Coronavirus outbreak is expected to weigh heavily on Sri Lankan banks’ asset quality in 2020 says First Capital Research.
The greatest initial impact is likely to be in loans to industries most affected by the disruption and consumer caution. In particular, banks’ lending to SME and to individuals employed in these sectors, are likely to record the largest increase in loan delinquencies.
“We expect an increase in Gross NPL during 2020 to 7.2% for 2020 end and ease off in 2021 end to 5.1% amid the possible recovery.”
Central Bank of Sri Lanka (CBSL) introduces a series of short-term measures supporting banks and we believe that these relaxed capital conservation buffers would be providing banks some breathing space. “We believe the measure may reduce pressure on some borrowers and lower the potential for regulatory breaches by banks. CBSL measures allow some respite for banks to stay afloat, as profitability takes a massive beating.”
For the first time in 2 decades bank profitability may decline for the third consecutive year and ROE is expected reduce to around 8.4% and also reduction in profitability?”
Adverse business impacts and the potential business disruptions are likely to negatively impact the financial services segment causing medium term stress Market disruptions are expected to inject severe stress on the economy specifically during 2Q & 3Q.
We expect AWPR to dip to 9% and range from 9%- 11% over next 2- year period supporting a gradual improvement in credit growth over the medium term (more towards 2021 end) despite the challenges
“Introduction of Debt Moratoriums may reduce stress on businesses, but causes a bane for banks and lack of growth and the Moratoria, may avert banks from expanding lending.”
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