economic capsule - november 2016

Economic CapsuleNovember 2016

Research & Development Unit

239th Issue

C O N T E N T S

BANKING AND FINANCE

Commercial Bank’s 9-month post-tax profit crosses Rs 10 billion (Bank results)

Commercial Bank ranked 2nd in Business Today’s Top 30

Commercial Bank first to launch NFC-enabled premium credit cards for both Visa & Mastercard

ECONOMY & BUSINESS

Budget Highlights 2017

Budget Implications on Banking and Financial Sector

Sri Lanka External Sector Performance – Aug 2016

Performance of the Economy in 2016

Prospects for 2017

ANALYSIS & FORECAST

INTERNATIONAL

India Banned Rs 500 and Rs 1000 Currency Notes

Condominium Industry in Sri Lanka

October, 2014


Banking & Finance

4 < Research & Development Unit >

Commercial Bank’s 9 months post tax profit crosses Rs 10 Billion (Bank results)

Commercial Bank of Ceylon PLC has reaffirmed its status as one of the strongest-performing entities in Sri Lanka’s financial sector with solid third quarter and nine-month results.

The country’s benchmark private sector bank has posted profit before VAT and NBT of Rs 16.398 billion for the nine months ending 30th September 2016,reflecting growth of 15.19% during a period of rising interest rates and shrinking margins.

Gross income grew by 17.94% over the corresponding nine months of last year to Rs 66.868 billion at the end of the period reviewed. Profit before tax improved by 13.92% to Rs 13.887 billion while profit after tax at Rs 10.151 billion reflected robust growth of 20.48%.

• Loan book up by Rs 66.4 billion to Rs. 574.5 billion.

• Deposits grow by Rs 86.4 billion to Rs 710.5 billion.

• Assets reach Rs 953.3 billion, up Rs 73.5 billion in 9 months


Commercial Bank Ranked 2nd in “Business Today” Magazine’s ‘Top 30’

This is also the ninth year that Sri Lanka’s benchmark private sector bank has been ranked among the top five listed companies in the country on the basis of financial performance by “Business Today”.

The Commercial Bank of Ceylon PLC has been ranked second in “Business Today” Magazine’s ‘Top 30’ public listed companies in Sri Lanka in 2015-16 for the fourth consecutive year.

Commercial Bank first to launch NFC enabled premium credit cards for both Visa & Mastercard The Commercial Bank of Ceylon has become the first bank in Sri

Lanka to offer Near Field Communication (NFC) enabled credit cards of both Visa and Mastercard, two of the leading brands in the sphere.

Near Field communication is a set of communication protocols that enable the chip mounted on the credit card to establish contactless communication with a portable device such as a smart phone or NFC enabled point-of-sale unit, by bringing the two within about 4 centimeters of each other.

Holders of Commercial Bank’s NFC-enabled credit cards will be eligible for numerous exclusive benefits local and internationally, including upgrades at premium hotels, access to premium airport lounges, premium travel experiences, offers at gourmet restaurants, special shopping offers and concierge services.

< Research & Development Unit > 6


October, 2014


Economy & Business

Budget Highlights - 2017


Rs. Bn % GDPItem 2016 2017 Bud 2016 2017 Bud Total Revenue 1,648 2,088 13.4 15.5 Tax Revenue 1,432 1,821 11.6 13.5 Non Tax Revenue 144 189 1.2 1.4 Provincial Councils Tax Sharing and Devolved Rev 72 78 0.6 0.6Grants 10 10 0.1 0.1Total Expenditure 2,328 2,723 18.9 20.2 Recurrent 1,842 2,024 15.0 15.0 Public Investment 500 708 4.1 5.2Budget Surplus (+)/Deficit(-) -670 -625 -5.4 -4.6

Total Foreign Financing 395 272

Total Domestic Financing 275 353


Budget Implications on Banking and Financial Sector

Imposition of a Financial Transaction Levy (FTL)

New levy called FTL at the rate of Rs. 5 (0.05%) per Rs.10,000 on the total cash transactions including easy cash by banks and other financial institutions.

FTL will be treated as expenditure for income tax purpose.

As clarified by the Minister of Finance the intention of the government is to reduce over the counter cash transactions.

< Research & Development Unit >

Changes to Withholding Tax (WHT) Withholding Tax (WHT) on interest income will be increased to 5 % from the

present level (2.5%).

Exemption applicable on savings account with less than Rs. 60,000 per annum will be removed.

WHT will be re-introduced on specified fees where the payment exceeds Rs. 50,000 per month.

