Management Discussion And Analysis

Operating Environment

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POLITICAL
  • Political Uncertainty
Impact on Sampath Bank and Our Response

Given the uncertainty that prevailed, the private sector adopted a cautious approach to investment, softening credit demand. In view of this, the Bank sought alternative investment options for surplus funds including investments in US Treasuries.
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ECONOMIC
Significant Milestones Strengthen the Nation’s Economic Stability....
Successful Completion of Sri Lanka’s External Bond Restructuring Programme
  • Following two years of intense negotiations, Sri Lanka successfully concluded its International Sovereign Bond (ISB) restructuring in December 2024, with a significant majority of investors exchanging their existing bonds for new debt instruments. The agreement resulted in the restructuring of approximately 96% of the nation’s total commercial external debt amounting to USD 12.6 Bn.
  • The nation also reached an agreement in principle with most commercial creditors including international banks for a further USD 200 Mn, with the restructuring due to be completed by the year-end.
  • The international debt restructuring is expected to alleviate the country’s debt burden considerably, enabling the re-direction of resources towards vital development initiatives and social welfare programmes while establishing a sound foundation for long-term fiscal stability.
Ongoing Commitment to the IMF Extended Fund Facility Programme
  • Sri Lanka reached a staff-level agreement with the IMF on the third review under the Extended Fund Facility Arrangement, granting the country access to approximately USD 333 Mn in financing.
Sovereign Credit Rating Upgrade
  • Following the conclusion of the ISB restructuring and an improved outlook for the country’s macro- economic indicators, Fitch Ratings and Moody’s Ratings upgraded Sri Lanka’s long-term foreign currency issuer rating to CCC+ and Caa1 (stable outlook) respectively. Fitch Ratings also upgraded the nation’s local-currency issuer rating to CCC+ from CCC- to align with the upgrade in the long-term foreign currency issuer rating.
X Gross Domestic Product (GDP)
  • The Sri Lankan economy continued to demonstrate recovery with GDP expanding by 5% (projected) during 2024.
  • All major sectors recorded positive growth with Agriculture, Industry and Services expanding by 1.9%, 11.2% and 2.6% respectively up to Q3 2024.
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Interest Rate Movement
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An accommodative monetary policy stance resulted in the continued decline in interest rates.

Inflation
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Inflation maintained a downward trajectory, with headline inflation standing at -1.7% in December 2024.

Exchange Rate Movement
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The Sri Lankan Rupee appreciated by 10% against the USD to Rs 292.58 during 2024 supported by enhanced inflows from workers’ remittances, tourist earnings and export conversions.
Tourism Sector Revival
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The tourism sector continued to show signs of recovery with earnings expanding by 53.2% to USD 3.2 Bn as at end-December 2024.

Worker Remittances

Worker remittances maintained its upward trajectory expanding by 10.1% to USD 6.6 Bn as at end- December 2024.

Impact on Sampath Bank and Our Response

We proactively capitalised on opportunities that emerged from the gradual economic recovery, tailoring our strategy to facilitate business revival in economically significant sectors, including tourism, agriculture, renewable energy, healthcare and trade. Specific emphasis was placed on supporting and building resilience within the SME sector, through customised lending, expert advice and guidance to improve business operations and strategic planning through the expertise of the Business Revival Unit.

The Bank also focused on strengthening its market position in the remittance market. Furthermore, the Bank accepted the local bonds option in the GOSL’s ISB restructuring, converting 30% of the dues into Sri Lankan Rupee bonds and accepting new USD bonds for the remainder which was subject to a 10% haircut. Accordingly, impairment charges of Rs 15.8 Bn recognised for the ISBs were reversed. Overall, our strategic efforts contributed to a 59.4% increase in PAT and a ROE of 17.74% which stood among the best in the industry.

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ECONOMIC
Significant Milestones Strengthen the Nation’s Economic Stability....
Successful Completion of Sri Lanka’s External Bond Restructuring Programme
  • Following two years of intense negotiations, Sri Lanka successfully concluded its International Sovereign Bond (ISB) restructuring in December 2024, with a significant majority of investors exchanging their existing bonds for new debt instruments. The agreement resulted in the restructuring of approximately 96% of the nation’s total commercial external debt amounting to USD 12.6 Bn.
  • The nation also reached an agreement in principle with most commercial creditors including international banks for a further USD 200 Mn, with the restructuring due to be completed by the year-end.
  • The international debt restructuring is expected to alleviate the country’s debt burden considerably, enabling the re-direction of resources towards vital development initiatives and social welfare programmes while establishing a sound foundation for long-term fiscal stability.
Ongoing Commitment to the IMF Extended Fund Facility Programme
  • Sri Lanka reached a staff-level agreement with the IMF on the third review under the Extended Fund Facility Arrangement, granting the country access to approximately USD 333 Mn in financing.
Sovereign Credit Rating Upgrade
  • Following the conclusion of the ISB restructuring and an improved outlook for the country’s macro- economic indicators, Fitch Ratings and Moody’s Ratings upgraded Sri Lanka’s long-term foreign currency issuer rating to CCC+ and Caa1 (stable outlook) respectively. Fitch Ratings also upgraded the nation’s local-currency issuer rating to CCC+ from CCC- to align with the upgrade in the long-term foreign currency issuer rating.
Gross Domestic Product (GDP)
  • The Sri Lankan economy continued to demonstrate recovery with GDP expanding by 5% (projected) during 2024.
  • All major sectors recorded positive growth with Agriculture, Industry and Services expanding by 1.9%, 11.2% and 2.6% respectively up to Q3 2024.
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Interest Rate Movement
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An accommodative monetary policy stance resulted in the continued decline in interest rates.

