41108 Financial Sector Quarterly Update- 2ndt Quarter 2006

SRI LANKA

FINANCIAL SECTOR QUARTERLY UPDATE

SECOND QUARTER 2006

• Highlights •

Public Disclosure Authorized

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 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 1st quarter of 2006, 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 40%. In terms of deposits, PDBs led with 45% followed by the SCBs with 43%. In terms of advances, the PDBs recorded 49% while the SCBs contributed only 37%, indicating that the PDBs continue to be more aggressive in the supply side. The

Public Disclosure Authorized PDBs, during the period under review, recorded an increase of 11% in terms of assets, 10% in terms of deposits and 9% in terms of advances. The four major private banks continued to dominate the PDB category accounting for 84% of the assets, 89% of the deposits and 84% of the loans granted. The Non Performing Loans (NPLs), as a percentage of total advances in the commercial banking sector, further declined from 7.9% in the 4th quarter 2005 to 7.6% in the 1st quarter, 2006. The decline was reflected in all categories. The banks continue to make high provisions for the NPLs and the Tsunami has not impacted adversely on the banks’ performance. The LankaClear officially commenced the Cheque Imaging and Truncation (CIT) system in May under a World Bank funded project bringing down the clearing time of cheques from over 7 days to less than 2 days in all regions of the country.

In May, Mr. Sunil Mendis announced his resignation after completing two years as the Governor of the Central Bank and the Government appointed Mr. Nivard Cabraal to that position from July. Mr. Cabraal was the Secretary to the Ministry of Plan Implementation and also was associated with “Mahinda

Public Disclosure Authorized Chintana”, which is considered the Policy Statement of the Government. He is an accountant by profession. Lanka Putra, a new licensed specialized bank was set up to support infrastructure and SME financing. The Government also announced that the failed Pramuka Bank will commence operations as a new state savings bank.

Performance of the Licensed Specialized Banks (LSB) : At the end of the 1st quarter 2006, out of the total assets of the LSBs, the National Savings Bank (NSB) led with 68% followed by DFCC Bank (16%), Regional Development Banks (7%) and the State Mortgage & Investment Bank (SMIB) (3%). In terms of their lending operations, DFCC led with 33% followed by NSB (31%), RDB (15%) and SMIB (8%). NPLs, as a percentage of total advances of the LSBs, declined from 9.3% in the 4th quarter to 7.7%.

Interest Rates : During the 2nd quarter of 2006, there has been reversal of the declining trend of the average prime lending rate and it has increased from 12.0% in March to 12.6% in June. The Central 2

Public Disclosure Authorized Bank increased the repo rate and reverse repo rate by 25 basis point in June to 9% and 10.50% respectively. The short term Treasury Bill rates have also increased marginally to 10.45%. The offer

1 The changes noted in the percentages of both commercial banks and specialized banks is mainly due to the NDB bank being transferred to the commercial category. 2 Active open market operations which commenced in March, 2003 continued. 1 Financial Sector Quarterly Update- 2ndt Quarter 2006

rates, in the interbank money market, have followed the market trends and have increased to a range of 11.1% - 11.6%. The Central Bank has been relatively aggressive in open market operations which helped in containing monetary expansion. Broad money supply has been increasing due to the rapid credit expansion for the private sector and though it has decelerated, the rate of increase is about 18%. The Central Bank on behalf of the Government issued Dollar denominated Sri Lanka Development Bonds in June and were heavily oversubscribed. The Government has decided to accept $250 million at the rate of LIBOR plus 1.3% for 2-year maturities and $50 million at LIBOR plus 1.4% for 3-year maturities.

Exchange Rate Movements:3 The Rupee continued to depreciate against all major currencies during the quarter. The rupee depreciated against the Dollar by 1.2%, Euro by 5.7%, SDR by 3%, Sterling Pound by 6.2% and Japanese Yen by 2.3%. The trade deficit widened but it has been offset by private remittances and official inflows. The gross official reserves in May amounted to $ 2.6 billion which cover 3.4 months of imports while the total reserves increased to $ 4.8 billion in April covering 5.8 months of imports.

