Economic Capsule - January 2014

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J a n u a r y 2 0 1 4

E C O N O M I C C A P S U L E

ECONOMIC & BUSINESS NEWS

Commercial Bank Bags Overall Gold at JASTECA CSR Awards Commercial Bank Installs ‘Forex ATM’ at Crescat Commercial Bank opens ‘24 Hour Automated Banking Centre’ at Ward Place Central Bank of Sri Lanka - Consolidation of the Financial Sector

FINANCIAL SECTOR NEWS

Sri Lanka Issues USD 1 Bn International Sovereign Bond Issue Changes in the Monetary Policy External Sector Performance – December 2013 Global Foreign Direct Investments International Tourism Exceeds Expectations with Arrivals up by 52 mn in 2013

ANALYSIS & FORECAST Sri Lanka Medium Term Framework Projections – Roa

d Map 2014 IMF World Economic Outlook

C O N T E N T S

FINANCIAL SECTOR NEWS


Commercial Bank Bags Overall Gold at JASTECA CSR Awards

The Commercial Bank of Ceylon won Gold and Silver for its corporate social responsibility initiatives in Education and Healthcare respectively at the JASTECA CSR Awards presented by the Japan Sri Lanka Technical & Cultural Association.

The Bank’s multifaceted community programmes in the sphere of Education & Training received the JASTECA CSR Gold award, while its many initiatives in the sphere of Health were acknowledged with the Silver Award at the awards gala on Friday 17th January.

This is the first occasion that the Commercial Bank participated in the JASTECA CSR Awards competition.

The awards recognise the tangible impacts and sustainability of the programmes conducted by Commercial Bank in these two areas, under the guidance of the Bank’s CSR Trust.


Commercial Bank Installs ‘Forex ATM’ at Crescat

The Commercial Bank of Ceylon has installed an automated teller machine (ATM) that converts foreign currency into Sri Lanka Rupees at Crescat Boulevard, one of Colombo’s leading shopping malls.

Located on the walkway between Crescat Boulevard and the Cinnamon Grand hotel, the ATM accepts US Dollar and Euro currency notes and issues their equivalent in Sri Lanka Rupees, bringing convenience to many customers, particularly tourists.

Customers may change between US$ 10 or EUR 10 upto a maximum of US$ 200 or EUR 150.

“This foreign exchange ATM does not require an ATM card, and can be used by tourists and the public in addition to customers of Commercial Bank.


Commercial Bank opens ‘24 Hour Automated Banking Centre’ at Ward Place

The ‘24 Hour Automated Banking Centre’ offers opening of savings accounts and fixed deposits, access to online banking, settlement of credit card dues, and withdrawals via an ATM, as well as cash and cheque deposits.

The Commercial Bank has opened its first 24 Hour Automated Banking Centre at its Ward Place branch to offer a range of services around the clock, every day of the year.

Customers can also submit loan applications through the Automated Banking Centre at a later stage, the Bank said.


Central Bank of Sri Lanka - Consolidation of the Financial SectorSri Lanka’s present financial system now needs some structural changes to ensure that Banks & NBFIs are well positioned in the envisaged US$100 bn economy…

Banks and NBFIs account for 64 % of the entire Financial System assets Banks – 57% NBIFs – 7%

At present, only 5 domestic banks have asset bases of over Rs. 500 bn …

Assets size Number ofBanks

Capital(Rs Bn)

Total Assets(Rs Bn)

Marketshare %

Over Rs 500 Bn 5 172.3 3,891.0 66.3

Rs 250 Bn to Rs 500 Bn 1 21.5 369.8 6.3

Rs 100 Bn to Rs 250 Bn 3 45.0 540.7 9.2

Rs 50 Bn to Rs 100 Bn 3 31.0 307.6 5.2

Less than Rs 50 Bn 4 33.6 183.3 3.1

Cont…


Consolidation of the Financial Sector (cont…)

The small State-owned Banks with assets less than Rs. 100 bn account for just 2.6% of totalassets of the Banking sector…


Total Assets(Rs Bn)

Marketshare %

Capital(Rs Bn)

Rs 50 Bn to Rs 100 Bn 1 79.7 1.4 4.3

Less than Rs 50 Bn 4 68.1 1.2 12.9

12 Foreign Banks account for only 10% of market share, although many have been in operation in Sri Lanka for many decades!


