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 SECOND QUARTER 2009 Highlights Financial Sector Quarterly Update:2 nd Quarter 2009 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 1 st quarter of 2009, out of the total assets in the commercial banking sector, the private domestic banks (PDBs) contributed 46% followed by the two state commercial banks (SCBs) with 40%. 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 39%, 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 an increase of 1.4% in terms of assets, 0.8% in terms of deposits while the advances recorded a decline of 3.6%. The Non Performing Loans (NPLs), as a percentage of total advances in the commercial banking sector increased from 6.0% in December to 7.4% in March reflecting the impact of the global economic recession. The increase was recorded in all categories. The banks continue to make high provisions for the NPLs. However, the provisioning cover has been declining due to the current crisis. Given the global economic recession, there is a possibility of even higher NPLs later this year. The issues relating to both the finance companies as well as oil hedging still continue. The CBSL could not find a strategic partner for the sale of shares in Seylan Bank since the terms of the proposals were unacceptable. With the issue of share capital in August, the state financial institutions are expected to take up 33%. In a recent Supreme Court ruling, privatization of Sri Lanka Insurance was revoked and the shares were vested with the Government. Sri Lanka Insurance has major shares in private commercial banks and one of the private hospitals and minor shares in several private companies. The Fitch Rating has assessed the banking sector recently and has indicated despite the current financial sector problems they can be rated stable to negative. Furthermore, banks had topped the corporate results in The two senior Deputy Governors, Dr. Ranee Jayamaha and Mr. W.A. Wijewardane retired after serving the CBSL for over 3 decades. Dr. Jayamaha has been appointed as a Presidential Advisor on banking. In June, 38 th Annual Meeting of Asian Clearing Union was held in Colombo which was attended by the members Bangladesh, India, Iran Myanmar, Pakistan, Nepal and Sri Lanka. The Maldives also was admitted as a member during the Annual meeting. Performance of the Licensed Specialized (LSB) : At the end of the 1 st quarter 09, out of the total assets of the LSBs, the National Savings Bank (NSB) led with 66% followed by DFCC Bank (13), Regional Development (8%) and the State Mortgage & Investment Bank (SMIB) (3%). In terms of their lending operations, NSB led with 40%, followed by DFCC (23%), RDB (15) and SMIB (8%). NSB in recent years 1 1 st Quarter data for bank performance. 1

2 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 7.6% in the 4 th quarter 08 to 9.8% in the 1 st quarter 09. It has been noted that the NPLs have increased in the development banks due to the economic recession. 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 were handed over to various state financial institutions such as Lanka Putra, Merchants Bank etc. This phenomenon has benefitted the banks. Interest Rates: During the 2 nd quarter of 2009, a downward trend of the average prime lending rate has been observed. It has further declined from 18.5%. in March to 15.5% in June. The CBSL policy rates have declined during the period under review; the repo rate and reverse repo rate declined from 10.5% to 8.5% and 11.75% to 11.0% 2 respectively. In addition, in May CBSL also removed the penal rate for reverse repo. The short term Treasury Bill rates have declined significantly and the one year rate ended up at 12.34% in June. The offer rates, in the interbank money market, with the reduction the SRR declined to a range of 10.45%-11%. A Fitch Rating Report on domestic banking sector issued in June has indicated that the liquidity levels of the banking sector have improved especially with the deceleration of credit to the private sector due to low demand and the greater risk aversion of the banks. With the cessation hostilities in the North, the demand for Sri Lanka Development Bonds was significant and the Government could raise $ 115 million at LIBOR+4.9%. The IMF also has approved Standby facility of $ 2.5 Billion over 20 months. Exchange Rate Movements: 3 The Rupee further depreciated against major currencies in the 2 nd quarter of The Central Bank has been active in the forex market and during the period under review CBSL permitted flexibility in the exchange rate thus allowing a gradual depreciation. The dollar reached a record high in April reaching Rs 120 but has stabilized at a relatively lower levels. The Rupee depreciated against the Japanese Yen by 3.4%, Euro 3.9%, SDR 2.5%, Dollar 0.3% and the Sterling Pound by 13.9%. Total foreign reserves in May 09 has declined to $ 3.1 billion (3.1 months of imports) while the gross official reserves amounted to US$ 1.5 billion (1.5 months of imports). The decline in the fuel prices has eased the pressure slightly. The private remittances continue to flow into the country 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 marginally over the past few months. It will be further boosted up by the inflow of the first tranche of the IMF loan. Inflation 4 : The inflation decelerated during the period under review. In the 2 nd quarter of 2008, Point-to- Point Index declined from 5.3% to 0.9% while the Monthly Moving Average Index declined form from 18.6% in March to 12.5% in June. The lower fuel prices, energy prices and the food prices (rice, wheat and milk foods) have made a favorable impact on the inflation. The agricultural produce and fish from East and North will invariably improve the supply side. The food prices may further come down with the produce form and East and North reaching the market. The Government has allowed 24 hour fishing in the North and East coast and also opened the A9 road which links the North and South for restricted transportation of goods and passengers. This also has resulted in significant decline in prices in the Northern peninsula. Capital Market Movements: The positive impact of the liberation of the Northern Province from LTTE has shown significant improvement in the stock market. The ASPI has significantly improved by 48% from 2,638 in March to 2,432 in June. Milanka and MBSL Indices too have increased by 57% and by 46% respectively. The investors continue to be bullish and there is active trading in the market. Monthly turnover ranged from Rs. 2.6 billion ($ 22.0 million) to Rs billion ($ million) during the quarter. Foreign investor transactions recorded a net outflow of Rs. 2.4 billion (US $.21.4 million) during the 2 nd quarter of 2 Active open market operations which commenced in March, 03 continued. 3 The Central Bank floated the Rupee in January The price indices were revised in January 2008 and the new series is being used from this quarter. 2

