Private bank growth in Sri Lanka offers new investment opportunities


Sri Lanka’s private banks enjoyed strong loan and deposit growth in 2017 due to careful asset management and judicious repricing. However, ongoing increases in capital requirements are leading a number of institutions to undertake rights issues and float debenture bonds to raise funds, giving investors a chance to participate in the market’s overall growth.

Market Share 

According to a December 2017 report on the domestic banking sector by Colombo-based investment bank First Capital Holdings, private commercial banks made up 46% of the local market, with the top-three private banks accounting for nearly two-thirds of the segment’s total asset base.

The largest private sector bank by assets in the country is Commercial Bank of Ceylon (ComBank), with an 11% overall market share and comprising nearly one-quarter of domestic private bank assets. ComBank is followed by Hatton National Bank (HNB), with 10% of total assets; Sampath Bank with 8%; National Development Bank (NDB) and Seylan Bank, which each have a 4% market share; Nations Trust Bank (NTB) and DFCC Bank, both capturing 3%; and Union Bank of Colombo (UBC) and Pan Asia Banking Corporation (PABC), with 1% each. Three additional private banks have less than 1% shares of the market by assets: Sanasa Development Bank, Amana Bank – Sri Lanka’s first private sharia-compliant bank – and the Housing Development Finance Corporation Bank.

According to a June 2017 report on Sri Lankan banks, published by global ratings agency Fitch, state-owned players have lost market share to the private sector in recent years. Public banks find it more difficult raise capital, as they are unlisted and constrained by the government’s limited financial capacity. This situation has given the private sector the chance to pursue aggressive growth strategies.

Industry Leader 

Indeed, in line with Fitch’s analysis of the private banks, ComBank ended 2017 on a strong footing, achieving profit before taxes (PBT) of 18.14% to reach LKR28.06bn ($183.2m), according to the bank’s financial statement. Profit after tax (PAT) rose by 14.25% to hit LKR16.58bn ($108.3m) on the back of a 24.10% increase in gross income, which reached LKR115.59bn ($754.7m). Total assets rose 12.96% to LKR1.14trn ($7.4bn), rising at an average of LKR11bn ($71.8m) per month. This marked the third successive year in which ComBank saw annual loan growth of more than LKR100bn ($653m), with net loans and receivables up 19.71%, reaching LKR737.48bn ($4.8bn).

As the first Sri Lankan private bank to establish subsidiaries outside the country, ComBank has opened 17 branches in Bangladesh. Meanwhile, in a joint venture with investment firm Tree Top Investments, ComBank established a foothold in the Maldives, which commenced operations in 2016. These operations helped ComBank’s subsidiaries and associates report collective PAT of LKR23.28bn ($152m) in 2017, an increase of 14.93% on the previous year.

First Capital expects ComBank to continue its strong performance into 2018, forecasting a 22% increase in earnings for the year. The recent decline in ComBank’s net interest margin (NIM) is expected to reverse, with yields picking up faster than funding costs and the possibility of increasing interest rate spreads. At 16%, ComBank’s predicted loan book growth is below recent levels of expansion, and reflects the careful stance that larger banks are taking towards credit risk.


HNB navigated the challenging environment arising in 2017 to see PAT growth of 16.4% to reach LKR16.5bn ($107.7m), according to the bank’s fourt quarter statement. HNB’s PBT and financial value after-tax rose by 10.5% to LKR27.1bn ($176.9m), while total assets grew by 11.2% to LKR954.9bn ($6.2bn).

HNB has been maintaining lower growth in advances to ensure portfolio quality and focus on profitable balance sheet increases. It reported loan growth of 9.4% to LKR639bn ($4.2bn) in 2017, above broader economic expansion but well below the sector as a whole. This is sufficiently backed by steady increases in deposits, which reached 12.5%, surpassing LKR700bn ($4.6bn).

Through maintaining its current and savings account ratio and focusing on profitable sectors, the bank’s NIM increased from 4.80% in 2016 to 4.87%. First Capital echoed this finding, noting that HNB’s NIMs are supported by its broad coverage of the high-yield small and medium-sized enterprise (SME) and retail segments.

The bank is forecast to achieve 11% earnings growth in 2018, with loan growth rising to 16% on the back of a recent LKR15bn ($98m) rights issue, which boosted capital sufficiently above the Basel III requirements implemented in June 2017.


