SRI LANKA SECTOR QUARTERLY UPDATE. Highlights

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized SRI LANKA SECTOR QUARTERLY UPDATE THIRD QUARTER 29 Highlights Financial Sector Quarterly Update:3 RD Quarter 29 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 website and Colombo Stock Exchange. If the data is adjusted by respective organizations in subsequent reports, we adjust our records accordingly. Performance of the Commercial Banking Sector 1 : At the end of the 2 nd quarter of 29, 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 47% while the SCBs contributed 4%, indicating that the PDBs still continue to lead the supply side. It has been noted that growth in credit has slowed down drastically in the past one year. The PDBs, during the period under review recorded a decline of 2.3% in terms of assets and 5.4% in terms of deposits while the advances recorded an increase of 2.3%. The four major private banks continued to dominate the PDB category accounting for 76% of the assets, 83% of the deposits and 8% of the loans granted. However, during the past two years, the other banks have increased their share substantially. The Non Performing Loans (NPLs), as a percentage of total advances in the commercial banking sector increased from 7.4% in March to 8.4% in June reflecting the adverse impact of the global economic recession. The increase was recorded in all categories. The banks continue to make relatively high provisions for the NPLs. However, the provisioning cover has been declining due to the current crisis and the CBSL is closely watching the situation. Given the slow economic recovery of the global trading partners, there is a possibility of even higher NPLs later this year. There is a likelihood of the European Commission withdrawing the GSP+ facility due to alleged human rights violations. Both Fitch Rating and Standard and Poor have upgraded country outlook from Negative to Stable with the building up of the foreign reserves since July 29. The Central Bank (CBSL) launched a concessionary loan scheme of Rs. 3 billion for the Northern Province after the liberation. The maximum loan size is Rs. 2, with a maturity period of 5 years at 12 %. The borrowers need to bring in 1% of the equity. The banking sector including the private banks has expanded their presence in the East and even in the North which still has limited access. There had not been recurrence of violence after the elimination of the LTTE hierarchy and the investor confidence is slowly building up. The former Secretary of the Ministry of Finance, Dr. P.B. Jayasundera was allowed by the Supreme Court to hold public positions and was re-appointed to his former position as Secretary Ministry of Finance by the President. 1 2 nd Quarter data for bank performance. 1

2 The sudden death of Dr. Uthum Herat, the senior most Deputy Governor of the Central Bank in October at a young age of 52 years will be great loss to the institution as well as to the financial sector as a whole. He was one of the highly respected economists in the country. He also served as IMF Alternate Director for South Asia. His unexpected demise, just five months after his appointment as the Deputy Governor, has come as a great shock to the financial community. Performance of the Licensed Specialized (LSB) : At the end of the 2 nd quarter 9, out of the total assets of the LSBs, the National Savings Bank (NSB) led with 67% followed by DFCC Bank (12%), Regional Development (8%) and the State Mortgage & Investment Bank (SMIB) (4%). In terms of their lending operations, NSB led with 4%, followed by DFCC (21%), RDB (15) and SMIB (7%). NSB in recent years has been aggressive in the lending side but has contained the NPLs at 2.1%. NPLs as a percentage of total advances of the LSBs, increased further from 9.8% in the 1 st quarter to 1.6% in June. Though problems relating to the failed unauthorized companies continue, there had not been any major collapse of the finance companies during the quarter under review. Most of the registered failed companies have been handed over to various state financial institutions. However, this phenomenon has benefitted the banks. Interest Rates: During the 3 rd d quarter of 29, a downward trend of the average prime lending rate has been observed. It has further declined from 15.5% in June to 12.9% in September. The CBSL policy rates have declined during the period under review; the repo rate and reverse repo rate declined from 8.5% to 8.% and 11.% to 1.5% respectively 2. The short term Treasury Bill rates have declined significantly and the one year rate ended up at 11.% in September. The offer rates, in the interbank money market further declined to a range of 9.5%-1.4%. Government raised $ 41 million at LIBOR plus 425 basis points and retired the maturing 2 years development bonds amounting to $ 35 million. In August, the Government raised $ 175 million and the issue was heavily oversubscribed. The foreign investors continue to invest in government securities. Exchange Rate Movements: 3 The Rupee performance was mixed. The Central Bank has been active in the forex market with mopping up operations in order to stabilize the exchange rate. The dollar has stabilized at around Rs The Rupee depreciated during the 3 rd quarter against the Japanese Yen by 7.5%, Euro by 3.5%, SDR by 2.3% while appreciating against the Dollar by.1% and the Sterling Pound by 3.2%. Total foreign reserves in August had increased up to $ 4. billion (4.6 months of imports) while the gross official reserves amounted to US$ 3.8 billion (4.4 months of imports). The private remittances continue to flow into the country reaching almost US $ 2. billion and with the military victory over LTTE in May, the pressure on defense expenditure has lessened. The CBSL has been able to build up the foreign reserves to record level of over US 4. billion and the foreign reserve build up is expected to reach above US $ 5. billion by end of the year. It will be further boosted up by the inflow of the second tranche of the IMF loan. Inflation 4 : The inflation further decelerated during the period under review. In the 3 rd quarter of 29, Point-to-Point Index declined from.9% to.7% in September while the Monthly Moving Average Index declined from 12.5% in June to 6.6% in September. The stability in fuel prices, energy prices and the food prices (rice, wheat and milk foods) has made a favorable impact on the inflation. The agricultural produce and fish from East and North has invariably improved the supply side. However, with the impending elections in early 21, the call for higher wages might lead to an increase in inflation. This will be cushioned by the recent price reduction in essential food items announced by the Government. 2 Active open market operations which commenced in March, 3 continued. 3 The Central Bank floated the Rupee in January The price indices were revised in January 28 and the new series is being used from this quarter. 2

