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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 Privat e Private 12 14 % 15 % % Domestic Privat e Domestic Domestic Banks Banks Banks St at e 45% 49% 45% Stat e Co mmercial State Commercial Banks Commercial Banks 43% Banks 37% 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 Ot her B anks HNB Other Banks H NB 16 % 16 % 24% 10% HNB 24% 27% Seylan Seylan 20% 19 % Seylan 20% Sampat h Commercial Commercial B ank B ank Sampath Sampath Bank 13 % 28% Bank Commercial Bank 15 % Bank 13 % 27% 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. 3 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% 4 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 11 October 7,902 9.74 340 9.91 1,680 9.98 560 11.04 510 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.