economic capsule - february 2016

Economic CapsuleFebruary 2016

Research & Development Unit

230th Issue

C O N T E N T S

BANKING AND FINANCE Group Results for the year ended 31 December 2015

CBC Branch Openings

Commercial Bank Adjudged Best Among Banks for Sustainability Reporting

Commercial Bank wins ‘Asia’s Best Integrated Report’ Award

Commercial Bank Announces Debenture Issue of Rs 5 bn. with Option to Increase to Rs 7 bn

Fitch Takes Rating Actions on Sri Lanka Financial Institutions on Sovereign Downgrade

ECONOMY & BUSINESS Fitch Downgrades Sri Lanka to 'B+'; Outlook Negative

Rising foreign deposits, debt add to Sri Lanka external weakness: Moody's

CBSL Increases its Policy Rates

Inflation

External Sector Performance 2015

Moody's Cuts China Outlook

Condominium Industry in Sri Lanka

October, 2014


Banking & Finance

4< Research & Development Unit >

Commercial Bank Group Results for the year ended 31 December 2015Profit Before Tax Profit After Tax Due to other

CustomersLoans and Receivables to other Customers

5

CBC Branch Openings

# 248 - Supermarket Banking Unit at the Laughs Supermarket Delgoda

Opening of the branch by Commercial Bank’s Assistant General Manager Personal Banking II Mr Niran Costa.

# 247 - Galle City Minicom Branch # 249 - BIA’s Departures Terminal

Opening of the Commercial Bank branch at the BIA Departures Terminal by the Bank’s Assistant General Manager Operations Mr Palitha Perera

Commercial Bank opened a second branch at the Bandaranaike International Airport (BIA) Katunayake, to serve the foreign currency needs of passengers using its Departures Terminal. The new branch will be open around the clock, 365 days of the year. In October last year, the Bank opened a similar branch at the airport’s Arrivals Terminal.

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Cont..


CBC Branch Openings (cont..)

Commercial Bank ‘s 250th service point is located within the Orion City complex at Dr. Danister de Silva Mawatha, Colombo 9, the new branch represents the Bank’s commitment to deploy the latest in secure technology to enhance convenience to customers and promote eco-friendly operations. Modelled on the Automated Banking Centre set up by the Bank at Ward Place, Colombo 7, this self service branch will facilitate real time cash deposits, sending of requests for account opening and loans, cheque deposits, access to the Bank’s Online Banking facility, fund transfers, cash withdrawals, bill payments and will also provide information services such as branch locations and interest rates throughout the day.

250th service point opened at Orion City

The Chairman of the Bank Mr. Dharma Dheerasinghe formally inaugurated the new branch.


Commercial Bank Adjudged Best Among Banks for Sustainability Reporting

The Sustainability Report of the Commercial Bank of Ceylon PLC has been adjudged the best in the Banking Sector at the 2015 Sri Lanka Sustainability Reporting Awards presented by the Association of Chartered Certified Accountants (ACCA) Sri Lanka Liaison Office.

One of five key segments in the Bank’s Annual Report for 2014, the Commercial Bank Sustainability Report is a comprehensive 57-page account covering the economic, social and environmental performance of Sri Lanka’s largest private bank for the fiscal year ending December 31, 2014.

The entries were judged on the triad of 3Cs - Completeness, Credibility and Communication.


Commercial Bank wins ‘Asia’s Best Integrated Report’ Award

Commercial Bank’s 2014 Annual Report was adjudged ‘Asia’s Best Integrated Report’ at the Asia Sustainability Reporting Awards in Singapore.

The Commercial Bank was the only Sri Lankan company to be awarded at this prestigious event. The award ceremony recognised companies under 14 awards categories and one winner was declared for each category.

Organised by CSR Works International, Singapore’s leading sustainability advisory, research and training firm, the Asia Sustainability Reporting Awards attracted 180 entries from companies in Hong Kong, China, Japan, India, Taiwan, Malaysia, Thailand, Sri Lanka, the Middle East, Indonesia, Singapore and the Philippines.


Commercial Bank Announces Debenture Issue of Rs 5 bn. with Option to Increase to Rs 7 bn Commercial Bank announced plans to raise Rs 5 bn via a debenture issue with an

option to increase it by a further Rs 2 bn, for the growth of the Bank’s lending portfolio and to further strengthen its balance sheet.

The listed, rated, unsecured, subordinated, redeemable debenture issue opened on 29th February.

The Bank will offer two types of debentures, Type A with a five year tenure and Type B with a 10 year tenure.

