the future
A global economic slowdown appears likely in 2012. The primary focus for concern remains the Euro Zone (as large as that of the US), where the debt crisis threatens to disrupt some of the world’s major economies and confidence in Governments and financial markets continue to weaken. Western Europe’s combination of high inflation, economic stagnation and explicit sovereign defaults is especially troubling.
Despite this bleak scenario, a true global economic recession is not expected in 2012. The world economy will likely continue to expand, albeit at a growth rate in the 3% range, down from the 4% rate estimated for 2011. American banks are slowly being restructured, and the wheels of finance are starting to turn - factors that could help the US economy grow by about 2%, matching the 2011 rate. Economic prospects for the large emerging markets, especially China, provide greater cause for optimism in averting the prospect of a worldwide recession in the coming year.
A detailed examination of pricing behaviour in 2011 points to continuing volatility in global prices through the coming year. The IMF cites several factors: climate conditions disrupting supply chains; natural disasters; reduced demand for commodities because of slowing global economic growth; increased demand for bio-fuels impacting crop prices; and speculation in commodity markets. In addition, the ongoing social and political turmoil of the ‘Arab Spring’ continues to disrupt petroleum production and keeps oil prices elevated. In short, global commodity markets will be volatile in 2012.
The national Government, not facing a significant election for two more years, will also have ample opportunity to implement necessary economic reforms.
Sri Lanka can look forward to high potential foreign exchange earnings in a number of key areas, including information technology, business process outsourcing, tourism etc. All these areas of growth should help the country to achieve its economic goals.
The upgrading of Sri Lanka’s sovereign credit rating in 2011 by three key agencies - Fitch, Moody’s and Standard & Poor’s - will allow the Government to borrow at a lower cost from overseas markets. The depreciation of the rupee against the US dollar is expected to encourage exports and reduce demand for imports, helping to ease pressure on the current account deficit. However, the current account deficit is expected to increase marginally in 2012, from the 5.6% figure estimated for 2011.
The country still faces several ongoing economic challenges, including a large public debt resulting from high servicing costs; global oil and commodity prices pushing up import expenditures and causing a ballooning trade deficit; the fiscal burden from loss-making state-owned enterprises; and a sluggish, unstable world economy.
At present, nearly 60% of Sri Lanka’s exports go to slow-moving markets in Europe and North America. Less than 10% go to India, China and Japan. Therefore, increasing exports to southern, southeastern and eastern Asia should be integral to the country’s future growth strategy. Asian cross-border trade has become the most dynamic component in the international trading system. Located a mere 20 miles from India, Sri Lanka has an unrivalled opportunity to plug into rapidly growing supply chains in India, particularly in its southern region. Attracting Chinese foreign direct investments is another key strategy for the Government’s serious consideration.
While the depreciation of the rupee is not expected to significantly curtail domestic demand for imports and any further depreciation or appreciation of the rupee will depend to a large extent on movements in the current account deficit as well as on the level of foreign fund inflows.
The Government’s improved fiscal management is estimated to have reduced the budget deficit to 7.0 % of GDP in 2011 (from a figure of 8.0% in the previous year) and it is expected to further reduce to 6.5% in 2012. If sustained, the Government’s policies will help reduce its dependence on monetary policy for demand management, thereby easing the pressure on interest rates.
As part of its overall economic strategy, the Sri Lankan Government set out a series of policies in the 2012 budget to bring the banking industry in line with national measures aimed at stimulating economic growth.
The Government’s vision can be made more concrete by projecting specific goals that the banking sector must realise by 2016, assuming a USD 100 Bn. economy, as detailed in the Central Bank's Road Map for 2012 and beyond. The highlights of the Road Map are given below:
To achieve these proposed goals, banks will need to realign their business models and processes to match the economy’s evolving needs. This can be accomplished by implementing the following measures:
The Sri Lankan Government envisions the implementation of innovative and sophisticated financing solutions throughout the banking industry:
Despite this bleak scenario, a true global economic recession is not expected in 2012. The world economy will likely continue to expand, albeit at a growth rate in the 3% range, down from the 4% rate estimated for 2011. American banks are slowly being restructured, and the wheels of finance are starting to turn - factors that could help the US economy grow by about 2%, matching the 2011 rate. Economic prospects for the large emerging markets, especially China, provide greater cause for optimism in averting the prospect of a worldwide recession in the coming year.
