Friday, November 16, 2012

Banking sector profits surge 30%

The country’s banking sector comprising 33 players with a total of 6,952 outlets, saw profits surge 30 percent year-on-year during the first eight months of this year despite shrinking margins and slow income growth, the Central Bank said.

"Depreciation of the rupee, with the Central Bank allowing greater flexibility in the exchange rate resulted in an increase in the net gain from the revaluation of foreign currency assets and liabilities. Consequently, the banking sector recorded increased profits (after tax) of Rs. 53 billion during the first eight months of 2012 (Rs. 41 billion in 2011), despite the reduction in the interest margin and lower increase in other non interest income," the Monetary Authority said in a recent report.

"The banking sector remained stable and maintained profitability despite the moderation in lending activities since the second quarter of 2012. Total assets of the banking sector increased by 15 per cent during the first eight months of 2012 against that of 11 per cent during the corresponding period of 2011. However, the increase in the assets base slowed down from 8 per cent during the first quarter of 2012 to 6 per cent since end March 2012 due to policy measures taken to contain credit expansion.

"Deposits continued to be the main source of funding. The banks continued to offer attractive products and expand their delivery channels. The banking sector reported a marginally higher increase of 12 per cent in total deposits during the first eight months of 2012 compared to that of 10.5 per cent in 2011," the Central Bank said.

"The share of borrowings in total funding recorded an increasing trend from 14.9 per cent to 16.5 per cent, consequent to banks raising funds from overseas sources reflecting increased investor confidence in the long term stability and creditworthiness of banks. The share of borrowings in foreign currency increased from 42 per cent in end 2011 to 55 per cent by end August 2012. During this period, the Bank of Ceylon successfully completed an international bond issue by raising US Dollars 500 million with a maturity of five years, becoming the first Sri Lankan entity other than the Government to raise funds in such manner.

"The banking sector responded positively to the ceiling on credit imposed in March 2012. The annual growth in lending slowed down from 36 per cent in end March 2012 to 32 per cent by end August 2012. However, the banking system continued to support the financial needs of the economy. Loans and advances granted during the first half of 2012 has been mainly to trade (22 per cent), agriculture and fishing (16 per cent), construction (11 per cent) and manufacturing (7 per cent) sectors.

"The non - performing loans (NPLs) increased. Gross NPL ratio (ratio of gross NPLs to total loans) and net NPL ratio increased marginally from 3.8 per cent and 2.1 per cent in end 2011 to 4.1 per cent and 2.5 per cent, respectively, at end August 2012. The provision coverage ratio declined from 57.1 per cent in end December 2011 to 50.2 per cent in end August 2012.

"Both capital adequacy ratio (CAR) and overall liquidity of the banking system remained healthy. CAR that indicates the ratio of capital to risk weighted assets of banks was at 14.8 per cent, while the statutory liquid asset ratio (ratio of liquid assets to applicable liabilities) was at 31 per cent. Both ratios were well above the regulatory minimum of 10 per cent and 20 per cent, respectively.

"Access to finance increased further. The service delivery channels of licensed banks continued to expand. The 33 banks operated throughout the country with 6,952 banking outlets, of which 68 were opened during the first eight months of 2012.

"Several policy measures were introduced to ensure stability in the banking sector. In order to restrict the higher than desired credit growth of licensed banks, the Central Bank imposed a limit of 18 per cent (of the total outstanding of rupee credit as at end 2011) on the rupee credit growth during 2012. The smaller banks and those banks that had a lower level of lending in 2011 were permitted to lend up to Rs. 800million. Where the banks were in a position to raise corresponding funds from overseas sources, the above limit were increased to 23 per cent and Rs. 1,000 million. Considering the recent trends in the market interest rates, licensed banks were given the option to increase the interest rates on housing loans to 16 per cent per annum and credit card advances to 28 per cent per annum.

"Supervisory and regulatory framework was strengthened to enhance risk management in the banking sector. An integrated risk management framework was implemented for all licensed banks. A consultation paper on Internal Capital Adequacy Assessment Process (ICAAP) was issued, which requires banks to assign capital for additional risks not covered under Pillar 1 of Basel II.

"Such process will foster a strong emphasis on risk management and encourage ongoing improvements in banks’ risk assessment capabilities. In order to promote a high standard of business conduct and market practice for the orderly conduct of the foreign exchange trading activities in Sri Lanka, a direction was issued to licensed commercial banks covering market practices, ethics, standard of conduct and practices to be followed, the knowledge level that needs to be maintained and sanctions on non-compliance. In addition, to ensure good governance, locally incorporated licensed banks were requested to obtain prior approval of shareholders for any special payments/ benefits made to bank directors at their retirement in addition to normal remuneration and incorporate such special payments/benefits to the remuneration policy of the bank. Further, banks were requested to extend those special payments/ benefits to bank directors on arm’s length basis and disclose the same in the Annual Report of the respective financial year," the Central Bank said.

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