SRI LANKA FINANCIAL SECTOR QUARTERLY UPDATE. SECOND QUARTER 2003 Highlights

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized SRI LANKA FINANCIAL SECTOR QUARTERLY UPDATE SECOND QUARTER 23 Highlights Introduction : This note is prepared by the World Bank Colombo Office to review the trends of some of the key indicators which have an impact on the financial sector performance. The main indicators identified in the report are: (i) banking sector performance in terms assets, deposits, advances, (ii) interest rates, (iii) exchange rate movements, (iii) inflation and; (iv) capital market movements. The data is collected from the Central Bank, individual banks, Department of Census and Statistics and Colombo Stock Exchange. If the data is adjusted by the respective organizations in subsequent reports, we will adjust our records accordingly. Performance of the Commercial Banking Sector : At the end of the 1 st quarter of 23, out of the total assets in the commercial banking sector, the state commercial banks (SCBs) accounted for 49% while the private domestic banks (PDBs) accounted for 39%. In terms of deposits, the SCBs led with 4%, which was followed by the PDBs with 4%. The PDBs, during the period under review, recorded an increase of 4.5% in terms of assets, 4 % in terms of deposits and 2% in terms of advances. The four major private banks dominated the PDB category accounting for 2% of the assets, 91% of the deposits and 9% of the loans granted. The Non Performing Loans (NPLs), as a percentage of total advances in the commercial banking sector, increased from 15.2 % in December 22 to 16.7% at the end of the 1 st quarter of 23. The Hatton National Bank (HNB), the largest private domestic bank, has been put on the watch list of the local rating agency; Fitch Ratings(FR) who had earlier issued a SL A rating for HNB. However, during a recent review, the FR ascertained that the levels of NPLs in HNB have risen significantly. The FR report also highlighted that the HNB had very high exposure to a few borrowers who were non performing. Therefore, HNB issued 5 year unsecured debentures amounting to Rs. 2 billion to raise additional capital in the market and the issue was several fold over subscribed. IFC divested its shares in a small private bank; Nations Trust Bank (NTB) and the NTB declared a rights issue to the staff of the bank in order to broad base its ownership. The supreme court has issued a stay order on the Appeal Court cancellation of the liquidation of Pramuka bank and the Central Bank (CBSL) has been granted two weeks to examine other options before the liquidation. The Zurich Insurance group had sold its shares in the NDB-Zurich insurance Co to a consortium consisting of Bank of Ceylon and NDB. NDB, through one of its subsidiaries CDIC, is expected to raise additional capital in the market for this acquisition. The DFCC has made a formal offer to buy the MERC bank; a small troubled bank. Given the high liquidity levels in the market, there is pressure on the banks to reduce interest rates. The Central Bank is continuing the media campaign to educate the public with regard to the risk of investing in unregulated financial institutions. Performance of the Licensed Specialized (LSB) : At the end of the 1 st quarter 23, out of the total assets of the LSBs, the National Savings Bank (NSB) led with 62% followed by National Development Bank (NDB) (16%), DFCC Bank (%), Regional Development (5%) and the State Mortgage & Investment Bank (SMIB) (4%). In terms of their lending operations, NDB led by 3%, followed by DFCC (26%), NSB (24%), SMIB & RDB (9%). The NPLs, as a percentage of total advances of the LSBs, declined from 14% to 13% in the first quarter of 23.

