SRI LANKA. Highlights

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1 Financial Sector Quarterly Update- 3nd t Quarter 26 SRI LANKA FINANCIAL SECTOR QUARTERLY UPDATE THIRD QUARTER 26 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 respective organizations in subsequent reports, we will adjust our records accordingly. Performance of the Commercial Banking Sector 1 : At the end of the 2nd quarter of 26, out of the total assets in the commercial banking sector, the private domestic banks (PDBs) contributed 45% followed by the two state commercial banks (SCBs) with 4%. In terms of deposits, PDBs led with 45% followed by the SCBs with 42%. In terms of advances, the PDBs recorded 49% while the SCBs contributed only 37%, indicating that the PDBs continue to be more aggressive in the supply side. The PDBs, during the period under review, recorded a marginal increase of 4% in terms of assets, 4% in terms of deposits and 6% in terms of advances. The four major private continued to dominate the PDB category accounting for 81% of the assets, 88% of the deposits and 83% of the loans granted. The Non Performing Loans (NPLs), as a percentage of total advances in the commercial banking sector, further declined from 7.6% in the 1 st quarter to 7.3% in the 2 nd Quarter. The banks continue to make high provisions for the NPLs and risk management of the banks has significantly improved. Performance of the Licensed Specialized (LSB) : At the end of the 2 nd quarter 26, out of the total assets of the LSBs, the National Savings Bank (NSB) led with 68% followed by DFCC Bank (15%), Regional Development (7%) and the State Mortgage & Investment Bank (SMIB) (3%). In terms of their lending operations, DFCC and NSB led with 31% followed by RDB (15%) and SMIB (7%). NPLs, as a percentage of total advances of the LSBs, increased from 7.7% to 8.7%. Interest Rates : During the 3 rd quarter of 26, the increasing trend of the average prime lending rate continued and it further increased from 12.6% in June to 14.1% in September. The Central Bank increased its policy rates; the repo rate and reverse repo rate by 25 basis point in June to 9.63% and 11.13% 2 respectively. The short term Treasury Bill rates have also increased to around 1.7%. The offer rates, in the interbank money market, have followed the market trends and have increased sharply to a range of 15%. With the increased expansion of credit both private and public sectors, there has been liquidity pressure in the market. The Central Bank allows the market forces to be reflected in open market operations to the extent possible. The Government is planning to allow foreign participation in the open market. Exchange Rate Movements: 3 The Rupee also came under tremendous pressure during the quarter. The rupee depreciated against the Sterling Pound (2.3%) and SDR (.4%) while appreciating marginally against Dollar (.1%), Euro (.1%) and Japanese Yen ( 2.1%). The trade deficit widened but it has been offset by private remittances and official inflows. The gross official reserves in August amounted to $ 2.6 billion 3.1 months of imports and the BOP registered a surplus of $ 24 million. 1 The changes noted in the percentages of both commercial banks and specialized banks is mainly due to the NDB bank being transferred to the commercial category. 2 Active open market operations which commenced in March, 23 continued. 3 The Central Bank floated the Rupee in January 23. 1

2 Financial Sector Quarterly Update- 3nd t Quarter 26 Inflation: The inflation escalated in the 3 rd quarter reversing the downward trend as predicted in the previous update. In the 3 rd quarter of 26, Point-to Point Index marginally declined from 17.7% in June to 15.5% in September while the Monthly Moving Average Index increased from 1.1% to 11.2% reflecting the past trend The full impact of the fuel price adjustments is reflected despite the favorable prices in agricultural products. In addition, with the increasing exchange rates, there is cost push inflation. Capital Market Movements 4 : Despite the continuation of the Cease-fire agreement, both the Government and the LTTE have increased offensives in the North and East. In the meantime, the UNP and the SLFP entered into a MOU to co-orporate on national issues. The ADB signed an agreement to fund Colombo Port expansion. ICASL has published Accounting Standards Book, a 26 edition which also includes standards for smaller enterprises. The new Companies Act was passed in Parliament on October 2, 26 and it will ensure better corporate governance. The capital market performance has been mixed and volatile. The ASPI has increased by 12.7% from 2,114 in June to 2,383 in September. Milanka and MBSL indices also increased by 1.2% and 19.6% respectively. The investors seem more bullish with the prospect of two major parties getting together on national issues, however this will be captured in the next quarter. Monthly turnover ranged from Rs.6.3 billion (US $ 61 million) to Rs. 7.3 billion (US $ 71 million) during the quarter. Foreign investor transactions recorded a net outflow of Rs..8 billion (US $. 6.5 million) during the 3 rd quarter of 26 and the market capitalization increased 67 billion to Rs. 729 billion. Report, Graphic design and concept: Sriyani Hulugalle Data Update: Prameela Namasivayam November 12, 26 4 The investor sentiments have been strengthened since the cease fire since 22 2

