Page

The Foreign Branch saw reasonable growth in advances and profits during 2011, despite the increase in interest rates in the latter part of the year. Although the Off-Shore Banking Centre did not reach budgeted levels in advances, it did achieve targets for deposits and profits.

The non-performing loans ratio for 2011 was a low 2.72%, reflecting the prudent lending practices that have shaped the Corporate Banking Division’s high-quality loan book. The unit provided a long term loan of Rs. 1.5 Bn., payable over 14½ years, to the Road Development Authority - the first ever disbursement from the Investment Fund Account, proposed in the National Budget. The loan funds to be utilised to restore/improve 21.5 km stretch of the A6 highway between Dambulla and Habarana.

After the relaxation of import duty on vehicles and electrical items, a significant increase in vehicles and other imports was seen and the turnover recorded 32% increase over the previous year. Opening up of markets in Northern and Eastern Provinces also helped to increase the turnover. Out of the total imports 51% related to vehicle imports.

Similarly, exports recorded an increase of 29% over the previous year. Despite the crisis situation in the Middle East and the Euro Zone, a significant volume of tea exports was made to such countries.

Future Outlook

The Bank will work to maintain its preferred status in trade finance while continuing to develop new Islamic banking products, expanding off-shore lending in the South Asian region and actively pursuing investment opportunities in listed equities. Plans are also in place to expand the rated customer base and further rationalise the operations of the unit.

The Government’s strong support for exports augers well for the sector. Many entrepreneurs are keen on establishing the Sri Lankan brand overseas.

Corporate Finance Unit

The year began in a buoyant operating environment, with a vibrant stock market and low interest and inflation rates. However, the rise in interest rate levels and corresponding tightening of liquidity in the second half of 2011 sent lending rates higher, eroding business confidence and stock market performance. The weak market conditions adversely impacted trading volumes and reduced the margin trading customer base, as well as the size of the Bank’s portfolio. However, the overall quality of returns within the portfolio was not adversely impacted in the course of the year.

The margin trading activities exhibited strong growth in facility approvals and disbursements in the early part of 2011 and earned satisfactory returns in its first full year of operations.

The two new equity funds, established in 2010, outperformed the 2011 market indices, although the funds underperformed in comparison to the previous year’s numbers - a result that reflected the weakening overall stock market performance.

In 2011 the CFU was instrumental in helping the Bank launch software escrow services. This globally recognised practice balances the requirements of software vendors and the needs of users, with both employing the Bank as a neutral third party to safely store their source codes.

The CFU continued to fund renewable energy projects powered by hydro, wind and biomass, adding several new hydro and wind power projects to the portfolio. The unit also structured and invested in many securitisation transactions, increasing this portfolio by a significant volume over the previous year. The CFU also participated in a USD 75 Mn. syndicated term loan arranged for Sri Lanka Telecom by subscribing for 37.5% of the total loan.

Future Outlook

The Bank will continue consolidating and growing its margin trading operations at rates that reflect prevailing market conditions; there is tremendous opportunity for growth in this portfolio if market conditions improve. As long as current conditions continue, equity fund performance is expected to remain low. The CFU’s revenue gains may also be enhanced due to increased funding for large-scale infrastructure projects as a result of the ongoing rapid development taking place in the country.

Islamic Banking Unit

Commercial Bank opened Al Adalah, its first Islamic banking window, in June 2011, responding to consumer demands. The Bank has appointed three eminent scholars in Islamic jurisprudence to its Sharia Board to guide the operations of the IBU and conduct periodic audits to ensure that all transactions conform to Sharia parameters.

The IBU offers Sharia complaint banking products in the form of deposits and advances and provides a share of profit to depositors instead of the traditional fixed-percentage return. This profit-sharing process consists of identifying the gross income from all advances and then distributing them between depositors and the IBU.

The Islamic window is based in Colombo, however customers can operate their accounts, through the Bank's wide-spread branch network.

Future outlook

The Bank intends to explore innovative ways of bringing more customers into the Islamic banking fold. This will be accomplished through a range of approaches, including targeting high-net-worth corporate and personal customers in Colombo, as well as established businesses; who are seeking Sharia compliant banking products and tailoring services such as foreign currency accounts, trade finance facilities, personal finance and eBanking solutions. The Bank is also working on a plan to open IBU counters at outstation branches, beginning in the Eastern Province, and to offer training sessions outside of Colombo. Although the Bank faces stiff competition in this emerging market, there is room for tremendous growth, especially as many of the tax-related hurdles to Islamic banking practices are being resolved by the Government. There are plans to expand further and offer IBU products in Bangladesh as well.

Bullion Trading

The relaxation of the Nation Building Tax in 2010 helped the Bank achieve a three-fold increase in profit in bullion trading for 2011 over the previous year. Commercial Bank now has a one-third share of the Sri Lankan gold market, according to customs statistics. In 2011, the Bank introduced a special pawning service for bullion customers.

Future Outlook

The Bank plans to become the gold bullion market leader in Sri Lanka by introducing new products and seeking additional partners to augment its single current supplier.