BANKING SECTOR
WINDOWS OF OPPORTUNITY
Compiled by Yamini Sequeira
FUTURE READY BANKERS
Dilshan Rodrigo maintains that our banks remain resilient and future ready
Sri Lanka’s banking sector and broader economy have exhibited signs of recovery this year, following an extended period of multifaceted challenges. As Dilshan Rodrigo notes, “the year has been characterised by a rebound although the recovery has not yet been fully reflected in key financial metrics.”
“As indicated by the loan book, banking sector growth was marginal and is projected to reach a maximum of two to three percent by year end. Similarly, deposit growth showed limited advancement,” he explains.
With improving economic fundamentals, margins and spreads contracting like never before – thereby putting pressure on earnings from core business activities – banks have been relying on treasury and impairment reversals to shore up their bottom lines, he acknowledges.
Rodrigo adds: “Insufficient demand made it difficult to absorb available credit, presenting ongoing challenges. Despite these constraints, there is an optimistic outlook for the upcoming year with expectations of double digit growth.”
The key challenges facing the sector are non-performing assets; lack of clarity and consistency in government policy; and slow progress in completing the debt restructuring process (which delays credit ratings being upgraded, access to international markets and foreign investments), Rodrigo asserts.
Resolving these roadblocks will reassure banks on the adequacy of their provisions, and translate into positive investor sentiment and foreign direct investments (FDIs).
“Today, non-performing loans in the banking sector have touched 12-13 percent – or fourfold since 2018. Even with the recent spike in the share market, banking stocks are trading at net asset values below 0.5 and price-earning ratios of less than five presently. And return on equity levels are at 10 percent, which is well below regional and global benchmarks,” he notes.
However, Rodrigo says that “we need to recognise the efforts of the Governor of the Central Bank of Sri Lanka, together with the political leadership at the time, in entering into an agreement with the IMF to steady the ship, albeit late. Had it not been for this, our country could have descended into anarchy.”
Banks played a key role in business revival efforts through moratoriums, debt restructures, working capital financing, vision building workshops, supply chain linkages and the foray into digital marketplaces.
Rodrigo explains: “An encouraging factor is that 80-90 percent of businesses across the board did turn around as a result of these efforts. Although battered and somewhat bruised, banks still remain resilient and better poised to look forward to the future with optimism.”
Meanwhile, banks are facing an unsustainable tax burden, being called upon to pay 60 percent of their earnings in taxes, which he describes as disproportionate compared to others such as the casino and tobacco segments.
He continues: “This limits banks’ ability to invest in essential long-term initiatives. Additionally, regulatory controls on fees hinder revenue generation, creating an unfair operating environment.”
Rodrigo expresses optimism regarding the banking sector’s ability to return to double digit growth rates in both lending and deposits, similar to 2018.
“In terms of strategic economic focus, it is essential for Sri Lanka to determine its economic identity – i.e. whether to position itself as a trading, services or manufacturing nation. A strong emphasis on manufacturing is vital, focussing on building production capacity, and supporting assembly, manufacturing and import substitution initiatives,” he recommends.
Rodrigo argues that by failing to build industries around natural resources, the country is missing out on substantial economic returns that could be generated through local production and the export of finished goods.
“Currently, approximately 20 percent of agricultural produce is lost due to spoilage and inefficient logistics. Investing in effective warehousing and transportation infrastructure can minimise waste, while value added products can enhance profitability and export potential,” he adds.
And he asserts that “there is an urgent need to invest in renewable energy sources, contributing to energy independence and sustainability.”
Rodrigo believes that by positioning itself as an outsourcing destination, Sri Lanka can capitalise on India’s growing demand for various goods and services.
Reversing the brain drain and engaging the Sri Lankan diaspora are also critical to fostering economic growth and innovation.
He says: “Corruption is the insidious force crippling Sri Lanka’s economic potential, particularly within the trading sector. It festers in the licensing and approval processes, creating daunting barriers that suffocate legitimate businesses while favouring a corrupt few.”
“This toxic environment not only deters both local and foreign investments but also stifles the entrepreneurial spirit, leaving the country trapped in a cycle of underdevelopment,” Rodrigo laments.
He urges: “To unleash Sri Lanka’s true economic power, we must confront corruption head-on. It’s time to eradicate corruption, restore trust, and pave the way for sustainable growth and prosperity.”
Implementing robust digital infrastructure, such as universal digital IDs and QR code payment systems, could potentially increase GDP growth by 1-1.5 percent, while attracting foreign investment and gaining support from funders.
With many informal lenders operating outside the law, a digital banking ecosystem provides safer and regulated alternatives. At only 10-15 percent, current digital payment penetration rates among active customers highlight substantial growth potential.
Looking ahead, Rodrigo states: “I am optimistic about the potential appreciation of the Sri Lankan Rupee against the US Dollar by December and expect it to rise to around Rs. 280. This is contingent upon stable external factors and the absence of any major geopolitical disruptions.”
This anticipated improvement may be bolstered by the lack of international sovereign bond (ISB) payments this year alongside potential gains from tourism and remittances as instability in the Maldives drives increased activity.
However, risks such as rising imports and possible restrictions on remittances from the Middle East could impact this outlook.
“Over the past six years, the banking sector has faced major challenges that have limited profit generation, preventing it from achieving three to four times its current earnings and hindering substantial investments for economic growth. Now the sector aims to return to pre-crisis financial metrics from 2018,” Rodrigo states.
He concludes: “Today, Sri Lanka is a poster child for the IMF and holds the potential to exceed most macroeconomic projections – if we can get our act together! There is once again an opportunity to reset and achieve our true potential as a country. Let’s not waste this opportunity yet again.”
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