Financial Sector Quarterly Update- 1st Quarter 2008 44609 SRI LANKA FINANCIAL SECTOR QUARTERLY UPDATE FIRST QUARTER 2008 · 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. 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 Commercial Banking Sector1: At the end of the 4th quarter of 2007, 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 39%. 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 continue to be even more aggressive in the supply side. The PDBs, during the period under review, recorded an increase of 4.2% in terms of assets, 5.5% in terms of deposits and 3.1% in terms of advances. The four major private banks continued to dominate the PDB category accounting for 80% of the assets, 86% of the deposits and 83% 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, marginally declined from to 5.51% in the 3rd quarter to 5.0% in the last quarter of 2007. The banks continue to make high provisions for the NPLs. The Financial Intelligence Unit of the Central Bank signed a memorandum of understanding with the Bank Negara, Malaysia for exchange of information. CBSL on behalf of the government has raised a syndicated loan from the Standard Charted Bank for US$ 150 million on a 3-year maturity. Deutsche Bank has also been mandated to raise US$50 million. Performance of the Licensed Specialized Banks (LSB) : At the end of the 4th quarter 2007, out of the total assets of the LSBs, the National Savings Bank (NSB) led with 66% followed by DFCC Bank (16%), Regional Development Banks (8%) and the State Mortgage & Investment Bank (SMIB) (3%). In terms of their lending operations, NSB led with 38%, followed by DFCC (37%), RDB (14%) and SMIB (7%). NSB in recent years has been active in the lending side. NPLs, as a percentage of total advances of the LSBs, declined marginally from 7.5% in September to 6.76% in December 2007. Interest Rates: During the 1st quarter of 2008, the increasing trend of the average prime lending rate continued and it further increased from 18.0% in December '07 to 18.6% in March `08. The CBSL policy rates have stabilized during the period under review; the repo rate and reverse repo rate remained at 10.5% and 12.00%2 respectively. The short term Treasury Bill rates have slightly declined and the one year rate ended up at 19.0% in March. The offer rates, in the interbank money market, have followed the market trends and have increased to a range of 18.71-19.21.0%. Due to the aggressive open market operations and the decline in domestic credit both the private and public sector, the 1 4th Quarter data for bank performance. 2Active open market operations which commenced in March, 2003 continued. 1 Financial Sector Quarterly Update- 1st Quarter 2008 increasing trend in the interest rates has been arrested. The Government has also allowed foreign participation in the government securities market. Exchange Rate Movements:3 The Rupee has depreciated against all major currencies except the Dollar during the 1st quarter of 2008. The CBSL was active in the forex market to absorb foreign exchange thus stabilizing the dollar. The Rupee depreciated against the Sterling Pound (0.7%), SDR (2.9%), the Japanese Yen (8.0%) and the Euro (6.2%) while appreciating against the Dollar by 0.8%. Total foreign reserves in December amounted