Economic CapsuleAugust 2014

Research & Development Unit

C O N T E N T SFINANCIAL SECTOR NEWS Commercial Bank’s 6-month Pre-tax Profit Surpasses Rs. 6 bn Mark

Commercial Bank Partners with DIMO to Offer Special Leasing Packages

Commercial Bank Upgrades Corporate Online Banking

ECONOMIC & BUSINESS NEWS

Central Bank Enters into an Investment Agreement with People’s Bank of China

External Sector Performance – 1H, 2014

FDIs

Sri Lanka’s High External Funding Remains Rating Weakness: Fitch

IFC Invests in Cargills Foods

Floating Market, Open for Business

ANALYSIS & FORECAST

BANKING NEWS

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Commercial Bank’s 6-month Pre-tax Profit Surpasses Rs. 6 bn Mark

Commercial Bank has reported a noteworthy performance, posting profit before tax of Rs 6.474 bn and net profit after tax of Rs 4.479 bn for the first half of 2014.

The Bank’s profit before financial VAT and NBT was up 1.92% to Rs 7.587 bn. The imposition of Nation Building Tax (NBT) from 1st January 2014 resulted in the Bank’s NBT for the six months amounting to Rs 159 mn. Financial VAT and NBT together totalled Rs 1.113 bn for the first half 2014, an increase of 18.88%. These factors contributed to the marginal drop in the profit before tax of Rs 6.474 bn for the period under review. However, the profit after tax of Rs 4.479 bn reflected an increase of Rs 7.5 mn.

The Bank’s total assets reached Rs. 683.579 bn as at 30th June 2014, a growth of Rs 125.468 bn or 22.48% over the corresponding period last year and Rs. 76.973 bn or 12.69% since December 31, 2013.

Loans and receivables totalled to Rs 438 bn at the end of the period under review, an increase of Rs 18.7 bn or 4.46% since December 31, 2013, and a growth of Rs 48 bn or 12.33%, over corresponding period last year.

The focus on recoveries enabled the Bank to reduce both the Gross NPL ratio and the Net NPL ratio to 4.32% and 2.48% as at end June 2014 from 4.40% and 2.54% respectively as at end March 2014 despite industry NPL levels remaining high at 6.2%.

Total deposits grew by Rs 38.216 bn or 8.21% over the six months at an average of more than Rs 6.4 bn a month, to Rs 503.563 bn as at June 30, 2014. Deposit growth over the corresponding period of last year was Rs 74 bn or 17.23%.

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Commercial Bank Partners with DIMO to Offer Special Leasing Packages

The Commercial Bank of Ceylon has once again partnered with Diesel and Motor Engineering PLC (DIMO) to offer attractive leasing options for TATA commercial vehicles in a sixth month promotion commencing August 2014.

Under the agreement, DIMO will provide substantial discounts to Commercial Bank customers to lease TATA vehicles. The Bank will provide low interest rates and monthly rentals for leasing facilities. The vehicles covered under the special scheme include TATA trucks and buses.

A special insurance cover through Commercial Bancassurance has also been introduced for customers who lease vehicles through the Bank. This cover requires a low insurance premium.

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Commercial Bank Upgrades Corporate Online Banking

Corporate customers of Commercial Bank’s Online Banking service, now enjoy several new benefits with the latest release offered via www.combank.lk.

This includes the latest security enhancements for the benefit of the bank’s corporate customers such as two layer login; secure image upload where a user can upload a favourite image in to the Online Banking portal so that it would be displayed when signing on, facilitating verification of the site prior to entering a password; and a virtual key board that gives the user the option to use an on screen key board to avoid stealing of passwords.

This latest release has many other value additions. It is capable of allowing single/dual or multi-level authorisation facility for payments, helping large companies to automate many of their payments. The system is also capable of applying payment limits according to the signature rules of various companies. Further, this system is also capable of allowing corporates to schedule their bill payments to be effected on a future date/actual due date.

Viewing images of deposited and presented cheques is also possible now for users of this facility. This is the first time a bank in Sri Lanka has enabled its customers to view images of their deposited clearing cheques through an online banking platform. Registering of regular payment beneficiaries and executing payments to them 365 days of the year is also now possible. Submission of Letter of Credit applications with supporting document uploading too is possible. The bank has also enabled a corporate administrator facility for companies to manage their internal user authorities as and when required, conveniently without having to contact the bank.

Economic & Business News

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Central Bank Enters into an Investment Agreement with People’s Bank of China

The Central Bank of Sri Lanka and the People’s Bank of China had entered into a Bilateral Investment Agreement on Bond Investment on the 25th August 2014, which enables the Central Bank of Sri Lanka to further diversify its reserves management activities into Chinese Renminbi denominated assets. As a result, the Central Bank of Sri Lanka could now access one of the largest and growing securities markets in the world, while also enhancing the cooperation between the two central banks, and the two countries.