Total Assets(Rs Bn)

Marketshare %

Capital(Rs Bn)

Rs 250 Bn to Rs 500 Bn 1 297.2 5.1 26.8

Rs 100 Bn to Rs 250 Bn 1 107.3 1.8 16.0

Below Rs 50 Bn 10 173.8 3.0 40.8Cont…



The current NBFI sector, which is about 7% of the financial sector, is also dominated by just a few NBFIs…

Assets Number of

NBIFsTotal Assets

(Rs Bn)Marketshare %

Capital(Rs Bn)

Over Rs 20 Bn 10 433.0 61.5 64.1

Rs. 8 Bn to 20 Bn 7 97.4 13.8 8.5

Less than Rs 8 Bn 40 169.3 24.1 3.5

Under Litigation 1 3.8 0.5 0.1

Cont…



To ensure Financial System Stability, the expected outcome in consolidation is expectedto result in a banking sector where…

At least 5 Sri Lankan banks will have assets of Rs. 1 trillion or more, with such banks also having a strong regional presence

There will be a reduced number of banks as a result of mergers and absorptions There will be a large Development Bank that will provide a substantial impetus to development banking

activities in the country Banks will rely on new and effective IT applications Banks will have substantially lower interest margins through increased efficiency and prudent management

of assets and liabilities Foreign banks in Sri Lanka will demonstrate a greater participation in economic activities, and will be making

significant contributions to the economy Domestic banks which had assets less than Rs.100 bn, will have assets of Rs.100 bn or more, through organic

growth and merger/absorption with other banks/NBFIs over a reasonable time horizon. Cont…



and … an NBFI sector where …

There will be about 20 NBFIs, of which around 3 would be specialized in Micro finance Each NBFI will have an asset base of over Rs 20 Bn NBFIs will have improved loss absorbency capabilities and enhanced resilience to internal and external

shocks, due to the increase of the quality and quantity of capital NBFIs will be able to attract low cost, long term funds in the form of deposits and debt instruments NBFIs will have improved cost efficiencies in order to be competitive NBFIs will be able to diversify their business models and be ready to deal with market volatilities NBFIs will be able to manage risks in an integrated manner NBFIs will have improved governance, and fit and proper directors and

Accordingly, the objective of merger/absorption plan would be to fashion an NBFI sector that comprises of a smaller number of large NBFIs, which are fully compliant with the Central Bank’s regulatory framework.

Cont…



The present 58 NBFIs will be identified as Category A, B and C in preparation for the consolidation…

CategoryB

CategoryA

CategoryC

NBFIs with :• Assets more than Rs. 8 bn• Core Capital more than Rs. 1 bn• High degree of compliance with Directions issued by CBSL

Individual NBFIs

Groupwise

19 13

38 35

1 1

• LFCs or SLCs or Groups of LFCs and/or SLCs that do not fulfill one or more of the criteria of the Category A.

• NBFIs where business is at a standstill. No action pertaining to the consolidation is possible due to the stay order issued by the Court of Appeal in respect of the restructuring plan

Cont…



All Banks and NBFIs will be expected to adhere to a rather focused time-line...

Consolidation/Merger StrategySubmission of thePlan of Action to

Central Bank

Target Date forCompletion

Merger of NBFIs within aGroup 31 March 2014 30 June 2014

Merger/Absorption of Category B NBFIs by Banks or Category A NBFIs 31 May 2014

The majority of Category B NBFIs areexpected to be absorbed by December 2014, while any remaining areexpected to be completed by first halfof 2015

Increase of minimum corecapital of NBFIs to Rs. 1 bn 31 December 2014 1 January 2016

Increase of minimum corecapital of NBFIs to Rs. 1.5 bn 31 December 2014 1 January 2018

Cont…



If it is observed that any Category B NBFIs may remain unabsorbed after 31st March 2015, the Central Bank may consider such a situation as a possible threat to financial system stability… In such an event, the Central Bank will issue Directions to any Banks or NBFIs, directing such

institutions to implement and/or undergo a suitable consolidation process, under the provisions of the Monetary Law Act, Banking Act or Finance Business Act.

