Economic Capsule - January 2014

ECONOMIC
CAPSULE
January 2014

< Research & Development Unit >

CONTENTS
FINANCIAL SECTOR NEWS 

ANALYSIS & FORECAST



Commercial Bank Bags Overall Gold at JASTECA CSR Awards



Sri Lanka Medium Term Framework Projections – Road M



Commercial Bank Installs ‘Forex ATM’ at Crescat



IMF World Economic Outlook



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



Central Bank of Sri Lanka - Consolidation of the Financial Sector

ECONOMIC & BUSINESS 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

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 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.
 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.
 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 Sector
Sri 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 …
Number of
Banks

Capital
(Rs Bn)

Total Assets
(Rs Bn)

Market
share %

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


3

45.0

540.7

9.2


3

31.0

307.6

5.2

Less than Rs 50 Bn

4

33.6

183.3

3.1

Assets size


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 total
assets of the Banking sector…
Number of
Banks

Total Assets
(Rs Bn)

Market
share %

Capital
(Rs Bn)


1

79.7

1.4

4.3

Less than Rs 50 Bn

4

68.1

1.2

12.9

Assets size

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

Number of
Banks

Total Assets
(Rs Bn)

Market
share %

Capital
(Rs Bn)


1

297.2

5.1

26.8


1

107.3

1.8

16.0

Below Rs 50 Bn

10

173.8

3.0

40.8


Cont…

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

Total Assets
(Rs Bn)

Market
share %

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

Assets

Cont…


To ensure Financial System Stability, the expected outcome in consolidation is expected
to 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
Individual Group
consolidation…
Category
A

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

Category
B

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

Category
C

• 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

NBFIs

wise

19

13

38

35

1

1
Cont…


All Banks and NBFIs will be expected to adhere to a rather focused time-line...
Consolidation/Merger Strategy
Merger of NBFIs within a
Group

Submission of the
Plan of Action to
Central Bank

Target Date for
Completion

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 are
expected to be absorbed by December
2014, while any remaining are
expected to be completed by first half
of 2015

Increase of minimum core
capital of NBFIs to Rs. 1 bn

31 December 2014

1 January 2016

Increase of minimum core
capital 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…


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 bn
Licensed 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 Management
Framework by the introduction of the Basel III
Liquidity Coverage Ratio (LCR)

In 2014: Supervisory Observation period
In November 2014: Issue Direction to maintain
minimum LCR effective from 1st January 2015

Introduce a Regulatory Framework for Valuation of
immovable Property of Licensed Banks

During 1st Quarter 2014

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

During 2014
Cont…

Several new Regulatory measures will be implemented in the banking sector…
Key Policy Measure
Incorporate appropriate changes to existing regulatory framework in line with new
accounting standards
•Introduction of the new off-site surveillance reporting system

Target Date

From 2nd Quarter 2014

•Amendments to existing Directions and other regulations
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


Sri Lanka Issues USD 1 Bn International Sovereign Bond Issue
 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.

Year

2007
2009
2010
2011
2012
2014

Amount
(USD mn)

Period

Interest
Rate %

500
500
1,000
1,000
1,000
1,000

5 year
5 year
10 year
10 year
10 year
5 year

8.25
7.40
6.25
6.25
5.875
6.00

Bank

Year

Amount
(USD mn)

Period

Interest
Rate %

BOC
NSB
DFCC

2012
2013
2013

500
750
100

5 year
5 year
5 year

6.875
8.875
9.625
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
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

1,411.9

1,542.2

9.2

7,371.2

7,741.4

5.0

3,991.1

4,508.3

13.0

61.3

51.6

-15.9

19,190.2

17,999.2

-6.2

2,995.2

3,182.5

6.3

11,577.6

10,550.2

-8.9

5,044.6

4,308.2

-14.6

4,589.8

4,252.7

-7.3

-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

Tea
Industrial Products
Textiles and Garments
Mineral Products
Imports
Consumer Goods
Intermediate Goods
Fuel
Investment Goods
Deficit in the Trade Account


Source: Central Bank of Sri Lanka

 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.

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.

Sri Lanka Medium Term Framework Projections – Road Map 2014
2014

Projections
2015

2016

7.2

7.8

8.2

8.5

% 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

Indicator

Unit

2013 (Est)

Real GDP Growth

%

Total Investment

Source: Central Bank of Sri Lanka – Road Map 2014

IMF World Economic Outlook
January 2014 Update


We wish all of you a Peaceful Christmas and a
Meaningful New Year

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

Economic Capsule - January 2014

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