SRI LANKA FINANCIAL SECTOR QUARTERLY UPDATE SECOND QUARTER Highlights

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1 SRI LANKA FINANCIAL SECTOR QUARTERLY UPDATE SECOND 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 adjust our records accordingly. Performance of the Commercial Banking Sector : At the end of the 1 st quarter of 22, out of the total assets 1 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 5%, which was followed by the PDBs with 38%. The PDBs during the 1 st quarter recorded an increase of 7.7% in assets, 5.3 % in terms of deposits and 7.8% in terms of advances. With the slowdown in the economy and the high interest rate structure that prevailed during the past one year, the investment climate had deteriorated. Even though, the crowding-out effect of government borrowing has lessened, the private sector credit had not increased significantly. The four major private banks dominated the PDB category accounting for 83% of the assets, 9% 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 were 15.8% at the end of the 1 st quarter 22 as against 15.3% in the 4 th quarter of 21. The state banks level of NPA has further deteriorated from 16.% to 17.% during the 1 st quarter. The recent announcements made by the political leaders signal major restructuring for at least one of the state commercial banks to ensure financial viability. Open Market Operations & Interest Rates : During the 2 nd quarter of 22, average prime lending rate had reversed its downward trend to end up at 14.% in June as against 13.5 % in March, even though the repo and reverse repo rates of the Central Bank have remained stable at 11.5% and 13.7% respectively. One-year Treasury Bill rate also had remained stable. In addition, the offer rates in the interbank money market have stabilized at around 12% while the Bank Rate remained at 18% with the government reducing its domestic debt through repayments as well as introducing pricing adjustments in the public enterprises. The pressure in the money market has slackened due to less government borrowing while the private sector investments too 1 Assets include domestic banking units and the foreign currency banking units

2 Financial Sector Quarterly Update:2nd Quarter 22 did not increase as expected leading to a liquidity surplus in the banking sector. The government also issued Treasury Bonds of longer term maturities of 5 to 6 years. In addition, the government issued dollar denominated bonds amounting to US $ 92 million in June --- the final tranche of the Sri Lanka Development Bonds --- and the investors had been the domestic and foreign banks in Sri Lanka. Exchange Rate Movements: The exchange rate depreciated against all major currencies. Rupee depreciated marginally against the Dollar by.5% while other currencies were more significant: Euro (13.4%), Yen (11.1%), Sterling Pound (7.6%) and the SDR(6.6%). This reflected the weakening of the dollar and its impact on other currencies. There was slight pressure in the foreign exchange market at the beginning of the quarter due to the seasonal demand. An expansion in forward market was also noted. The depreciation will have a marginal lagged impact on the import prices and the inflation. Inflation: The upward trend in inflation has been arrested during the 2 nd quarter. The Point-to Point Index dipped down to 1.7% in June from 11.4% in March while the Monthly Moving Average Index declined to 11.4% in June from 12.7%. This was mainly because the food prices had stabilized. Capital Market Movements : The capital market, which had been in the doldrums since 1994, reflected a remarkable recovery with the election of a new political regime. The investor euphoria had lessened during the 1 st quarter but during the 2 nd quarter with the presentation of the budget and the continuing conflict free environment, the capital market had reflected favorable investor sentiments. The ASPI increased from 618 to 711 while both the Milanka and the MBSL Indices reflected a significant increase of about 2% reaching 1222 and 1468 respectively. Monthly turnover ranged from Rs. 2.5 billion (US $ 26 mn) to Rs. 5.2 billion (US $ 54 Million). The foreign investors had been rather active in the market with foreign purchases recording a net inflow of Rs. 1.7 billion (US $ 18 million) during the 2 nd quarter. The market capitalization increased from Rs 125. billion to Rs 144. billion. The sectors that had been active were finance, investment trusts, footwear textiles and hotels. With the continuation of the cessation of hostilities and the promise of major privatization initiatives, the investor confidence had been significantly strengthened. Despite the problems in the region, the regional funds too have shown increased interest during the 2 nd quarter. The investor interest has been mainly for the top 5 companies. A further recovery of the capital market can be envisaged from the recent public announcements by the political leaders, which signal major privatization initiatives. Report & Graphic Design & Concept : Sriyani Hulugalle Update of graphs: Krishantha Kumarasinghe 1/7/2 2

