economic capsule - december 2012

< Research & Development Unit >

December 2012

FINANCIAL SECTOR NEWS

Commercial Bank’s 2011 Annual Report Selected as the Best ‘Banking Sector’ Annual Report

Central Bank Governor, Enumerates 21 Point Plan for Bankers

Further Relaxations in Foreign Exchange

Sri Lankan Banks : Fitch 2013 Outlook

Bank Rating Outlooks 2013: China, India, Malaysia & Vietnam


C O N T E N T S

ECONOMIC & BUSINESS NEWS

Sri Lanka Prosperity Index

Sri Lanka’s 3Q GDP Grows by 4.8%

CBSL Cuts Policy Rate by 25 Basis Points

Sri Lanka Welcomes One Millionth Tourist

External Sector Performance - November 2012

Inflation - December 2012

Asia-Pacific Sovereign Credit Overview - Fitch Ratings

FINANCIAL SECTOR NEWS


Commercial Bank’s 2011 Annual Report Selected as the Best ‘Banking Sector’ Annual Report

Commercial Bank 2011 Annual Report won the following awards at the "Excellence in Annual Reports Awards - 2012" competition organized by The Institute of Chartered Accountants of Sri Lanka.

Overall Category - Bronze Award (Joint) Banking Sector - Gold Award Corporate Governance Category - Silver Award


Central Bank Governor, Enumerates 21 Point Plan for Bankers

Central Bank Governor, Ajith Nivard Cabraal enumerated a “To Do List” for the Bankers to follow diligently from 2013 onwards at the Bank Directors’ Symposium held on 12th December 2012.

1. Keep abreast of macro-economic factors, both national and international.

2. Ensure that all regulatory directions of the Central Bank are followed diligently.

3. Keep a close eye on the Bank’s capital adequacy - present and future.

4. Pay close attention to corporate governance - in particular, Board practices, top management services, and regulatory responses.

5. Train staff continuously, so that they are prepared for the new developments in banking in the evolving economy.

6. Upgrade Information Systems for the new levels of business. Cont.


Central Bank Governor, Enumerates 21 Point Plan for Bankers (cont…)

7. Improve Risk Management Systems and pay close attention to local and international trends, rather than individual “one-off” events.

8. Develop a corporate planning culture and practice it diligently.

9. Be conscious of “conglomerate” risk, if the Bank is a part of a group, or has associates.

10. Keep a close tab on the Bank’s international links and business partners with regular “know your customer” updates.

11. Attempt to improve the Bank’s rating, with at least one upgrade each year.

12. Consider new opportunities, eg. investment banking, private banking services, fee based services, etc., and try to introduce new services on a staggered basis.

13. Plan for management “succession” as a routine exercise, not as an exceptional effort.

14. Constantly search for productivity improvements, and tighten the interest spreads to improve profitability.

15. Encourage funding lines for the “5 Hubs + Tourism” initiatives of the country. Cont.


Central Bank Governor, Enumerates 21 Point Plan for Bankers (cont…)

16. Maintain SME focus and use the Budget 2013 initiatives for SMEs’ effectively.

17. Support foreign remittance business, both from the sender and receiver angles.

18. Support lagging provinces’ growth, particularly Northern, Eastern and Uva Provinces.

19. Source foreign capital for Tier 1 and Tier 2 of the Bank, by using the balance sheet strengths effectively.

20. Promote foreign capital inflows among the Bank’s clients, and help to bridge the savings gap that is existing in the country, while using the new Exchange Control relaxations introduced by Budget 2013, to the best effect.

21. Support local entrepreneurship and create new business leaders for the future.

Source: Central Bank of Sri Lanka


Further Relaxations in Foreign Exchange

As per the Budget 2013 no approval is required from the Exchange Control Department for:

I. Sri Lankan residents and Sri Lankan expatriates to transfer their foreign savings into Sri Lanka, of which the rupee equivalent of USD 5 million will qualify for a 3 year tax holiday period.