2 Financial Sector Quarterly Update:2nd Quarter 23 Open Market Operations & Interest Rates : During the 2 nd quarter of 23, average prime lending rate continued its downward trend further ending up at 1.4% in June as against 11. % in March 23. The repo rate and reverse repo rates further declined to.25% and 1.25% respectively in June. Active open market operations commenced in March, 23. The short term Treasury Bill rates have also reflected a decline with one-year Treasury Bill rate declining from 9.2% in March to.5% in June. The offer rates in the interbank money market too have stabilized at around 9.%. The downward trend observed is mainly due to the continued high liquidity in the market, the reduction in the CBSL rates and the active open market operations. The government continued to issue Treasury Bonds of longer term maturities of 3 to 6 years but has not issued 1 and 15 year long term maturities since the previous quarter. The IMF continues to provide technical support to the Central Bank on open market operations. Exchange Rate Movements: The rupee further depreciated against all major currencies except for the Japanese Yen although the depreciation against dollar was marginal. The forex market has stabilized and deepened and the forward market activities have increased. The rupee depreciated against the dollar by.1%, euro by 5.9%, sterling pound by 5.6%, SDR by 2.5% while the Japanese yen continued to remain stable. As the Gulf war did not linger on, the adverse impact of the war on the tea exports and tourism was not significant. The floods in the southern province might have a lagged effect on low grown tea which is yet to be seen. However, the unprecedented aid pledged at the Tokyo Donor Conference would cushion any adverse impact in the short run. Some of the economic analysts predict an appreciation of the rupee given the unexpected official flows which might erode export competitiveness of the country. In addition, Sri Lanka has been identified as a potential candidate for a US free trade agreement. This would have long term favorable implications for the country s external trade as US is a major trading partner (41% of exports). Inflation: The inflation has further declined in the 2 nd quarter of 23. The Point-to Point Index decreased substantially from 7.9% in March to 4.5% in June and the Monthly Moving Average Index declined from 9.9% to 9.% during the same period reflecting the lagged effect of the inflationary trends during the past. The decline in the point to point index is mainly due to the low prices in paddy and vegetables compared to last year. The inflation reflected a downward trend despite the adverse weather conditions that prevailed in the country, especially in the Southern and Central Provinces. Capital Market Movements :. The investor sentiments still hold strong despite the setback in peace negotiations and non participation of the LTTE at the Tokyo Donor Conference. The continuation of the conflict-free environment signals a long term commitment to peace by all parties despite continuing disagreements. The investor confidence has been strengthened by the overwhelming support shown by the donors. The second quarter recorded historic levels in the capital market indices. The ASPI has reached 149 from 739 while both the Milanka and the MBSL indices reflected an increase of 64% and 47% reaching 263 and 237 respectively. Monthly turnover ranged from Rs.2.3 billion (US $ 24. million) to Rs. 1.5 billion (US $ 1.4 million) during the quarter; highest ever recorded. The foreign investor activities recorded a net inflow of Rs. 1.6 billion (US $ 16.3 million) during the 2 nd quarter. The market capitalization increased to Rs. 24 billion. This is a reflection of the investor confidence as well as the result of the tax amnesty granted by the government and the declining interest rate regime in the banking sector. Unlike in the past, the foreign investors have been quite active, especially in the blue chip companies. The Milanka index is much more buoyant than the MBSL; an indication of the interest of the investor in the upper end of the market. Increases have been reflected in all indices but the heavily traded sector had been the banking sector. Colombo Stock Exchange has opened its second branch in Kandy in order to strengthen and broaden the local investor base. Report, Graphic Design & Concept : Sriyani Hulugalle Graphs Update:Malathi Ratnayake 1/7/23 2

3 Table 1: Market Structure of the Commercial Banking System As at the end of Fourth Quarter 22 Licensed Commercial Figure 1-Commercial Bank Assets State Commercial 49% Foreign % Private Domestic 39% Figure 2 - Commercial Bank Deposits State Commercial 4% Foreign % Private Domestic 4% State Commerci al 46% Figure 3: Commercial Bank Loans & Foreign Advances 11% Private Domestic 43% Licensed Specialized DFCC % Figure 1 B-LSB Assets Others 1% RDBs 5% Figure 3B: LSB Loans & Advances Others 2% RDBs 9% NSB 24% NDB 16% DFCC 26% SM IB 9% SMIB 4% NSB 62% NDB 3% Note : Only in the case of Table 1, data relate to Quarter 1, 23. Data reflect Domestic and Foreign Currency Banking Unit transactions. Source : CBSL Bank Supervision Department and individual commercial banks. 3

4 Table 2: Open Market Operations Treasury Bills Treasury Bonds 91 Days Days 364 Days 2 Years 3 Years 4 Years 5 Years 6 Years 1 Years 15 Years Month Volume Av. Yield % Volume Av. Yield Volume Av. Yield Volume Av. Yield Volume Av. Yield Volume Av. Yield Volume Av. Yield Volume Av. Yield Volume Av. Yield Volume Av. Yield Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % May 3, , June 1, , , 14. 1, , 14.1 July 2, , , , , 14.3 Aug 2, , , ,7.42 1, Sept 3, , , Oct 1, ,. 1,5 13. Nov 1, , ,.4 1,. 1,. Dec 2, , 1.9 1, 11. 1, Jan 2, , , , 9. 1,5 9.1 Feb 3, , , ,5 1.1 March 2, , , , 1.1 April 3, ,2.62 1, , 9.7 2, 9.5 May 2, , , , ,5.92 1,5 9.3 June 2, , , 9.5 2,5 9.1 Source: Central Bank of Sri Lanka Figure 4: Yield Curve of Govt. securities Figure 5: Y ield Trend of Government Securities Maturity of the Security 22July August September October November December 23 January February M arch 91 Days Day s 364 Days 2 Years 3 Years 4

