SRI LANKA. Highlights

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized SRI LANKA FINANCIAL SECTOR QUARTERLY UPDATE THIRD QUARTER 27 Highlights Financial Sector Quarterly Update- 3nd t Quarter 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. This was not prepared for four quarters. 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 Banking Sector 1 : At the end of the 2nd quarter of 27, 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 41%. In terms of deposits, PDBs led with 45% followed by the SCBs with 43%. In terms of advances, the PDBs recorded 47% while the SCBs contributed 4%, indicating that the PDBs continue to be more aggressive in the supply side. The PDBs, during the period under review, recorded an increase of 5.4% in terms of assets, 3.1% in terms of deposits and 4.5% in terms of advances. The four major private banks (HNB, Bank, Seylan and Sampath) continued to dominate the PDB category accounting for 81% of the assets, 87% of the deposits and 85% of the loans granted. The Non Performing Loans (NPLs), as a percentage of total advances in the commercial banking sector, further declined from 5.67% in the 1 st quarter to 5.44% in the 2 nd quarter. The banks continue to make high provisions for the NPLs and risk management of the banks has significantly improved; state banks (83%) higher than private domestic banks (61%). Mr. K.C. Kamalasabeyson, former Attorney General, was appointed to the Monetary Board in July but unfortunately he died due a terminal illness the following month. A World Bank report titled DFCC: One among the successful few was launched in September to commemorate the 5 th anniversary of the DFCC Bank. The study was to learn from the experience of DFCC how they could insulate themselves from any state interventions during the past 5 decades. NDB Bank and the Dialog (Mobile Phone operator) introduced mobile phone banking for the first time in Sri Lanka. The SME Bank and the Lanka Putra Bank, two state development banks are expected to be merged in October. Performance of the Licensed Specialized (LSB) : At the end of the 2 nd quarter 27, out of the total assets of the LSBs, the National Savings Bank (NSB) led with 65% followed by DFCC Bank (17%), Regional Development (7%) and the State Mortgage & Investment Bank (SMIB) (3%). In terms of their lending operations, NDB led with 35%, followed by DFCC (31%), RDB (15%) and SMIB (7%). NPLs, as a percentage of total advances of the LSBs, increased from 6.4% to 7.4%. Interest Rates: During the 3 rd quarter of 27, the increasing trend of the average prime lending rate continued and it further increased from 16.% in June to 17.9% in September. The Central Bank policy remained at the same level during the period under review; the repo rate and reverse repo rate remained at 1.5% and 12.% 2 respectively. The short term Treasury Bill rates have increased and the one year 1 The changes noted in the percentages of both commercial banks and specialized banks is mainly due to the NDB bank being transferred to the commercial category. 2 Active open market operations which commenced in March, 23 continued. 1

2 Financial Sector Quarterly Update- 3nd t Quarter 27 rate has ended up at 17.31%. The offer rates, in the interbank money market, have followed the market trends and have increased sharply to a range of %. In August the rates spiraled up to even 4% which was eased off by opening the overnight discount window at the Central Bank. With the increased expansion of credit, both private and public sectors, there has been a liquidity crunch in the market. The Central Bank is still within its borrowing limits. The increasing interest rate regime is due to high inflation, tight monetary policy and speculative behavior of the market. The Government has also allowed foreign participation in the government securities market. The Government issued dollar denominated bonds ($5 million) in the international market for the use of infrastructure development projects. The Standard and Poor revised the outlook from Negative to Stable indicating that the conflict has not so far had the expected adverse impact on the economy prior to the issue. It was almost 3 times oversubscribed but the interest rate is relatively high (8.25%) and the maturity is 5 years. Exchange Rate Movements: 3 The Rupee came under tremendous pressure during the quarter. The rupee depreciated against the Sterling Pound (3.%), SDR (4.5%), Dollar (1.8%), Euro (7.4%) and Japanese Yen (1.%). The trade deficit reduced and was also strengthened through private remittances. The gross official reserves in July amounted to $ 2.7 billion (3.1 months of imports) and the BOP registered a surplus of $ 115 million in July. There were adverse announcements which would have affected the rate, it was oversubscribed. Inflation: The inflation escalated in the 3 rd quarter and reflected an upward trend. In the 3 rd quarter of 27, Point-to-Point Index increased from 13.% in June to 17.3% in September while the Monthly Moving Average Index increased from 17.% to 17.5% reflecting the past trend. The price indices reflected the full impact of the price adjustments in fuel, gas and flour. In addition, with the increasing exchange rates, there is cost push inflation as well. Capital Market Movements 4 : Despite the continuing conflict situation in the North, the capital market reflected moderate performance. In recent past, the corporate sector has ventured into other countries to cushion any unprecedented downturn in the economy. With the increase of Indian tourists, the tourism sector has been able to maintain reasonable level of earnings. The capital market performance has been mixed and volatile. The ASPI has declined by.6% from 2,572 in June to 2,557 in September. Milanka and MBSL indices declined by 3.5% and 3.1% respectively. The investors seem more bullish, however there is active trading in the market. Monthly turnover ranged from Rs.2.5 billion ($ 22. million) to Rs. 8.5 billion ($ 75. million) during the quarter. Foreign investor transactions recorded a net inflow of Rs. 5.1 billion (US $. 45 million) during the 3 rd quarter of 27 and market capitalization increased from Rs. 828 billion ($ 7.3 billion ) in June to Rs. 827 billion ($ 7.3 billion) in September. Report, Graphic design and concept: Sriyani Hulugalle Data Update: Sashi Jeyaraj October 2, The Central Bank floated the Rupee in January The investor sentiments have been strengthened since the cease fire since 22 2