Governor of the Central Bank of Sri Lanka, Mr. Ajith Nivard Cabraal exchanged the Bilateral Investment Agreement with the Governor of the People’s Bank of China, Mr. Zhou Xiaochuan, at a special signing ceremony held at People’s Bank of China, Beijing.

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Jan-June 2013

US$ mn

Jan- June 2014

US$ mn

Growth Jan- June

(%) Exports 4,656.4 5,438.9 16.8 Agricultural Products 1,117.3 1,356.7 21.4 Tea 684.2 797.0 16.5 Industrial Products 3,521.9 4,030.1 14.4 Textiles and Garments 2,000.8 2,412.9 20.6 Mineral Products 11.5 45.2 294.1 Imports 9,094.1 8,985.0 -1.2 Consumer Goods 1,524.5 1,599.4 4.9 Intermediate Goods 5,399.4 5,558.8 3.0 Fuel 2,219.5 2,460.7 10.9 Textiles and Textile Articles 965.9 1,048.8 8.6 Investment Goods 2,163.3 1,820.7 -15.8 Deficit in the Trade Account -4,437.6 -3,546.1 -20.1 Workers’ Remittances 3,039.0 3,360.0 10.6 Earnings from Tourism 785.4 1,050.9 33.8

The cumulative trade deficit contracted by 20.1%, as a result of a 16.8% growth in export earnings and a 1.2%decline in import expenditure during the first half of 2014.

The overall BOP is estimated to have recorded a healthy surplus of USD 1,953.6mn during the first half of 2014, compared to a deficit of USD 169.2 mn during the corresponding period of 2013.

Sri Lanka’s gross official reserves, reached USD 9.2 bn by end June. In terms of months of imports, gross official reserves were equivalent to 6.1 months of imports by end June 2014.

External Sector Performance – 1H, 2014

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FDIs

According to Government sources Foreign Direct Investments (FDIs) had risen by 51% to USD 817 mn (cumulative) for 1H, 2014 from a year earlier, and the government is planning to woo more by issuing privilege cards to investors.

A plan to incentivise investments with the issuance of privilege cards – Gold, Silver and Bronze (based on the invested amount) along with a host of other benefits, including a green channel at Immigration, has been revealed by the Investment Promotion Minister.

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Sri Lanka’s High External Funding Remains Rating Weakness: Fitch

Fitch Ratings expects external liquidity will become an increasingly important rating driver for emerging Asian sovereigns over the next 24 months as the Fed gradually withdraws monetary accommodation.Fitch expects policy management by emerging Asian sovereigns will be of central importance in determining their credit outlook.

A less generous external funding environment is likely to lead to continued pressure on sovereigns to run relatively tight policy to compress imports and reduce the need for foreign capital. Structural reform could help to bolster external competitiveness and raise exports, but this may be difficult to implement over the short to medium term.

Rating agency Fitch projects Sri Lanka (BB-/Stable) will cut its gross external funding requirement (GXFR) the most between 2012 and 2014, relative to its foreign reserves, and warned its high levels of GXFR remains a credit and rating weakness. A year after the “taper tantrum,” emerging Asian sovereigns with the biggest external funding needs are generally reducing their degree of external vulnerability, although only modestly in most cases.

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IFC Invests in Cargills Foods

Cargills (Ceylon) PLC has entered into an agreement with the International Finance Corporation (IFC) for an equity investment of Rs. 2.5 bn into its retail branch, Cargills Foods Company (CFC).

IFC will invest Rs. 2.5 bn (USD 20 mn) to subscribe for an 8% stake in the share capital of CFC. The IFC investment was based on a pre-money equity valuation of Rs. 29,325 mn for CFC as at the date of subscription and translates into a post-money valuation of Rs. 31,875 m for the retail company only.

According to the company’s Annual Report, the move comes as part of the restructuring exercise rolled out during 2013/14. Last year the Group embarked on a restructuring process with a view to establish business specific companies and strengthen the efforts of the management to optimise resources and expertise as well as create opportunities for value creation including attracting direct capital to the Group.

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The Floating Market which sits between the long distance private bus terminal in Pettah and the Fort railway station contains 92 stalls including a restaurant and refreshment stalls. In addition to the private shopping stalls it will also house a number of selected state institutions that will offer local produce, gems and jewellery etc.

The first of its kind market in the country, the Floating Market will offer people a unique shopping and dining experience in a beautiful setting. Stalls are built on the banks of a canal of the Beira Lake. Floating platforms selling vegetables and fruit are one of the attractions of the market.

