Commercial Bank ends Tough 1Q with PBT of Rs 3.23 billion

< Research & Development Unit >
May 2013
ECONOMIC CAPSULE

FINANCIAL SECTOR NEWS 
 Commercial Bank ends Tough 1Q with PBT of Rs 3.23 billion
 Commercial Bank is Again MoneyGram’s ‘Most Productive Network’ in South Asia
ECONOMIC & BUSINESS NEWS 
 CBSL Cuts Policy Rates by 50 Basis Points
 Credit to Private Sector Slows Down Further
 Interest Rates
 External Sector Performance—1Q 2013
 Sri Lanka gets USD 218mn FDI in 1Q 2013
 Nepal’s First Forbes Billionaire to Expand Investments in SL
 Sri Lanka’s Progress in Millennium Development Goals
 China Offers Sri Lanka USD 2.2 billion in Loans
 Abans to Build USD 100 mn Lifestyle Mall
 Developing World’s Share of Global Investment to Triple by 2030
 Bangkok Ranked World's Top Travel Spot
 Analysis & Forecast: IMF Forecast for Sri Lanka
 Analysis & Forecast: Sri Lanka: Key Issues
 Analysis & Forecast: Sri Lanka: Risk Assessment Matrix
C O N T E N T S

Commercial Bank ends Tough 1Q with PBT of Rs 3.23 billion
 Commercial Bank has posted profit before tax of Rs 3.23 billion on gross income of Rs 16.77 billion
for the three months ended 31st
March 2013, despite the challenges of reduced foreign exchange
income and narrowing margins in the reporting period.
 The Bank’s foreign exchange income had declined by Rs 1.47 billion or 65% over the corresponding
quarter of the previous year, due to the appreciation of the Sri Lanka Rupee against the US Dollar
during the reporting period as against a depreciation during the corresponding quarter of the
previous year.
 Interest income improved by 24% to Rs 14.487 billion in the period under review, but interest
expenses increased at a higher rate of 44% to Rs 8.874 billion, exerting pressure on interest margins.
Consequently, the interest margin for the quarter declined to 4.34% from the 4.85% reported for
2012.
 As a result of these factors, the Bank’s profit after tax of Rs 2.241 billion for the three months was
lower by Rs 563 million over the first quarter of 2012. Cont…

Commercial Bank ends Tough 1Q with PBT of Rs 3.23 billion (cont…)
 Total deposits of the Bank grew by Rs 13.570 billion over the three months since December 2012,
surpassing Rs 400 billion to Rs 408.945 billion at 31st March 2013, recording a growth of
approximately 4%, while its interest earning assets too increased by the same percentage, growing
by Rs 15.907 billion to Rs 389.451 billion at the end of the quarter reviewed.
 Total assets of the Bank increased by 4.91% to Rs 536.9 billion from Rs 511.7 billion at the end of
2012.
 The Bank’s Tier I Capital Adequacy Ratio improved to 12.72% as at 31st March 2013 from 12.64% at
31st December 2012, while total capital adequacy (Tier I and Tier II) increased to 16.62% from
13.85%, largely due to a sum of US$ 75 million raised by the Bank from the International Finance
Corporation (IFC) as a ten year Subordinated Term Debt that qualifies for Tier II Capital.

Commercial Bank is Again MoneyGram’s ‘Most Productive
Network’ in South Asia
 The Commercial Bank of Ceylon, has been adjudged the
‘Most productive network in South Asia’ in 2012 for
MoneyGram, the global funds transfer company.
 This is the 2nd successive year that the bank received this
award, which was presented at MoneyGram’s regional
conference in Jodhpur India.