Interest income of senior citizens up to Rs. 1.5 mn p.a., which is Rs. 125,000 per month will be exempted from WHT.

Increase in the WHT on Treasury Bills/Bonds - It has been proposed to increase the WHT rate from 10% to 14%.

Budget Implications on Banking and Financial Sector (cont..)


Consolidation of Financial Institutions Encouraged

Banks must start meeting the requirements of Basel III by 2019, the government is of the view that consolidation of financial institutions will be beneficial in the long term and as such.

Encourages voluntary consolidation especially for the private banks.

Proposed to increase the minimum capital of − Licensed Commercial Banks to Rs. 20,000 mn

− Licensed Specialized Banks to Rs. 7,500 mn

− Primary Dealers to Rs. 1, 500 mn



Consolidation of Financial Institutions Encouraged (cont..)

Government will initiate action to amalgamate the HDFC Bank and State Mortgage and Investment Bank (SMIB) to create Housing Bank

The Cooperative Rural Banks and Divineguma Bank will also be amalgamated to create a stronger rural sector micro lending focused bank.

At present the single shareholder limit for banks is restricted at 10 % while the tenure for members of the Boards of Directors is restricted to 9 years.

Government will revisit these policies in view of the proposed consolidation of Banks.



Directed Lending

Banks are directed to lend at least;

− 10 % of the lending portfolio for Agriculture,

− 10 % for SME

− 10 % for Exports

− 10 % for Tourism

− 5 % for Youth and

− 5 % for Women

Lend at least 15 % of the deposits within the same area for business development.



Loan to Value Ratio (LTV)

Loan to Value ratio (LTV) to be limited for vehicle categories as follows:

− Three Wheelers 25 %,

− Motor Cars and Vans 50 %

− Commercial Vehicles (Lorries and Heavy Vehicles) 90 %



Cash Transaction Fee

Impose a fee of 2 % on cash transactions above Rs. 5 mn.

The proposed 2 % fee is not applicable on any transaction carried out through the banking channels including through cheques, telegraphic transfers, Bank drafts, etc.

VAT exemption on Gold Coins and Precious metals

This exemption has been removed from 01.01.2017.

This will have an adverse impact on the bank when auctioning the pawned gold coins and bars as the VAT applicable on the sale will become a capital loss to the Bank.



Introduction of Capital Gains Tax

Capital Gains Tax (CGT) will be introduced with effect from 1st April 2017 at a rate of 10 %.

CGT will be on sale of immovable property held for less than 10 years.

Increase in Dividend Tax

The dividend tax has been increased to 14% which would result in an additional cost to the Bank.

WHT on Dividend declared by the Bank will be borne by the shareholders which will be a final tax.



Increase in the WHT on Treasury Bills/Bonds

It has been proposed to increase the WHT rate from 10% to 14%.

Removal of Notional Tax Credit

It has been proposed to remove the Notional Tax Credit mechanism currently available for Treasury bill/bonds. Banks are required to pay Income Tax at 28% on the net interest income.

Further to the above, it has also been proposed to remove the notional tax credit on Corporate Debt Instruments. Currently per the prevailing law Corporate debt instruments are eligible to a WHT credit on any taxes deducted at source


NSB to grant Housing LoansNational Savings Bank is to grant housing loans at the rate of 7% for a period of 25

year to potential home owners. NSB is to raise Rs.370 Bn for this exercise. This would have a direct impact of the lending to this sector which comprises of 8 %

of the total rupee loan portfolio of the Domenstic Banking unit in the Bank.

Subsidized Housing Loans by Commercial BanksAll Commercial Banks are to provide 100,000 loans not exceeding Rs.200,000/- to

persons with financial constraints for housing below 750 sq ft. Government is to subsidize 50% of the interest cost of same.




Necessary amendments to the Banking Act to be in line with the modern day requirements.

Savings Accounts for School Children

It has been proposed that Commercial Bank should open savings accounts for school children as a Corporate Social Responsibility project.

There is no mention on the number of accounts per bank or the deposit value which is expected to be made by the respective Banks.


Simplified Value Added Tax This has been abolished from 01.01. 2017.

Vehicle Entitlement Levy This levy is to be collected at the point of customs from 01.01.2017. Hence, the Bank will not have to administer the collection of this tax.




Proposal to remove the restrictions imposed on international borrowings by the Non-Bank Financial Institutions (NBFI) to increase their foreign liabilities beyond 35% of the total assets in the Balance sheet

The Debt Recovery (Special) Provisions Act No. 2 of 1990 at present is applicable only to Licensed Commercial Banks (LCB) and a few Licensed Specialized Banks (LSB).