3 Licensed Table 1: Market Structure of the Banking System As at the end of 2nd Quarter 27 Figure 1 - Bank Assets Figure 2- Bank Deposits Figure 3- Bank Advances Foreign 14% St at e 41% Privat e Domest ic 45% St ate 43% Foreign 12 % Private Domestic 45% Foreign 13% St at e 4% Privat e Domest ic 47% Figure 1-A- Assets of Private Domestic Bank Figure 2-A: Deposits of the Private Domestic Figure 3-A : Loans & Advances of Private Domestic Other 19 % Seylan 19 % Sampat h Bank 14 % HNB 24% Bank 28% Other 1 % HNB 27% Seylan 2% Sampat h Bank 15% Bank 28% Ot her 15% Seylan 17% Sampat h Bank 14% HNB 25% Bank 29% Note : Only in the case of Table 1, data relate to Quarter 2, 27. Data reflect Domestic and Foreign Currency Banking Unit transactions. Source : CBSL Bank Supervision Department and individual commercial banks. 3

4 Licensed Specialized Others 7% DFCC 17% SMIB 3% RDBs 8% Figure 1B-LSB Assets NSB 65% Others 12% Figure 3B: LSB Loans & Advances RDBs 15% DFCC 31% SMIB 7% NSB 35% 4

5 Table 2 Interest Rates Oct-6 Nov Dec Jan-7 Feb Mar Apr May Jun Jul Aug Sep Lending Rates (%) 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 (%) Bank Savings Deposits N/A 5.5- Bank 1 Yr. Fixed Deposits N/A National Savings Bank Savings Deposits National Savings Bank 1 yr. Fixed Deposits Average Weighted Deposit Rate (AWDR) Source : Central Bank of Sri Lanka 5

6 Mo n th Financial Sector Quarterly Update: 3rd Quarter 27 Figure 4: Lending/ Deposit Rates Figure 5: Real Interest Rates % Bank Average Prime Lending Rates Bank Rate (%) Average Weighted Deposit Rate (AWDR) -15 Bank Average Prime Lending Rates Real Prime Lending Rate Average Weighted Deposit Rate (AWDR) Real Weighted Deposit Rate 6

7 Table 3 Exchange Rates 6-Oct November December Jan February March April 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 6 - Exchange Rates US$ GBS JPY* Euro SDR 7

8 Colombo Consumers' Price ( 1952=1) 4 : Consumer Prices Indices Growth T Rate % Month-to-month a b Point-to-point l 12-month M/A e Source: Census and Statistics Department Oct -6 Nov Dec Jan-7 Feb Mar Apr May Jun Jul Aug Sep All items Figure 7: Inflation Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Point-to-point 12-month M/A 8

9 Table 5: Capital Market Information Market Assessment Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 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 All Share Price Index M ilanka Price Index *1 MBSL Mid Cap *2, Finance & Insurance Investment Trusts Beverage, Food & Tobacco M anufacturing Figure 1: Market Perf ormance. Mont hly Market Turnover (Rs. Mns) Foreign Purchases (Rs. Mns) Foreign Sales ( Rs. Mns) Net Purchases (Rs. Mns) Market Capitalization (Rs. Billions) 1