SRI LANKA FINANCIAL SECTOR QUARTERLY UPDATE. FIRST QUARTER 2004 Highlights

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1 SRI LANKA FINANCIAL SECTOR QUARTERLY UPDATE FIRST QUARTER 24 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 : At the end of the 4 th quarter of 23, out of the total assets in the commercial banking sector, the two state commercial banks (SCBs) accounted for 46% while the private domestic banks (PDBs) accounted for 42%. In terms of deposits, the SCBs led with 47%, followed by the PDBs with 42%. In terms of advances, the PDBs recorded 47% while the SCBs followed with 41%. The PDBs, during the period under review, recorded an increase of 5.9% in terms of assets, 8.% in terms of deposits and 8.4% in terms of advances. The four major private banks dominated the PDB category accounting for 9% of the assets, 92% of the deposits and 91% of the loans granted. The Non Performing Loans (NPLs), as a percentage of total advances in the commercial banking sector, declined from 16% at the end of the 3 rd quarter to 14% in the 4 th quarter. The decline came from the private domestic banks and the foreign banks. The CBSL has tightened provisioning requirements and also has introduced a discounting mechanism of the collateral value of the NPLs. The commercial banks recorded profits mainly due to the reduction in the interest rates which brought down the cost of funds for the banks. Since the economy has strengthened the recovery rates also have improved. Performance of the Licensed Specialized (LSB) : At the end of the 4th quarter 23, out of the total assets of the LSBs, the National Savings Bank (NSB) led with 62% followed by National Development Bank (NDB) (13%), DFCC Bank (12%), Regional Development (5%) and the State Mortgage & Investment Bank (SMIB) (3%). In terms of their lending operations, NDB and DFCC led with 25% followed by NSB (22%), RDB (1%) and SMIB (8%). NPLs, as a percentage of total advances of the LSBs, remained at 12% during the 4 th quarter. If the investment climate deteriorates again and there is a set back in economic growth, the development banks would be adversely affected. Open Market Operations & Interest Rates : During the 1 st quarter of 24, average prime lending rate stabilized at 9.3% in March 24 while the repo rate and reverse repo rates had also stabilized at 7.% and 8.5% respectively. Active open market operations which commenced in March, 23 continued. The short term Treasury Bill rates have almost stabilized with one-year Treasury Bill rate increasing only marginally from 7.2% to 7.7% in March 24. The offer rates in the interbank money market too have stabilized at around 7.7%. This trend was mainly due to the continued high liquidity in the market, the reduction of the CBSL rates, active open market operations and low public borrowings. This trend might be reversed if the government adopts populist policies. In addition, if there is a reversal in economic reforms, the disbursement of IMF- Bank PRGF and PRSC next tranches would be delayed causing pressure on the government revenue. The Central Bank officially launched the Scriplesss Securities Settlement System on February 13, 24 formally completing LankaSettle, the automated payment and settlement system. Thus, Sri Lanka Central Bank became the first in South Asia region to introduce this integrated automated payment and settlement

2 Financial Sector Quarterly Update:1st Quarter 24 system. The Central Bank will also introduce a cheque imaging system to bring down the clearing time from 5-15 days to 1-2 outside the Western Province to address the delays in retail payment and settlement systems. This scheme is expected to facilitate and expedite payments in the SME sector, government payments and to improve access to finance. Exchange Rate Movements: The rupee depreciated marginally against all major currencies except Euro during the 1 st quarter. The forex market has stabilized and deepened and the CBSL too has been an active player in the Forex market. In the run up to the election, the CBSL engaged the forex dealers in a close dialogue not to avoid speculative trading resulting in a sharp depreciation. The rupee depreciated against the Dollar by.6%, Sterling Pound by 3.5%, SDR by.2%, the Japanese yen by 2.8% while appreciating against the Euro by 2.2%. With the spurt of economic activities, the imports have increased exerting pressure on the Dollar. In addition, with the political upheavals during the quarter, export proceeds too would have marginally slowed down. With the elections and the uncertainty in the policy regime, exporters would have been cautious. In addition, both the PRGF and PRSC tranches have been further delayed. Tourist arrivals did not substantially decline despite the announcement of the elections. Inflation: The inflation has further declined in the 1 st quarter of 24. Point-to Point Index declined substantially from 5.% in December 23 to 2.5% in March. Monthly Moving Average Index declined from 6.3 % to 3.9% during the same period reflecting the lagged effect of the inflationary trends during the past. The decline in inflation is mainly due to low prices in paddy and vegetables compared to last year. Better fiscal management has been further supported by increased output in domestic food supplies. However, people had not felt the favorable trends of the declining inflation as high cost of living was one of the major themes which the election campaign was conducted by the opposition. Capital Market Movements :. The investor sentiments have been strengthened since the cease fire since 22. However, announcement of a snap election further added to the apprehension. The cease fire has continued despite a change in the political regime which signals a long term commitment to peace by all parties. A split between North and East LTTE cadres raised further uncertainties in the peace process but was contained within a short period of time. The stock market has been rather volatile reacting to the mixed signals during the run up to the elections. The ASPI has marginally increased from 1,62 in December 23 to 1,284 and both Milanka and MBSL indices reflected a significant increase of 6.5% and 14.6% reaching 2,21 and 2,613 respectively. It could have been due to cashing in by short term investors. Increases were seen in banking, investment trusts, footware & textiles, palm oil and stores and supplies. Monthly turnover ranged from Rs.3.9 billion (US $ 4.1 million) to Rs.4.5 billion (US $ 46.2 million) during the quarter. Foreign investor transactions recorded a net inflow of Rs. 813 million (US $ 8.4 million) during the 1 st quarter. Market capitalization increased from Rs. 263 billion to Rs. 314 billion. If political instability continues and the peace negotiations are stalled for a longer period, the investor confidence is likely to diminish. Report, Graphic Design & Concept : Sriyani Hulugalle Graphs Update:Malathi Ratnayake 1/6/24 2