3 Licensed Commercial Table 1: Market Structure of the Commercial Banking System As at the end of 1st Quarter 26 Figure 1-Commercial Bank Assets Figure 2 - Commercial Bank Deposits Figure 3: Commercial Bank Loans & Advances Foreign 15% State Commercial 4% Private Domestic 45% State Commercial 43% Foreign 12 % Private Domestic 45% Foreign 14% St at e Commercial 37% Privat e Domest ic 49% Note : Only in the case of Table 1, data relate to Quarter 2, 26. Data reflect Domestic and Foreign Currency Banking Unit transactions. Source : CBSL Bank Supervision Department and individual commercial banks. Licensed Specialized Figure 1B-LSB Assets Figure 3B: LSB Loans & Advances DFCC 15% SMIB 3% RDBs 7% Others 7% NSB 68% Others 14% RDBs 15% DFCC 31% NSB 32% SMIB 8% 3

4 Table 2: Open Market Operations (Quarter 2, 26) Treasury Bills Treasury Bonds Month Volume 91 Days 182 Days 364 Days 2 Years 3 Years 4 Years 5 Years 6 Years Av. Yield Av. Av. Av. Av. % Volume Yield Volume Yield Volume Yield Volume Av. Yield Volume Av. Yield Volume Yield Volume Av. Yield Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % July 5, , August 5, , , , September 7, , , October 7, , November 5, , December 6, , January 8, February 6, , , March 6, , , April 5, , , May 1, , , June 5, , , , 11. July 6, Aug 6, , , Sept 1, Source: Economic Research Department, Central Bank of Sri Lanka Figure 4: Yield Curve of Govt. securities Figure 5 : Yield Trends of the Government Securities % Matur ity of the Secur ity October November December 26 Januar February March April May June July August September 91 Days 182 Days 364 Days 2 Year s 3 Year s 4 Year s 5 Year s 4

5 Table 3 Interest Rates October November December January 26 February March April May June July August Sept Lending Rates (%) Commercial Bank Average Prime Lending Rates Lowest Prime Lending Rates Sri Lanka Inter Bank Offer Rate (SLIBOR) (%) 1 Day Day Month Call Money Market Rate (Av) (%) Central Bank Repurchase Rate (%) CB Reverse Repurchase Rate (%) Bank Rate (%) Savings Rates (%) Commercial Bank Savings Deposits Commercial Bank 1 Yr. Fixed Deposits N/A 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)

6 M o n th % Figure 6: Lending/ Deposit Rates % Figure 7 - Srilanka Inter-Bank Offer Rates and Call Money Market Rate 4 Commercial Bank Average P rime Lending Rates Lowest P rime Lending Rates Bank Rate (%) Average Weighted Deposit Rate (AWDR) 1 Day 7 Day 1 Month Call Money Market Rate (Av) Figure 8: Real Interest Rates Commercial Bank Average Prime Lending Rates Real Prime Lending Rate Average Weighted Deposit Rate (AWDR) Real Weighted Deposit Rate 6

7 Table 4 Exchange Rates Exchange Rates End of US$ GBS JPY* Euro SDR 25 October November December January February March April May June July August September 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 US$ GBS JPY* Euro SDR 7

8 Table 5 : Consumer Prices Indices October November December January February March April May June July Aug Sept Colombo Consumers' Price ( 1952=1) All items Growth Rate % Month-to-month Point-to-point month M/A Greater Colombo Consumers' Price Index (1989 = 1) All items Growth Rate % Point-to-point month M/A Source: Census and Statistics Department Figure 1: Inflation October November December January Point-to-point February March April May June July 12-month M/A Aug Sept 8

9 Table 6. Capital Market Information Market Assessment October November December 26- January February March April May June July Aug Sept 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 11 Equity Market: Indices Figure 12: Equity M arket - Sector Indices Indices All Share Price Index M ilanka Price Index *1 MBSL Mid Cap *2, Finance & Insurance Investment Trusts Beverage, Food & Tobacco M anufacturing Figure 13: M arket Performance. Mont hly Market Turnover (Rs. Mns) Foreign Purchases (Rs. Mns) Foreign Sales ( Rs. Mns) Net Purchases (Rs. Mns) Market Capitalization (Rs. Billions) 1