SRI LANKA FINANCIAL SECTOR QUARTERLY UPDATE THIRD QUARTER

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1 SRI LANKA FINANCIAL SECTOR QUARTERLY UPDATE THIRD QUARTER 22 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 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 2 nd quarter of 22, out of the total assets in the commercial banking sector, the two state commercial banks (SCBs) accounted for 51% while private domestic banks (PDBs) accounted for 36%. In terms of deposits, the SCBs led with 48%, which was followed by the PDBs with 4%. The PDBs during the 2 nd quarter recorded an increase of 2% in terms of assets, 3 % in terms of deposits and 1% in terms of advances. The four major private banks dominated the PDB category accounting for 83% of the assets, 91% of the deposits and 9% of the loans granted. The non-performing assets (NPA) as a percentage of total advances in the commercial banking sector was 16.5% at the end of the 2 nd quarter 22 as against 15.8% in the 1 st quarter. The state banks level of NPA has further deteriorated from 17.% to 18.7% during the 2 nd quarter. The deterioration of the NPA ratio was partly due to a significant reduction in the volume of credit to the government and a reflection of the economic downturn in the past one year. The People s Bank (PB) management has announced a major restructuring program to ensure long term financial viability of the bank. Performance of the Licensed Specialized (LSB) : At the end of the 2 nd quarter 22, out of the total assets of the LSBs, the National Savings Bank (NSB) led with 59% followed by National Development Bank (NDB) (16%), DFCC Bank (12%), Regional Development (4%) and the State Mortgage & Investment Bank (SMIB) (4%). In terms of their lending operations, NDB led by 33%, followed by DFCC (24%), NSB (19%) and SMIB (9%). The NPA as a percentage of total advances of the LSBs was 16%. Even though the two development finance institutions play a major role in long term lending, access to resources is limited and both are exploring the possibility of consolidating their development finance and commercial banking operations.

2 Financial Sector Quarterly Update:3rd Quarter 22 Open Market Operations & Interest Rates : During the 3 rd quarter of 22, average prime lending rate has resumed its downward trend seen in the first quarter and ended up at 12.6% in September as against 14. % in June reflecting lower rates in the call market. In July, the Central Bank reduced its reverse repurchase rate from % to % and its repurchase rate from 11.5 % to 1.5 %. The short term treasury bill rates have also reflected a decline with one-year Treasury Bill rate dipping down from 13.7% in June to 11.3% in September. The offer rates in the interbank money market have declined from % range to % range. The downward trend observed is mainly due to the high liquidity in the market. The pressure in the money market has significantly slackened due to less government borrowing while the private sector investments are yet to reach the desired levels. The government continued to issue Treasury Bonds of longer term maturities of 5 to 6 years. Exchange Rate Movements: The exchange rates have stabilized and shown only a marginal depreciation. This is a reflection of the weakening of the Dollar. Central Bank has been buying foreign exchange in the market to strengthen its forex reserves but this did not have a major impact on the Dollar. The political stability apparently has attracted foreign currency remittances and export proceeds have helped to stabilize the exchange rates. The Rupee depreciated marginally against the Dollar by.1%, Sterling Pound by 2.% and SDR by.1% while Euro and Japanese Yen appreciated by 1.%. The release of the final tranche of the IMF Standby loan too contributed to the stability seen in the market. Inflation: The inflation has shown a declining trend in the 3 rd quarter. The Point-to Point change in the Colombo Consumer Price Index dipped down to 7.4% in September from 1.7% in June and the 12 month Moving Average Index declined to 1.4% from 11.4%. This was mainly due the stabilization in the food prices. Capital Market Movements : The capital market, which had been in the doldrums since 1994, reflected a remarkable recovery with the election of a new government. The investor sentiments further strengthened with the initiation of peace negotiations in Bangkok and the continuing conflict free environment. The ASPI increased from 711 to 857 while both the Milanka and the MBSL Indices reflected further significant increases by 2% and 23% respectively reaching 1464 and Monthly turnover ranged from Rs. 2. billion (US $ 2.7 million) to Rs. 5.1 billion (US $ 53. million). The foreign investors too have been rather active in the market with foreign purchases recording a net inflow of Rs. 96. million (US $ 9.4 million) during the 3 rd quarter. The market capitalization further increased from Rs 144. billion to Rs 174. billion. All sectors showed favorable performance. With the continuation of the cessation of hostilities and the peace negotiations in Bangkok, the investor confidence has significantly improved. The bourse has been kept active mainly by retail investors and specially by a few high net worth investors. Report, Graphic Design &Concept : Sriyani Hulugalle; Graphs Update: Krishantha Kumarasinghe 1/1/22 2

