economic capsule - february 2011

Research & Development Unit

February 2011

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Commercial Bank Breaks Rs 5 Bn PAT Barrier in Resurgent 2010

Commercial Bank Performance 2006-2010

Consolidated Company Results (Profit After Tax)

Branch Openings

IPO News

Eight Banks Selected to Participate in WB Supported Project to Improve Access to Finance in Sri Lanka

Economic & Business News

Financial Sector NewsC

o n

t e

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HSBC Bullish on Lanka than Rating Firms

IMF Releases the Sixth Tranche of USD 216.6 Mn under the SBA Facility

Tourism – Jan 11

External Trade – Dec 10

Inflation - Feb 11

Crop Damage Due to Two Rounds of Floods in 2011

Crisis in Middle East and North Africa

Analysis & Forecast

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Financial Sector News > >


Commercial Bank Breaks Rs 5 Bn PAT Barrier in Resurgent 2010

Solid loan book growth and noteworthy improvements in most key indicators have contributed to Commercial Bank of Ceylon PLC attaining a major banking sector performance landmark in the year ending 31st December 2010.

CBC (Bank) crossed the milestone Rs 5 bn mark in profit after tax during the year to end FY 2010 with a net profit of Rs 5.523 bn, achieving a growth of 28.3 % over 2009.

The Bank’s profit before tax grew by a healthy 29.5 % to Rs 9.317 bn, an increase of more than Rs 2 bn in the year reviewed.

A welcome resurgence in credit demand and a drop in non-performing advances in absolute terms helped achieve this growth by facilitating a 32.2 % (Rs 4 bn) improvement in net interest income, from Rs 12.41 bn to Rs 16.41 bn.

Total operating income of the Bank recorded a 14.7 % growth to Rs 23.193 bn, despite a steep drop in interest rates

On the strength of these results, the Board of Directors of the Bank has proposed a final dividend of Rs 4 per share, made up of Rs 2 in cash and Rs 2 in the form of a scrip dividend, taking total dividend per share for the year to Rs 7. The Bank paid two interim dividends of Rs 1.50 each earlier in the year.

This is the third year running that the Commercial Bank has declared annual dividends of Rs 7 per share, the highest in the local banking sector.

Deposits improved by Rs 25 bn or 10.7 % to Rs 259.779 bn at 31st December 2010.

Gross loans and advances increased by Rs 45 bn to Rs 228.373 bn, a growth of more than 25 %.

Total assets of the Bank grew by Rs 47 bn in the 12 months to Rs 370 bn at the end of the year.

Total provisions for loan losses decreased by 22.3 % (Rs 342 mn) to Rs 1.192 bn in the period reviewed.

Non-performing loans, net of interest in suspense, reduced by Rs 2.7 bn to Rs 9.369 bn, giving the Bank a net NPL ratio of 4.22 %, one of the best in the industry.

Open Credit Exposure Ratio (ratio of net non-performing loans to capital) recorded a significant improvement, from 28.68 % in 2009 to 18.61 % in the year reviewed.

The Bank’s Basic Earnings per Share improved 27.7 % to Rs 14.67; Net Asset Value per Share increased by 16.1 % to Rs 88.22 from Rs 76.01 (re-stated subsequent to the share split of 1 for 2); Return on Equity improved by more than 2 percentage points to 17.9 %, and Return on Assets grew nearly 12 % to 1.6 %.

The Bank also maintained its Capital Adequacy Ratios at 10.8 % (Tier I) and 12.3 % (Tier II) despite the growth of its loan book.

Significantly, the Bank was able to limit the growth in total operating expenses to 6.4 %, despite adding 15 new branches to its network in 2010 and the consequent increase in personnel. With income growing at a faster rate than expenses, the Bank’s Cost Income Ratio declined more than 2 percentage points to 54.69 %.

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Commercial Bank Performance2006-2010

Source: CBC Annual Report 2010

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Consolidated Company Results (Profit After Tax)

09 Months ended 31.12.2010

31.12.10 31.12.09 % Change

Aitken Spence 2,193.1 1,911.6 14.7

JKH 6,142.3 2,540.2 142.0

Hayleys 843.8 1,319.4 (36.0)

Hemas 974.7 549.0 77.5

12 Months ended 31.12.2010

SLT 3,943.0 778.0 407.0

Dialog Axiata 5,047.4 (12,208.2) 141.3

Rs. Mn

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Branch Openings

189 Katukurunda 18th MiniCom Centre @ Cargills

190 Wattala 05th Service Point @ Arpico

191 K-Zone, Katubedda 06th Customer Service Point

192 Hambantota

Free Lanka Group Launches Rs 1.5 bn IPO

Union Bank IPO Oversubscribed 350 Times

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IPO News

The Colombo Stock Exchange (CSE) is targeting a minimum of 50 Initial Public Offerings (IPOs) in 2011 and expects several to enter the market within the next few months with at least two issues hitting Rs.5 bn.

