SRI LANKA SECTOR QUARTERLY UPDATE. Highlights

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1 SRI LANKA SECTOR QUARTERLY UPDATE FIRST QUARTER 21 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 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 last 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 4.8%. In terms of deposits, SCBs led with 44.6% followed closely by PDBs with 43.6%. In terms of advances, the PDBs recorded 48% while the SCBs contributed 4%, indicating that the PDBs still continue to lead the supply side. The growth in credit which had slowed down drastically in the past two years is showing signs of growth. The PDBs, during the period under review recorded an increase of 3.7% in terms of assets, 4.8% in terms of deposits and a marginal increase of.4% in terms of advances. The four major private banks continued to dominate the PDB category accounting for 77% of the assets, 82% of the deposits and 83% of the loans granted. The Non Performing Loans (NPLs), as a percentage of total advances in the commercial banking sector declined from 8.6% in September to 7.6% in December 29, reflecting the recovery of the domestic and the global economy. The decline was recorded mostly in the domestic banks. The banks continue to make relatively high provisions for the NPLs (around 54%). The provisioning cover which has been declining due to the financial crisis seems to be improving. The EU is still in dialogue with the Government on the GSP Plus facility and has not yet withdrawn it yet. Some of the SMEs still continue to face difficulties in accessing credit due their past non-payment records. There is a concerted effort to open bank branches especially in the North and East including the foreign banks such as State Bank of India and HSBC. The local banks have been expanding their presence in the North and East and reportedly the deposit mobilization has taken place while the borrowing is much less. State banks reduced the interest rates to 9% for Northern credit program. IMF upgraded Sri Lanka to middle income emerging market status. Sri Lanka Insurance was permitted by the CBSL to invest over 1% in NDB; a private bank. Some economic analysts saw this as a negative trend while others considered that investments by large contractual savings funds, a positive sign for the development of the stock market. The government comfortably won the presidential elections in January and the parliamentary elections in April thus bringing political stability with the dawn of peace after a 3 year armed conflict. The government has almost a 2\3 majority in parliament. The President retained the Ministry of Finance with him and Dr. 1 4th Quarter data for bank performance. 1

