SRI LANKA FINANCIAL SECTOR QUARTERLY UPDATE THIRD QUARTER

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1 SRI LANKA FINANCIAL SECTOR QUARTERLY UPDATE THIRD 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 2 st quarter of 23, out of the total assets in the commercial banking sector, the two state commercial banks (SCBs) accounted for 47% while the private domestic banks (PDBs) accounted for 4%. In terms of deposits, the SCBs led with 47%, followed by the PDBs with 41%. In terms of advances, the PDBs recorded 45% while the SCBs followed with 44%. The PDBs, during the period under review, recorded an increase of 7.7% in terms of assets, 4.3% in terms of deposits and 5.1% in terms of advances. The four major private banks (HNB, Commercial Bank, Seylan and Sampath) dominated the PDB category accounting for 3% of the assets, 92% 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 16.7 % in the 1 st quarter of 23 to 17.2% at the end of the 2 nd quarter. The level of NPLs at the state commercial banks, marginally increased from 19.% to 19.7% during the period under review while the foreign banks recorded an increase from 7.% to.7%. A second rating agency, Lanka Ratings is to be set up jointly by the Ceylinco Group and the Rating Agency Malaysia. The government will also obtain a sovereign rating in two stages; initially from Fitch Rating and subsequently from Moodys or another reputed rating agency. The Finance Minister has requested the banks to recruit 1, graduates to resolve the unemployment problem. Performance of the Licensed Specialized (LSB) : At the end of the 2nd quarter 23, out of the total assets of the LSBs, the National Savings Bank (NSB) led with 63% followed by National Development Bank (NDB) (13%), DFCC Bank (12%), Regional Development (5%) and the State Mortgage & Investment Bank (SMIB) (4%). In terms of their lending operations, NDB led by 2%, followed by DFCC (26%), NSB (2%), RDB (1%) and SMIB (9%). The NPLs, as a percentage of total advances of the LSBs, remained at 13% during the second quarter too. It was noted that except for NSB, all others still recorded NPLs higher than 14%. The NPLs continue to be at a relatively high level. Open Market Operations & Interest Rates : During the 3rd quarter of 23, average prime lending rate continued its decline further ending up at 9.3% in September as against 1.4 % in June 23. The repo rate and reverse repo rates were further reduced to 7.5% and 9.5% respectively in September. The Central Bank (CBSL) reduced it s Bank rate from 1% to 15% in August 15, 23 in order to keep in line with the policy rates. Active open market operations which commenced in March, 23 continues. The short term Treasury Bill rates have also reflected a decline with one-year Treasury Bill rate declining from.5% in June to 7.1% in September. The offer rates in the interbank money market too have stabilized at around %. The downward trend observed is mainly due to the continued high liquidity in the market, the reduction of the CBSL rates, active open market operations and low public borrowings despite a revenue shortfall. The government issued Treasury Bonds of longer term maturities of 1 and 15 years amounting to Rs. 6 billion during 3 rd quarter. The CBSL is planning to issue 2 year bonds in October to further strengthen the long term yield curve which would be an incentive for promoting the corporate bond market.

2 Financial Sector Quarterly Update:3rd Quarter 23 Ministry of Finance claims that more than 5, had made declarations under the Tax Amnesty provided till August 3, 23 which would help in widening the tax base. The Central Bank launched the Real Time Gross Settlement System (RTGS) together with the automated General Ledger system on September th, without any technical glitches. The integrated RTGS/SSSS will be named LankaSettle which will facilitate large volume transactions and scripless trading of government securities. Sri Lanka Central Bank would be the first in South Asia region to introduce this integrated automated payment and settlement system. Exchange Rate Movements: The rupee appreciated against all major currencies except for the Japanese Yen during the 3 rd quarter. The forex market has stabilized and deepened and the CBSL too has been an active player in the Forex market. The rupee appreciated against the dollar by 2.%, sterling pound by 2.3%, euro by 1.2%, SDR by 1.2% while the Japanese yen depreciated by 5%. The appreciation of the rupee against the dollar reflects the weakening of the dollar against other major currencies. Due to the improved export earnings and also the increased official aid flows, the SL Rupee has strengthened against major currencies. The exporters complain of an erosion in competition in the international market for SL products specially for Tea. European Union is reported to have agreed to extend a 5% reduction in import tariff for Sri Lankan exports. The Sri Lankan government support for EU at Cancun is reported to have hastened this decision. Sri Lanka is contributing to the thinking of the US of promoting more bi-lateral trade agreements and is negotiating trade agreements with Pakistan, Thailand, Singapore, Malaysia, in addition to the US. Inflation: The inflation has further declined in the 3 rd quarter of 23. The Point-to Point Index increased marginally from 4.5% in June to 4.% in September and the Monthly Moving Average Index declined from 9.% to 7.6% 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 government s improved fiscal management and the cautious monetary policy attributed to this trend. This has been further supported by the increased output in domestic food supplies and also the appreciation of the Rupee. Capital Market Movements :. The investor sentiments have been strengthened despite the continued problems in peace negotiations and the US re-designating LTTE as a terrorist organization. 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 reinforced by the overwhelming support demonstrated by the donor community. The capital market made history in the third quarter again. The ASPI has reached 1,292 from 1,49 while both the Milanka and the MBSL indices reflected an increase of 16% and 13% reaching 2,395 and 2,62 respectively. 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. Monthly turnover ranged from Rs.5.3 billion (US $ 54. million) to Rs.16.5 billion (US $ 175 million) during the quarter; highest ever recorded. However, the foreign investor transactions recorded a net outflow of Rs. 3.6 billion (US $ 39 million) during the 3rd quarter reflecting the instability of short term investments. The market capitalization increased to Rs. 3 billion. Hayleys MGT Knitting Mills Ltd. became the first company to issue dollar denominated 3 month commercial paper (US $ 7,). Hemas Group issued an IPO of Rs. 6 million which was over subscribed, thus reflecting the excess liquidity levels of the financial market. Despite the setback in peace negotiations as well as continued opposition instigated strikes, the stock market continued its bull run and the investment analysts feel that the market is slightly overheated. This is a reflection of the investor confidence as well as the low deposit rates in the banking sector. Sri Lanka is currently a favored country in the emerging market category. Unlike in the past, the foreign investors continue to be active, especially in the blue chip companies in the financial sector and the hotel sector. Report, Graphic Design & Concept : Sriyani Hulugalle Graphs Update:Malathi Ratnayake 14/1/23 2

