Monday, October 3, 2011

Commercial banks deliver record interim performances

Prasad Polwatte and Asanka Liyanage

The Sri Lankan economy is bouncing back with a projected nine percent growth in 2011, in the backdrop of a further fillip through increased foreign direct investments or FDIs with the surge in tourist inflows.

The Foreign Direct Inflows in the first quarter of 2011 totalled US $ 236 million. It was reported that the local financial markets were more stable with improved liquidity and declines in interest rates since the beginning of 2010. The exchange rates were fairly stable during the period and the same trend is likely to continue in 2011. On the other hand financial markets encourage long-term borrowings through Initial Public Offering (IPOs) of shares and debentures which contributed to the downward trend in interest rates.

The banking sector sustained its earnings via investment income from government securities and equities.

In this article an effort has been made to compare and contrast the performances of Licensed Commercial Banks (LCBs) in the first half 2010 and 2011.

Both state and private LCBs overall performances were comparatively higher and almost all key performance indicators showed an improvement.

Except Seylan all LCBs have increased their profits. Significant increases are noticeable in the performance of the two state banks and Commercial Bank and Pan Asia Bank of the Private Sector. The main reason for this increases were the reduction in provisioning for bad and doubtful debts and loans written off compared to previous year. However, the increments in interest income and interest expenses were fairly moderate.

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 Ceylon PLC (the contribution to profit after tax from this CBC share disposal was Rs 5,282 million).

Generally, LCBs performances have improved in all measures and paved the way to set aside money for loan defaults and improved liquidity for on lending.

Even though an increasing trend was visible in the growth in Advance portfolio of the banks (Approximately 20% to 30%) the interest income showed only a marginal increase because of the decrease in Average Weighted Prime Lending Rates (AWPLR).

Further, LCBs were more concentrated on government securities and that especially in Treasury Bills, of which interest rates have decreased considerably during the period.

LCBs have shown an average deposit growth around 20% to 30% in the first half of 2011, and also, the same growth is reported for loans and advances. These were remarkable achievements, when deposits during the period have experienced unattractive low interest rates. In sharp contrast the growth in loans and advances were not adequate with low interest rates offered by banks.

Apart from the Commercial and Nations Trust Bank shares, prices of all other LCB shares have declined during the period. This reduction in prices might be mainly due to overall declining trends in prices in the Colombo Stock Exchange.

However, even with the drop market prices of LCBs alone were positioned well above their respective book values. Due to the improved profits in the first six months of 2011, all LCBs have made a remarkable improvement in their ROA and ROE except Seylan. Banks exercise a delegated function of CBSL as a monitor to ensure that firms use the resources allocated to them effectively.

They also play an important role in sharing risk in the economy by diversifying and thereby minimize market fluctuations during the period. Key performance indicators showed an overall improvement in the first half 2011. However it was mainly due to the efficient recovery actions rather than profits generated from core banking activities. Therefore, a greater challenge persists for LCBs to sustain and improve upon the first half performance to the next lap due to external shocks, immerging competitors, new regulations and tax structure.
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