Inflation: The inflation escalated in the 2nd quarter reversing the downward trend as predicted in the previous update. In the 2nd quarter of 2006, Point-to Point Index more than doubled from 6.4% in March to 17.7% in June and the Monthly Moving Average Index increased from 9.6% to 10.1%. The full impact of the fuel price adjustments is reflected despite the favorable prices in agricultural products. Paddy cultivation recorded a bumper harvest while the fisheries sector too has recovered substantially. Yet, the fuel, flour, electricity and transport price adjustments have resulted in the spiraling inflation bringing them up to a two-digit level.

Capital Market Movements4: Despite the continuation of the Cease-fire agreement, the LTTE has increased its attacks in the North and East as well as in Colombo. During the period under review, two major attacks on top officials of the armed forces demonstrate the fragility of the security situation. The capital market performance has been mixed and volatile. The ASPI has declined by 6.6% from 2,264 in March to 2,114 and Milanka and MBSL indices declined significantly by 5.2% and 10.4% respectively. The investors are still not confident of the conflict situation and the volatility in the market has been quite significant during the past few months. Monthly turnover ranged from Rs. 4.1 billion (US $ 39.4 million) to Rs. 7.2 billion (US $ 69.3 million) during the quarter. Foreign investor transactions recorded a net inflow of Rs. 1.6 billion (US $. 15.6 million) during the 2nd quarter of 2006 but in June, there was a net outflow while the market capitalization declined from Rs. 688 billion to Rs. 645 billion. With the support of the Central Bank and the primary dealers, the Bloomberg officially launched an e-bond trading system. Sri Lanka is the first South Asian country to introduce this system which enhances transparency and trade efficiency of government securities.

Report, Graphic design and concept: Sriyani Hulugalle Graph Update: Malathi Ratnayaka July 17, 2006

3 The Central Bank floated the Rupee in January 2003. 4 The investor sentiments have been strengthened since the cease fire since 2002

2 Financial Sector Quarterly Update: 2nd Quarter 2006

Table 1: Market Structure of the Commercial Banking System As at the end of 1st Quarter 2006

Licensed Commercial Banks

Figure 1-Commercial Bank Assets Figure 2 - Commercial Bank Deposits Figure 3: Commercial Bank Loans & Advances Foreign Foreign B anks Foreign Banks Banks 12 Privat e Private 14 % 15 % % Domestic Privat e Domestic Domestic Banks Banks Banks St at e 45% 49% Stat e 45% Co mmercial Commercial State Banks Banks Commercial 43% 37% Banks 40%

Figure 1-A- Assets of Private Domestic Bank Figure 3-A : Loans & Advances of Privat e Domestic Banks Figure 2-A: Deposits of the Private Domestic Banks Other Banks H NB Ot her B anks 16 % HNB Other Banks 24% 16 % 24% 10% HNB 27% Seylan Seylan Seylan 20% 20% 19 % Commercial Sampath Bank Bank Sampat h Commercial 13 % 27% B ank B ank Sampath 13 % 28% Bank Commercial 15 % Bank 28%

Note : Only in the case of Table 1, data relate to Quarter 1, 2006. Data reflect Domestic and Foreign Currency Banking Unit transactions. Source : CBSL Bank Supervision Department and individual commercial banks.

