LB Finance Annual Report 2023/24
Welcome to our annual report, where innovation meets insight. Dive into a dynamic digital journey through our achievements and milestones. Explore interactive data visualizations and engaging narratives that highlight our year's story in stunning HTML elegance. Discover how we've transformed vision into reality, and get inspired for the future ahead!
The Strategic Report
GLOBAL ECONOMY
Global growth is estimated at 3.2% in 2023 and is projected to remain at this pace throughout 2024 and 2025. Several factors impacted this growth including high borrowing costs, withdrawn fiscal support, lingering pandemic effects, and weak productivity.
WORLD OUTPUT
3.2%
3.2%* 2024
ADVANCED ECONOMIES
1.6%
1.7%* 2024
EMERGING AND DEVELOPING ASIA
5.6%
5.2%* 2024
MYANMAR ECONOMY
Economic growth in Myanmar in 2023 plummeted to 0.8% from 2.4% in the previous year, primarily due to instability and conflict. Key sectors experienced widespread declines, with agriculture contracting by 1.8% due to increased costs and supply chain disruptions, while industrial activity grew only marginally at 2.2% due to power shortages, exchange rate volatility, and weak global demand. The services sector saw modest growth at 1.0%, primarily driven by domestic travel and tourism, finance, and healthcare.
Source: Asian Development Outlook April 2024
Global headline inflation is anticipated to decrease from an annual average of 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025. Advanced economies are expected to return to their inflation targets sooner than emerging market and developing economies, highlighting the uneven nature of the global recovery.
Although international tourist arrivals surged to seven times the previous year's level, instability remains a major obstacle to the tourism sector's full recovery.
Inflation remained high in 2023, averaging 22% due to a confluence of factors including supply chain disruptions, shortages, currency depreciation, and rising transportation costs. Worsening instability across the country has further exacerbated inflationary pressures, particularly in conflict-affected areas, by hindering food production and trade flows.
Risks to the global outlook are now broadly balanced. On the downside, new price spikes stemming from geopolitical tensions, including those from the war in Ukraine and the conflict in Gaza and Israel, could, along with persistent core inflation where labour markets are still tight, raise interest rate expectations and reduce asset prices.
Outlook
The economic outlook remains bleak, with persistent uncertainty and instability expected to further weaken the economy. Increased armed conflict in several regions has negatively impacted economic activity, resulting in a projected real GDP growth of only 1.2% in 2024 and 2.2% in 2025, significantly lower than the 6-7% average growth rate seen between 2016 and 2019. Agriculture is forecast to decline by an additional 1% in 2024 due to higher production costs, conflict, and trade disruptions. Disruptions along border areas, particularly with China, have severely curtailed exports and imports, with agricultural exports already dropping by 10.7% in January 2024. Unless the situation improves, these trends are likely to continue.
SRI LANKA ECONOMY
HIGHLIGHTS AND THEIR IMPACT THROUGH PESTEL ANALYSIS
POLITICAL
Sri Lanka, having endured its most severe economic and political crisis since independence, is showing signs of stabilisation. This was supported by the implementation of monetary and fiscal policy measures as part of the IMF Extended Fund Facility Programme.
Outlook
The IMF's stabilisation and reform efforts could face significant political risks beyond 2024. With presidential elections scheduled for September of next year and parliamentary elections likely in 2024, political uncertainty and potential shifts in policy direction could hinder progress.
Risks Associated
- Market Risk
- Liquidity Risk
ECONOMIC
Sri Lanka's economy exhibited signs of a rebound in 2023, experiencing a moderate contraction of 2.3%, a significant improvement compared to the 7.3% contraction in 2022. This gradual recovery was particularly evident in the second half of the year, marked by positive GDP growth rates. This turnaround was driven by renewed macroeconomic stability, characterised by softening inflation and easing external sector pressures.
Market interest rates experienced a significant decline in 2023, reversing the high levels recorded in 2022. This shift was primarily attributed to accommodative monetary policy measures implemented since June 2023.
Moreover, S&P Global Ratings raised Sri Lanka's long and short-term local currency sovereign credit ratings on Sri Lanka to 'CCC+/C', from 'SD/SD' (selective default) and affirmed our 'SD/SD' foreign currency ratings.
The outlook on the 'CCC+' long-term local currency rating is stable.
Outlook
The Central Bank of Sri Lanka projects economic growth to be 3% in 2024. Furthermore, the successful completion of Sri Lanka's external debt optimisation programme could lead to an improved sovereign credit rating, strengthening investor confidence and potentially unlocking access to more favourable financing terms.
The Central Bank aims to target the Colombo Consumer Price Index (CCPI)-based quarterly headline inflation rate at 5%. Moreover, more stable inflation rates, improved macroeconomic conditions, and other policy measures are anticipated to mitigate upward pressure on interest rates in the future.
