SRI LANKA FINANCIAL SECTOR QUARTERLY UPDATE FIRST QUARTER

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1 SRI LANKA FINANCIAL SECTOR QUARTERLY UPDATE FIRST 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 4 th quarter of 22, out of the total assets in the commercial banking sector, the two state commercial banks (SCBs) accounted for 49% while private domestic banks (PDBs) accounted for 3%. In terms of deposits, the SCBs led with 49%, which was followed by the PDBs with 4%. The PDBs, during the period under review, recorded an increase of 6% in terms of assets, 4 % in terms of deposits and 7% in terms of advances. The four major private banks dominated the PDB category accounting for 2% of the assets, 9% of the deposits and % of the loans granted. The Non Performing Loans (NPLs), as a percentage of total advances in the commercial banking sector, were 15.2% at the end of the 4 th quarter 22 as against 15.7% at the end of the 3 rd quarter. PB appointed a new General Manager and assigned restructuring to the former CEO of the bank. The Pramuka Bank still remains closed and the liquidation process is yet to commence. The two small commercial banks have not concluded discussions with potential investors to inject capital. Bank of Ceylon (BOC) is expected to help in setting up a holding company to manage state assets in a more profitable manner. A new chairperson (Mrs. Sumi Moonasinghe) has been appointed to the BOC. The Standard Chartered Grindlays bank merger has been concluded and it is expected to play an active role in the banking sector. The Ministry of Finance is drafting legislation to set up an asset management company to take over the NPLs of the state banks. With the enactment of the new Consumer Protection Act, the banking sector fears rigid regulation (e.g. interest rates). The Central Bank (CBSL) has approved a Code of Conduct for banks, which will be used as a self regulatory mechanism. The government has introduced mandatory rating for banks, which will bring better discipline in the financial sector and improve disclosure policies and governance. The Institute of Chartered Accountants of Sri Lanka also has required the banking sector to disclose measures adopted for good governance in their annual reports. The government will move away from the insurance industry with the divestiture of 9% of its shares of Sri Lanka Insurance Co. Ltd (SLIC) to a local consortium led by Distilleries Corporation Ltd which has significant stakes in insurance(ual), banking (HNB, Commercial and DFCC), corporate sector (Aitkens Spence, Stassen). Performance of the Licensed Specialized (LSB) : At the end of the 4 th quarter 22, out of the total assets of the LSBs, the National Savings Bank (NSB) led with 6% followed by National Development Bank (NDB) (17%), DFCC Bank (13), Regional Development (5%) and the State Mortgage & Investment Bank (SMIB) (4%). In terms of their lending operations, NDB led by 31%, followed by DFCC (25%), NSB (24%), SMIB & RDB (9%). The NPLs, as a percentage of total advances of the LSBs, declined from 17% to 14% in the last quarter of 22. Given the economic performance of the last two years, the NPLs continue to be on the high side. NSB has been rated AAA by the Fitch Rating agency but has indicated that the NSB needs to expand its activities.

2 Financial Sector Quarterly Update:1st Quarter 23 Open Market Operations & Interest Rates : During the 1 st quarter of 23, average prime lending rate continued its downward trend and ended up at 11.% in March as against.2 % in December 22. The repo rate and reverse repo rates further declined to 9.% and 11.% respectively in March. Active open market operations commenced on March 1, 23. The short term Treasury Bill rates have also reflected a decline with the one-year Treasury Bill rate marginally declining from 9.9% in December to 9.2% in March. The offer rates in the interbank money market too have stabilized at around 9.6%. The downward trend observed is mainly due to the continued high liquidity in the market as well the active open market operations. The government continued to issue Treasury Bonds of longer term maturities of 3 to 6 years and CBSL also issued and 15 year long term maturities for the first time in order to develop a long term yield curve. The government is working with the CBSL to set up an independent Public Debt Office with technical support from international Financial Institutions. Exchange Rate Movements: The Rupee slightly depreciated against all major currencies except for the Sterling Pound and the Japanese Yen. Despite the war in Iraq, there was no pressure in the foreign exchange market. This is partly a reflection of further weakening of the Dollar and increase in foreign exchange inflows. The forex market has stabilized and deepened due to the increased forward market activities. The Rupee depreciated marginally against the Dollar by.3%, Euro by 4.4%, SDR by 2.% while Japanese Yen has stabilized. The Sterling Pound marginally appreciated by 1.4 % during the first quarter of 23. There can be a fall out of the war especially on tea auctions in Colombo and also trigger a decline in remittances and earnings in tourism. It would be a double hit for the tea industry given the bumper crop and the Gulf War. The government has already assured support to the tea industry. However, with the expected official flows from both IMF and the World Bank for the poverty reduction support program, the adverse impact would be cushioned. Inflation: The inflation has shown a declining trend in the 1 st quarter 23 specially given the recovery of the agricultural production. If the Gulf war continues, there can be pressures on fuel prices. The Point-to Point Index decreased from 11.3% in December to 7.9% in March while the Monthly Moving Average Index increased from 9.6% to 9.9% during the same period reflecting the lagged effect of the inflationary trends during the past. There was pressure on the inflation in January due to seasonal price variations aggravated by the rains. The rate of inflation has dipped substantially and has reached a single digit. However, the recent price increase in petrol and the proposed expected increase in telecommunication tariff, may put pressure on the inflation. The expected bumper harvest in paddy in the Maha season will soften the effect to a greater extent. Capital Market Movements :. The investor sentiments still hold strong with the continuing peace negotiations and the conflict free environment. However, the first quarter of 23 showed a decline compared with the previous quarter. The ASPI further declined from 15 to 739 while both the Milanka and the MBSL indices reflected a decline of 6% reaching 1,26 and 1,575 respectively. Monthly turnover ranged from Rs. 1. billion (US $.3 million) to Rs. 1.9 billion (US $ 19.6 million). The foreign investor activities recorded a net inflow of Rs. 454 million (US $ 4.6 million) during the 1 st quarter which arrested the net outflows. The market capitalization marginally increased to Rs billion. The prolonged war in Iraq and its adverse impact might cause ripples in the stock market. There had been changes in the top management of the Securities Commission and the Colombo Stock Exchange. The corporate sector is concerned about governance and has introduced certain measures to strengthen corporate governance. Report, Graphic Design & Concept : Sriyani Hulugalle Graphs Update: Krishantha Kumarasinghe /4/23 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 13% Private Domestic 3% Figure 2 - Commercial Bank Deposits State Commercial 4% Foreign % Private Domestic 4% Figure 3: Commercial Bank Loans & Advances State Commerci al 45% Foreign % Private Domestic 43% Figure 1-A- Assets of Private Doemestic Bank Figure 2-A: Deposits of the Private Domestic Figure 3-A : Loans & Advances of Private Domestic Other 1 % Seylan 19 % Sampath Bank % HNB 31% Commercial Bank 2% Seylan 21% Sampath Bank 13% Other % HNB 34% Commerc ial Bank 22% Seylan 2% Other % Sampath Bank 13% HNB 3% Commercia l Bank 25% 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 13% Others 1% RDBs 5% NDB 17% SM IB 4% NSB 6% Figure 3B: LSB Loans & Advances DFCC 25% Others 2% RDBs 9% NSB 24% SM IB 9% NDB 31% 4