This merger/absorption process must not adversely affect the staff of the respective institutions…

No staff member is to be forcibly retrenched as a result of these merger/absorption processes No salary of any employee is to be reduced from that prevailing as at 31st December 2013. Those involved in the merger/absorption process will be encouraged to appoint competent Human Resource Consultants to perform independent reviews on senior management

Cont…


Consolidation of the Financial Sector (cont…)In the meantime, banks’ capital will be strengthened significantly…Increase in minimum capital requirement for existing banks by 1st January 2016:Licensed Commercial Banks - minimum Rs. 10 bnLicensed Specialized Banks - minimum Rs. 5 bn

The Risk Management Framework of banks will also be improved further…Key Policy Measure Target Date

Issue guidelines on the Stress Testing Framework During 1st Quarter 2014

Implement the new Liquidity Risk ManagementFramework by the introduction of the Basel IIILiquidity Coverage Ratio (LCR)

In 2014: Supervisory Observation periodIn November 2014: Issue Direction to maintainminimum LCR effective from 1st January 2015

Introduce a Regulatory Framework for Valuation ofimmovable Property of Licensed Banks During 1st Quarter 2014

Introduce prudential requirements to regulate theexposure of the banking system to asset markets andother potential economic shocks and concentrations

During 2014Cont…



Several new Regulatory measures will be implemented in the banking sector…

Key Policy Measure Target Date

Incorporate appropriate changes to existing regulatory framework in line with new accounting standards•Introduction of the new off-site surveillance reporting system•Amendments to existing Directions and other regulations

From 2nd Quarter 2014

Establish minimum standards for core banking systems and other IT based platforms used by banks During 2nd Quarter 2014

Develop a comprehensive supervisory framework for consolidated supervision of banking groups During 2014

Cont…



In this newly emerging scenario, certain marketing practices currently pursued by Banks & NBFIs will be discontinued…

Lottery schemes will be prohibited

New guidelines will be issued on non-interest incentive schemes offered by banks to mobilize deposits

Accuracy of disclosures on interest rates, fees and charges, etc. will be closely monitored

The implementation of the current Directions on Customer

Charter of banks will be enforced

More focused attention will be given to customers’ complaints and consumer protection, so as to address grievances in an efficient and timely manner

Source: Central Bank of Sri Lanka - Master Plan on Consolidation of the Financial Sector

ECONOMIC & BUSINESS NEWS


Sri Lanka Issues USD 1 Bn International Sovereign Bond Issue

Year Amount(USD mn) Period Interest

Rate %

2007 500 5 year 8.252009 500 5 year 7.402010 1,000 10 year 6.252011 1,000 10 year 6.252012 1,000 10 year 5.8752014 1,000 5 year 6.00

Bank Year Amount(USD mn) Period Interest

Rate %

BOC 2012 500 5 year 6.875NSB 2013 750 5 year 8.875DFCC 2013 100 5 year 9.625

The Central Bank of Sri Lanka (CBSL), launched and priced a US$ 1.0 billion 5-year International Sovereign Bond (Issue) at a yield of 6.00 % per annum.

The Issue represents the sixth US Dollar benchmark offering in the international bond markets by Sri Lanka since 2007 and the first Sovereign Bond issue in the international capital markets in 2014.

Citigroup, The Hongkong and Shanghai Banking Corporation Limited, Standard Chartered Bank and UBS acted as Joint Lead Managers/Bookrunners on the transaction.

Cont…


Sri Lanka Issues USD 1 Bn International Sovereign Bond Issue (cont…)

Fitch Ratings, Moody's Investors Service and Standard and Poor’s have rated the Issue at 'BB-', ‘B1’ and ‘B+' respectively. The Issue was announced during the Asia morning on January 6, 2014 with an initial price guidance of 6.25 % per annum.

The final order books stood at US$ 3.2 billion, an oversubscription ratio of 3.2 times, from 200 accounts, achieved within eighteen hour bookbuild period.

Distriution: Asia 12 %, Europe 26 % and the US 62 %. Global Fund Managers were the largest investors in the transaction, representing 89 %, with Banks and Private Banks taking 8 % and 3 % respectively.


Changes in the Monetary Policy

The Monetary Board decided to establish a Standing Rate Corridor (SRC) in place of the current Policy Rate Corridor w.e.f. 02.01.14 Accordingly, the following changes will take place:

The current Standing Repurchase Facility will be renamed as the Standing Deposit Facility (SDF), and the Standing Deposit Facility Rate (SDFR) will be the rate for the placement of overnight excess funds of the banking system.

The current Standing Reverse Repurchase Facility will be renamed as the Standing Lending Facility (SLF), and the Standing Lending Facility Rate (SLFR) will be the rate for the lending of overnight funds to the banking system.

Repo SDFR

RRepo SLFR


Changes in the Monetary Policy (cont…)

Rate Cut The Monetary Board decided to reduce the

Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points to 8.00 % w.e.f 02.01.14, thereby compressing the Standing Rate Corridor to 150 basis points from the current 200 basis points.