5 Table 3: Interest Rates July Aug Sep Oct Nov Dec 23 Jan Feb March April May June Lending Rates (%) Commercial BankAverage Prime Lending Rates Lowest Prime Lending Rates Sri Lanka Inter Bank Offer Rate (SLIBOR) (%) 1 Day Day Month Call MoneyMarket Rate (Av) (%) Central Bank Repurchase Rate (%) CB Reverse Repurchase Rate (%) Bank Rate (%) Savings Rates (%) Commercial BankSavings Deposits N/A N/A N/A N/A N/A Commercial Bank 1 Yr. Fixed Deposits N/A N/A N/A N/A N/A National Savings Bank Savings Deposits National Savings Bank 1 yr. Fixed Deposits Average Weighted Deposit Rate (AWDR) Source: Economic Research Department, Central Bank of Sri Lanka 5

6 Figure 6: Lending/ Deposit Rates % Average Weighted Dep o sit Rate (AWDR) Financial Sector Quarterly Update: 2nd Quarter 23 6 % July Aug Sep Oct Nov Dec 23 Jan Feb March April May June M o n th Commercial Bank Average Prime Lending Rates Lowest Prime Lending Rates Bank Rate (%) Figure : Real Interest Rates Commercial Bank Average Prime Lending Rates Real Prime Lending Rate Average Weighted Deposit Rate (AWDR) Real Weighted Deposit Rate 16 4 Figure 7 - Srilanka Inter-Bank Offer Rates and Call Money Market Rate Jul y Aug Sep Oct Nov Dec 23 Jan Feb Mar ch Apr il May June 1 D ay 7 Day 1 M o nt h Call Money MarketRate(Av)

7 Table 4: Exchange Rate Movements Exchange Rates End of US$ GBS JPY* Euro SDR 22 July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June Note: Rupees per 1 JPY; From January 22, all members of the Euro Currency Area replaced their national currencies with the Euro. Source: Economic Research Department, Central Bank of Sri Lanka Figure 9: Exchange Rates Rupees Month US$ GBS JPY* Euro SDR 7

8 Table 5 : Consumer Prices Indices July Aug Sep Oct Nov Dec Jan Feb Mar April May June Colombo Consumers' Price ( 1952=1) All items Growth Rate % Month-to-month Point-to-point month M/A Greater Colombo Consumers' Price Index (199 = 1) All items N/A Growth Rate % Point-to-point N/A -month M/A N/A Source: Census and Statistics Department Figure 1: Consumer Price Index Month Month-to-month Point-to-point -month M/A 6 4 2

9 Table 6: Capital Market Movements Market Assessment 22 July Aug Sep Oct Nov Dec 23 Jan Feb March April May June All Share Price Index Milanka Price Index * MBSL Mid Cap * Sector Indices, Finance & Insurance Beverage, Food & Tobacco Chemicals & Pharmaceuticals Construction Diversified Holdings Footwear & Textiles Hotels & Travels Investment Trusts Land & Property Manufacturing Motors oil palm Plantations Services Stores & Supplies Trading Market Capitalization Monthly Market Turnover (Rs. Mns) Foreign Purchases (Rs. Mns) Foreign Sales (Rs. Mns) Net Purchases (Rs. Mns) Market Capitalization (Rs. Billions) * - MILANKA - Covers the largest 25 companies 2 *- MBSL - Covers the next largest 25 companies Source: Colombo Stock Exchange 9

10 Figure : Equity Market - Sector Indices Figure 11 Equity Market: Indices Indices June May April March Feb 23 Jan Dec Nov Oct Sep Aug 22 July Series1 Series2 Series3, Finance & Insurance Beverage, Food & Tobacc o Investment Trusts Manuf acturing 23 Jan Feb March April May June Figure 13: Market Performance. Foreign Sales (Rs. Mns) Dec 22 July Aug Sep Oct Nov -2 Month Monthly Market Turnover (Rs. Mns) Foreign Purchases (Rs. Mns) Net Purchases (Rs. Mns) Market Capitalization (Rs. Billions) Indices