3 Table 1: Market Structure of the Banking System As at the end of Second Quarter 22 Licensed Commercial Figure 1-Commercial Bank Assets Foreign 13% State Commercial 51% Private Domestic 36% Figure 2 - Commercial Bank Deposits State Commercial 48% Foreign 12 % Private Domestic 4% Figure 3: Commercial Bank Loans & Advances State Commerc ial 49% Foreign 11% Private Domestic 4% Licensed Specialized Figure 1 A-LSB Assets Figure 2A: LSB Loans & Advances DFCC 12% Others 5% RDBs 4% Others 7% RDBs 8% NSB 19% SM IB 9% NDB 16% SM IB 4% NSB 59% DFCC 24% NDB 33% Note : Only in the case of Table 1, data relate to Quarter 2, 22. 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 182 Days 364 Days 2 Years 3 Years 4 Years 5 Years 6 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 Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % 21 Sept 1, Nov 1, , Dec 2, Jan 2, , , , Feb 2, , , March 2, , , April 2, , , , May 3, , June 1, , , , , July 2, , , , , Aug 2, , , , , Sept 3, , , Source: Central Bank of Sri Lanka 15.8 Figure 4: Yield Curve of Govt. securities Figure 5: Yield Trend of Government Securities Matur ity of the Secur ity October November December 22 January February March April May June 91 Days 182 Days 364 Days 2 Years 3 Years 4

5 Table 3: Interest Rates Oct-1 Nov Dec 22 Jan Feb March April May June July Aug Sep Lending Rates (%) Commercial Bank Average PrimeLending Rates Lowest Prime LendingRates Sri Lanka Inter BankOffer Rate (SLIBOR) (%) 1 Day Day Month Call MoneyMarket Rate (Av) (%) Central Bank Repurchase Rate (%) CB ReverseRepurchase Rate (%) Bank Rate (%) Savings Rates (%) Commercial BankSavings Deposits N/A Commercial Bank 1 Yr. Fixed Deposits 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 Financial Sector Quarterly Update: 3rd Quarter 22 Figure 8: R eal Interest Rates a Commercial B nk Average Prime Lending Rates Real Prime Le nd ing Rate 6 Oct-1 Nov Dec 22 Jan Feb March April May June July Aug Sep M o n th Commercial Bank Average Prime Lending Rates Lowest Prime Lending Rates Bank Rate (%) Average Weighted Deposit Rate (AWDR) Figure 7 - Srilanka Inter-Bank Offer Rates and Call Money Market Rate 16 % Oct Nov Dec 22 Jan Feb Mar ch Apr i l May June Jul y Aug Sep 1 Day 7 Day 1 M o nt h Call M oney M arket Rate (Av) Average Weighted Deposit Rate (AWDR) Real Weighted Deposit Rate %

7 Table 4: Exchange Rate Movements Exchange Rates End of US$ GBS JPY* Euro SDR 21Oct Nov Dec Jan Feb Mar April May June July Aug Sep Note: Rupees per 1 JPY; From January 22, all 12 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 Price Index Oct Nov Dec 22 Jan Feb Mar April May June July Aug Sep Colom bo Consum ers' Price ( 1952=1) All item s Growth Rate % M onth-to-m onth Point-to-point m onth M/A Greater Colombo Consumers' Pr (1989 = 1) All item s N/A Growth Rate % Point-to-point N/A 12-m onth M/A N/A Source: Census and Statistics Department Figure 1 : Consumer Price Index % Growth -5 Month Month-to-month Point-to-point 12-month M/A 8

9 Table 6: Capital Market Movements Market Assessment July Aug Sep Oct Nov Dec 22Jan Feb March April M ay June July Aug Sep All Share Price Index Milanka Price Index * MBSL MidCap * 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) * - Covers the largest 25 companies 2 *- Covers the next largest 25 companies Source: Colombo Stock Exchange 9

10 Figure 11 Equity Market: Indices Fi gure 12: Equity Market - Sector Indices Indic Nov Dec 22Jan Feb March April May June July Aug Sep Indices 1 All Share Price Index Milanka Price Index *1 MBSL Mid Cap *2 Invest 5 Plantat, Finance & Insurance Beverage, Food & Tobacco ment Trusts Manufacturing ions Figure 13: Market Performance Oct Nov Dec 22Jan Feb March April May June July Aug Sep Month Monthly Market Turnover (Rs. Mns) Foreign Purchases (Rs. Mns) Foreign Sales (Rs. Mns) Net Purchases (Rs. Mns) Market Capitalization (Rs. Billions) es Oct