Inflation
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Inflation maintained a downward trajectory, with headline inflation standing at -1.7% in December 2024.

Exchange Rate Movement
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The Sri Lankan Rupee appreciated by 10% against the USD to Rs 292.58 during 2024 supported by enhanced inflows from workers’ remittances, tourist earnings and export conversions.

Tourism Sector Revival
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The tourism sector continued to show signs of recovery with earnings expanding by 53.2% to USD 3.2 Bn as at end-December 2024.

Worker Remittances

Worker remittances maintained its upward trajectory expanding by 10.1% to USD 6.6 Bn as at end- December 2024.

Impact on Sampath Bank and Our Response

We proactively capitalised on opportunities that emerged from the gradual economic recovery, tailoring our strategy to facilitate business revival in economically significant sectors, including tourism, agriculture, renewable energy, healthcare and trade. Specific emphasis was placed on supporting and building resilience within the SME sector, through customised lending, expert advice and guidance to improve business operations and strategic planning through the expertise of the Business Revival Unit.

The Bank also focused on strengthening its market position in the remittance market. Furthermore, the Bank accepted the local bonds option in the GOSL’s ISB restructuring, converting 30% of the dues into Sri Lankan Rupee bonds and accepting new USD bonds for the remainder which was subject to a 10% haircut. Accordingly, impairment charges of Rs 15.8 Bn recognised for the ISBs were reversed. Overall, our strategic efforts contributed to a 59.4% increase in PAT and a ROE of 17.74% which stood among the best in the industry.

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Social
  • Declining inflation and interest rates and the overall stabilisation of macro-economic conditions eased the financial strain on households and institutions to some extent, lessening the risk of default.
  • However, diminished real income amidst elevated prices and tax reforms continued to dampen credit demand and the repayment capacity of borrowers.
  • The need to expand access to financial services and strengthen financial literacy among all Sri Lankans, remained a strong imperative in 2024.
Impact on Sampath Bank and Our Response

Striking a balance between responding to the needs of our customers and preserving asset quality, we engaged proactively with vulnerable customers offering revised payment plans to support business recovery. Financially distressed businesses with future potential were assigned to the Business Revival Unit for intensive monitoring and business restructure. The Bank also re-organised its SME lending unit to enhance support to small business. A range of digital solutions and financial literacy programmes conducted during the year continued to support financial inclusion in lesser served regions of the country. Moreover, the Bank maintained its commitment to its flagship CSR initiatives driving impactful change within the community.

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TECHNOLOGY
  • The rapid advancement of technology and the global shift towards a cashless society have necessitated the introduction of innovative digital products and affordable, accessible non-cash payment methods.
  • Data analytics offers significant opportunities to strengthen agility amidst evolving operating conditions while driving operational efficiency.
  • Concurrently, concerns regarding cybersecurity and data protection have gained in prominence.
Impact on Sampath Bank and Our Response

Our digital strategy strives to harness the full potential of technology while mitigating cybersecurity risks. We offer numerous digital solutions to customers including Sampath Vishwa, WePay and the mobile application. These solutions eliminate the need for branch visits, enhances accessibility and promotes ease of use through trilingual interfaces. The Bank also leverages technology to streamline processes and automate routine tasks to improve operational efficiency and accuracy. Data driven insights derived from advanced data analytics has strengthened decision-making while ongoing investments in the Bank’s cybersecurity architecture has safeguarded the Bank against cyber threats.

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ENVIRONMENT
  • Increasingly stringent environmental regulations and disclosure requirements.
  • The escalating incidence and intensity of extreme weather events and other climate related challenges have accelerated the urgency for climate action.
  • Growing pressures from stakeholders to adopt sustainable practices.
  • Opportunities to build long-term resilience by embedding and promoting sustainable business practices along the value chain.
Impact on Sampath Bank and Our Response

Cognisant of its impact as a provider of finance, Sampath Bank continued to drive sustainable practices within and along its value chain. Financing the renewable energy sector is a key priority for the Bank while a range of initiatives including green loans, the sustainable green financing scheme, green leases and the ESMS system promotes and prioritises lending to sustainable business ventures. Ongoing efforts to minimise its own environmental footprint led to equipping 9% of branches with solar panels, conscious reductions in paper consumption and e-waste, and the promotion of digital platforms for banking. The Bank continued to invest in numerous flagship environment-related CSR initiatives, re-iterating its commitment to driving towards a more sustainable future.