3 Table 1: Market Structure of the Commercial Banking System As at the end of 4th Quarter 23 Licensed Commercial Figure 1-Commercial Bank Assets State Commercial 47% Foreign 11% Private Domestic 42% Figure 2 - Commercial Bank Deposits State Commercial 46% Foreign 12% Private Domestic 42% State Commercial 41% Figure 3: Commercial Bank Loans & Foreign Advances 12% Private Domestic 47% Figure 1-A- Assets of Private Doemestic Bank Figure 2-A: Deposits of the Private Domestic Figure 3-A : Loans & Advances of Private Domestic Seylan 22% Other 1 % HNB 3% Seylan 2% Other 8% HNB 33% Seylan 21% Other 9% HNB 3% Sampath Bank 13 % Commercial Bank 26% Sampath Bank 14% Commercial Bank 25% Sampath Bank 14% Commerci al Bank 26% Note : Only in the case of Table 1, data relate to Quarter 4, 23. Data reflect Domestic and Foreign Currency Banking Unit transactions. Source : CBSL Bank Supervision Department and individual commercial banks. 3

4 Licensed Specialized Figure 1 B-LSB Assets DFCC 12% Others 4% RDBs 5% NDB 14% SM IB 3% NSB 62% Figure 3B: LSB Loans & Advances Others 9% RDBs 1% NSB 22% DFCC 25% NDB 26% SM IB 8% 4

5 Table 2: Open Market Operations (Quarter 1, 24) Treasury Bills Treasury Bonds 91 Days 182 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. YieldVolume Av. Yield Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % April 3, , , , , 9.5 May 2, , , , , ,5 9.3 June 2, , , 9.5 2,5 9.1 July 1, , , , 8.51 August 1, , , 8.3 2, , 7.63 September 2, , , , , ,5 7.4 October 1, , , November 2, , , December 3, , January 2, , , 7.95 February 2, , March 1, Source: Economic Research Department, Central Bank of Sri Lanka Figure 4: Yield Curve of Govt. securities Figure 5: Yield Trend of Government Securities % Maturity of the Security. April May June July August September October November December 24 January February March 91 Days 182 D ays 364 Days 2 Years 3 Years 5

6 23 April May June July August September October November December 24January Feuruary March Lending Rates (%) Commercial Bank Average Prime LendingRates Lowest Prime Lending Rates Sri Lanka Inter BankOffer 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 N/A N/A N/A Commercial Bank 1Yr. Fixed Deposits N/A N/A N/A National Savings Bank Savings Deposits National Savings Bank 1 yr. FixedDeposits Average Weighted Deposit Rate (AWDR) Source: Economic Research Department, Central Bank of Sri Lanka 6

7 Figure 6: Lending/ Deposit Rates 7 23 April June August October December Feuruary M o n th Commercial Bank Average Prime Lending Rates Lowest Prime Lending Rates Bank Rate (%) Average Weighted Deposit Rate (AWDR) % 8 4 Figure 8: Real Interest Rates Commercial Bank Average Prime Lending Rates Real Prime Lending Rate Average Weighted Deposit Rate (AWDR) Real Weighted Deposit Rate Figure 7 - Srilanka Inter-Bank Offer Rates and Call Money Market Rate 1 Day 7 Day 1 Mont h Call Money Market Rate(Av) %

8 Table 4: Exchange Rate Movements Exchange Rates End of US$ GBS JPY* Euro SDR 23 April May June July August September October November December January February March 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 8

9 Table 5 : Consumer Prices Indices Apr May Jun Jul Aug Sept Oct Nov Dec Jan (24) Feb March 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 N/A Growth Rate % Point-to-point N/A 12-month M/A N/A Source: Census and Statistics Department Figure 1: Inflation 12 1 Table 6: Capital Market Movements Apr May Jun Jul Aug Sept Oct Nov Dec Jan (24) Feb March Point-to-point 12-month M/A 9

10 Table 6. Capital Market Information Market Assessment April May June July August September October NovembDecember 24 Jan February March 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 1

11 Figure 11 Equity Market: Indices Figure 12: Equity Market - Sector Indices All Share Price Index Milanka Price Index *1 MBSL Mid Cap *2, Finance & Insurance Beverage, Food & Tobacco Investment Trusts Manufacturing Figure 13: Market Performance April Ma Jun Jul Augu Septemb Octob Novemb Decemb 24 Ja Februa ry March y e y st er er er er n -5-1 Month M onthly M arket Turnover (Rs. M ns) Foreign Purchases (Rs. Mns) Foreign Sales (Rs. Mns) Net Purchases (Rs. M ns) M arket Capitalization (Rs. Billions) 11 Indices

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