First half performance in licensed commercial banks: Drop in lending rates affects income

Prasad Polwatte and Asanka Liyanage

Domestic financial markets were somewhat volatile at the beginning of 2009. It became more liquid and stable in the second half of 2009 and first half of 2010 with the declining inflationary pressures and the easing of monetary policy, resumption of capital inflows due to reduced risk aversion and improved investor sentiment following the end of the hostilities. stronger capital positions and enhanced risk management infrastructures that had been instituted have placed the financial sector on a stronger footing to absorb the impact of the economic slowdown.

   
Financial markets were more stable with improved liquidity and declines in interest rates from the beginning of 2010.

The exchange rates were more stable. Equity prices have surged upwards during the year. The banking sector sustained its earnings via an increase in investment income from government securities and equities.

Almost all banks have adopted investing funds in long term investments rather than in short term investments. On the other hand they encourage short term borrowings as it was less costly than the long term borrowings.

In this article an effort has been made to compare and contrast the performance of Licensed Commercial Banks (LCBs) first half 2009 and 2010. Both public and private LCBs overall performance was comparatively higher in first half of 2010 compared to the 2009. All of the key performance indicators showed positive signs averagely within the sector.

Summary of Key Performance Indicators of first Half of 2010 and 2009 of Leading LCBs is presented in table 1.

An overall drop apart from DFCC bank can be seen in total revenue compared to 2009 first half in 2010. The main reason was drop in interest income by averagely 15 percent in 2010 first half compared to 2009.

In the case of DFCC bank the results of 2010 included profit relating to the sale and change of classification of part of the Bank's shareholding in Commercial Bank of Ceylon PLC (CBC).
   

The contribution to profit after tax from the transactions related to CBC was Rs 5,282 million for the Bank.

The main reason for the drop in interest income was drop in lending rates from 15 percent- 18 percent to 10.3 percent- 10.6 percent range in 2010 (Source. http://www.cbsl.gov.lk/). Even though an increasing trend was visible in the growth in Advance portfolio of the banks (Approximately 5 percent -10 percent) but the interest income had dropped mainly due to the decrease in Average Weighted Prime Lending Rates (AWPLR).

On the other hand LCBs concentrated on Government securities specially Treasury bills, of which interest rates were decreased by considerable percentage. Details are as follows.

Table 2

A material decrease in interest expense was shown in first half of 2010 to 2009. (Averagely 25 percent to 40 percent drop in all banks). The decrease in the Average Weighted Deposit Rates (AWDR) was the main factor for this interest cost reduction. It is clearly evident in the following table.

Table 4

The deposit growth in 2010 first half has not proportionately increased the interest cost in LCBs due to the drop in AWDR. On the other hand banks were unable to attract more deposits since short term deposit interest rates were less attractive and customers tend to switch for more attractive investment opportunities in Capital/Money markets.

Apart from NDB and PABC all other banks have recorded an increase in their profit after tax in first half of 2010 compared to 2009. The same increase can also be notified in Net asset per share, ROE and ROA.

Both Public and Private LCBs overall performance was improved in first half of 2010 compared to 2009. All of the key performance indicators showed positive signs averagely within the sector.

Share prices of all banks had been grown rapidly in 2010 compared to the same half in last year. A substantial increase could be seen in all banking sector companies.

It is clearly evident in the following table. (Please note in the case of Commercial bank price mentioned at 30.06.2010 is after 1:2 share split)

The banking sector is continuously seeking opportunities at North and East for their market exposures. On the other hand the CBSL is of the view that further decrease of interest rates in future is possible and the banking sector should take in to account the amount of customer deposits that can be overlooked due to further decrease in the interest rates.

LCBS will face great challenges in the second half to sustain its level of performance of the first half 2010.


source - www.dailynews.lk