to $ 4.9 billion (4.9 months of imports) while the gross official reserves amounted to US$ 3.5 billion (3.5 months of imports) and the BOP registered a surplus of $ 416 million by end of March. Despite the escalation in international fuel prices and food prices, the foreign reserves have remained at relatively comfortable levels due to inward remittances and favorable export earnings. Inflation: The inflation marginally slowed down during the period under review. In the 1st quarter of 2008, Point-to-Point Index increased from 16.4% in December 2007 to 18.1% March 2007 while the Monthly Moving Average Index increased from 17.5% to 18.8% reflecting the past trend. The spiraling fuel prices and the food prices (rice, wheat and milk foods) have impacted on the inflation. The price indices reflected the full impact of the price adjustments in fuel, gas and flour. The Government is continuously adjusting the fuel prices which will have an impact on all items due to increase in transport costs. It is a better economic policy in the long run though it has short term costs. Capital Market Movements4: Despite the escalation of military operations in the North, the capital market reflected moderate performance. In the recent past, the corporate sector has ventured into other countries to cushion any unprecedented downturn in the economy. With the speculation of the Eastern Provincial council the investors would have followed a more "wait and see" policy during the quarter under review. The capital market performance has been mixed and volatile. The ASPI has marginally increased by 0.3% from 2,541 in December '07 to 2,550 March `08. Milanka Index declined by 3.37% and MBSL index by 1.05%. The investors still seem bullish, However, there is active trading in the market. Monthly turnover ranged from Rs.9.6 billion ($ 89.1 million) to Rs. 3.4 billion ($ 31.5 million) during the quarter. Foreign investor transactions recorded a net inflow of Rs. 2.3 billion (US $. 21.3 million) during the 1st quarter of 2008 and market capitalization increased Rs. 820 .0 billion ($ 7.5 billion) to Rs. 828 (US$ 7.7 bn). Report, Graphic design and concept: Sriyani Hulugalle Data Update: Sashi Jeyaraj June 5, 2008. 3The Central Bank floated the Rupee in January 2003. 4The investor sentiments have been strengthened since the cease fire since 2002 2 Financial Sector Quarterly Update: 1st Quarter 2008 Table 1: Market Structure of the Commercial Banking System As at the end of 4th Quarter 2007 Licensed Commercial Banks Figure 3- Commercial Bank Advances Figure 1 - Commercial Bank Assets Figure 2- Commercial Bank Deposits Foreign ForeignBanks ForeignBanks Banks 13% 15% 13% Private PrivateDomestic PrivateDomestic Domestic Banks Banks Banks 46% 48% 45% State State State Commercial Commercial Commercial Banks Banks Banks 42% 39% 39% Licensed Specialized Banks Figure 1 B:LSB Assets Figure 3B: LSB Loans & Advances Others RDBs RDBs 8% 8% 14% NSB DFCC Others 38% 16% 13% SMIB NSB 3% 65% DFCC SMIB 28% 7% Note : Only in the case of Table 1, data relate to Quarter 4, 2007. Data reflect Domestic and Foreign Currency Banking Unit transactions. Source : CBSL Bank Supervision Department and individual commercial banks. 