Shareholders are the ultimate judges of an enterprise’s performance. In making their assessment, they look for the clearest measures of financial success and responsible management: the numbers. As 2011 drew to a close, Commercial Bank prepared for investors’ objective appraisal with the same pride and confidence that we bring to meeting the expectations of our customers every day. As a team, and on behalf of all our stakeholders, we have reason to be proud: The excellent results we achieved over the past year rank amongst the most compelling - and rewarding - in the Bank’s history.

Our positive performance against key success measures is particularly gratifying in the face of continuing uncertainty in the global economy, most notably with

regard to European sovereign debt crisis and ongoing efforts to return stability to the international financial system. Within the Asia-Pacific region, Commercial Bank has proven itself as a strong and disciplined banking leader, well positioned to maintain steady growth.

The encouraging picture detailed in the pages of this Annual Report coincides with a carefully planned transition in the senior management of the Bank during the coming year. As our strategy continues to evolve under new leadership, it will do so on a solid foundation built on the accomplishments of the entire management team, and indeed all of our employees, over the past 15 years.

Key Drivers of Profitability

Post-tax profit for 2011 grew by 45.71% over the previous financial year, exceeding Rs. 2.524 Bn. for the first time in the Bank’s history to end the year at Rs. 8.048 Bn. The momentum reflected in our 2010 results continued at a healthy pace, yielding further increases in business volumes across the board. As a result, we have seen substantial improvements in almost every key performance ratio. One highlight worth underlining is the increased return on average shareholders' funds, which at 20.76% is significantly higher than the yield on Treasury Bills for the same period.

The challenge of excess liquidity, noted in last year’s Annual Report, continued into 2011 but grew less acute as the year progressed. This improvement was aided in part by our fine-tuning of the Bank’s overall strategy, as

we shifted our focus from attracting deposits to expanding our portfolio of loans and advances. At the same time, our collective efforts were concentrated on enhancing and promoting the entire spectrum of consumer banking products and services, including personal loans, home loans, pawning and leasing. As a result, the Bank’s market share in the consumer arena has increased substantially.

Another strategic priority in 2011 was to encourage and better service the flow of inward remittances from Sri Lankans working abroad. The gains realised in this regard reflect the competitive advantage that the Bank has created in recent years by building a more effective network of exchange houses overseas. We will continue to invest in this area going forward.

Financing a Nation’s Renewal

Commercial Bank led the Sri Lankan financial services sector in embracing the Investment Fund Account strategy introduced in November 2010 as a component of the Government’s Budget for the following year. Under this new programme, all banks are required to allocate a percentage of tax savings - resulting from the reductions in the VAT rate on financial services and rate of income tax - and make those funds available exclusively for purposes specified by the Government. In September 2011, the Bank approved a loan of Rs. 1.5 Bn. to the Road Development Authority, payable over 14½ years, for a major highway improvement project.

In providing this substantial long term lending facility, the Bank has not simply complied with legislation. Our leadership in deploying the Investment Fund Account reflects a deeper commitment to the Government’s national development efforts through the financing of vital infrastructure projects.

In another innovative financing initiative aimed at stimulating economic development, the Bank reached an agreement with the International Finance Corporation

(IFC), a member of the World Bank Group, establishing a seven-year facility totalling USD 65 Mn. (approximately Rs. 7.4 Bn.) to expand lending to small and medium enterprises (SMEs). Signed in December 2011, the deal marks the most significant investment to date in Sri Lanka by the IFC, one of the largest multilateral source of loan and equity financing for sustainable private sector projects in the developing world.

The IFC facility is also a first for South Asia in its use of future flow-backed financing: by securitising the value of expected remittance flows, the Bank has gained the necessary leverage to borrow funds at far below prevailing market rates. This in turn will enable us to improve access to credit for some 20,000 SMEs, fostering better economic conditions in historically underserved areas - particularly Northern and Eastern Sri Lanka.

We expect continued growth in lending driven by post-war reconstruction and the general revival across all business sectors. The Bank is currently negotiating additional credit facilities and actively seeking out other financing opportunities with overseas partners.

Sure Signs of Growth

Commercial Bank’s operations in Bangladesh showed promising signs of sustainable growth in 2011. That country’s economic prospects have brightened with the resumption of overseas demand for manufactured goods, particularly apparel. The rise in exports has brought a comparative improvement in the national standard of living, despite the challenges of several recent natural disasters and the lingering impact of the global economic downturn.