CBSL Cuts Policy Rates by 50 Basis Points
The Monetary Board of Central Bank of
Sri Lanka reduced its policy
rates by 50 basis points
each with effect from 09 May, 2013.
Previous Rate
(since 12.12.12)
Rate w.e.f.
09.05.13
Repo 7.50 7.00
RRepo 9.50  9.00
 The rate cut comes despite comments from the International Monetary Fund (IMF) which said
Sri Lanka must not ease monetary conditions as inflation remains a concern, even though the
prices rose at a slower pace in April than in the previous month.
 The central bank stated that there was now a need to stimulate the domestic economy after a
slower-than-expected pick-up in economic activity in the first few months of 2013.
 According to CB Governor, “credit growth has been rather slow, so there was a need to give impetus
to stimulate growth and we decided to cut the rates. Inflation is also well under control." Cont…

CBSL Cuts Policy Rates by 50 Basis Points (Cont…)
In addition, the reserve maintenance period of commercial banks will also be increased
to two weeks from one week with effect from 1st June 2013 in order to offer greater
flexibility to commercial banks in managing their liquidity, while maintaining the
Statutory Reserve Ratio at the current level of 8 %.

Credit to Private Sector Slows Down Further
Despite the easing of monetary
conditions, in December 2012, credit
growth has continued to moderate to
about 10.9 % by March 2013, partly
reflecting the base effect, as against
the Central Banks targeted growth of
credit to the private sector by year
end of about 18.5 %.
(YoY Change %)

Interest Rates
Market interest rates have been
adjusting downward, albeit
slowly, responding to the easing
of monetary conditions since
December 2012.

External Sector Performance—1Q 2013
Category
Jan-Mar
2012
USD mn
Jan- Mar
2013
USD mn
Growth
Jan- Mar
(%)
Exports 2,570.1 2,363.2 -8.1
Agricultural Products 575.5 551.2 -4.2
Tea 335.7 333.6 -0.6
Industrial Products 1,977.2 1,804.9 -8.7
Textiles and garments 1,036.1 1,050.0 1.3
Mineral Products 14.4 4.0 -72.0
Imports 5,349.2 4,492.0 -16.0
Consumer Goods 882.1 711.2 -19.4
Intermediate Goods 3,146.9 2,622.1 -16.7
Fuel 1,552.7 1,079.2 -30.5
Textiles & textile articles 532.1 496.2 -6.7
Investment Goods 1,309.0 1,156.6 -11.6
Trade Deficit -2,779.1 -2,128.9 -23.4
 By end March 2013, gross official
reserves amounted to USD 6,689
mn, while total international
reserves, which include gross
official reserves and foreign
assets of commercial banks
amounted to US dollars 8,121 mn.
 In terms of months of imports,
gross official reserves were
equivalent to 4.4 months of
imports by end March 2013.
Source: CBSL

Sri Lanka gets USD 218mn FDI in 1Q 2013
 Sri Lanka has received USD 218 mn of foreign direct
investments in the first quarter of 2013 and is
targeting two billion dollars for the full year,
according to investment promotion minister
Lakshman Abeywardena.
 The investors came from, Taiwan, Canada, Virgin
Islands, Netherlands, Singapore, UK, Australia and
India. In 2012 Sri Lanka received USD 1,338 mn in
FDI up from USD 1,066 mn a year earlier.

 Binod already has considerable investments in Sri Lanka, including a major equity stake in
owning company of Taj Samudra, Taj Exotica and Vivanta hotels in Sri Lanka (as well as
Maldives) and two Jetwing resorts (Vil Uyana and Jetwing Sea).
 He has also acquired three bungalows in Hatton and identified several tourist sites and
assets around the country as part of launching his Chaudhary Group’s (CG) up market
experiential holidays (Zinc Hospitality, Zinc Boutique Journeys and &Beyond) in Sri Lanka
among rich Western tourists. This is in addition to working with Jetwing to put up an 85-
room luxurious hotel in Kandy with an investment of USD 15 million.
 Additionally, CG has recently set up Sri Lanka office (Cinnovation Group) to fast track a
proposed one million ton capacity cement mill in Jaffna with an envisaged investment of
USD 75 to 100 million
Nepal’s First Forbes Billionaire to Expand Investments in SL
Nepal’s Fortune Billionaire Binod Chaudhary, Chairman of the Cinnovation/Chaudhary Group, a
conglomerate of close to 80 companies with interests in banking, foods, cement, real estate, hotels,
power, retail and electronics wants to expand his investments in Sri Lanka.

