With the strong earnings outlook, increase in expected credit growth, the banking sector for 2012 remains buoyant, according to industry analysts. “The increase in expected credit growth is more than 20% and the average gross nonperforming loan ratio is down to about 4.5%. There are healthy capitalization levels and a return on equity of nearly 18% - all of which makes this sector attractive," Danushka Samarasinghe, Director Research TKS Securities noted. He said that the negative market sentiment, the banking sector counters which have shed ground currently appear very attractive at the current price levels.
Industry analysts note that despite the pressure created on interest margins in a declining interest rate environment, banking sector achieved a remarkable growth during 2010 registering a 18% year on year growth in total asset base to stand at Rs 3,548 billion as at 31 December 2010 and it will do the same this year as well. During 2010 declining interest rates stimulated the business volumes of the banking sector with loans and advances growing by 23% year on year to reach Rs 1,959 billion.
Slashing interest rates in 2011 saw credit growth accelerate with private sector credit growth reaching a 16 year high of 34.4% year on year in June 2011 driven by high economic activity. Analysts said that to ensure the sustainability of the financial system, it is anticipated that the interest rates would rise by 150 to 250 basis points this year. “Even though in general the rising interest rates slowed down the economic activity, Sri Lanka managed to secure satisfactory growth levels amidst the higher interest rate environment during the past years. Therefore the country would still be able to accept this level of rise in the rates,” Mr. Samarasinghe said.