5 Table 2: Open Market Operations Treasury Bills Treasury Bonds 91 Days 12 Days 364 Days 2 Years 3 Years 4 Years 5 Years 6 Years 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, ,.9 1, 11. 1, Jan 2, , , , 9. 1,5 9. Feb 3, ,6 9. 2, ,5. March 2, , , ,. Source: Central Bank of Sri Lanka Figure 4: Yield Curve of Govt. securities Figure 5: Yield Trend of Government Securities % 9 9 Maturity of the Security April May June 22July August September October November December 91 Days 12 Days 364 Days 2 Years 3 Years 5

6 Table 3: Interest Rates April May June July Aug Sep Oct Nov Dec 23 Jan Feb March 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 N/A N/A Commercial Bank 1 Yr. Fixed Deposits 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 6

7 Figure 6: Lending/ Deposit Rates Figure 7 - Srilanka Inter-Bank Offer Rates and Call Money Market Rate 16 % 4 Commercial Bank Average Prime Lending Rates M o n th Lowest Prime Lending Rates Bank Rate (%) Average Weighted Deposit Rate (AWDR) 1 Day 7 Day 1 Mont h Call Money Market Rat e (Av) April May June July Aug Sep Oct Nov Dec 23 Jan Feb March Figure : Real Interest Rates April May June July Aug Sep Oct Nov Dec 23 Jan Feb Mar Commercial Bank Average Prime Lending Rates Real Prime Lending Rate Average Weighted Deposit Rate (AWDR) Real Weighted Deposit Rate 7

8 Table 4: Exchange Rate Movements Exchange Rates End of US$ GBS JPY* Euro SDR 22 April May June July Aug Sep Oct Nov Dec Jan Feb Mar Note: Rupees per 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 Table 5 : Consumer Prices Indices Month US$ GBS JPY* Euro SDR

9 Table 5 : Consumer Prices Indices April May June July Aug Sep Oct Nov Dec Jan Feb Mar Colombo Consumers' Price ( 1952=) All items Growth Rate % Month-to-month Point-to-point month M/A Greater Colombo Consumers' Price Index (199 = ) All items N/A Growth Rate % Point-to-point N/A -month M/A N/A Source: Census and Statistics Department Figure : Consumer Price Index % Growth Month Month-to-month Point-to-point -month M/A 9

10 Table 6: Capital Market Movements Market Assessment 22 April May June July Aug Sep Oct Nov Dec 23 Jan Feb 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

11 Figure 11 Equity Market: Indices Figur All Share Price Index Milanka Price Index *1 MBSL Mid Cap *2, F Investme e : Equity Market - Sector Indices inance & Insurance Beverage, Food & Tobacco nt Trusts Manufacturing 11 Indices Feb March Figure 13: Market Performance Monthly Market Turnover (Rs. Mns) Foreign Purchases (Rs. Mns) Foreign Sale Net Purchases (Rs. Mns) Market Capitalization (Rs. Billions) s (Rs. Mns) 22 April May June July Aug Sep Oct Nov Dec 23 Jan Month