According to Securities and Exchange Commission (SEC) Director General Mr. Malik Carder, around 10 IPOs are expected to enter the market before April 2011. He noted that at least two of them will hit Rs.5 bn with others expected to surpass the Rs.2.5 bn mark. State firms are also expected to enter the market

Sri Lankan stock market became the best performing in the world in 2010 and the market turnover was Rs. 570 bn. For the first two months of 2011 it has recorded Rs.127 bn.

Union Bank initial public offer for Rs 375 mn of stock has drawn record subscriptions of Rs 131 bn or 350 times making it the largest oversubscription ever in Sri Lanka. The previous high was with Singer Finance that attracted subscriptions 135 times the offer.

The number of applications counted was 30,100 and the number of shares applied for was 3.3 bn. Based on applications processed, the total value of the shares applied for was Rs.131 bn.

Sri Lanka’s Free Lanka Capital Holdings (FLCH), one the country’s largest tea producers and owning a large land base in Colombo, is offering its shares to the public – hoping to raise Rs 1.5 billion.

In an announcement, the company that owns the Pussellawa and Maturata tea plantations stated its Initial Public Offering (IPO) is to open on March 17, 2011 and will have for sale 300 million shares at Rs 5 each.

Sri Lanka IPO Flow to Pick up Pace in 2011

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Eight Banks Selected to Participate in WB Supported Project to Improve Access to Finance in Sri Lanka

According to Diarietou Gaye, World Bank Country Director for Sri Lanka and the Maldives, “The SME sector is expected to be one of the key elements in economic development in Sri Lanka.

Effective since January 2011, the project provides two facilities: – A line of credit to participating state and private commercial banks to refinance SME loans; – and a risk sharing facility administered by the Sri Lanka Insurance Company providing partial credit guarantees to reduce

the bank’s risk of lending to SME borrowers.

Under both facilities, participating financial institutions will be required to implement a technical assistance program to strengthen their SME banking capability over time and to provide capacity building to SMEs.

The selected banks:

Eight financial institutions have been selected to participate in a USD 57.4 mn World Bank (WB) project that supports the Sri Lanka Government’s efforts to improve access to finance for Small and Medium Enterprises (SMEs) affected by the global financial crisis.

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ECONOMY & BUSINESS NEWS > >


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Bullish on Lanka than Rating Firms

HSBC, has upgraded its own rating on Sri Lanka’s 2011 sovereign credit from B+ positive to BB-/Stable, which is above those given by major rating agencies.

HSBC backed its upgrade over Sri Lanka’s improving external profile saying it underpins higher credit rating. It also noted that structural reforms by Sri Lanka should sustain faster economic growth. It also said that its upgrade reflects initiatives on the Government’s fiscal consolidation and continued efforts to stimulate private sector capital formation.

HSBC Global Research - Asia’s Bond Markets

Rating Agency Current /Outlook

HSBC BB- Stable

S&P B+ Stable

Fitch B+ Positive

Moody’s B1 Stable

According to analysts the sovereign rating upgrade from HSBC Global Research represents a very positive development for Sri Lanka in the international bond markets, which has further enhanced positive sentiment amongst global investors towards the country. “With this upgrade to BB-, HSBC Global Research is now one step ahead of Moody’s, S&P and Fitch, and this is likely to add pressure on the rating agencies themselves to upgrade Sri Lanka too,” analysts opined.

Source: Daily FT 2011/03/04

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IMF Releases the Sixth Tranche of USD 216.6 Mn under the SBA Facility

Received on Tranche USD mn

July, 2009 1st 322.0

Nov, 2009 2nd 329.0

June, 2010 3rd & 4th 407.8

Sep, 2010 5th 212.5

Feb, 2011 6th 216.6

Full Amount of the IMF SBA - USD 2,599.4 mn

Total Funds Received up to now - USD 1,487.9 mn

Funds to be received - USD 1,111.5 mn

The Balance USD 1.1 Bn is to be spread across five tranches scheduled over the rest of 2011 and into the beginning of 2012.

Consequently, the gross official reserves had increased to USD 6.8 Bn by 3 Feb 2011 from USD 5.1 Bn at end Dec 2009. Gross official reserves were equivalent to 6.2 months of imports as at 3 Feb 2011

Source: CBSL & IMF

Inflation - Feb 11The annual average inflation, as measured by the Colombo Consumers’ Price Index, increased marginally to 6.1 % in February from 6.0 % in January, 2011. However, on a year-on-year basis, inflation increased to 7.8 % in February from 6.8 % in the previous month, mainly due to the increase in prices of most varieties of vegetables, coconut, coconut oil, red onions and rice primarily owing to both crop destruction and transport dislocations that occurred due to the flood situation that prevailed in major food producing areas. Meanwhile, core inflation, both in terms of year-on-year and annual average bases decelerated further to 2.9 % and 5.5 %, respectively, in February 2011 compared to 3.6 % and 6.0 % in the previous month.


Tourism – Jan 11 Tourist arrivals increased by 46% to

654,476 in 2010. Earnings from tourism in 2010

increased by 65% to USD 576 Mn. Tourist arrivals in January 2011 were

74,197, an increase of 46.2% compared with January 2010.