A detailed examination of pricing behaviour in 2011 points to continuing volatility in global prices through the coming year. The IMF cites several factors: climate conditions disrupting supply chains; natural disasters; reduced demand for commodities because of slowing global economic growth; increased demand for bio-fuels impacting crop prices; and speculation in commodity markets. In addition, the ongoing social and political turmoil of the ‘Arab Spring’ continues to disrupt petroleum production and keeps oil prices elevated. In short, global commodity markets will be volatile in 2012.
The Sri Lankan Economy
In this uncertain global scenario, can Sri Lanka maintain its growth momentum? The country’s political stability will contribute to an estimated GDP growth rate of 7% to 8% in 2012. This would mark the third year in a row of growth above 7% - a historic achievement. The successful integration of the Northern and Eastern Provinces has opened up significant opportunities in the agricultural, industrial and service sectors.The national Government, not facing a significant election for two more years, will also have ample opportunity to implement necessary economic reforms.
Sri Lanka can look forward to high potential foreign exchange earnings in a number of key areas, including information technology, business process outsourcing, tourism etc. All these areas of growth should help the country to achieve its economic goals.
The upgrading of Sri Lanka’s sovereign credit rating in 2011 by three key agencies - Fitch, Moody’s and Standard & Poor’s - will allow the Government to borrow at a lower cost from overseas markets. The depreciation of the rupee against the US dollar is expected to encourage exports and reduce demand for imports, helping to ease pressure on the current account deficit. However, the current account deficit is expected to increase marginally in 2012, from the 5.6% figure estimated for 2011.
The country still faces several ongoing economic challenges, including a large public debt resulting from high servicing costs; global oil and commodity prices pushing up import expenditures and causing a ballooning trade deficit; the fiscal burden from loss-making state-owned enterprises; and a sluggish, unstable world economy.
At present, nearly 60% of Sri Lanka’s exports go to slow-moving markets in Europe and North America. Less than 10% go to India, China and Japan. Therefore, increasing exports to southern, southeastern and eastern Asia should be integral to the country’s future growth strategy. Asian cross-border trade has become the most dynamic component in the international trading system. Located a mere 20 miles from India, Sri Lanka has an unrivalled opportunity to plug into rapidly growing supply chains in India, particularly in its southern region. Attracting Chinese foreign direct investments is another key strategy for the Government’s serious consideration.
Inflation
Several factors are expected to push inflation upward in 2012: higher oil prices; rising household wealth (and correspondingly upbeat consumer sentiment); higher foreign capital inflows; and the devaluation of the rupee. However, it is expected that these inflationary pressures will be mitigated by improved domestic supply. An inflation rate of between 6% and 7% is expected to prevail by the end of 2012.Exchange Rate
Increased imports of investment goods - required for ongoing development activities across Sri Lanka - along with higher expenditure on imported crude oil are expect to put pressure on the rupee in 2012. The rate of expansion of export income will be reduced by the ongoing recession in Sri Lanka’s major exports markets - the EU and the US. The collapse of Treasury Bond prices in several European economies has undermined Sri Lanka’s foreign reserve position. The drain of foreign reserves will therefore continue, exerting further pressure on the exchange rate.While the depreciation of the rupee is not expected to significantly curtail domestic demand for imports and any further depreciation or appreciation of the rupee will depend to a large extent on movements in the current account deficit as well as on the level of foreign fund inflows.
The Government’s improved fiscal management is estimated to have reduced the budget deficit to 7.0 % of GDP in 2011 (from a figure of 8.0% in the previous year) and it is expected to further reduce to 6.5% in 2012. If sustained, the Government’s policies will help reduce its dependence on monetary policy for demand management, thereby easing the pressure on interest rates.
