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2011 in many ways was a year of challenges and opportunity for Sri Lanka and the Bank. The economy continued its healthy growth recording an estimated growth of 8.3% in GDP. The growth story was reflected in the business of the Bank as well with healthy growth in its business in a dynamic economic environment. In this environment treasury faced several challenges in managing the liquidity and interest rate risk of the Bank along with its exchange rate exposure.

The exchange rate of the country was strongly defended by CBSL prior to its official devaluation during the presentation of the 2012 Government Budget in November 2011. CBSL used its recently built up foreign currency reserves aggressively to maintain a stable and steadily appreciating exchange rate in the midst of all round depreciation of regional currencies. This led to low margin regime among the banks which affected the exchange profit of the Bank. However, the Bank was able to meet its budgeted exchange profit for the year even after discounting the exchange gain from reserves revaluation.

A greater challenge was posed by funding requirements of the Bank, in a situation of steadily diminishing liquidity in the market. Rapid credit growth by banking sector resulted in a tight competition for funding that pushed up interest rates on both deposits and Government Securities higher towards the last quarter of the year, this situation worsened by the reduction in liquidity as a result of intervention in the foreign exchange market by the CBSL.

The upward movement of interest rates in the market adversely impacted the operations in Government Securities which performed lower than expectations.

USD/LKR exchange rate depreciated by 2.82% during the year to close at Rs. 114.00. This was after the 3% depreciation announced by the Government in November 2011. The increased volatility in the local market in the latter part of the year enabled treasury to earn additional exchange profit during the last two months of the year.

Treasury also put in place the necessary framework to commence operations in derivative products by obtaining the required regulatory and internal approvals and introducing the operating mechanisms. Special effort was taken to develop the skill levels of the treasury staff throughout the year by providing training opportunities locally and overseas. Treasury also identified its future staff requirements and recruited management trainees to the dealing room with the objective of grooming them for the future.

In 2011 the Bank completed a Treasury system review aimed at acquiring new and necessary technological capabilities, identifying business needs for the next five years and evaluating proposals for upgrading infrastructure. The Bank also carried out a customer satisfaction survey to better ascertain Treasury’s positioning among its key clients.

Treasury was very active in developing its client relationships. The dealers regularly visited the key clients of the Bank maintaining a constant and positive rapport and organised several events throughout the year aimed towards relationship enhancement.

Future Outlook

Treasury expects a challenging year ahead in 2012, where the Bank will be diversifying more into non-traditional funding mobilisation. The Bank is projected to meet nearly third of its funding requirements through foreign currency borrowing which will mainly finance the domestic LKR asset expansion. Management of the interest rate and exchange rate risks arising from these mismatches in the absence of efficient instruments in the market will pose several challenges.

Sri Lanka economy is expected to see increasing interest rate scenario in 2012, thus driving the Bank’s cost of funds during the year upwards. Utilisation of funds profitably through advising ALCO of the Bank on the Balance Sheet management and correct product pricing will be the responsibility of Treasury. In addition, the exchange rate would expect to depreciate in 2012 with higher market volatility which would pose both challenges and opportunities to treasury.