II. Providers of goods and services to non residents to accept foreign currency if such receipts are:

III. Deposited in “Foreign Exchange Earners’ Accounts” in currencies of their choice in commercial banks within 7 working days of the transaction, or

IV. Converted into Sri Lankan rupees

V. Corporate entities to borrow up to USD 10 million per year over the next 3 years, 2013 to 2015.

VI. Licensed commercial banks to borrow up to USD 50 million per year over the next 3 years, 2013 to 2015.


Sri Lankan Banks : Fitch 2013 Outlook

According to Fitch, the Outlook on the National Long-Term Ratings of most Sri Lankan banks is Stable.

Fitch believes that domestic prospects should still be sufficient to support a reasonable performance and profile as the level of penetration still remains low – although risk management capacity and strength of franchises is likely to be put to the test.

Cont.


Sri Lankan Banks : Fitch 2013 Outlook (Cont…)

Economic Growth to Decelerate: Fitch forecasts Sri Lanka’s real GDP to fall to about 6.0%- 6.5% over 2012-2013, from 8.3% in 2011.

Loan Expansion to Moderate: Fitch expects the increase in lending to remain close to the 23% upper limit of the credit ceiling in 2012.

Potential Rise in NPLs: The uptick in NPLs up to end-Q312 may continue, reflecting the impact of higher input costs, drought and fragile external demand. NPL ratios could come under some pressure, but are unlikely to deteriorate to the peak experienced in 2009.

Constrained Earnings: Fitch expects profitability to moderate due to dampened net interest margins amidst intense competition for deposits and a potential rise in credit costs, as loan-loss reserves remain modest.

Higher Loans/Deposits Ratios: Loans/deposits ratios, which averaged 88% at 9M12, may continue to rise, as loan expansion could still outpace that of deposits. Fitch believes that reliance on non-deposit sources may continue, including funding obtained offshore, although deposits are likely to remain the main source of funding.

Stronger Capitalisation Needed: Greater capital buffers are needed to counterbalance structural balance sheet issues and to absorb unexpected losses. Core capital formation is likely to be reliant on profit retention unless domestic equity markets rebound.

Cont.

Source: 2013 Outlook: Asia-Pacific Banks - Fitch Ratings


Sri Lankan Banks : Fitch 2013 Outlook (Cont…)


Bank Rating Outlooks 2013: China, India, Malaysia & Vietnam

Source: 2013 Outlook: Asia-Pacific Banks - Fitch Ratings

ECONOMIC & BUSINESS NEWS


Sri Lanka Prosperity Index The SLPI is a multi-dimensional indicator reflecting the economic and social developments in the country and the provinces on an annual basis.

Province

2009 2010 Growth

2010/09

2011Growth

2011/10Index Rank Index Rank Index Rank

Western 72.2 1 73.5 1 1.9 76.1 1 3.5

Central 54.5 3 56.7 3 4.1 58.3 3 2.9

Southern 56.8 2 57.8 2 1.8 60.0 2 3.7

Northern 48.9 9 51.8 9 5.8 55.6 6 7.5

Eastern 50.0 8 53.3 6 6.7 54.6 8 2.5

North Western 53.3 4 55.1 4 3.4 57.1 4 3.7

North Central 50.9 7 53.0 7 4.3 54.9 7 3.5

Uva 50.9 6 52.6 8 3.4 54.5 9 3.6

Sabaragamuwa 51.8 5 53.9 5 4.1 55.8 5 3.6

Sri Lanka 56.5 58.2 3.1 60.6 4.1Source :Central Bank of Sri Lanka


Sri Lanka’s 3Q GDP Grows by 4.8%

Sector

Third Quarter (3Q) 2011 (%) 2012 (%)

Share Growth Share Growth

Agri, Forestry & Fishing 11.8 6.5 11.2 -0.5Industry 29.1 10.8 29.8 7.3Services 59.1 7.8 59.0 4.6GDP 100.0 8.5 100.0 4.8

The Central Bank has revised Sri Lanka’s 2012 economic growth target to 6.5% from an earlier 6.8% due to its tight monetary and fiscal policies, according to the bank’s Deputy Governor.