The five-year debentures will carry a fixed interest rate of 10.75% p.a. (AER 11.04%) payable semi-annually, while the ten-year debenture will offer a fixed interest rate of 11.25% p.a. (AER 11.57%), also payable semi-annually. The investors’ return is further enhanced by the tax concessions applicable to listed debentures.


Fitch Takes Rating Actions on Sri Lanka Financial Institutions on Sovereign Downgrade Fitch Ratings has downgraded the Issuer Default Ratings (IDR) of Bank of Ceylon

(BOC) and National Savings Bank (NSB) to 'B+' from 'BB-' and downgraded the IDRs of People's Leasing & Finance PLC's (PLC) IDRs to 'B' from 'B+'.The IDRs of DFCC Bank PLC (DFCC) were affirmed at 'B+'.

The Outlooks on all the IDRs are Negative to reflect the Negative Outlook on the sovereign.

Fitch maintains a stable sector outlook for the Sri Lankan banking sector for 2016 as Fitch do not expect the sector's credit profile to deteriorate materially even though operating conditions could become more challenging.

The operating environment remains a key rating driver for the Sri Lankan banking sector given its potential volatility.

Condominium Industry in Sri Lanka

October, 2014


Economy & Business


Fitch Downgrades Sri Lanka to 'B+'; Outlook NegativeFitch Ratings has downgraded Sri Lanka's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to 'B+' from 'BB-'.

A Negative Outlook has been assigned to the IDRs.

The issue ratings on Sri Lanka's senior unsecured foreign- and local-currency bonds are also downgraded to 'B+' from 'BB-'. The Country Ceiling is downgraded to 'B+' from 'BB-' and the Short-Term Foreign-Currency IDR is affirmed at 'B'.

The rating action reflects the following key rating drivers: Increasing refinancing risks Significant debt maturities Weaker public finances Decline in foreign-exchange reserves Foreign-currency debt portion remains high Cont..


Fitch Downgrades Sri Lanka to 'B+'; Outlook Negative (cont..)

Increasing refinancing risks: The Sri Lankan sovereign faces increased refinancing risks on account of high upcoming external debt maturities. Further, the sovereign's external liquidity position (70.9% in 2015) remains strained, reflecting pressure on foreign exchange reserves.

Significant debt maturities: Sri Lanka faces significant debt maturities in 2016 amid the country's vulnerability to a shift in investor sentiment. Fitch estimates the sovereign's external debt service to be close to USD4bn for the rest of 2016, compared with FX reserves of USD6.3bn (end-January 2016).

Weaker public finances: The deterioration in Sri Lanka's fiscal finances is driven partly by consistently low general government revenues. At an estimated 13% of GDP, Sri Lanka's gross general government revenues remain far below the 'B' median of 25.4% and the 'BB' median of 26%.

Decline in foreign-exchange reserves: While the authorities have undertaken certain measures to support external finances, including entering into bilateral swaps with other central banks, Fitch does not view this to be a sustainable way to improve the stability of the external finances.

Foreign-currency debt portion remains high: Sri Lanka has also increased its issuance of foreign-currency debt, which Fitch estimates now makes up close to 46% of total public debt, up from nearly 42% at the end of 2014. This has increased vulnerability of Sri Lanka's public debt to a significant depreciation of the exchange rate, which would increase the debt burden in local currency terms. Cont..

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Fitch Downgrades Sri Lanka to 'B+'; Outlook Negative (cont..)

Rating Sensitivities

The Negative Outlook reflects the following risk factors that could, individually or collectively, result in a downgrade of the ratings:A further increase in external vulnerability driven by a sustained decline in FX reserves reflecting, for instance, reduced international market access and/or a sudden reversal in portfolio inflows. A further deterioration in policy coherence and credibility that widens macroeconomic imbalances and/or heightens external vulnerabilities.Continued fiscal slippage resulting in a failure to stabilise the general government debt ratio

The main factors that could, individually or collectively, lead to a revision of the Outlook to Stable are:

Implementation of a predictable and robust policy framework leading to a reduction in risks to basic economic and financial stability.Improvement in Sri Lanka's public finances underpinned by a credible medium-term fiscal consolidation strategy, including a broadening of the general government revenue base.Sustained smaller current-account deficits with higher levels of non-debt capital inflows (FDI) and an increase in foreign exchange reserves.

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Rising foreign deposits, debt add to Sri Lanka external weakness: Moody's

Sri Lanka rising non-resident deposits and foreign debt has increased the country’s external vulnerability to above that of similar countries in the 'B1' speculative grade.