It is expected that this compression will facilitate the reduction of the interest spread of banks over time, without affecting the deposit rates offered by banks to their customers. Source: CBSL



Open Market Operations Open Market Operation (OMO) auctions will continue unchanged, with Repurchase

and Reverse Repurchase auctions, depending on liquidity conditions in the domestic money market

The Monetary Board was of the view that the requirement of providing collateral by the Central Bank to OMO participants under the Standing Deposit Facility was unnecessary, since the Central Bank is the monetary authority of the country.

Accordingly, in consideration of the Central Bank’s zero credit risk in rupee transactions, the Monetary Board decided that, with effect from 1st February 2014, the Standing Deposit Facility will be uncollateralised.

However, all other OMO transactions will remain collateral-based, as at present.



CBSL Removes Minimum Cash Margin Requirement The Monetary Board also reviewed the minimum cash margin requirement of 100 %

against Letters of Credit opened with commercial banks for the import of certain categories of motor vehicles, imposed on 30th August 2013.

Considering the improvement in the external sector, the Monetary Board decided to remove this requirement with immediate effect.


External Sector Performance – December 2013

The overall BOP is estimated to have recorded a surplus of USD 991 mn during 2013.

Sri Lanka’s gross official reserves is estimated to have recorded USD 7.2 bn by end December 2013, and is estimated to be equivalent to around 4.5 months of imports.

Source: Central Bank of Sri Lanka

Category Jan-Dec

2012 US$ mn

Jan- Dec 2013

US$ mn

Growth Jan- Dec

(%)

Exports 9,773.5 10,386.2 6.3 Agricultural Products 2,331.5 2,581.1 10.7 Tea 1,411.9 1,542.2 9.2 Industrial Products 7,371.2 7,741.4 5.0 Textiles and Garments 3,991.1 4,508.3 13.0 Mineral Products 61.3 51.6 -15.9 Imports 19,190.2 17,999.2 -6.2 Consumer Goods 2,995.2 3,182.5 6.3 Intermediate Goods 11,577.6 10,550.2 -8.9 Fuel 5,044.6 4,308.2 -14.6 Investment Goods 4,589.8 4,252.7 -7.3 Deficit in the Trade Account -9,416.7 -7,613.0 -19.2 Workers’ Remittances 5,985.3 6,762.7 13.0 Earnings from Tourism 1,038.7 1,402.1 35.0


Global Foreign Direct Investments

Global foreign direct investment (FDI) inflows rose by 11% in 2013, to an estimated US$1.46 trillion.

FDI flows to developed countries remained at a historically low share of global total FDI flows (39%) for the second consecutive year. They increased by 12% to US$576 billion. FDI to the European Union (EU) increased, while flows to the United States continued their decline.

FDI flows to developing economies reached a new high of US$759 billion, accounting for 52% of global FDI inflows in 2013. At the regional level, flows to Latin America and the Caribbean, and Africa were up; developing Asia, with its flows at a level similar to 2012, remained the largest host region in the world.

Source: UNCTAD


International Tourism Exceeds Expectations with Arrivals up by 52 mn in 2013

International tourist arrivals grew by 5% in 2013, reaching a record 1,087 million arrivals, according to the latest UNWTO World Tourism Barometer.

Despite global economic challenges, international tourism results were well above expectations, with an additional 52 million international tourists travelling the world in 2013.

For 2014, UNWTO forecasts 4% to 4.5% growth - again, above the long term projections.

ANALYSIS & FORECAST


Sri Lanka Medium Term Framework Projections – Road Map 2014

Indicator Unit 2013 (Est)Projections

2014 2015 2016

Real GDP Growth % 7.2 7.8 8.2 8.5

Total Investment % of GDP 31.0 32.0 32.5 33.0

GDP Deflator % 7.0 6.0 5.5 5.0

Headline Inflation % 4.7 5.0 4.5 4.0

Trade Balance % of GDP -12.8 -11.6 -10.2 -8.4

Current Account Balance % of GDP -3.9 -2.4 -1.0 0.1

Overall Balance USD Mn 700 1,500 1,750 3,700

Current Account Balance (Fiscal) % of GDP -0.5 1.1 1.6 2.3

Overall Balance % of GDP -5.8 -5.2 -4.4 -3.8

Government Debt % of GDP 78.0 74.3 70.6 65.0

Broad Money Growth (M2b) % 16.0 14.0 14.0 14.0

Private Sector Credit Growth (in M2b) % 8.0 16.0 17.0 17.0

Source: Central Bank of Sri Lanka – Road Map 2014


IMF World Economic Outlook January 2014 Update

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.

Research & Development Unit

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Economic Capsule - January 2014

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