As such, to improve the debt recovery processes at banks and financial institutions, it has been proposed to introduce amendments, expanding the applicability of the Debt Recovery (Special) Provisions Act No. 2 of 1990 to all LSBs and Licensed Finance Companies.

Setting up of an agency, the Financial Asset Management Agency (FAMA), to assist failing finance companies, having identified the vulnerabilities that the finance companies could create in the overall financial sector, as many of the finance companies have high non-performing loan ratios.

Finance Companies

Proposals Related To Other Financial Institutions


A new Securities and Exchange Act during the 1st quarter of 2017, which will provide the Securities and Exchange Commission (SEC) with enhanced enforcement capacity, and greater flexibility in operations.

Demutualization Bill which has been a long felt need during the 1st quarter of 2017. The Colombo Stock Exchange will then be converted to a company with shares being held by shareholders.

Implement the Securitizations Act during 2017 which will facilitate the diversified investment opportunities.

To improve the outreach of the Treasury bond market to foreign investors specially to attract more stable and foreign investments to Bonds and streamlining its settlement mechanism, it has been proposed to utilize the Euroclear facility by 30th June 2017.

Given the significant potential for Real Estate Investment Trusts (REIT), we will facilitate the SEC in introducing amendments to the unit trust code.

Capital Markets

Proposals Related To Other Financial Institutions (cont..)

16< Research & Development Unit >

External Sector Performance – August 2016

Export Performance

Income from garment exports increased by 3.5 % during the first eight months of 2016, when compared to the corresponding period in 2015.

However ,this increase in export earnings was offset by a decline in export incomes from transport equipment, petroleum products (particularly bunker and aviation fuel), tea, spices, (particularly pepper and cloves), gems and diamonds, leading to the aforementioned total reduction in export incomes.

The main merchandise export destinations were USA, UK, India, Germany and Italy, which received about 53.0 % of Sri Lanka’s exports.

Source: CBSL

Category Jan- Aug 2015

Jan-Aug 2016

Change (%)

Industrial Exports 5,455.0 5,314.7 (2.6)

Textiles and garments

3,218.7 3,333.7 3.6

Agricultural exports 1,520.6 1,667.8 (8.8)

Tea 901.2 835.0 (7.3)

Mineral and other 32.6 29.9 (8.2)

Total Exports 7,155.4 6,865.2 (4.1)


External Sector Performance– August 2016 (cont..)

Import Performance

Expenditure on imports during the first eight months of 2016 reached USD 12,403 mn which is a 1.6 % decline from the level reached at the end of the first eight months of 2015, mainly due to the decline in imports of personal vehicles, fuel, commercial transport equipment, and cereals and milling industry products.

However, non-fuel imports during the first eight months of 2016 were 1.2 % higher than the corresponding period in 2015.

Imports from China, India, Japan, Singapore and the United Arab Emirates accounted for about 57.2 %of total imports.

Source: CBSL

Category Jan- Aug 2015

Jan-Aug 2016

Change (%)

Consumer Goods 6,442.7 6,309.0 (2.1)

Food and Beverages 1,124.4 1,039.1 (7.6)

Intermediate goods 6,442.7 6,309.0 (2.1)

Fuel 1,834.7 1,500.8 (18.2)

Investment goods 3,007.4 3,259.6 8.4

Total Imports 12,604.0 12,402.9 (1.6)


October, 2014


International


India Banned Rs 500 and Rs 1000 Currency Notes

On Nov. 8, Prime Minister Narendra Modi declared that all 500 and 1,000 rupee notes would cease to be legal tender just four hours later.

This was some 86% of the entire cash money supply of the country.

Indians were given until Dec. 30 to trade their old rupees for the new cash, or deposit them into a bank account.

Then, on Nov. 24, the government banned cash exchanges except at a few Reserve Bank of India branches.

The government has already been forced to make several concessions, allowing institutions such as hospitals, pharmacies and gas stations to accept the old notes until Dec.15.

Source: www.bbc.com,www.cnn.com, www.economist.com, www.indianeconomy.net


It's all about cracking down on "black money," illicit funds earned from corruption or tax evasion and stashed away in cash.

India loses hundreds of billions of dollars in unpaid tax every year, and only about 2% of Indians pay any income tax at all.

The size of this shadow economy is reckoned to be as much as 20% of India's entire GDP. Mr Modi's demonetisation is designed to drive black money out of the shadows.

Why ?

