• Asia-Pacific banking stability threatened by potential surge in US tariffs
• Central Bank expects positive profit outlook for SL banks in 2025 amid macroeconomic recovery

Fitch Ratings has set Sri Lanka’s banking sector outlook for 2025 to ‘improving’, but says a surge in US tariffs could threaten this assumption in the Asia Pacific region.

Fitch Ratings had anticipated broadly stable operating conditions across most Asia Pacific banking systems in 2025, but a surge in US tariffs could threaten this assumption in some markets.

It said that the effect of the trade war on specific banking systems in the region will depend on final tariff outcomes, their impact on local economic growth, banks’ exposure to vulnerable sectors, and the potential for changes in fiscal, monetary or credit policy.

“The trade war could also prompt national authorities to cut policy interest rates faster than we had assumed, which would lower banking sector net interest margins in most markets,” Fitch Ratings said, lowering the banks’ profitability.

However, the Central Bank in its annual economic review said that if favourable macro-financial conditions are in place, the profit outlook for the banking sector in Sri Lanka remains positive in 2025.

It said that resilience of the financial sector is expected to strengthen further in 2025, driven by the positive impact of macroeconomic recovery, policy actions, and reforms.

The Central Bank added that the continued favourable macroeconomic outlook and low interest rates are expected to further support the expansion of private sector credit, sustaining the expansionary phase of the credit cycle.

It also said “banks must manage their foreign currency liquidity positions prudently to guard against risks associated with exchange rate fluctuations, external imbalances and foreign currency funding gaps.”