3 Table 1: Market Structure of the Commercial Banking System As at the end of 2 nd Quarter 23 Licensed Commercial Figure 1-Commercial Bank Assets State Commercial 4% Foreign 12% Private Domestic 4% Figure 2 - Commercial Bank Deposits State Commercial 47% Foreign 12% Private Domestic 41% Figure 3: Commercial Bank Loans & Advances State Commerci al 44% Foreign 11% Private Domestic 45% Licensed Specialized Figure 1 B-LSB Assets Figure 3B: LSB Loans & Advances DFCC 13% NDB 13% Others 3% RDBs 5% Others 7% RDBs 1% NSB 2% SMIB 9% SMIB 4% NSB 62% DFCC 26% NDB 2% Note : Only in the case of Table 1, data relate to Quarter 2, 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 (Quarter 3, 23) Treasury Bills Treasury Bonds 91 Days 12 Days 364 Days 2 Years 3 Years 4 Years 5 Years 6 Years 1 Years 15 Years Month Volume Av. YieldVolume Av. Yield Volume Av. Yield Volume Av. Yield Volume Av. Yield Volume Av. YieldVolume Av. YieldVolume 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 % July 2, , , , , 14.3 Aug 2, , , , , Sept 3, , , Oct 1, , 12. 1,5 13. Nov 1, , , , 12. 1, 12. 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 July 1, , ,.75 2,.51 August 1, , ,.3 2, , 7.63 September 2, , , , 7.3 1, ,5 7.4 Figure 4: Yield Curve of Govt. securities Figure 5: Y ield Trend of Government Securities Source: 13 Economic Research Department, Central Bank of Sri Lanka Maturity of the Security 22 October November December 23 January February March April May June July August September 91 Days 12 Days 364 Days 2 Years 3 Years 4

5 July Aug Sep Oct Nov Dec 23 Jan Feb March April May June July August September Lending Rates (%) Commercial Bank Average Prime LendingRates Lowest Prime Lending Rates Sri LankaInter Bank Offer Rate (SLIBOR) (%) 1 Day Day Month Call Money Market Rate (Av) (%) Central Bank Repurchase Rate(%) CBReverseRepurchase Rate (%) Bank Rate (%) Savings Rates (%) Commercial Bank SavingsDeposits N/A N/A Commercial Bank 1 Yr. Fixed Deposits N/A N/A National Savings Bank SavingsDeposits National Savings Bank1 yr. Fixed Deposits Average Weighted Deposit Rate (AWDR) Source: Economic Research Department, Central Bank of Sri Lanka 5

6 Financial Sector Quarterly Update: 3rd Quarter 23 Figure 6: Lending/ Deposit Rates Figure 7 - Srilanka Inter-Bank Offer Rates and Call Money Market Rate 12 % 4 r a Oct Nov Dec 23 Jan Feb March April May June July August September M o n th Commercial Bank Average P ime Lending Rates Lowest Prime Lending Rates Bank Rate (%) Average Weighted Deposit R te (AWDR) Oct Nov Dec 23 Jan Feb Mar ch Apr i l May June Jul y August September 1 D ay 7 Day 1 M o nt h Call M oney M arket Rate (Av) Figure : Real Interest Rates Commercial Bank Average Prime Lending Rates Real Prime Lending Rate Average Weighted Deposit Rate (AWDR) Real Weighted Deposit Rate %

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 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 Month $ GBS JPY* Euro SDR 7

8 Table 5 : Consumer Prices Indices July Aug Sep Oct Nov Dec Jan Feb Mar April May June July August September Col ombo 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 12-month M/A N/A Source: Census and Statistics Department Figure 1: Consumer Price Index Month Month-to-month Point-to-point 12-month M/A

9 Table 6: Capital Market Movements Market Assessment 22 July Aug Sep Oct Nov Dec 23 Jan Feb March April May June July August September All SharePrice Index Milanka PriceIndex * 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 12: Equity Market - Sector Indices September August July June May April March Feb 23 Jan Dec Nov 1 Figure 11 Equity Market: Indices s2 Series , Finance & Insurance Beverage, Food & T obacco Investment Trusts Manufacturing September August July Indices 1 5 Oct Series1 Serie Indices Figure 13: Market Performance Oct Nov Dec 23 Jan Feb March April May June -5-1 Month ns) Monthly Market Turnover (Rs. Mns) Foreign Purchases (Rs. Mns) Foreign Sales (Rs. M Net Purchases (Rs. Mns) Market Capitalization (Rs. Billions)