Risks Associated
- Market Risk
- Liquidity Risk
- Credit Risk
TECHNOLOGICAL
Artificial intelligence (AI), machine learning, blockchain, cryptocurrencies, and mobile platforms are reshaping the financial services landscape, empowering consumers with greater control and transparency.
This technological wave is transforming relationships with advisors and disrupting traditional financial models. Digital currencies and blockchain technology hold the potential to revolutionise the economy by increasing transparency through immutable ledgers, improving access for underserved populations, enhancing automation through smart contracts, and lowering costs for financial products and transactions. This shift is driving a new era of financial empowerment, promising greater accessibility, efficiency, and transparency.
Sri Lanka, standing at the cusp of digital transformation, has taken a significant leap forward with the launch of its National Digital Economy Strategy. This blueprint, developed through a collaborative effort involving government bodies, academia, and industry stakeholders, and supported by the World Bank, reflects Sri Lanka' s commitment to harnessing digital technologies for inclusive growth and societal progress.
Outlook
The Digital Payments market is expected to experience significant growth in the coming years. Total transaction value is projected to reach US$9.98 billion in 2024 and is expected to grow at a CAGR of 14.49% from 2024 to 2028, reaching US$17.15 billion by 2028.
CELLULAR MOBILE CONNECTIONS
32.49 Mn
2022 - 33.66 Mn
INDIVIDUALS USING INTERNET
12.34 Mn
2022 - 11.85 Mn
SOCIAL MEDIA USER IDENTITIES
7.5 Mn
2022 - 7.21 Mn
Risks Associated
- Reputation Risk
- Cyber Security Risk
Source: DATAREPORTAL
SOCIAL
Sri Lanka' s mid-year population in 2023 decreased by 0.6% to 22.04 million, primarily due to a decline in births and increases in both deaths and net migration. The economically active population (labour force) also contracted, falling to 8.41 million in 2023 from 8.55 million in 2022. Despite this, the unemployment rate remained unchanged at 4.7% in 2023, reflecting a simultaneous decline in both the unemployed population and the labour force.
Outlook
The unemployment rate in Sri Lanka is forecast to be 5.24% in 2024 and the unemployed people in Sri Lanka are forecast to be 460,000 in 2024.
POPULATION
22.04 Mn
2022 - 21.904 Mn
LABOUR FORCE
8.41 Mn
2022 - 8.547 Mn
UNEMPLOYMENT RATE
4.7%
2022 - 4.7%
DEPARTURE FOR FOREIGN EMPLOYMENT
297,656
2022 - 311,056
Risks Associated
- Sustainability Risk
- Operational Risk
ENVIRONMENTAL
Climate change poses a significant threat to global financial stability, with rising temperatures impacting economic activity, leading to price volatility and systemic risk. The risks are categorised as physical and transition
Physical risk: Climate-related damages decrease production, driving up prices and impacting financial institutions through increased non-performing assets.
Transition risk: Shifting to a low-carbon economy disrupts traditional businesses, potentially leading to financial losses and instability.
Sri Lanka, identified as highly vulnerable to climate risks, faces potential instability in sovereign bond yields due to these threats.
Risks Associated
- Sustainability Risk
- Operational Risk
Outlook
Sri Lanka is committed to reducing greenhouse gas emissions and adapting to climate change under the Paris Agreement. The government views climate action as an opportunity for sustainable development and green economic growth. To further this commitment, Sri Lanka has proposed three new initiatives at COP28: a climate justice forum, a tropical belt initiative, and an international climate change university. The UN is ready to support Sri Lanka in achieving a more sustainable future.
LEGAL
The Central Bank of Sri Lanka strengthened the legal framework prioritising the preservation of financial system stability. Through enhanced crisis preparedness and management, the Central Bank effectively steered the financial system by implementing policies to bolster resilience, maintaining vigilant oversight, and regulating financial institutions in 2023. This included the introduction of the Banking (Special Provisions) Act to define its Resolution Authority and its powers.
This act establishes financial safety nets, new resolution measures, and a dedicated department within the Central Bank to exercise its authority. It also formally recognises the Deposit Insurance Scheme and provides a framework for orderly bank wind-ups. The Act also enables the extension of resolution measures from licensed banks to Licensed Finance Companies (LFCs) as needed. Additionally, a guideline on dividend declaration and profit repatriation was issued to LFCs to bolster their resilience and capital adequacy, ensuring their capacity to support customer credit needs during economic uncertainty.
Outlook
The Central Bank of Sri Lanka is taking several steps to improve the stability of the non-bank financial sector. These include:
- Implementing Phase II of the Masterplan for Consolidation of Non-Bank Financial Institutions: This will strengthen and stabilise Non-Bank Financial Institutions (NBFIs) starting in 2024.
- Amending the regulatory framework: Updating the Finance Business Act and Finance Leasing Act, introducing new rules, and strengthening the supervisory review process will help adapt to market developments and improve stability.
- Supporting the Microfinance and Credit Regulatory Authority Act: The Act, which is expected to be passed soon, will regulate unregulated moneylenders and improve market conduct and consumer protection.
