Sri Lanka listed banks to grow loans by 25pc

COLOMBO, April 9 (LBO): Loans by Sri Lanka's listed commercial banks will grow 25 per cent in 2011, up from 22.5 per cent in the with bad loans and also interest rates remaining low despite rising inflation, an equities research report has said. "We believe the positive macro economic outlook will translate to higher demand for credit aided by the low interest rates," a report by NDB stockbrokers said. "Despite a high loan growth forecast, we anticipate the gross non-performing loans (NPLs) to reside around 6 per cent in FY11 (financial year 2011) due to the improving debt servicing capacity of borrowers." Strong credit demand is likely to come from small and medium enterprises in construction and agriculture, large firms in leisure, energy, construction, trade and in personal lending in pawning (gold jewellery backed loans) housing and leasing. NDB Stockbrokers said loans by commercial banks rose 23 per cent to 862 billion rupees by December 2010 agaisnt a 6-per cent contraction a year earlier. "Falling interest rates coupled with the increasing demand for credit resulted in a healthy loan growth," the NDB stockbrokers report said. "Gold backed lending and housing loans were seen giving a boost to the loan growth of many banks." Margin trading facilities for stock purchases were also popular. The report said PABC Bank reported highest loan growth of 80 per cent and Sampath Bank 30 per cent. Without margin trading and gold backed loans, PABC loans grew 49 per cent and Sampath 26 per cent. Seylan Bank, which is recovering from a run and massive bad loans and is under state-supported restructure had recorded the lowest loan growth of 9.1 per cent while DFCC Bank's loans had grown 10.5 per cent. Asset quality of listed commercial banks had improved with bad loans falling to 6.7 per cent in 2010 from 10.58 per cent. Gross non performing loans were just 1.90 at NDB and 3.95 per cent at Sampath. Provision cover at NDB was 95.7 per cent and at Samapth 79.5 per cent. Seylan with 21.3 per cent and DFCC with 7.5 per cent had the highest bad loans ratio. "Despite rising inflation and other external factors, we feel the government is unlikely to raise policy rates significantly which could hamper the growth of the economy," the report said. With rising inflation and low interest rates, deposit growth may be lower than loan growth. The report forecasts deposits at listed banks to grow 12 per cent. "We expect the deposit mobilisation to be a challenge in FY11 as we anticipate the prevailing low interest rates to continue," the report said. "This we feel will be further exacerbated by the rising food prices, threatening the overall savings capacity." Net interest margins are likely to remain around 5.0 per cent, the report said.