3 Financial Sector Quarterly Update: 1st Quarter 2008 Table 2 ­ Interest Rates 06-Oct Nov Dec 07-Apr May Jun Jul Aug Sep Oct Nov Dec 08-Jan Feb March Lending Rates (%) Commercial Bank Average Prime Lending Rates 14.76 13.78 15.19 18.39 15.97 16 17.48 17.14 17.9 17.6 17.85 17.95 17.83 18.54 18.16 Sri Lanka Inter Bank Offer Rate (SLIBOR) (%) 1 Day 13.72 12.03 14.73 13.33 15.04 14 14.6 14.96 21.83 12.92 13.69 20.25 15.13 16.17 19.21 7 Day 13.94 12.42 14.96 15.04 15.66 15.77 16.17 16.54 19.79 15.21 16.23 18.5 16.88 17.13 18.54 1 Month 14.31 13.02 15.29 17.42 17.46 17.75 17.71 18.46 19.9 17.13 18.21 19.38 18.56 18.4 18.71 Call Money Market Rate (Av) (%) 13.06 11.76 14.47 13.17 13.37 13.51 14.28 14.77 19.54 16.5 15.78 14.99 14.92 16.27 16.88 Central Bank Repurchase Rate (%) 9.625 9.625 10.00 10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5 CB Reverse Repurchase Rate (%) 11.13 11.13 11.50 12 12 12 12 12 12 12 12 12 12 12 12 Bank Rate (%) 15.00 15.00 15.00 15 15 15 15 15 15 15 15 15 15 15 15 Savings Rates (%) 3- 3- 3- Commercial Bank Savings Deposits 3.00-10.5 3.00-10.5 N/A 3-9.50 3-9.50 3-9.50 3-13.0 3-15.0 3-15.0 3-15.0 3-16.50 3-15.0 16.50 16.51 16.52 5.50- 5.50- 5.50- 5.50- 5.50- 6.65- 8- 8- Commercial Bank 1 Yr. Fixed Deposits 13.75 5.50-14.00 N/A 1250 12.50 12.50 16.65 16.65 8-17.0 18.75 8-18.75 18.75 National Savings Bank Savings Deposits 5.0 5.0 5.0 5 5 5 5 5 5 5 5 5 5 5 5 National Savings Bank 1 yr. Fixed Deposits 10.3 11.0 11.0 10 10 10.25 15 15 15 15 15 15 Average Weighted Deposit Rate (AWDR) 7.03 7.87 7.6 8.34 8.65 8.86 9.27 9.61 9.65 9.92 10.31 10.31 10.32 10.32 10.32 Source : Central Bank of Sri Lanka 4 Financial Sector Quarterly Update: 1st Quarter 2008 Figure 4: Lending/ Deposit Rates Figure 5: Real Interest Rates 25 20 20 15 15 %10 10 5 5 0 0 Mo n th -5 -10 CommercialBank Average P rime Lending Rates Bank Rate (%) -15 Average Weighted Deposit Rate (AWDR) CommercialBank Average PrimeLendingRates Real PrimeLendingRate Average Weighted Deposit Rate (AWDR) Real WeightedDeposit Rate 5 Financial Sector Quarterly Update: 1st Quarter 2008 Table 3 ­ Exchange Rates Exchange Rates End of US$ GBS JPY* Euro SDR 07-Apr 109.98 219.04 92.00 149.58 167.76 May 111.78 219.91 92.00 148.69 167.72 June 111.37 223.00 90.00 149.62 168.76 July 111.76 228.95 94.00 153.62 171.31 August 112.99 227.73 97.00 154.43 173.09 September 113.4 229.71 99.00 160.65 176.40 October 112.32 230.58 98.00 160.91 175.57 November 110.52 228.15 100.00 162.99 175.65 December 108.65 214.39 100.00 160.24 172.21 08-Jan 107.75 214.61 101 160.21 172.25 Feb 107.83 214.50 103.00 163.65 172.85 March 107.76 216.36 108.00 170.17 177.19 Note: Rupees per 100 JPY; From January 2002, all 12 members of the Euro Currency Area replaced their national currencies with the Euro while subsequently more have joined. Source: Economic Research Department, Central Bank of Sri Lanka Figure 6 - Exchange Rates 250 200 150 100 50 0 US$ GBS JPY* Eur o SDR 6 Financial Sector Quarterly Update: 1st Quarter 2008 Table 4 : Consumer Price Indices 07-Apr May Jun Jul Aug Sep Oct Nov Dec 08-Jan Feb march Colombo Consumers' Price ( 1952=100) All items 5025.4 5176.4 5344.3 5496.5 5453.2 5513.8 5723 5976.2 5954.9 6302.5 6345.4 6441.7 Growth Rate % Month-to-month 0.1 3.0 3.2 2.8 -0.8 1.1 3.8 4.4 0.4 5.8 0.7 1.5 Point-to-point 16.3 13.7 13.0 17.6 17.3 17.3 18.2 19.3 16.4 21.6 24.0 18.1 12-month M/A 17.4 