Risks Associated
- Reputation Risk
- Operational Risk
LICENSED FINANCE COMPANIES (LFC) SECTOR
Profitability of the LFC sector rose in 2023, with Profit After Tax (PAT) increasing by 11.3% to Rs. 47.7 billion, driven by growth in both net interest income and non-interest income. This increased the Return on Assets (ROA) to 4.3% in 2023, up from 3.7% in 2022. However, the Return on Equity (ROE) marginally declined to 12.4% in 2023 from 12.7% in 2022 due to a larger increase in equity capital. Additionally, the cost-to-income ratio rose to 81.1% in 2023 compared to 79.9% in 2022.
The assets of the LFC sector are mainly composed of loans and advances, which constituted 68.6% of the total. While this portfolio contracted by 3.2% in 2023, reaching Rs. 1,160.4 billion compared to a 7.7% growth in 2022, Finance Leases remain dominant, accounting for 41.5% of total loans and advances. Other secured loans, including vehicle loans, contributed 32.5% while loans against gold and deposits declined by 4.7% and 3.2% respectively. Conversely, other assets, primarily cash and balances with banks and institutions, recorded a 3.2% increase in 2023.
The LFCs sector maintained a strong liquidity position throughout 2023, exceeding the minimum regulatory requirement. At the end of the year, the sector held Rs. 254.9 billion in regulatory liquid assets, significantly exceeding the mandated Rs. 103.4 billion. This resulted in a liquidity surplus of Rs. 151.5 billion, a substantial increase from the Rs. 86.9 billion surplus reported at the end of 2022.
Outlook
The improving macroeconomic environment and the resurgence of businesses, particularly Micro, Small, and Medium Enterprises (MSMEs), are poised to create a more conducive landscape for the Non-Banking Financial Institution (NBFI) sector in 2024. This positive outlook is fuelled by proactive measures to bolster regulatory frameworks, strengthen corporate governance, and cultivate financial stability and growth.
KEY CHALLENGES OF THE LFC SECTOR
- Economic Headwinds: Restrictions on vehicle imports, adverse macroeconomic conditions, elevated inflation, and eroded household disposable income are negatively impacting the demand for loans and leases, a key part of the sector's business.
- Credit Risk & Asset Quality: Heightened exposure to pawning advances poses a risk due to gold price volatility. Deteriorating asset quality, evidenced by rising Stage 3 loan ratios, necessitates increased impairment charges and careful risk management.
- Operational Challenges: The sector faces challenges in managing credit risk, fostering growth, and maintaining stability amid challenging macroeconomic conditions.
- Cybersecurity: Protecting customer data and infrastructure from cyber threats is paramount.
- Regulatory Environment: The sector must navigate a rapidly evolving regulatory landscape, including new policies and compliance requirements.
- Market Volatility: Volatility in exchange rates and interest rates creates uncertainty and challenges for the sector.
- Sovereign Risk: Sri Lanka's sovereign rating continues to impact the non-bank financial sector's ability to access financing and operate effectively.
Source: CBSL Annual Economic Review 2023
OUR COMPETITIVE LANDSCAPE (FIVE FORCES ANALYSIS)
Power of Customer
While large-ticket loan / deposit customers have historically been highly price-sensitive and possessed greater bargaining power, MSMEs have generally been less rate-sensitive and held less leverage in negotiations. However, as Micro, Small and Medium Sized Enterprises (MSMEs) become more financially sophisticated, they are likely to become increasingly price-sensitive and demand more competitive terms.
Our Response
Focus on relationship building among existing customer base and channel resources towards finding new opportunities
Power of Business Partner
As a financial institution, our primary suppliers are providers of support services. Due to the nature of their services, which are essential but not core to our business, the bargaining power of these business partners is generally low.
Our Response
Focus on a diversified pool of support service providers to reduce risk of over-dependence on any specific group of service providers
Threat of New Entrants
Sri Lanka's financial sector is comprised of 30 banks and 34 non-bank financial institutions (NBFIs), creating a competitive landscape. The likelihood of new entrants is also based on the decision by authorities to grant new licenses.
Our Response
Build a strong and credible brand that stands out among peers
Threat of Substitute Products
While the threat of substitutes within the NBFI industry itself is low, competition from banks and other financial institutions offering similar loan and deposit products poses a significant challenge. In the medium to long term, the threat of substitutes is substantial, highlighting the need for NBFIs to innovate and create value-added solutions to meet the evolving lending needs of businesses and individuals.
Our Response
Stay updated with industry best practices and new opportunities offered through technology and incentives
Competitive Rivalry
Traditionally, Sri Lankan customers have been reasonably loyal; however, competitive tactics among entities have greatly reduced loyalty levels, especially across high net-worth customer segments.
Our Response
Improve product mix, customer service and process efficiency to attract and retain customers. Explore new ways of delivering value and innovative means of utilising existing resources to extend our range of offerings.