India Banned Rs 500 and Rs 1000 Currency Notes (cont..)



Impact

Disturbs economic activities

In much of the Indian economy, and especially outside big cities, where cash transactions are most common (90% of transactions are conducted in cash) and financial infrastructure least developed, the sudden invalidation of a vast amount of outstanding currency represents a significant monetary shock.

Liquidity crunch (short term effect)

People are not able to get a sufficient volume of popular denominations, especially Rs 500. This currency unit is the favourite denomination in daily life. It constituted nearly 49% of the previous currency supply in terms of value. Current reports indicate that all security printing presses can print only 2000 million units of Indian Rs. 500 notes by the end of this year.




Welfare loss for the currency using population

Most active segments of the population who constitute the ‘base of the pyramid’ uses currency to meet their transactions. The daily wage earners, other labourers, small traders etc. who reside out of the formal economy uses cash frequently. These sections will lose income in the absence of liquid cash.

Consumption will be hit

Consumption ↓→ Production ↓→ Employment ↓→ Growth ↓→ Tax revenue ↓

Loss of Growth momentum

India risks its position of being the fastest growing largest economy: reduced consumption, income, investment etc. may reduce India’s GDP growth as the liquidity impact itself may last three -four months.



Impact

Impact on black money

Only a small portion of black money is actually stored in the form of cash. Usually, black income is kept in the form of physical assets like gold, land, buildings etc. Hence the amount of black money countered by demonetization depends upon the amount of black money held in the form of cash and it will be smaller than expected. But more than anything else, demonetization has a big propaganda effect. People are now much convinced about the need to fight black income. Such a nationwide awareness and urge will encourage the government to come out with even stronger measures.

Impact on bank deposits and interest rates

Deposits in the short term may rise, but in the long term, its effect will come down. The savings with the banks are actually liquid cash people stored. It is difficult to assume that such ready cash once stored in their hands will be put into savings for a long term. They saved this money into banks just to convert the old notes into new notes. These are not voluntary savings aimed to get interest. It will be converted into active liquidity by the savers when full-fledged new currency supply takes place. This means that new savings with banks is only transitory or short-term deposits. It may be encashed by the savers at the appropriate time. It is not necessary that demonetization will produce big savings in the banking system in the medium term.


Source: www.bbc.com,www.cnn.com, www.economist.com, www.indianeconomy.net21 < Research & Development Unit >

Impact


October, 2014


Analysis & Forecast

Performance of the Economy in 2016


The economy grew by 3.9 % during the first half of 2016 in real terms, in comparison to 5.7 % growth recorded in the corresponding period of 2015.

Although some increase in the unemployment rate was observed in the second quarter of 2016, the unemployment rate during the first half of 2016 was 4.4 % in comparison to 4.6 % in the first half of the previous year.

The deficit in the trade balance increased by 1.6 %, year-on-year, during the first eight months of 2016, as a result of the considerable reduction in exports compared to marginal decline in imports.

The overall budget deficit of Rs. 432.7 bn during the first seven months of the year was mainly financed through domestic sources.

Market interest rates moved upwards during the first nine months of 2016 reflecting transmission of the impact of tight monetary conditions in the economy.

Buttressed by the expansion in credit extended to the private sector and the government, the growth in broad money supply (M2b) continued to remain high with an average growth of 18.1 per cent during the first eight months of 2016.

The growth momentum in the financial sector continued during the first eight months of 2016 with all major sectors remaining sound.

Source: CBSL


Prospects for 2017

As projected under the medium term macroeconomic framework, the economy is expected to grow around 6.3 % in real terms in 2017.

The Agriculture activities are expected to recover in 2017. Industry related economic activities are expected to continue the positive growth momentum in 2017. Services activities would maintain their higher growth trajectory in 2017, supported by all the major economic activities within the segment.

Investment activities are expected to continue a positive growth momentum in 2017, accounting for 30.9 % of GDP, contributed by both government and private investment expenditure.

A slowdown in domestic credit expansion is expected in the period ahead in response to monetary tightening measures adopted by the Central Bank.

The external sector performance is expected to improve gradually in 2017. Export earnings are projected to increase by 9.6 % in 2017 with the expected improved economic conditions in the global economy and improvements in trade relations with main trading partners.

Workers’ remittances are expected to record a moderate growth in 2017. Receipts to the financial account are projected to increase at a moderate level in 2017.

Source: CBSL

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 >

“Our main business is not to see what lies dimly at a distance, but to do what lies clearly at hand”

Thomas Carlyle

economic capsule - november 2016

Economy & Finance