Sri Lanka Reaping Peace Dividend: HSBC
 “Despite being one of the smaller economies in
emerging Asia at USD 60 bn in 2012, Sri Lanka’s
infrastructure development is greater than many of its
neighbours, as measured by the AIM (Asia
Infrastructure Measure),” stated HSBC Global Research
in a latest Asia macro economics report titled ‘Bridging
the gap: Asia needs to invest over US$ 1 trillion in urban
infrastructure’.
 In the chapter on Sri Lanka titled ‘Peace dividend,’ the
report said that development has been sustained since
2007, with the AIM climbing through the years.
 The HSBC report has categorised Sri Lanka among three
‘Take off’ economies with the other two being China
and Malaysia. Source: Daily FT

Sri Lanka’s Progress in Millennium Development Goals (MDGs)
Sri Lanka is facing a mixed score card with regard to its progress in achieving Millennium
Development Goals (MDGs) as per the latest Asian Development Bank (ADB) findings.
Out of the 21 broader
goals, Sri Lanka has
progressed to an “early
achiever” on 11 of those
whilst being on track on
four goals. However on the
two aspects of forest cover
and CO2 emissions, Sri
Lanka is regressing and on
four goals Sri Lanka’s
progress is slow.
Source: ADB

Abans to Build USD 100 mn Lifestyle Mall
 The Abans Group in collaboration with Silver Needle Hospitality signed an
agreement with AEDAS an internationally reputed, award winning architectural
firm to lead the design for their proposed USD 100 mn five-star super mall
opposite the Beira Lake in Colombo. The construction will commence early next
year and is expected to be completed by 2016.
 The Abans Lifestyle Mall, which will be named the Colombo City Centre, will be
unique as it will be the first and only lifestyle mall in Sri Lanka on par with the
huge super malls in Singapore and Dubai.
China Offers Sri Lanka USD 2.2 billion in Loans
 China has offered Sri Lanka about USD 2.2 billion in loans for infrastructure projects
and a free trade pact.
 China and Sri Lanka agreed on USD 1.5 billion in private-sector investment in the
northern express highway, which links Kandy in the central part of Sri Lanka, to Jaffna
in the north.
 Officials from the two sides also agreed on the extension of a railway, the southern
highway and the development of the port of Colombo.

 The percentage of global investment that goes to developing
countries should triple in the next two decades as emerging
economies catch up to richer nations and become more
integrated into financial markets, according to the World Bank.
 China will account for 30 % of global investment in 2030, with
Brazil, India and Russia together accounting for another 13 %.
 In terms of volumes, investment in the developing world will
reach USD 15 trillion, versus USD 10 trillion in high-income
economies.
 China and India will account for almost half of all global
manufacturing investment.
Developing World’s Share of Global Investment to Triple by 2030
Source: World Bank

Bangkok Ranked World's Top Travel Spot
 Bangkok has edged out
London as the world's most
popular air travel destination,
becoming the first Asian city
to earn the distinction,
according to a ranking by the
MasterCard Index of Global
Destination Cities.
 Istanbul and Dubai showed
the strongest expected
growth in the number of
visitors.
 The ranking was based on a
city's expected international
air travel arrivals and the
amount of money spent in
the city by those arrivals. Source: Reuters

Global Economy Advancing but Pace of Recovery Varies, says OECD
Economic Outlook
 The global economy is moving forward,
but divergence between countries and
regions reflects the uneven progress
made toward recovery from the
economic crisis, according to the OECD’s
latest Economic Outlook. Historically
high unemployment remains the most
serious challenge facing governments.
 World real gross domestic product (GDP)
is projected to increase by 3.1% this year
and by 4% in 2014. Across OECD
countries, GDP is projected to rise by
1.2% this year and by 2.3% in 2014, while
growth in non-OECD countries will rise
by 5.5% this year and 6.2% in 2014.
 The United States was seen driving global growth with the world's
biggest economy projected to expand 1.9 % this year and then
accelerating to 2.8 % in 2014, which would be the country's best
rate since 2005.
 In contrast, the euro zone was estimated to remain in recession for
a second year. The OECD sees its economy contracting 0.6 % in
2013 and then returning to growth next year with a rate of 1.1 %.
Change in real GDP, in per cent
Source: OECD