2 Sarath Amunugama has been appointed a Deputy Minister of Finance while Dr. P.B. Jayasundera continues as the Secretary to the Ministry in addition to being the Secretary of a newly created Ministry of Economic Development. Performance of the Licensed Specialized (LSB) : At the end of the 4 th quarter 9, out of the total assets of the LSBs, the National Savings Bank (NSB) led with 68% followed by DFCC Bank (12%), Regional Development (9%) and the State Mortgage & Investment Bank (SMIB) (3%). In terms of their lending operations, NSB led with 42%, followed by DFCC (2%), RDB (15) and SMIB (7%). NSB in recent years has been aggressive in the lending side but has contained the NPLs at 3.2%. NPLs as a percentage of total advances of the LSBs remained at 1.6% in December. It has been noted that the NPLs have increased in the development banks due to the global economic crisis. The problems relating to the failed unauthorized companies continue but there had not been any further collapse of finance companies during the quarter under review. Most of the registered failed companies have been handed over to various state financial institutions for rehabilitation. Part payments are being made to the depositors. Interest Rates: During the 1st quarter of 21, the downward trend of the average prime lending rate continued. It has further declined from 1.9% in December 9 to 1.6% by March 1. The state banks reduced the interest rates and it was followed by the private sector during the later part of the year. The CBSL policy rates were maintained during the period under review; the repo rate and reverse repo rate remained at 7.5% and 9.75% respectively 2. The government borrowings from the public declined with access to official flows. The short term Treasury Bill rates have declined significantly and the one year rate ended up at 9.47% in March. The offer rates, in the interbank money market ranged from % and the banks have excess liquidity since the demand for credit is still at a low level. Exchange Rate Movements: 3 The Rupee appreciated against all major currencies during the 1 st quarter. 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. 114 since June 29. The Rupee appreciated during the 1 st quarter against the Sterling Pound by 6.4%, Euro by 6.1%, SDR by 3.1%, Japanese Yen by.8%, Dollar by.4% and the total foreign reserves by January had increased up to $ 6.7 billion (7.5 months of imports) while the gross official reserves amounted to $ 5.1 billion (5.8 months of imports). Although the 3 rd tranche of IMF has not yet been released, the Government through a dollar dominated bond mobilized $ 1 million during the period under review. The Central Bank relaxed exchange control regulations allowing more residents earning foreign currency to open foreign currency accounts, permitting forward contracts for foreign currency transactions, removing the 1% margin deposits against advance payments for imports, removing the suspension of pre-payment for the import bills and allowing different exiting investment accounts to be unified as Securities Investment Accounts (SIA). Inflation 4 : The inflation ended up at a lower single digit level during the period under review. In the 1 st quarter of 21, Point-to-Point Index increased from a low 4.8% by end of 29 to 6.3% in March 1 while the Monthly Moving Average Index further declined from 3.4% in December to 3.2% in March 1.. 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, there are signs of increasing inflation. Capital Market Movements: With the continued peaceful environment for another quarter, the equity market conditions have further improved recording historic high levels of turnover. The ASPI has further 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 recorded an increase of 1% from 3,386 by end of the year to 3727 in March 1. Milanka and MBSL Indices too have continued to mirror a similar trend by recording further increase of 9.7% and 2% respectively. The investors continue to be bullish and there is active trading in the market. The monthly turnover ranged from Rs billion ($ million) to a spectacular Rs billion ($ 287 million) during the quarter. Foreign investor transactions recorded a net outflow of Rs. 13. billion (US $. 114 million) during the 1 st quarter of 21 reflecting the profit taking of foreign investors. Market capitalization increased from Rs. 1.1 Trillion ($9.5 Billion) to Rs. 1.2 Trillion (US$ 1.6 billion) continuing to be over the one trillion mark. Despite remarkable performance in the stock market, the analysts believe that the market liquidity is not adequate to attract foreign investors and require significantly large companies such as Telecom listed on the stock market. Report, Graphic design and concept: Sriyani Hulugalle Data Update: Sashikala Jeyaraj May 13, 21 3

4 Licensed Commercial Table 1: Market Structure of the Commercial Banking System As at the end of 4th Quarter 29 Figure 1 - Commercial Bank Assets Figure 2- Commercial Bank Deposits Figure 3- Commercial Bank Advances State Commercial 41% Foreign 14% 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 4, 29. Data reflect Domestic and Foreign Currency Banking Unit transactions. Source : CBSL Bank Supervision Department and individual commercial banks. Licensed Specialized DFCC 12% SMIB 3% Others 9% Figure 1 B:LSB Assets RDBs 8% NSB 68% Others 16% RDBs 15% Figure 3B: LSB Loans & Advances NSB 42% DFCC 2% SMIB 7% 4

5 Table 2 Interest Rates March April '9 May June July August September October November December January February March 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 Aug National Savings Bank Savings Deposits National Savings Bank 1 yr. Fixed Deposits Average Weighted Deposit Rate (AWDR) Source : Central Bank of Sri Lanka Figure 4: Lending/ Deposit Rates 2 Figure 5: Real Interest Rates 15 % Commercial Bank Average Prime Lending Rates -5 Average Weighted Deposit Rate (AWDR) -1 Call Money Market Rate (Av) (%) Central Bank Repurchase Rate (%) Commercial Bank Average Prime Lending Rates Real Prime Lending Rate 5

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

7 Table 4 : Consumer Price Indices Colombo Consumer Price Index*(N) (22=1) Jan 29 Feb Marc h April May June July Augus t Septembe r Octobe r Novembe r Decembe r All Items Jan Fe b Marc h 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 % Point-to-point 12-month M/A 7

8 Table 5. Capital Market Information Market Assessment April May June July August September October November December Jan 1 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 8

9 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 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) 9