3 2009 reflecting profit taking and market capitalization increased from Rs. 599 billion ($ 5.0 billion) in March to Rs. 775 billion ($ 6.7 billion). In addition, the recent announcement of the IMF standby arrangement has had a favorable impact on the equity market. Report, Graphic design and concept: Sriyani Hulugalle Data Update: Sashi Jeyaraj July 25,

4 Licensed Commercial Table 1: Market Structure of the Commercial Banking System As at the end of 1st Quarter 2009 Figure 1 - Commercial Bank Assets Figure 2- Commercial Bank Deposits Figure 3- Commercial Bank Advances State Commercial 39% Foreign 15% Private Domestic 46% State Commercial 42% Foreign 14% Private Domestic 44% State Commercial 39% Foreign 14% Private Domestic 47% Note : Only in the case of Table 1, data relate to Quarter 1, Data reflect Domestic and Foreign Currency Banking Unit transactions. Source : CBSL Bank Supervision Department and individual commercial banks. Licensed Specialized RDBs 8% DFCC 13% SMIB 4% Others 9% Figure 1 B:LSB Assets NSB 66% Others 14% RDBs 15% Figure 3B: LSB Loans & Advances DFCC 23% NSB 40% SMIB 8% 4

5 Table 2 Interest Rates July August September October November December Jan 2009 February March April May June 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 5

6 30 Figure 4: Lending/ Deposit Rates 25 Figure 5: Real Interest Rates % Commercial Bank Average Prime Lending Rates Average Weighted Deposit Rate (AWDR) -15 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 July August September October November December Jan Feb March April May June Note: Rupees per 100 JPY; Source: Economic Research Department, Central Bank of Sri Lanka Figure 6 - Exchange Rates US$ GBS JPY* Euro SDR 7

8 Table 4 : Consumer Price Indices July August September October November December Jan 2009 Feb March April May June Colombo Consumer Price Index*(N) (2002=100) All Items CCPI (N) Growth Rate % Month-to-month Point-to-point month M/A Note : The price indices were revised in January 2008 and the new series is being used from this quarter. Source: Census and Statistics Department Figure 7: Inflation % Point-to-point 12-month M/A 8

9 Table 5. Capital Market Information Market Assessment July Aug September October November December Jan '09 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) * - 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 Investment Trusts Beverage, Food & Tobacco, Finance & Insurance Figure 10: Market Performance. Monthly Market Turnover (Rs. Mns) Foreign Sales (Rs. Mns) Market Capitalization (Rs. Billions) Foreign Purchases (Rs. Mns) Net Purchases (Rs. Mns) 10