank of Sri Lanka Monetary Board Advisory Audit Committee Chairperson Dr. Ranee Jayamaha, Sri Lanka Banks’ Association Chairman Lakshman Silva, and RAK Bank UAE CEO Peter England.

Addressing participants at the webinar, Dubai’s RAK Bank CEO Peter England said, “The easiest thing in the world is to downgrade stuff. It’s a stroke of a pen, and it is very unfortunate. I believe in character, reputation and experience. Nothing is more important than character, and the Sri Lankan banking industry has demonstrated great resilience. I’m still very positive, about the banking sector in Sri Lanka.”

He added RAK Bank has had ‘zero issues’ in their operations with Sri Lanka’s banking sector, and this was a great testament to the strength of the Central Bank of Sri Lanka and the institutions. 

Alpen Capital in its report presents a detailed overview of the Sri Lankan economy and its banking and NBFI sectors. The report aims to provide an overall understanding of the sectors to investors, investment funds and companies looking for lucrative and viable investment opportunities in Sri Lanka. 

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 Government in face of the pandemic. Despite ongoing challenges, most institutions were well-capitalised during the latest financial year, with consolidation remaining a key priority of the Government, Alpen Capital reports. It found opportunities in agriculture, fisheries and livestock sectors backed by consumer and state interest, whilst digitalisation 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. 

Joining the discussion, Dr. Ranee Jayamaha, assured that Sri Lanka will meet its debt commitments due this month, stating, “There is no questions about it whatsoever,” and the Government was already working on meeting the next commitment due in early 2022. 

“The pandemic was hard on us, but we have been a resilient economy. The economy is recovering and growing in comparison to last year the contraction of 2020. The changes and action taken by the Government and the Central Bank of Sri Lanka has provided stability to businesses and customers to overcome the disruptions. The banks have adequate capital and are well over regulatory ratios. Given these actions we enabled banks to keep the foreign currency liquidity. Rising NPLs remains a concern given the situation, but it remains to be seen and evaluated. With all these indicators we expect the Sri Lankan economy to pick up gradually,” Dr. Jayamaha said. 

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.

“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. 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,” says Alpen Capital Senior Director Dilip Samanthilaka.

“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 amongst the global financial markets. However, the banking and NBFI sectors remain one of the largest and most promising sectors for the country. 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,” says Alpen Capital Senior Director Sharmin Karanjia.

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. This caused multiple credit rating agencies such as Fitch to downgrade the country’s long-term foreign currency ratings to CCC in 2020. Reserves have been boosted this year by securing project financing through various multilateral and bilateral channels, as well as swap facilities under the South Asian Association for Regional Cooperation (SAARC) currency framework, and the People’s Bank of China and planned IMF SDR allocation. 

In June 2021, Fitch Ratings has reaffirmed Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘CCC’ and believes these resources will enable Sri Lanka to meet its remaining debt maturities through the rest of this year.

Crises are not new to the SL banking sector over the past three decades, and there is a lot of learning from that, said Banks’ Association Chairman Lakshman Silva. The Central Bank has proactively taken measures to give redress to sectors affected, and banks have implemented facilities to support businesses, he said. 

“The sector has been resilient as usual, and forged ahead despite challenges like the downgrade by rating agencies. We would like investors to look at the broader picture and not just ratings. DFCC Bank too has attracted $ 150 million capital, and we are ready to use that funding to assist the Government’s development plan. Sri Lanka is looking at an inclusive development plan, and supporting SMEs is a huge part of this process,” he added.