IMF Forecast for Sri Lanka
2011 2012 2013 P 2014 P 2015 P
Real GDP growth % 8.2 6.4 6.3 6.8 6.5
Inflation (end-of-period) % 4.9 9.2 7.9 6.7 6.5
Revenue % of GDP 14.3 13.0 13.2 13.7 14.1
Expenditure % of GDP 21.4 19.7 19.3 19.3 19.3
Central government balance % of GDP -6.9 -6.4 -5.8 -5.4 -5.0
Government debt (domestic and external) % of GDP 78.4 80.2 79.9 78.0 75.8
Current account balance % of GDP -7.8 -6.6 -5.7 -5.3 -4.9
Gross official reserves (end of period) USD mn 5,758 6,677 6,964 6,798 7,095
External Debt (public & private) % of GDP 49.8 56.7 54.8 53.7 52.5
Cont…

SRI LANKA: KEY ISSUES
Context: Notable progress has been achieved in recent years, on both the policy and macroeconomic
fronts. Challenges remain, however, including in the near term elevated inflation and slowing, yet
resilient, growth.
The current account deficit is narrowing, but exports and FDI are lower than expected. Safeguarding
macroeconomic stability and launching a new phase of structural reforms would facilitate ambitious
medium-term development goals.
 Reducing high public debt levels requires continued fiscal consolidation. IMF supports the authorities’ 5.8% of GDP
budget deficit target for 2013.
 A critical issue is strengthening the revenue system to support consolidation while making space for capital
investment and key social spending in order to sustain robust and inclusive growth.
 A second generation of tax reform focused on base broadening and improving administration is needed.
 Addressing losses at state-owned energy companies requires a comprehensive approach.
Fiscal policy:
Cont…

KEY ISSUES (cont…)
 With inflation elevated and growth slowing, monetary policy is facing a challenging task.
 Policy was eased recently. Further stimulus should remain on hold until inflation pressures decline.
 Moving toward a flexible inflation targeting framework would provide a nominal anchor for monetary policy in the
context of exchange rate flexibility.
Monetary and exchange rate policy:
 The Financial Sector Assessment Program (FSAP) update recognized progress made in strengthening banking
supervision and financial soundness indicators are strong.
 However, rapid credit expansion in recent years justifies heightened vigilance for systemic vulnerabilities.
 Annual stress tests and raising capital buffers in banks exposed to notable credit risks, more robust consolidated
supervision and macroprudential frameworks, and development of pension and crisis preparedness frameworks
would help cement financial stability.
Financial stability: :
Cont…

KEY ISSUES (cont…)
 Exports have declined significantly as a share of GDP and world exports since 2000.
 Deeper integration with the world economy, attracting FDI, and a more enabling environment for exports and the
private sector would broaden the sources of growth and enhance external resilience.
 Important measures include reducing policy barriers, continuing to expand infrastructure and improve the business
climate, reforming the trade tariff structure, and sustaining exchange rate flexibility.
Strengthening trade and broadening growth:
Cont…

Sri Lanka: Risk Assessment Matrix
Risk Up/Dow
n-side
Likeli
hood
Impact Policy Response
Tax revenue weakness continues.
Larger-than-expected budget deficit.
 H H
Accelerate revenue administration reforms,
broaden base, curtail non-essential
spending.
Stalled or incomplete delivery of Euro area policy
commitments, protracted period of slow European
growth. Fiscal policy shock in the U.S.
Emerging markets capital flow reversal, weaker FDI or
remittance inflows. Pressure on reserves.
 M H
Allow exchange rate flexibility. Fiscal space
is limited.
Inflation pressures broaden.  M H Tighten monetary policy
Global oil shock triggered by geopolitical events, causing
higher losses at SOEs, inflation, or weaker growth.
 L M
Adjust domestic energy prices, allow
exchange rate flexibility, vigilance for impact
on core inflation and banks' asset quality.
Banks' asset quality deteriorates in aftermath of very
rapid credit growth.
 M L
Intensify risk-focused supervision, continue
enforcing prudential regulations.
Source: IMF

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

Commercial Bank ends Tough 1Q with PBT of Rs 3.23 billion

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