17.4 17.0 17.2 17.3 17.5 17.7 17.7 17.5 17.6 18.1 18.8 Source: Census and Statistics Department Figure 7: Inflation 30 25 20 15 10 5 0 07-Apr y Ma Jun Jul Aug Sep Oct Nov Dec08-Jan Feb rch ma Point-to-point 12-month M/A 7 Financial Sector Quarterly Update: 1st Quarter 2008 Table 5. Capital Market Information 08- Market Assessment Jan Feb Mar 07-Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar All Share Price Index 2924 2983 2790 2811 2508 2572 2442 2527 2556.6 2615 2560 2540.99 2446 2531 2550 Milanka Price Index *1 4040 4188 3838 3869 3550 3584 3358 3453 3459.9 3529.59 3372.97 3291.87 3113 3172 3181 MBSL Mid Cap *2 5093 5306 4779 4820 4213 4353 4213 4196 4217 4395.95 4298.04 4310.43 4104 4280 4265 Sector Indices Banks, Finance & Insurance 5321 5424 5125 4951 4385 4717 4628 4786 4743 5022 4992 5110 4833 4988 4977 Beverage, Food & Tobacco 3483 3498 3135 3239 2877 2973 2845 3002 3214 3198 3116 3184 3160 3335 3493 Chemicals & Pharmaceuticals 3397 3255 2907 2695 2293 2383 2286 2303 2463 2614 2523 2545 2411 2623 2672 Construction 557 547 558 568 501 540 527 567 583 604 731 723 784 903 820 Diversified Holdings 810 837 834 817 722 755 691 719 702 712 712 715 677 704 714 Footwear & Textiles 890 885 838 800 646 708 710 796 815 911 932 929 872 937 876 Hotels & Travels 1468 1437 1321 1303 1150 1213 1135 1223 1354 1299 1312 1335 1470 1384 1345 Investment Trusts 14764 14391 13024 13390 10634 11213 10249 10255 11566 11817 12206 12249 11124 11205 12714 Land & Property 330 335 299 293 245 272 273 288 281 304 285 287 270 294 294 Manufacturing 1308 1387 1254 1282 1135 1185 1138 1134 1132 1145 1093 1086 1121 1210 1208 Motors 3603 3665 3361 3461 3028 2963 3063 2885 2937 2942 2893 2736 2699 2757 2873 oil palm 20272 20128 22627 22652 18067 17680 17088 16634 17373 17879 20359 20164 19505 21454 21818 Plantations 450 440 421 410 385 433 426 450 437 448 597 723 712 874 825 Services 7028 7074 6603 6994 6026 6133 5564 5814 5937 5963 6203 7791 6772 7047 7438 Stores & Supplies 10309 10636 9641 9907 9851 8676 7731 9908 10020 11261 11244 10746 10312 10331 10935 Trading 2535 2536 2373 2492 2097 2286 2227 2244 2334 2610 2674 246 2451 2484 2417 Market Capitalization Monthly Market Turnover (Rs. Mns) 14935 14272 9730 4235 12537 5292 2500 7840 8528 10704 8310 6100 3419 7625 9654 Foreign Purchases (Rs. Mns) 3266 3861 3079 2711 10741 3571 1311 3605 5066 4154 3677 3414 1427 3096 4177 Foreign Sales (Rs. Mns) 4116 4847 2905 2631 8858 2352 566 887 3461 2103 1948 813 707 3556 2057 Net Purchases (Rs. Mns) -850 -986 174 80 1883 1219 745 2718 1605 2051 1729 2601 720 -460 2120 Market Capitalization (Rs. Billions) 910 928 869 885 804 828 787 815 827 843.37 825.32 820.65 792 820 828 1* - MILANKA - Covers the largest 25 companies 2 *- MBSL - Covers the next largest 25 companies Source: Colombo Stock Exchange 8 Financial Sector Quarterly Update: 1st Quarter 2008 Figure 8 Equity Market: Indices Figure 9: Equity Market - Sector Indices 6000 16000 5000 14000 4000 12000 cesidnI 3000 10000 2000 8000 1000 6000 0 4000 2000 0 Banks, Finance & Insurance Beverage, Food & Tobacco M ilanka Price Index *1 M BSL M id Cap *2 Investment Trusts Figure 10:Market Performance . Monthly Market Turnover (Rs.Mns) ForeignPurchases(Rs.Mns) ForeignSales(Rs.Mns) Net Purchases(Rs.Mns) Market Capitalization (Rs.Billions) 9