First Capital expects the listed banking sector profitability to grow at 40% YoY (year-over-year) by the end of 2023 with banking sector earnings expected to grow by 4% to Rs. 160 billion with the expected economic turnaround in the second half of 2023 (H2 2023).

According to a report released on the banking sector last week, First Capital states that the banking sector performance, which is a proxy to the economic performance, recorded a 27.0% YoY decline in profitability while the economy contracted by 7.8% YoY in 2022. 

It said that the recovery in the economy is expected to boost the outlook for the listed banking sector, targeting profits to grow at 40% by the end of 2023 and 60% in 2024.

The report further said that with the economy expected to rebound in the second half of 2023, it expects impairment provisioning to significantly slow down while recovery in loan growth may support net interest income.

Therefore, First Capital expects banking sector earnings to recover during H2 of 2023 to grow by 4% YoY to reach Rs. 160 billion by the end of 2023.

Moreover, it said that economic activity is expected to spike with stronger credit growth when interest rates drop below 15%.

It expects private credit to grow by 1% YoY by the end of 2023 and by 7.5% by the end of 2024.

According to the Central Bank of Sri Lanka (CBSL) indicators, the Average Weighted Prime Lending Rate (AWPLR) stood at 13.68% at the end of last week.

Moreover, First Capital expects gross loans in the banking sector to record a tepid growth of 5% by the end of 2023.

Meanwhile, the gross loan book is expected to grow at 10 % in 2024 benefitted by the lenient monetary policy. 

“However, we believe that the 10-year growth of +13.5% growth in the banking sector gross loan book is possible only by the end of 2025, with expectations that the CBSL will stick with the current monetary policy and International Monetary Fund (IMF) targets whilst Sri Lanka records a robust growth in GDP,” First Capital said.

Also, First Capital forecasts stage 3 Non-Performing Loans (NPL) in the banking sector to decline from current high levels to 13.5%-11.0% between the fourth quarter (Q4) of 2023 and end of 2025. “The improvement in the NPL ratio is largely attributable to the improved recoveries as well as the broadening of the loan base, due to the expected recovery of the economy,” it added.