Cont..

Moody’s External Vulnerability Indicator (EVI):

Short-Term External Debt + Currently Maturing Long-Term External Debt + Total Non Resident Deposits Over One Year

------------------------------------------------------------------------- x 100Official Foreign Exchange Reserves


Rising foreign deposits, debt add to Sri Lanka external weakness: Moody's Moody's estimated Sri Lanka's external debt burden to have risen to 57 % of gross domestic product in

2015 from 49 % in 2010, when credit conditions were more favourable, and was now left with high debt repayments.

"In Sri Lanka, the decline of capital flows has resulted in higher recourse to short-term external financing and a sizable decline in foreign exchange reserves.“

ADB has announced a USD 2.0 bn funding package, shortly after the government announced that it was going to the International Monetary Fund.

"The sovereign’s recourse to multilateral financing underscores its large external financing needs and the limited scope for market financing to meets those needs, revealing Sri Lanka’s credit-negative vulnerability to external event risk," Moody's stated.

"An agreement with the IMF and financing from the ADB will provide some liquidity and thereby easeimmediate financing pressures. "At the same time, the financing will likely be at more favorable terms than market borrowing, alleviating debt servicing cost pressures to some extent.“

According to Moody's over the next three years, an agreement with the IMF can lead to higher tax collections and low budget deficits which can reduce debt. "Moreover, such an agreement will likely restore investor confidence in Sri Lanka’s policy framework, and ultimately support more stable external inflows," the rating agency stated.


CBSL Increases its Policy Rates

Monetary policy was tightened at the end of 2015 in light of rapid money and private credit growth, excess liquidity, and the deterioration in the external position.

Accordingly, the CBSL increased the statutory reserve ratio (SRR) by 1.50 % in January 2016, pushing up intermediation costs of banks.

Central Bank increased its policy rates by 50 basis points effective from 23rd February 2016 considering the excessive growth of broad money fuelled by domestic credit expansion in the midst of continued upward trend in underlying inflation.

Previous W.E.F. 16.01.2016SDFR 6.00 6.50SLFR 7.50 8.00

Source: CBSL


Inflation

Headline inflation (as measured by YoY change in CCPI) increased to 2.7% in February, 2016 from 0.9% January, mainly due to elimination of effect of price reduction of few essential food items, L. P. Gas, Kerosene Oil, Petrol, Diesel and Bus Fare(Budget Proposals) implemented by the Government in February 2015. .

Year-on-year headline inflation based on the National Consumer Price Index (NCPI, 2013=100) which recorded 4.2 % in December 2015, sharply declined to record a negative figure of 0.7 % in January, 2016.

Core inflation (which excludes fresh food, energy, transport, rice and coconut) continued its increasing trend reaching 4.6 % in January 2016 and 5.7% in February, 2016, on a year-on-year basis, from 0.8 % recorded in February 2015. The IMF’s head of recent mission to Sri Lanka too had raised concerns about rising core inflation. Source: CBSL


External Sector Performance 2015

• Earnings from exports during 2015 decreased by 5.6 % to USD 10,505 mn and expenditure on imports declined by 2.5 % to USD 18,935 mn. Meanwhile trade deficit widened by 1.7% from USD 8,286.7 mn in 2014 to 8,429.7 mn in 2015.

• Lower performance in tea, rubber products, textile and garments and seafood exports contributed mainly for the drop in exports.

• Significant decline recorded in fuel import bill due to lower oil prices and lower thermal power generation caused the decline in import expenditure.

Cont..

5.6

2.5

1.7

Source: CBSL


External Sector Performance 2015 (etc.)

• BOP: for the year 2015, the overall BOP is estimated to have recorded a deficit of USD 1,489 mn compared to a surplus of USD 1,369 mn recorded in 2014.

• GOR: Sri Lanka’s gross official reserves as at end December 2015 amounted to USD 7.3 bn, equivalent to 4.6 months of imports.

• Exchange Rate: During 2016 up to 18 February, the rupee appreciated by 0.1 % against the US dollar.

2.2%

14.5% 17.7%

22.6%

0.5%

USD Mn

Source: CBSL


Moody's Cuts China Outlook

Moody's downgraded its outlook on Chinese government debt to "negative" from "stable”, citing uncertainty over authorities' capacity to implement economic reforms, rising government debt and falling reserves.

The Moody's downgrade comes just days before the National People's Congress (NPC) is due to vote on China's 13th five year plan, a closely held development blueprint for the next five years, which policymakers began formally drafting in 2015

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 - february 2016

Economy & Finance