Keeping in line with private sector growth in the banking industry, Sampath Bank’s PAT rose by 32.7%, to hit LKR12.1bn ($79m) in 2017, with PBT increasing 31.8%, to reach LKR16.6bn ($108.4m), according to its 2017 annual report. Total assets grew by 20.7%, reaching LKR795.1bn ($5.2bn), while total loans increased by 22.5% from LKR468.5bn ($3.1bn) at the end of 2016 to hit LRK574bn ($3.6bn). This marked a milestone as the bank’s gross annual loan growth exceeded LKR100bn ($653m) for the first time in its history.

Corporate loans rose 26.8%, driven by lending to high-growth sectors including manufacturing, trading and infrastructure, while SME and retail loans rose by 19%. Like a number of other bigger banks, Sampath was able to reprice its asset and liability portfolios to boost its margins at a time of rising rates, with NIMs increasing from 3.87% to 3.91%.

First Capital estimated Sampath Bank’s loan book to grow at a compound annual growth rate of 15% between 2016 and 2018, and for its net profit to grow by 17% and 14% in 2018 and 2019, respectively.

Varied Picture 

Across the board, performance varied from bank to bank. In the first three quarters of 2017, in terms of deposit growth, DFCC and UBC recorded the highest rates, expanding by 33.2% and 26.4%, respectively; while PABC and Seylan Bank registered respective increases of 4.6% and 8.2%, according to First Capital. With regard to loan growth, market leaders included UBC, with a 20.4% increase, followed by Sampath (18.3%), PABC (4.1%) and HNB (7.3%).

Generally, banks successfully reduced their rates of non-performing loans (NPLs) in 2017. UBC reduced its NPL ratio from 8% to 3%, while Seylan cut its rate from 8% to 5%. As of September 2017 PABC had the highest NPL ratio in the private sector, at 6%, with all others recording NPL rates of between 2% and 3%, according to First Capital. Across the banking sector as a whole, NPLs are expected to remain at around 4% in 2018.

Investor Opportunities 

Six private sector banks are listed on the Colombo Stock Exchange, providing both retail and institutional investors the opportunity to tap into the sector’s growth. The bank shares are often attractively priced, with an average price-to-earnings (P/E) ratio of 6.9x, according to First Capital data. Listed banks that performed better than average in 2017 were ComBank voting shares with 8.5x, followed by HNB voting shares and Sampath (7.9x), and NDB (7x).

Dividend yields are expected to vary in 2018, with the average for the sector forecast at 6%, according to First Capital. Those expected to perform at or above average are ComBank at 10% for non-voting and 8% for voting shares; followed by Seylon Bank non-voting shares, HNB and NDB (7%); and Sampath Bank (6%).

The need to raise capital in order to comply with upcoming central bank regulations, which are in line with Basel III standards, has led several banks to turn to rights issues and debenture bonds, providing further opportunities for investors eyeing the banking market. In December 2017 Sampath raised a respective LKR7.6bn ($49.6m) and LKR6bn ($39.2m) through a rights issue and a Basel III-compliant subordinated debenture offer. The bank is expected to undertake a further LKR12.5bn ($81.6m) rights issue and a possible LKR7.5bn ($49m) debenture bond offer in 2018.

Meanwhile, ComBank announced in June 2017 that its LKR10.1bn ($65.9m) rights issue that offered one new share for each 10 held was oversubscribed – an indication of shareholder appetite for the bank’s equity. This was followed in January 2018 by the announcement of a LKR5bn ($32.6m) debentures issuance convertible into equity, with a further LKR5bn ($32.6m) to be offered if the first tranche proves oversubscribed. The bonds will have a tenure of five to 10 years, with the issuance taking advantage of ComBank’s strong ratings; Fitch rates the bank at “AA” – the highest of any private bank in the country.

There will be a further increase in the volume of Basel III-compliant debentures issued by banks in 2018, according to a January statement from Fitch, as sector players look to meet rising capital requirements and support balance-sheet expansion. Seylan Bank and NTB were among those proposing to issue debentures in early 2018. However, the rising cost of capital requirements is also expected to put pressure on smaller private banks, and will likely encourage mergers and acquisitions in the coming years, with consolidation leading to stronger institutions in the longer term.


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The Report: Sri Lanka 2018

Banking chapter from The Report: Sri Lanka 2018

Cover of The Report: Sri Lanka 2018

The Report

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