Bank profits to shoot up by 30-40% this year

Maintaining ‘Investment Fund Accounts’ concerns Association

 By Azhar Razak

Sri Lanka’s banking sector is likely to record a sharp 30-40 percent increase in after-tax profits in 2011 following recent measures taken by the government to reduce taxes and gradually lower provisions, analysts predict. Effective tax rates applicable for banks is expected to come down to about 40-45 percent from a high of 55-60 percent witnessed in previous years while recent policy initiatives taken by the banking regulator to strengthen the financial system is also likely to provide a good environment to do business, they opine.


“The outlook for the banking industry is looking very healthy this year and most banks are likely to post at least a 30-40 percent growth in Profit after Tax. This is because of the favourable budget proposals for the sector followed by the banking regulator’s recent assurance to keep inflation and interest rates at a lower level in 2011,” Senior Research Analyst at CT Smith Stockbrokers, Sanjeewa Fernando told The Bottom Line.

According to the 2011 budget proposals outlined for the sector, corporate taxes are to be reduced from 35 percent to 28 percent, VAT on financial services will be reduced from 20 percent to 12 percent while bank debit tax on withdrawals is to be abolished. Moreover, the Central Bank has also allowed general provisions provided by banks to gradually reduce by 0.1 percent for each quarter up to five quarters commencing October 2010.
“The Central Bank has also said that its target on real interest rate for this year would be around 0.5 to 1.5 percent while inflation will be maintained at mid-single digit levels which would mean there would be healthy environment for business,” Fernando said.

On the other hand, the regulator also recently introduced an insurance deposit scheme applicable for banks which requires banks to insure ‘specific’ deposits with the Central Bank. According to analysts, the deposit insurance premium payable being an extra cost burden would partly offset the tax savings and benefits earned through the gradual reduction of provisions.

“This measure will amount to the cost of deposits going up to a range between 0.1 percent to 0.15 percent. The Central Bank has also requested banks to provide loans to fisheries and dairy sectors at the rate of 8 percent which would also hit bank’s interest margins,” he said.
Meanwhile, the 2011 budget proposals have also required banks to register separate Investment Fund Accounts with the Central Bank to transfer all tax savings arising from its new proposals. Commenting on this decision, secretary general of Sri Lanka Banks Association Ltd, Upali de Silva said that the association has, however, requested the regulator to allow banks to maintain Investment Fund Accounts by themselves.
“We have made this suggestion to the Central Bank because we feel, since we are anyway regulated by the CBSL, the regulator will have authority to check this account and then direct us on lending to the SME’s and micro finance sectors,” de Silva pointed out.

The Central Bank recently said that it expected credit to the private sector to expand by about 16% YoY. Recent statistics show that net credit to the private sector has increased by 20.3 percent to Rs. 1.41 trillion in October 2010 from Rs. 1.17 trillion a year ago.

http://www.thebottomline.lk/2011/01/09/page1.html

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