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Financial Sector Quarterly Update: 2nd Quarter 2006

Licensed Specialized Banks

Figure 3B: LSB Loans & Advances Figure 1B-LSB Assets RDBs 7% RDBs Others 15% NSB 6% Others 31% DFCC 13% 16%

SMIB NSB SMIB 3% 68% DFCC 8% 33%

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Financial Sector Quarterly Update: 2nd Quarter 2006

Table 2: Open Market Operations (Quarter 2, 2006)

Treasury Bills Treasury Bonds

91 Days 182 Days 364 Days 2 Years 3 Years 4 Years 5 Years 6 Years Av. Yield Av. Av. Av. Av. Month Volume % Volume Yield Volume Yield Volume Yield Volume Av. Yield Volume Av. Yield Volume Yield Volume Av. Yield

Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn % Rs. Mn %

July 5,972 9.03 319 9.19 681 9.36 100 10.39 600 6 10.42 1,500 10.74

August 5,994 9.34 315 9.39 2,622 9.48 1,250 10.83 850 10.85 1,000 10.65 600 7 10.87

September 7,410 9.62 405 9.76 1,371 9.80 2,000 11.02 600 8 11.05

October 7,902 9.74 340 9.91 1,680 9.98 560 11.04 510 11 11.08

November 5,628 10.02 372 10.21 1,253 10.29 950 11.12 1000 9 10.69

December 6,352 10.10 347 10.32 1,923 10.37 950 11.22 1000 10

2006 January 8,780 10.10 525 10.36 795 10.37 538 11.22 550 12 11.25

February 6,917 10.11 1054 10.37 1,363 10.37 2,848 11.16 300 11.25 300 11.34

March 6,100 10.10 2085 10.35 1,700 10.38 1,000 11.04 750 11.15 500 11.26

April 5,608 10.05 2834 10.34 3,047 10.37 1,500 10.85 500 10.87 750 10.90 100 10.90

May 1,854 10.09 1375 10.36 1,309 10.38 1,000 10.90 750 10.92 750 10.95

June 5,213 10.16 513 10.44 2,195 10.45 1,000 10.96 1,000 11.00

Source: Economic Research Department, Central Bank of Sri Lanka

Figure 4: Yield Curve of Govt. securities Figure 5 : Yield Trends of the Government Securities

12 12.0 11 10.0 10 8.0

9 6.0 % 8 4.0 2.0 7 0.0

Matur i ty of the Secur i ty

July August September October 91 Days 182 Days 364 Days 2 Year s 3 Year s November December 2006 January February March April May June 4 Year s 5 Year s

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Financial Sector Quarterly Update: 2nd Quarter 2006

Table 3 – Interest Rates

July August September October November December January 2006 February March April May June Lending Rates (%) Commercial Bank Average Prime Lending Rates 10.83 11.30 11.76 11.85 12.03 12.24 12.12 11.95 11.97 11.93 11.98 12.63 Lowest Prime Lending Rates 9.00 9.00 10.00 9.80 10.00 10.40 10.00 10.00 10.21 10.50 10.50 11.12

Sri Lanka Inter Bank Offer Rate (SLIBOR) (%) 1 Day 9.76 9.81 10.31 10.54 10.56 10.93 10.29 10.28 10.47 10.33 10.68 11.1 7 Day 9.93 9.97 10.50 10.69 10.73 11.09 10.60 10.40 10.62 10.50 10.81 11.35 1 Month 10.26 10.34 10.85 10.98 11.00 11.50 10.95 10.75 10.96 10.91 11.05 11.64

Call Money Market Rate (Av) (%) 9.63 9.49 10.14 10.21 10.43 10.73 9.92 9.89 10.33 10.01 10.64 10.58 Central Bank Repurchase Rate (%) 8.25 8.25 8.5 8.50 8.50 8.75 8.75 8.75 8.75 8.75 8.75 9.00 CB Reverse Repurchase Rate (%) 9.75 9.75 10.00 10.00 10.00 10.25 10.25 10.25 10.25 10.25 10.25 10.50 Bank Rate (%) 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00