3 Table 1: Market Structure of the Commercial Banking System As at the end of First Quarter 22 Figure 1-Comm ercial Bank Assets Figure 2 - Commercial Bank Deposits Foreign 13% Private Domestic 36% Foreign 12% Private Domestic 38% State Commercial 51% State Commercial 5% Figure 3: Commercial Bank Loans & Advances Foreign 11% Private Domestic 37% State Commercial 52% Note : Only in the case of Table 1, data relate to Quarter 1, 22. Data reflect Domestic and Foreign Currency Banking Unit transactions. Source : Central Bank 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. YieldVolume Av. Yield Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % 21 July Aug 1, , , Sept 1, , Oct 1, Nov 1, , Dec 2, Jan 2, , , , Feb 2, , , March 2, , , April 2, , , , May 3, , June 1, , , , , Source: Central Bank of Sri Lanka Figure 4: Yield Curve of Govt. securities Figure 5: Yield Trend of Government Securities % Yield 1 21July August Maturity of the September Security 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 21July Aug Sep Oct Nov Dec 22 Jan Feb March April May June 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 Commercial Bank 1 Yr. Fixed Deposits N/A National Savings Bank Savings Deposits National Savings Bank 1 yr. Fixed Deposits AverageWeighted Deposit Rate (AWDR) Source: Central Bank of Sri Lanka 5

6 Figure 6: Lending/ Deposit Rates Financial Sector Quarterly Update: 2nd Quarter 22 Figure 7 - Srilanka Inter-Bank Offer Rates and Call Money Market Rate 24 2 % Jul y Aug Sep Oct Nov Dec 22 Jan Feb M ar ch Apr i l M ay June 1 Day 7 Day 1 M o nt h Call Money Market Rate(Av) Figure 8: R eal Interest Rates Commerci a l Bank Average Prime Lending Rates Real Prime Lending Rate Average Weighted Deposit Rate (AWDR) Real Weighted Deposit Rate 6 July Aug Sep Oct Nov Dec 22 Jan Feb March April May June Commercial Bank Average Prime Lending Rates Lowest Prime Lending Rates Bank Rate (%) Month Average Weighted Deposit Rate (AWDR) %

7 Table 4: Exchange Rate Movements (Rupees Per One Unit of Foreign Currency) Exchange Rates End of US$ GBS JPY* Euro SDR 21July Aug Sep Oct Nov Dec Jan Feb Mar April May June Note: Rupees per 1 JPY; From January 22, all 12 members of the Euro Currency Area replaced their national currencies with the Euro. Source: Central Bank of Sri Lanka Figure 9: Exchange Rates Rupees Month US$ GBS JPY* Euro SDR 7

8 Table 5 : Consumer Price Index July Aug Sep Oct Nov Dec 22 Jan Feb Mar April May June 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: Consum e r Price Index % Growth 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 May June 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) *1 - Covers the largest 25 companies *2 - Covers the next largest 25 companies Source: Colombo Stock Exchange 9

10 2 Financial Sector Quarterly Update: 2nd Quarter 2 Figure 12: Equity Market - Sector Indices Figure 11 Equity Market: Indices Indices June May April March Feb 22Jan Dec Nov Oct Sep Aug July Aug Sep Oct Nov Dec 22Jan Feb March April May June B anks, Finance & Insurance Beverage, Food & Tobacco Investmen t Trusts M anufacturing Plantations Figure 13: Market Performance June May April March Feb 22Jan Dec Nov Oct Sep Aug July -1 Monthly Market Turnover (Rs. Mns) Foreign Purchases Month (Rs. Mns) Foreign Sales (Rs. Mns) Net Purchases (Rs. Mns) Market Capitalization (Rs. Billions) 1 July All Share Price Index Milanka Price Index *1 MBSL Mid Cap *2 Indices