Industry Forecast - Higher Capital Requirements Positive For Long-Term Financial Stability - JAN 2018

BMI View: We believe that the introduction of higher minimum capital requirements for Sri Lanka n banks bode well for fi nancial stability over the long- term, but note that over the coming quarters, economic headwinds could continue to push up bad loan levels, while higher provisioning requirements and funding costs weigh on profitability.

On October 26, the Central Bank of Sri Lanka (CBSL) announced that existing banks operating in the country will have to meet more stringent minimum core capital requirements together with the Basel III framework by end-2020, while new banks to be established are required to meet the new standards with immediate effect. We believe that this will help to safeguard financial stability over the long-term as lenders, particularly state banks, will be forced to raise capital and thus be in a better position to weather systematic shocks and unexpected losses. That said, the outlook for banks is likely to remain challenging in the near-term as economic headwinds due to poor weather conditions are likely to continue to push up non-performing loan (NPL) levels. Profitability is also set to decline as banks face higher loan-loss provisions, funding costs, and withholding taxes.

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