Data released on 19.12.12 showed economic growth slowed to nearly a three-year low of 4.8% in the 3Q, from 6.4% y-o-y growth in the 2Q.

Sri Lanka implemented sweeping policy measures to avert a balance-of-payments crisis in 2012 by raising key policy rates twice since February and floating the rupee currency. The Central Bank also kept a lid on credit growth while the government raised fuel and electricity prices as part of an effort to contain the fiscal deficit.

“As a result of those tightening measures and as well as some of the supply side factors such as drought, the third quarter has been the most affected quarter,” according to Mr. Nandalal Weerasinghe, Deputy Central Bank Governor .“As a result, for the whole year, CBSL have revised down the growth to 6.5% from the earlier 6.8%. The global economy is also recovering, which means our external sector could rebound.”

He stated the country would see a USD 100 mn balance of payments surplus this year compared to a deficit of USD 1,061 mn in 2011, and the current account deficit would be reduced to 5% of the GDP this year compared to 8% in 2011.

Source: Reuters

Source: Census & Statistics Department


CBSL Cuts Policy Rate by 25 Basis Points

The Monetary Board of Central Bank of Sri Lanka has decided to reduce the policy rates by 25 basis points each while allowing the ceiling on rupee credit extended by banks to expire at end 2012.

Previous Rate (since 05.04.12)

Rate w.e.f. 12.12.12

Repo 7.75 7.50

RRepo 9.75 9.50

The Monetary Board was also of the view that the credit ceiling imposed for 2012 has served its purpose and such a policy measure may not be required in the near future.


Sri Lanka Welcomes One Millionth Tourist

Sri Lanka's tourist arrivals rose 20.1% to 109,202 in November 2012 from a year earlier with arrivals between Jan-Nov up 16% to 883,353.

Tourism earnings for the Jan-Nov period recorded an increase of 23% to USD 905.3 Mn compared to USD 735.7 Mn in the corresponding period of 2011.

According to the tourism promotion office, Sri Lanka is targeting 1.2 mn tourist arrivals for 2013 after welcoming a million tourists in 2012 more than it target of 950,000.


External Sector Performance November 2012

Category Jan. – Nov. 11’ US$ mn

Jan. – Nov. 12’ US$ mn

Growth % Jan. – Nov.

Exports 9,625.4 8,991.4 -6.6

Agricultural Products 2,316.6 2,114.1 -8.7

Tea 1,357.9 1,273.6 -6.2

Industrial Products 7,271.8 6,727.5 -7.5

Textiles and garments 3,809.1 3,633.3 -4.6

Rubber products 804.3 782.7 -2.7

Mineral Products 31.0 52.0 68.1

Imports 18,393.0 17,574.3 -4.5

Consumer Goods 3,328.3 2,755.0 -17.2

Intermediate Goods 11,114.9 10,701.6 -3.7

Petroleum 4,306.1 4,672.5 8.5

Textile and textile articles 2,118.8 2,072.6 -2.2

Investment Goods 3,904.4 4,090.9 4.8

Balance of Trade -8,767.6 -8,582.9 -2.1

InflationDecember 2012

MonthCCPI (%)

Year on Year Annual Avg.

Nov 2012 9.5 7.2

Dec 2012 9.2 7.6

Source: Central Bank of Sri Lanka


Asia-Pacific Sovereign Credit Overview - Fitch Ratings

Fitch expects emerging Asia’s macroeconomic performance as a region to outperform global peers.

Emerging Asia is projected to remain the fastest-growing global region, with growth of 6%-6.5% a year until 2014.

Even excluding still fast-growing China (constituting 48% of emerging Asia’s overall GDP), the rest of the region is expected to grow 5 % in 2012, picking up to 5.5% in 2013 and 6% in 2014, outpacing global emerging markets as a whole.

Inflation for the whole region is expected to average 3.7% a year in 2012-2014, close to the 2001-2011 average of 3.6% and below the average for all emerging markets of 4.8% a year.