External Trade – Dec 10

Category

Jan - Dec2009

US$ mn

Jan - Dec2010

US$ mn

ChangeJan - Dec(per cent)

Exports 7,084.5 8,307.0 17.3Imports 10,206.6 13,511.7 32.4Balance of Trade -3,122.1 -5,204.7 -66.7Workers’ Remittances 3,330.3 4,116.0 23.6

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Crop Damage Due to Two Rounds of Floods in 2011Areas affected: Batticaloa, Trincomalee, Kilinochchi, Ampara, Vavuniya, Anuradhapura and Mahaweli System B

Mostly affected crops: Paddy, vegetables & other field crops (OFC) (maize, millets, pulses, condiments, onions, oil crops & potato

Expected paddy production loss: 0.75mn Mt (24.5 %)

Revised paddy production forecast for the Maha season:

2.3 mn Mt

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Crisis in Middle East and North Africa

A revolutionary wave of

demonstrations and protests have

been taking place in the Middle

East and North Africa since

December 2010.

To date Tunisia, Egypt, and Libya

have seen revolutions of historical

consequence, Algeria, Bahrain,

Iran, Iraq, Jordan, Oman, and

Yemen have all seen major

protests, and minor incidents have

occurred in Kuwait, Mauritania,

Morocco, Saudi Arabia, Somalia,

Sudan and Syria. To date, two

heads of state have been

overthrown—Tunisia's on 14

January and Egypt's on 11

February, 2011.

As many of the world's major oil producing countries are in the Middle East, the unrest has sent oil prices higher.

The International Monetary Fund accordingly revised its forecast for 2011 oil prices to reflect a higher price, and also reported that food prices could rise. Additionally, concerns about Egypt's Suez Canal have raised shipping and oil prices.

Recent unrest in the Middle East pushed London crude prices to nearly USD 120 recently, their highest level since August 2008, exacerbating worries about inflationary pressures in emerging Asian economies.

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Anal

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6M

The GDP growth rate for 1H 2011 is expected to be 5.0 % mainly due to the following factors:

GDP Growth Rate

Lack of adequate investments.

Floods destroyed nearly 0.75mn Mt of paddy produce, which is 24.5 % of the expected production due in the 'Maha' season. Besides, extensive losses have been recorded in relation to livestock and other crops.

The expected reduction in global economic growth, greater competition coming from other exporting countries, and the threat of dwindling western markets for our exports.

Period Growth Rate

3Q - 2010 8.0%

2010E 8.0%

1Q - 2011F 5.4%

2Q - 2011F 4.6%

1H - 2011F 5.0%F - Forecast, E - Estimate

Cont…

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Anal

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6M

The rupee is expected to slightly appreciate viz. the USD during 1H 2011 in view of the following:

Exchange Rate (Rs/USD)

The foreign exchange inflows in 2011 are expected to exceed the outflows due to an expected continuation of foreign fund investments in government securities.

Besides, the recent relaxation of foreign exchange controls is expected to encourage further foreign fund inflows. Foreign fund inflows will be further boosted by continued inflow of funds under the IMF SBA facility as well as continued fund inflows from India, China and Japan.

The government’s stated commitment to keep the exchange rate at a more or less stable level.

Central Bank may allow the rupee to slightly appreciate with a view to curtailing inflationary pressure coming from imports.

Period Exchange Rate

25 Feb 11 110.80

June 2011 F 109.5

F - Forecast

Cont…

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Anal

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6MInflation is expected to record 6.6 % by end 1H 2011 due to the following:

Inflation (Annual Average Change in CCPI)

Oil prices are expected to remain high (above USD 100/bbl). The current turmoil sweeping across the Middle East & North Africa is likely to exert upward pressure on oil prices.

Extensive crop losses in relation to paddy and other crops and damage caused to livestock due to the recent floods, will cause supply side problems.

The expected Maha season production would be sufficient up to mid October 2011.

Global food shortages and resultant increase in food prices. However, the expected appreciation or the stability of Rs/USD

exchange rate would help to reduce the imported inflationary pressures.

The DCS is planning to replace the current inflation index with a new one during 1H 2011. Reportedly, the new index will give lower weightages to food and energy sectors, when compared to the respective weightages given in the current index. Therefore, the new index may reflect a lower rate of inflation.

Period A. A.

Feb 2011 6.1%

End June 2011 F 6.6%

F - Forecast

Cont…

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Anal

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6M

The low interest rate scenario can be expected to prevail in 1H 2011(albeit slightly higher than the current rates) in view of the following:

Interest Rates

The government’s keenness to keep interest rates low to drive investments and growth and also to keep the interest cost of public debt under control.

Subdued rate of inflation Although Budget 2011 envisages greater

dependence on domestic sources to finance the budget deficit, excess liquidity in the banking system will help to stem upward pressure on interest rates.

Rate 25 Feb 11 % Jun 2011 % F

PLR 9.13 9.20

T Bill- 03 months 6.97 7.20

T Bill- 12 months 7.33 7.40

AWFDR (Jan 11) 8.16 8.25

F - Forecast

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.

Those who feel that they have never made a mistake in their lives, have never tried a new thing in their lives.

Albert Einstein

economic capsule - february 2011

Economy & Finance