Investments
According to the Central Bank, investment activities are expected to grow at a higher rate in 2012, sustaining the country’s growth momentum. The increased pace of investment will likely be driven by the private sector. A significant portion of private investment will be directed towards tourism and port activities, together with sectors such as manufacturing and infrastructure development.Macroeconomic Outlook-2012
| GDP Growth | 7-8% |
| Rate of Inflation | 6-7% |
| Budget Deficit as % GDP | 6.5% |
| 1 - year Treasury Bill Rate | 9.2% |
As part of its overall economic strategy, the Sri Lankan Government set out a series of policies in the 2012 budget to bring the banking industry in line with national measures aimed at stimulating economic growth.
The Government’s vision can be made more concrete by projecting specific goals that the banking sector must realise by 2016, assuming a USD 100 Bn. economy, as detailed in the Central Bank's Road Map for 2012 and beyond. The highlights of the Road Map are given below:
- An increase in banking sector assets to Rs. 8,000 Bn. from the current total of approximately Rs. 4,100 Bn.
- Total lending to reach Rs. 5,000 Bn. from the current level of approximately Rs. 2,500 Bn.
- Lending to embrace a broader spectrum of corporates and households.
- Significant improvement in access to financing across the country.
- A projected decline of the net interest margin to approximately 3.3% from the current level of 4.2%.
- Market capitalisation of the Colombo Stock Exchange to reach 70% of GDP.
- Outstanding value of the corporate bond market to increase from its current level of just under Rs. 100 Bn. to a total of Rs. 1,000 Bn.
To achieve these proposed goals, banks will need to realign their business models and processes to match the economy’s evolving needs. This can be accomplished by implementing the following measures:
- Diversify funding and sources of new business while pursuing better integration with regional and international financial markets.
- Upgrade banking systems and processes to facilitate increased business activity.
- Expand the range of products, services and delivery channels to keep pace with the economy’s emerging needs.
- Concentrate on improving cost efficiency and resource utilisation in order to boost profitability.
- Address human capital issues, including increased staff requirements and the need for management expertise.
The Sri Lankan Government envisions the implementation of innovative and sophisticated financing solutions throughout the banking industry:
- Banks will be expected to better leverage their balance sheets.
- The financial services sector must adopt a more international perspective in order to meet the ‘doubling of assets’ goal prescribed above, bridging the gap mainly with foreign sources of financing.
- Banks must look for stable wholesale funding sources rather than relying solely on small-scale customer deposits.
- Instead of depending on fund-based conventional banking products, institutions must explore fee-based services and investment banking products.
As the Central Bank continues to fine-tune its regulatory regime, banks and other financial institutions will be required to further strengthen:
- the quantity and quality of capital needed to enhance their loss absorbency;
- the systems and processes that will enable migration to more advanced approaches within the Basel II capital framework
- the management of banking risks in an integrated manner
- the governance, fitness and propriety of directors and senior management to establish operational accountability.
Regulatory Changes
The financial services sector is fundamentally dependent upon public confidence. It is governed by a set of regulations that require frequent updating and amendment to mirror the evolving sophistication of financial products and services on offer.The following regulatory changes will have a significant impact on the operations of Sri Lankan banks:
Following the convergence of the Sri Lanka Accounting Standards with the International Financial Reporting Standards, LKAS 32 on ‘Financial Instruments: Presentation’, LKAS 39 on ‘Financial Instruments: Recognition and Measurement’ and SLFRS 7 on ‘Financial Instruments: Disclosures’ effective from January 01, 2012, would bring significant changes in terms of measurement, recognition and disclosure requirements specially to the banking industry in Sri Lanka. With the introduction of these new standards on Financial Instruments, the existing provisioning method based on the expected loss model will be changed to an incurred loss model where the provisioning is based on existence of actual evidence of impairment. Some of the items recognised as Off-Balance Sheet items under the present accounting arena may sit on the Balance Sheet having met the definition of a financial instrument.
In term of implementation, the Bank has already prepared its opening Statement of Financial Positions incorporating the requirements of these new and revised accounting standards. Steering Committee appointed for the implementation of these standards is assisted by a few working committees formed to look after each different applicable areas such as impairment, treasury products, disclosures etc. The Bank is well equipped with the adoption of these standards in its letter and spirit on their effective date.
One of the other areas affected is the share based payment transactions as per the requirements of SLFRS 2 on ‘Share-Based Payment’. This will result in recognising such transactions including ESOPs to be recognised at the fair value of the equity instruments granted, instead of the actual sale proceeds being recognised under the present context.