Foreign Currency (FC) and Local Currency (LC) ratings affirmed at ‘BB-’ with a Stable Outlook, May 2012

− Fiscal consolidation− Strong growth, lower inflation

Public finances remain weak− Currency caused sharp Gross Govt. Debt

(GGD) rise in 2012

Policy tightening has eased BoP pressures, but needs to be monitored

Key rating drivers− Political stability− Policy consistency to deliver sustainable BoP− Sustained strong growth; improvement to

investment climate− Credible fiscal consolidation to put public debt on

a more sustainable path

Sri Lanka

Cont.


Asia-Pacific Sovereign Credit Overview - Fitch Ratings (Cont…)

The outlooks for long term Foreign Currency (FC) & Local Currency (LC) issuer default ratings were revised to Negative from Stable on 15 June 2012, which reflects risks that India’s long-term growth prospects may deteriorate further and that the fiscal consolidation process has slowed.

The economic outlook remains weak as real GDP continues to slow and inflation stays elevated.

India’s external financial position remains a rating strength, as foreign-exchange reserves stood at USD295bn at end-October 2012, equal to six months of current external payments. This provides India a key buffer during periods of higher global risk aversion

Reform measures (e.g. fuel price hikes, government divestment and opening up of FDI) are encouraging but unlikely to generate an immediate growth dividend; some proposals still require legislative approval

Upsides: An acceleration in economic reforms and an improving investment climate.

Downsides: A significant loosening in fiscal policy, particularly ahead of the 2014 general elections

India

Negative outlook for Local Currency issuer default ratings given in April 2011 were affirmed in April 2012.

No “hard landing” in short term But rebalancing economy towards consumption poses

medium-term challenge What could trigger a LC downgrade?

− Debt “migration” on to sovereign balance sheet from broader economy

− Risks to financial stability

− More detail on policy in these areas may follow leadership transition completion in March 2013 and affect outlook resolution

Ratings supported by sovereign balance sheet/FX reserves

China

Cont.

Long-Term Foreign Currency IDR - BBB- Long-Term Foreign Currency IDR - A+


Asia-Pacific Sovereign Credit Overview - Fitch Ratings (Cont…)

Sovereign

Long-Term

FC IDR*

Outlook

Status Trend

Public finances

Macro economics

Structural issues

External finances

Public finances

Macro economics

Structural issues

External finances

Emerging AsiaKorea AA - Stable Neutral Neutral Weakness Neutral Positive Stable Stable PositiveTaiwan A + Stable Neutral Strength Neutral Strength Stable Stable Stable StableChina A + Stable Neutral Strength Weakness Strength Negative Negative Negative StableMalaysia A - Stable Weakness Neutral Weakness Strength Negative Stable Stable NegativeThailand BBB Stable Neutral Neutral Weakness Strength Stable Stable Stable StableIndonesia BBB - Stable Neutral Neutral Weakness Weakness Stable Stable Stable StableIndia BBB - Negative Weakness Neutral Weakness Strength Negative Negative Negative NegativePhilippines BB+ Stable Neutral Strength Weakness Strength Stable Stable Stable StableSri Lanka BB- Stable Weakness Neutral Neutral Weakness Positive Stable Stable NegativeMongolia B+ Stable Neutral Weakness Neutral Neutral Stable Stable Stable StableVietnam B+ Stable Neutral Neutral Neutral Neutral Stable Positive Stable PositiveDeveloped AsiaAustralia AAA Stable Strength Strength Neutral Weakness Stable Stable Stable StableSingapore AAA Stable Strength Neutral Neutral Strength Stable Stable Stable StableHong Kong AA+ Stable Strength Strength Neutral Strength Stable Stable Stable StableNew Zealand AA Stable Neutral Neutral Neutral Weakness Stable Stable Stable StableJapan A+ Negative Weakness Weakness Strength Strength Negative Stable Stable Stable* Foreign Currency, Issuer Default Rating Source: Asia-Pacific Sovereign Credit Overview - Fitch Ratings

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

We wish all our Valued Readers a Very Happy Year

economic capsule - december 2012

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