Exploring Private Equity Investments in the Banking Sector of Sri Lanka
According to a study by CT CLSA Securities, the broker and dealer of the Capital Markets Investment Group CLSA in Sri Lanka, the local banking sector could generate more private equity investment opportunities in the near term as Basel III associated demands start to take complete impact. The study observed that in terms of liquidity coverage ratio, net stable financing ratio and leverage, the Basel III standards will force local banks to raise capital from shareholders to fulfil regulatory demands.
Basel III is an internationally accepted collection of policies established in reaction to the financial crisis of 2007-09 by the Basel Committee on Banking Supervision to strengthen bank regulation, supervision and risk management. According to the study entitled “Banking on Fundamentals”, the banking industry in Sri Lanka has retained capital ratios above the specified minimum level under Basel III, showing enhanced risk absorption ability in the industry.
The study added that by the end of 2020, it is anticipated that the capital of licensed commercial banks will further be enhanced through private equity injections or listings with better income and new capital. For private equity investors, lower valuations are another appealing entry point. According to the study, licensed commercial banks in Sri Lanka give very appealing value proposals, with low valuations combined with elevated anticipated yields relative to their regional colleagues. For instance, the price-to-earnings ratio of Sri Lankan banks as at August 8, 2018 shows a 5.6x total versus 16.7x in India, 11.3x in Bangladesh, and 12.4x in Pakistan.
Meanwhile, private firms in Sri Lanka are displaying higher growth in their earnings of up to 40%, financing themselves efficiently through their income, rather than requiring private equity capital injection. Chetan Gupta, managing director of Samena Capital, a Dubai-based Private Equity Firm focused on the subcontinent and Asia, agreed that for an economy filled with potential investment opportunities such as Sri Lanka, the banking sector is an appealing industry.
Most private equity deals in the country are focused on Sri Lanka’s growth story, with investments mainly in healthcare, education, hospitality, export sectors, as well as infrastructure. The past private equity deals in the country include TPG Growth’s acquisition of a 28 percent stake in Asiri Hospital Holdings from Actis in 2015 as well as TPG’s $113 million majority stake in the Union Bank of Colombo in 2014, the country’s biggest buyout deal to date.
OSL Take:
Sri Lanka’s banking sector is on an upward trajectory with the benefits of several trade concessions enjoyed by the country. The latest data released by Sri Lanka’s Central Bank has also revealed the developments in the country’s banking sector. The government also plans to relaunch the concept of infrastructure development banks and even non-bank financial institutions, and hopefully in the coming year, make excellent strides. Therefore, foreign businesses/investors could look at investment opportunities in Sri Lanka’s banking sector.
| Article Code : | VBS/AT/06092019/Z_T2 |