Sri Lanka bank profits are projected to reach Rs. 170 billion by the end of 2025, supported by strong credit expansion, stable interest rates, and lower impairments, according to First Capital’s latest banking sector earnings forecast.
Sri Lanka bank profits surge as credit expands, interest rates stabilize, and impairments decline
Sri Lanka’s banking sector is on track for a significant profitability boom, with Sri Lanka bank profits expected to reach Rs. 170 billion by the end of 2025 and surpass Rs. 200 billion by 2027. The forecast, issued by First Capital, points to strong loan book growth, easing interest rates, and improving lending conditions as the key drivers behind this surge.
The report highlights an impressive 78 percent year-on-year increase in banking sector earnings expected by the close of 2025. This rapid growth is primarily attributed to rising net interest income, enhanced fee and commission earnings, and a reduction in impairment costs. The sector has already achieved 55 percent of its annual profit forecast by the end of June 2025, signaling a strong upward trajectory.
Market analysts note that the banking sector is currently trading at a discount of 0.9 times book value. The top eight listed banks have reported an average return on equity of 16.9 percent in the second quarter, underscoring strong investor confidence. First Capital expects this performance to generate a 22.5 percent price upside and a total return of 28 percent for the sector in 2025.
Private sector credit is also forecast to grow by 15 percent to approximately Rs. 9,500 million in 2025 and by 12 percent in 2026. The anticipated decline in the Average Weighted Prime Lending Rate (AWPR) to between 8 and 9 percent by mid-2026 is expected to make credit more affordable, further stimulating lending activity and economic growth. Lower borrowing costs will likely enhance liquidity in the market, enabling businesses to expand and consumers to increase spending.
First Capital also pointed out that while overall loan book performance has accelerated, the consumer loan segment has shown relatively slower growth in the first half of 2025. However, with new fiscal stimulus measures and additional budgetary support anticipated in 2026, consumer credit demand is expected to pick up in the coming months, especially among lower-income segments of the population.
The projected profit surge reflects a broader post-crisis recovery within Sri Lanka’s banking and financial ecosystem. Following years of macroeconomic instability, stabilizing interest rates have provided a more predictable environment for credit expansion. This has allowed banks to improve margins while minimizing exposure to non-performing loans.
The strong outlook for Sri Lanka bank profits is also reinforced by structural adjustments made in the sector over the past two years. Cost optimization strategies, tighter credit risk management, and more diversified income streams have positioned banks to capitalize on renewed economic momentum.
Economists emphasize that this profitability boost may also strengthen the banking sector’s balance sheets, allowing for greater lending capacity and improved capital buffers. This, in turn, can support broader economic recovery efforts, particularly in key sectors such as construction, manufacturing, and services.
Investor sentiment has also improved as macroeconomic conditions stabilize. The attractive valuation levels and expected returns have made the banking sector a focal point for both local and foreign investors seeking stable yet high-yield opportunities. If these projections materialize, banks may be able to reinvest in digitalization, branch expansion, and more consumer-centric financial products.
Looking ahead, maintaining the delicate balance between credit growth and financial stability will be crucial. Analysts caution that while a reduction in lending rates boosts demand, banks must continue to maintain disciplined lending practices to avoid asset quality deterioration. Effective policy coordination between monetary authorities and the financial sector will be key to sustaining this growth trajectory.
With the combination of credit expansion, strong earnings momentum, and improving investor confidence, Sri Lanka’s banking sector is poised for a transformative period. If current conditions persist, the sector could play a leading role in driving the country’s economic resurgence over the next two years.