Savings Rates (%) 3.00- 3.00- 3.00- 3.00- Commercial Bank Savings Deposits 3.00-8.0 3.00-9.0 10.25 10.25 10.25 10.25 3.00-10.25 3.00-10.25 3.00-9.50 3.00-9.50 3.00-9.50 N/A 5.50- 5.50- 5.50- 5.50- 5.50- 5.50- Commercial Bank 1 Yr. Fixed Deposits 10.00 10.50 11.00 11.00 11.50 11.50 5.50-12.00 5.50-12.00 5.50-12.00 5.50-12.50 5.50-12.50 N/A National Savings Bank Savings Deposits 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 National Savings Bank 1 yr. Fixed Deposits 9.0 9.0 9.0 9.0 9.0 9.0 10.0 10.0 10.0 10.0 10.0 10.0 Average Weighted Deposit Rate (AWDR) 5.5 5.73 5.84 5.86 5.96 6.24 6.34 6.46 6.56 6.48 6.47 6.61

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Financial Sector Quarterly Update: 2nd Quarter 2006

Figure 6: Lending/ Deposit Rates Figure 7 - Srilanka Inter-Bank Offer Rates and Call Money Market Rate 16 14 16 12 10 12 % 8 % 8 6

4 4 2 0 Mo n th 0 Commercial Bank Average Prime Lending Rates Lo we s t P rim e Le nding R a te s 1 D a y 7 Day 1 M o n t h Call Money Market Rate (Av) Bank Rate (%) Average Weighted Deposit Rate (AWDR)

Figure 8: Real Interest Rates

15

10

5

0

-5

-10 Commercial Bank Average Prime Lending Rates Real Prime Lending Rate Average Weighted Deposit Rate (AWDR) Real Weighted Deposit Rate

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Financial Sector Quarterly Update: 2nd Quarter 2006

Table 4 – Exchange Rates Exchange Rates End of US$ GBS JPY* Euro SDR 2005 July 100.55 176.51 90.00 122.03 146.05 August 101.26 180.98 91.00 123.81 149.16 September 101.24 178.40 90.00 121.93 147.03 October 101.87 179.83 87.00 122.47 147.72 November 101.95 176.48 85.00 119.58 145.13 December 102.08 176.04 87.00 121.05 145.88 2006 January 102.20 180.80 87.00 123.62 147.48 February 102.49 178.32 88.00 121.46 147.43 March 102.72 179.35 88.00 124.97 148.10 April 102.76 185.01 90.00 128.69 150.45 May 102.93 193.78 91.00 132.39 153.06 June 103.94 190.52 90.00 132.07 152.54

Note: Rupees per 100 JPY; From January 2002, all 12 members of the Euro Currency Area replaced their national currencies with the Euro. Source: Economic Research Department, Central Bank of Sri Lanka

Figure 9: Exchange Rates 250

200

150

100 Rupees

50

0

US$ GBS JPY* Eur o SDR

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Financial Sector Quarterly Update: 2nd Quarter 2006

Table 5 : Consumer Prices Indices July August September October November December January February March April May June Colombo Consumers' Price ( 1952=100) All items 4073.0 4032.1 4072.4 4082.30 4172.90 4286.60 4304.0 4290.5 4209.0 4321.6 4553.1 4730.5 Growth Rate % Month-to-month 1.3 -1.0 1.0 0.2 2.2 2.7 0.4 -0.3 -1.9 2.7 5.4 3.9 Point-to-point 10.8 10.9 10.5 10.4 9.1 8.0 8.0 7.1 6.4 9.2 13.2 17.7 12-month M/A 12.7 12.8 12.7 12.5 12.1 11.6 11.1 10.3 9.6 9.2 9.4 10.1

Greater Colombo Consumers' Price Index (1989 = 100)

All items 374.8 372.3 374.1 375.20 383.10 389.20 391.4 390.4 388.7 395.3 410.0 - Growth Rate %

Point-to-point 9.8 9.1 6.6 6.00 4.80 3.30 4.2 4.2 4.9 6.1 9.7 -

12-month M/A 13.2 13.2 12.7 12.00 11.10 10.00 9.0 8.1 7.3 6.7 6.6 -

Source: Census and Statistics Department

Figure 10: Inflation 20 18 16 14 12 10 8 6 4 2 0

y t Jul ugus A ry September October vember a ry ua Point-to-pointNo December Janu br 12-monthl M/A Fe March ay Apri M June