Floating Market, Open for Business

Analysis & Forecast

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Inflation

Cont…

Currently, favorable supply-side developments, such as a ramp-up in agricultural production from the northern and eastern areas, are helping to contain inflation to the mid-single digit range.

Present trends indicate that inflation is likely to remain within the CBSL’s 4-6% target range, and private credit growth is likely to remain well below its 16% y/y target for year-end. The YTD decline in inflation has been much sharper than what had been expected – largely because the impact of the drought in Q4-2013 has been less than what was anticipated.

Interest Rate During 2013, monetary policy had been progressively eased with a view to assisting the

country’s growth prospects. Interest rates had recorded a decreasing trend following the 50 basis points reduction in policy rates by the CBSL in May 2013 and this trend was supported by the 200 basis points reduction in SRR in July, 2013.

Market interest rates have continued to adjust downwards. Short term interest rates, including the average weighted prime lending rate (AWPR) have decreased to historic low levels while longer term lending rates such as interest rates on housing loans and leasing are adjusting downwards. Deposit rates, which fell in tandem with policy interest rates, appear to have stabilised at their new levels.

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Credit to Private Sector

Total credit growth has declined substantially from the peak rates seen in late 2011/early 2012. From the start of 2012 until May 2014, total credit growth declined by 35ppt to 5.1% y/y. Of this decline, roughly 60% can be attributed to a fall in private credit growth (currently 2.0% y/y), 30% to slower government credit growth, and the remaining 10% to a drop in credit to public corporations. The decline in private credit growth has been even more pronounced than expected.

Weak private credit growth can be primarily attributed to a significant decline in loans to the consumer sector, which account for 30% of total private-sector loans. Of the 28ppt fall in private credit growth since the start of 2012, 40% can be attributed to a decline in consumer loan growth. This decline in loan growth to the consumer sector is masking some improvements in private-sector lending (e.g., in the industrial and services sectors).

The fall in consumer loan growth is driven by a fall in pawning-related loans (which constitute the bulk of personal loans), in light of the 30% fall in gold prices since the end of 2012. During the credit boom in 2011, consumer loans were the largest contributor to private credit growth. Swings in consumer loan growth tend to have a significant impact on total private credit growth.

Cont…

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Exchange Rate

The domestic foreign exchange market has remained relatively stable year-to-date, with the Sri Lankan rupee marginally appreciating by 0.45 % against the US dollar during the year up to 18 August 2014.

IMF analysis indicates that the exchange rate is broadly in line with fundamentals, and the analysis saw merit in CBSL’s purchases to build its reserves, which remain on the lower end of most reserve adequacy metrics. However, IMF has also cautioned that the persistent stability of the rupee (vis-à-vis the US dollar) that has arisen as a side effect of foreign exchange absorption by the CBSL since the fourth quarter of 2013 carries risks. First, it may create the perception that the rupee is implicitly fixed—a point supported by the shift in exchange rate classification from “managed float” to “stabilized” under the IMF’s Annual Report on Exchange Rate Arrangements. This perception could lead market participants and firms to hold un-hedged foreign exchange risk on their balance sheets. Second, should external balance continue to improve and inflation remains low, it could gradually lead to increasing currency misalignment.

Therefore, sufficient exchange rate flexibility will be required to adjust to fundamental pressures, while intervention will have to be limited to accumulation of reserves and smoothing short-term volatility according to the IMF.

Cont…

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Global Economic Prospects

The global growth for 2014 is expected to be 3.4%, reflecting the impact of the weak first quarter, particularly in the US and a less optimistic outlook for several emerging markets. Global growth is expected to rebound from the second quarter of 2014.

The IMF points to the fact that although global recovery continues, it is nevertheless at an uneven pace, and that downside risks remain. The update therefore emphasizes the need for continued policy efforts to secure a more robust recovery.

Global growth decelerated more than expected in the first quarter of 2014, largely because of temporary setbacks, including a sharp correction to an earlier inventory buildup and the effects of a harsh winter on domestic demand in the United States.

Growth was adversely affected in China as policies were tightened to dampen credit growth and housing market activity. Growth moderated in other emerging markets due to softer external demand and also because of slower-than-expected investment growth.

The views expressed in Economic Capsule are not necessarily those of the Management of Commercial Bank of Ceylon PLC

The information contained in this presentation has been drawn from sources that we believe to be reliable. However, while we have taken reasonable care to maintain accuracy/completeness of the information, it should be noted that Commercial Bank of Ceylon PLC and/or its employees should not be held responsible, for providing the information or for losses or damages, financial or otherwise, suffered in consequence of using such information for whatever purpose.

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