Sri Lanka Commercial Banking Report Q3 2012 - New Market Report Now Available

New Financial Services market report from Business Monitor International: "Sri Lanka Commercial Banking Report Q3 2012"

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Boston, MA -- (SBWire) -- 08/15/2012 --BMI View: With the Central Bank of Sri Lanka (CBSL) taking a surprisingly hawkish turn in its latest monetary policy review, the country's commercial banking sector will not only have to grapple with an economy that is expected to sharply slowdown in the months ahead, but also with a more hostile monetary policy environment. While the question of which group of banks (state or private) is more vulnerable could prove to be immaterial, as these two overriding factors are unlikely to spare either over the longer term, we prefer state banks given the lower leverage. Even though Sri Lankan commercial banks are not as integrated with the domestic economy as compared to their South Asian regional peers, the industry will still feel the full brunt of the slowdown in real GDP growth we expect this year (see our online service, February 14 2012, 'Growth Slowdown Inevitable'). We estimate that total banking sector assets as a percentage of GDP in the country stood at 49.2% in 2011, below the estimated regional average of 61.1%. While the industry has slowly returned to its pre- 2008 levels - assets as a percentage of GDP fell markedly to 44.2% in 2008 from 50.0% in the preceding year - we believe that 2012 will mark a temporary hiatus to the recent upward momentum. We are pencilling in real GDP growth of 6.0% this year from an estimated 7.9% in 2011, with banking sector asset growth plunging to 12.0% from an estimated 21.5%. CBSL Targets Loan Growth Against the backdrop of a slowing economy, the Central Bank of Sri Lanka (CBSL)'s hawkish turn in early February represents a twin blow for the industry in 2012. To be sure, even though the central bank has been dovish on interest rates over the past three years, we note that it decided to increase the reserve ratio by 100 basis points (bps) last April. In its February monetary policy review, the CBSL stated the need to restrain private sector credit growth by commercial banks to stem import-related credit (to ease balance of payments pressures) and to 'ensure' that inflation remains low. Firstly, it decided to increase borrowing costs by 50bps (taking the reverse repo rate to 9.00%). Perhaps more importantly, the CBSL directed commercial banks to moderate disbursements to make sure that annual loan growth this year does not exceed 18%. Considering that loan growth came in at an estimated 30%, the mandated fall in 2012 will undoubtedly prove costly for the industry. Stress in the banking system has certainly increased over recent months. The overnight Sri Lanka Inter Bank Offered Rate (SLIBOR), which largely remained stable in 2011, has been extremely volatile since November. Indeed, the overnight SLIBOR has ticked up from 8.05% in the end of October to 9.67% as of February 27 - a 162bps increase. Which Banks Will Fall First? Even though state banks will likely be induced to limit loans more aggressively than private banks (especially if the latter refuse to do so), the fact that

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