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Financial Sector Quarterly Update: 2nd Quarter 2006

Table 6. Capital Market Information

2006- Market Assessment July August September October November December January February March April May June All Share Price Index 2047 2145 2434 2516 2292 1922 2139 2213 2264 2263 2204 2114 Milanka Price Index *1 2734 2804 3209 3321 2944 2451 2773 2801 2878 2861 2817 2729 MBSL Mid Cap *2 3420 3549 3951 4272 3901 3292 3847 3889 3939 3878 3673 3531 Sector Indices Banks, Finance & Insurance 3334 3585 4090 4406 4114 3575 3922 4089 4147 4101 4016 3832 Beverage, Food & Tobacco 1830 1913 2406 2476 2245 1890 2078 2202 2259 2282 2196 2245 Chemicals & Pharmaceuticals 2338 2383 2494 2496 2200 1763 1982 2510 2565 2485 2489 2266 Construction 369 356 365 382 329 272 301 307 328 308 309 292 Diversified Holdings 649 702 790 789 720 596 631 688 687 659 634 611 Footwear & Textiles 817 853 949 1079 772 626 752 829 807 794 799 744 Hotels & Travels 1690 1739 1860 1902 1717 1359 1550 1575 1625 1584 1465 1345 Investment Trusts 9042 10099 12416 13239 11908 8382 10340 10449 10580 10791 9810 8793 Land & Property 266 273 339 478 366 293 375 385 414 366 347 336 Manufacturing 1021 1033 1139 1172 1046 843 984 989 993 974 927 908 Motors 1350 1527 1932 1992 1860 1517 1736 2069 2067 2007 2039 2139 oil palm 19326 20565 19998 19934 18602 18086 20025 20404 19624 23179 23204 20464 Plantations 298 299 327 342 342 245 283 368 356 339 390 381 Services 6770 6937 9015 9359 9359 6833 7956 7908 7710 7540 7090 6529 Stores & Supplies 8358 9445 9348 12007 12007 10910 7236 8840 10444 10437 10440 10305 Trading 1874 1868 1978 2342 2342 1672 2031 2014 2189 2093 1955 1866 Market Capitalization Monthly Market Turnover (Rs. Mns) 7924 12143 13353 13565 11578 4978 7897 7367 11362 6225 4178 7208 Foreign Purchases (Rs. Mns) 3066 3747 3674 3602 3960 1498 3688 1385 4731 2301 1825 1086 Foreign Sales (Rs. Mns) 1318 2488 1680 3244 3530 1180 3758 1952 3338 1381 844 1359 Net Purchases (Rs. Mns) 1748 1259 1994 358 430 318 -70 -567 1393 920 982 -274 Market Capitalization (Rs. Billions) 620 650 735 762 696 584 650 672 688 688 673 645

1* - MILANKA - Covers the largest 25 companies 2 *- MBSL - Covers the next largest 25 companies

Source: Colombo Stock Exchange

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Financial Sector Quarterly Update: 2nd Quarter 2006

Figure 11 Equity Market: Indices Figure 12: Equity M arket - Sect or Indices

4500 4000 14000 3500 12000 3000 10000 2500 8000

2000 6000 1500 4000 Indices

1000 2000

500 0 0

All Share Price Index M ilanka Price Index *1 B anks, Finance & Insurance Beverage, Food & Tobacco MBSL Mid Cap *2 Invest ment Trust s M anuf act uring

Figure 13: Market Perf ormance .

Monthly Market Turnover (Rs. Mns) Foreign Purchases (Rs. Mns) For eign Sales ( Rs. Mns) Net Purchases (Rs. Mns) Market Capitalization (Rs. Billions)

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