3 Capital Market Movements: The positive impact of the liberation of the country from the LTTE has shown significant improvement in the stock market. The ASPI has remarkably improved by 2.8% from 2,432 in June to 2,939 in September. Milanka and MBSL Indices too have mirrored a similar trend by recording increases of 21% and 22% respectively. The investors continue to be bullish and there is active trading in the market. However, the arrest of a high networth overseas investor in US for insider dealing has made the market slow down. He has significant shares in a few of the blue chip companies. The monthly turnover ranged from Rs. 9.4 billion ($ 81.9 million) to Rs. 19. billion ($ 16.8 million) during the quarter. Foreign investor transactions recorded a net inflow of Rs. 1.2 billion (US $. 1.7 million) during the 3 rd quarter of 29 which reflects improvement in investor confidence and market capitalization increased from to Rs. 775 billion ($ 6.7 billion) to Rs. 941 billion ($ 8.2 Billion). Report, Graphic design and concept: Sriyani Hulugalle Data Update: Sashi Jeyaraj November 8, 29. 3

4 Licensed Commercial Table 1: Market Structure of the Commercial Banking System As at the end of 2nd Quarter 29 Figure 1 - Commercial Bank Assets Figure 2- Commercial Bank Deposits Figure 3- Commercial Bank Advances State Commercial 4% Foreign 15% Private Domestic 45% State Commercial 42% Foreign 13% Private Domestic 45% State Commercial 4% Foreign 13% Private Domestic 47% Note : Only in the case of Table 1, data relate to Quarter 2, 29. Data reflect Domestic and Foreign Currency Banking Unit transactions. Source : CBSL Bank Supervision Department and individual commercial banks. Licensed Specialized Others 9% DFCC 12% SMIB 4% RDBs 8% Figure 1 B:LSB Assets NSB 67% Others 16% Figure 3B: LSB Loans & Advances RDBs 15% DFCC 22% NSB 4% SMIB 7% 4

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6 October November December Table 2 Interest Rates Jan 29 February March April May June July August September Lending Rates (%) Commercial Bank Average 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 National Savings Bank Savings Deposits National Savings Bank 1 yr. Fixed Deposits Average Weighted Deposit Rate (AWDR) Source : Central Bank of Sri Lanka 3 Figure 4: Lending/ Deposit Rates 25 Figure 5: Real Interest Rates % Commercial Bank Average Prime Lending Rates Average Weighted Deposit Rate (AWDR) Call Money Market Rate (Av) (%) Central Bank Repurchase Rate (%) Commercial Bank Average Prime Lending Rates Real Prime Lending Rate Average Weighted Deposit Rate (AWDR) Real Weighted Deposit Rate 6

7 Table 3 Exchange Rates Exchange Rates End of US$ GBS JPY* Euro SDR October November December Jan Feb March April May June July August September Note: Rupees per 1 JPY; Source: Economic Research Department, Central Bank of Sri Lanka Figure 6 - Exchange Rates US$ GBS JPY* Euro SDR 7

8 Colombo Consumer Price Index*(N) (22=1) October November December Table 4 : Consumer Price Indices Jan 29 Feb March April May June July August September All Items CCPI (N) Growth Rate % Month-to-month Point-to-point month M/A Note : The price indices were revised in January 28 and the new series is being used from this quarter. Source: Census and Statistics Department Figure 7: Inflation % 1 5 Point-to-point 12-month M/A 8

9 Table 5. Capital Market Information Market Assessment October November December Jan '9 Feb March April May June July August September 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 8 Equity Market: Indices Figure 9: Equity Market - Sector Indices Indices Indices All Share Price Index Milanka Price Index *1 MBSL Mid Cap *2 Hotels & Travels Construction Investment Trusts Beverage, Food & Tobacco, Finance & Insurance Figure 1: Market Performance. Monthly Market Turnover (Rs. Mns) Foreign Sales (Rs. Mns) Market Capitalization (Rs. Billions) Foreign Purchases (Rs. Mns) Net Purchases (Rs. Mns) 1