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LEGAL
  • The Banking (Amendment) Bill was approved by Parliament on 2nd April 2024 and was effective from 15th June 2024.
  • The Cabinet suspended parate execution until March 2025.
  • The GOSL introduced a 3-phase plan to lift restrictions on vehicle imports. As of end-December 2024, phases 1 and 2 have been implemented allowing the importation of public passenger transport vehicles, special purpose vehicles, non-motorised vehicles and commercial and goods transportation vehicles.
  • Other regulatory developments within the banking industry.
Impact on Sampath Bank and Our Response

The Bank proactively monitored the developments in the legal landscape and aligned its processes with the new requirements to ensure compliance with all laws and regulations in a timely manner.

BANKING SECTOR PERFORMANCE
CREDIT GROWTH AND ASSET QUALITY
  • The Banking sector recorded a credit growth of 4.1% as at end-December 2024, in contrast to the 2.6% contraction witnessed in 2023 supported by stabilising macro-economic conditions and declining interest rates.
  • Overall default risk of the Banking sector also declined as at end-December 2024 as loans classified as Stage 3 decreased in absolute terms while the Stage 3 Loan Ratio improved to 12.3%.
  • Meanwhile, the Stage 3 Impairment Coverage Ratio improved to 54.1% as at end 2024 (2023: 49%).
DIGITAL PENETRATION

The Banking sector continued to make progress in promoting digital transaction channels among customers with increases in volume and value of transactions recorded as at end-December 2024.

PERFORMANCE

Profitability of the Banking sector improved supported by the expansion in net interest income as the decrease in interest expenses outpaced interest income in a declining interest rate environment, coupled with lower impairment charges.

CAPITAL ADEQUACY

Capital adequacy levels improved following the issuance of Tier II capital instruments and internal capital generation from improved earnings.

LIQUIDITY

Rupee liquidity was maintained in 2024 as surplus funds ensuing from slower credit growth were invested in government securities.

FUNDING STRUCTURE

D-SIBs and other domestic banks continued to maintain a well-diversified funding base with a substantial proportion derived from retail deposits.

KEY REGULATORY DEVELOPMENTS IN 2024
  • Revised directions on large exposures of licensed banks to be implemented from 1st January 2026 to mitigate potential credit concentration risks.
  • Guidelines for the establishment of Business Revival Units in Licensed Commercial Banks.
  • The maximum interest rate on rupee denominated lending products was rescinded following easing monetary conditions.
  • The Liquidity Coverage Ratio and the Net Stable Funding Ratio were designated the statutory liquidity ratios of banks while the use of the Statutory Liquid Asset ratio was discontinued.
  • Off-shore banking was identified as a permissible activity of licensed commercial banks and the demarcation of the Domestic Banking Unit and Off-shore Banking Unit was eliminated. Following this, regulations were issued to facilitate the conduct of licensed commercial banks’ off-shore banking business.
  • The Banking (Amendment) Bill was approved by Parliament on 2nd April 2024 and came into effect from 15th June 2024.
  • A risk weighting of 20% was assigned to exposures guaranteed by National Credit Guarantee Institute Limited when calculating the capital requirements under BASEL III for LCBs and LSBs.
  • A new direction on Corporate Governance was issued for LCBs and LSBs with a view to strengthen responsibility and accountability of the Board of Directors and senior management.

Source: CBSL

OUTLOOK

Sri Lankan economy made a significant recovery in 2024, laying the foundation for a stronger and more resilient economic future. The successful completion of the international sovereign bond restructuring led to a sovereign rating upgrade. Political stability and the GOSL’s commitment to the IMF-EFF programme along with improvements in key macro-economic indicators including declining inflation, expanding foreign exchange reserves and a more stable exchange rate has strengthened the country’s financial outlook. These positive developments have boosted investor sentiment and positioned the country for sustainable economic growth. Ongoing commitment to implementing essential economic reforms is expected to build on the stability achieved in 2024. Continued fiscal discipline, structural adjustments and institutional strengthening are expected to build economic resilience against external shocks while creating a conducive environment for private sector expansion. Moreover, the CBSL is committed to implementing monetary policy measures to stabilise inflation within the target of 5%.

CBSL has outlined a comprehensive policy agenda aimed at further strengthening the financial sector’s resilience and stability over the short to medium term. These include an array of policy measures including the Bank Recapitalisation Strategy, a market driven consolidation plan for licensed banks, enhanced crisis management and resolution measures and strengthening the conduct of risk based Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) examination of banks. Additionally, facilitating the expansion of digital payments while safeguarding against cybersecurity risks, driving sustainable financing activities and enhancing financial inclusion also remain key priorities for the CBSL. Collectively, these initiatives are expected to create a more resilient, inclusive and sustainable financial system that is positioned to drive the economic aspirations of the country while enhancing the economic opportunities of its people.

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