Currently, the country’s banks use a basic indicator approach to calculate the capital charge under operational risk. Beginning in January 2013, banks will be required to adopt a new Standardised Approach for calculating such risk-related charges.
Strategic Direction
Commercial Bank originally specialised in traditional trade finance on behalf of business elites. As the Bank has evolved through a long and rich history, it has transformed itself into a true national bank, firmly establishing its presence in every corner of the country. Today’s extensive branch and ATM network testifies to the Bank’s impact nationwide, as does its progress in the largely untapped Northern and Eastern Provinces over the last two years.Commercial Bank follows a well-established procedure, dating back to the 1980s, for writing its Corporate Plan and Budget. The objectives, targets and key performance indicators enshrined in these documents have helped lift the Bank to its present position and instilled a target-driven culture throughout its operations.
The Board of Directors and management critically reviewed the strategic direction of the Bank at the time the Corporate Plan and the Budget were prepared and approved. Well-articulated Vision and Mission statements act as the catalyst in its safe but uneven journey towards further heights in future.
The Corporate Plan and Budget for 2012 through 2016 present a rigorous medium-term view, detailing the Bank’s present status and mapping out strategies to consolidate its niche position in the private sector banking market while capitalising on future opportunities. The plan also details measures to enhance the Bank’s brand identity with a view to consistently improving the market share of its business lines. SWOT analyses and goals with specific time frames are presented for the principal strategic business units: Personal Banking, Corporate Banking, Treasury, Bangladesh Operations, Information Technology, Human Resources, Integrated Risk Management and Marketing.
The Bank has drawn up plans to optimise its profitability, efficiency and productivity in 2012. To help ensure the success of these proposals, strategies have been devised to raise the bar further which could measure the improvement in ratios such as return on equity, return on assets and cost/income.
The Corporate Plan takes a dynamic yet disciplined approach to assessing long-term cost-optimisation strategies. Management will concentrate on optimising the Bank’s cost structure through various forms of re-engineering, including the centralisation of business processes, a channel migration programme and better utilisation of IT resources to develop cost-effective delivery options.
The efficient utilisation of capital is another important measure of organisational success, especially in the context of the Bank’s aggressive expansion of its loan book. The Corporate Plan proposes maintaining the capital adequacy ratio - a symbol of stability of a financial services organisation well above the mandatory minimum level even while the Bank’s asset base is expanding.
Commercial Bank will continue working to improve its already high customer satisfaction levels through process improvements, centralisation of services and automation. In addition, the Bank will maintain a cautious approach when launching media campaigns designed to clarify and enhance the brand image.
The Bank intends to expand its presence into untapped and underserviced areas building on past efforts, the Bank will continue to improve the country’s banking infrastructure and create opportunities for all prospective customers to enter formal banking streams and enjoy improved access to financial services.
The Corporate Plan and the Budget is prepared based on certain assumptions. Most of these assumptions relate to the economic environment. Given the facts that the Bank does not function in isolation, its performance depends on many variables in the environment - both internal and external and that it does not have control over the external environment, the Bank conducted a sensitivity analysis on the projections to potential changes in key variables with a view to identify the probable impact to the Bank.
In addition to all of the points discussed above, the Corporate Plan outlines the following major initiatives for the planning period:
- Improve operational efficiency and rationalise the Bank’s cost structure through a stronger commitment to IT solutions.
- Reduce the Bank’s reliance on traditional bricks-and-mortar branch banking with a move to electronic banking solutions.
- Align the overall business strategy with the Government’s core economic strategies.
These strategic priorities will amplify brand equity of the Bank and will enable it to record sizable and sustainable performance, thereby enabling the Bank to be solidly integrated into the country’s economic development as the largest private bank.
Commercial Bank views itself as an integral component in the renewal and future development of an entire nation. It is an ambitious yet realistic vision that foresees the country becoming an economic hub in the region, with a consequent doubling of per capita income to US dollar 4,000 by 2016.
Commercial Bank embraces this challenge, believing wholeheartedly that its operations, its resources and, above all, its people are ideally positioned to lend a helping hand as Sri Lanka pursues the boldest of economic goals.