In this positive economic climate, we foresee continued growth in deposits and advances, as well as profit levels, in our Bangladesh business. In the coming year, we will

be introducing a wider range of products and services tailored to the local marketplace while continuing our efforts to maintain tight controls on non-performing assets.

With respect to the Bank’s international horizons, we have leveraged our traditional strength in trade finance to expand its role in our business mix, with excellent results over the past year. Our efforts on behalf of both importers and exporters earned the Bank recognition as ‘Best Trade Finance Bank in Sri Lanka’ for 2011 from the European publication Trade Finance.

Leaders in Innovation

With the global economic environment likely to favour comparatively low interest rates for some time, the Bank has been actively pursuing other avenues of profitable growth. One area of focus has been fee-based transactions, notably in facilitating overseas investments on behalf of companies and high-net-worth individuals. Fee-based income reached an all-time high in 2011, and we expect that success to continue.

The past year also saw a renewed emphasis on deepening and diversifying our fund-based operations - especially in the area of pawning, where our success has been a catalyst for growth across the Sri Lankan

marketplace. We have also shown innovative leadership in the bullion business: last year the Bank was one of the largest importers of gold in the country.

Finally, Commercial Bank’s dedication to strengthening our retail customer base is reflected in the expansion of our nationwide ATM network with an additional 100 locations over the past year. By making our products and services more accessible where customers live and work - including in high-traffic areas such as railway stations - we are fulfilling the Bank’s vision of being the most innovative, technologically advanced and customer-friendly financial services organisation in Sri Lanka.

Ready for the Future

The Bank’s excellent performance in 2011 bolsters the foundation upon which we will meet the challenges and opportunities that lie ahead. As our business continues evolving in all aspects to keep pace with a changing world, several points are particularly noteworthy:

In terms of how we manage and report on our operations, we have begun making the transition to the International Financial Reporting Standards (IFRS) established by the International Accounting Standards Board. While full IFRS compliance is not required until the first quarter of 2012, there will be a definite paradigm shift within the Bank as our current policies and practices are modified - along with a welcome enhancement of our global standing as we endorse greater uniformity in reporting standards worldwide.

As for the consumer marketplace, we see exciting opportunities ahead as advances in technology open up new channels for the promotion and delivery of financial services. In particular, the rise of mobile banking - and the

promise of forging deeper relationships with customers even when they are on the move - will challenge us to be more innovative than ever. Building on our past successes, we are confident that the Bank will once again be a leader in establishing this exciting new channel.

A final perspective on the future worth noting here is our view that further consolidation within Sri Lanka’s banking industry is both necessary and inevitable. In an increasingly competitive environment, as customers’ service expectations continue to rise, banks will be able to control the cost of intermediation only by leveraging economies of scale. Last year, Commercial Bank appeared for the second time in the prestigious Top 1000 World Banks ranking published by The Banker magazine. Our goal moving forward is to advance as quickly as possible into the top 500 - through domestic growth and by expanding internationally as well.

Our Legacy of Success

As many shareholders are aware, on April 27, 2012, I will officially step down from my role as Managing Director, a position I’ve had the privilege to hold since 1996. I would therefore like to take this opportunity to add a few personal observations to what will be my last annual message to shareholders.

Over the past 15 years, Sri Lankans have witnessed dramatic changes in every area of our daily lives. Our country has been through periods of intense internal conflict and political turmoil. At the same time, we’ve been confronted with economic crises of global proportions. Indeed, the challenges we’ve faced at home have mirrored, to a large degree, those faced by other nations around the world.

It has been a difficult time for businesses of all kinds to remain focused on their objectives. And it has been particularly challenging for banks, which are not simply commercial enterprises but are also seen as both agents and stewards of economic prosperity. That Commercial Bank has not only prevailed but flourished through these years is a testament to the collective efforts of many talented, visionary and deeply committed individuals. I would like to pay tribute to their exemplary teamwork by touching on just a few highlights of the past decade and a half:

• Encouraging the IFC to invest in Commercial Bank via the stock exchange - the first such investment in the region by this highly-regarded global institution.
• Forging relationships with other significant investors.
• Expanding the business overseas, notably with the establishment of operations in Bangladesh.
• Building a more empowered and engaged workforce, and demonstrating the value of collaborative teamwork across the organisation.
• Establishing the Employee Share Option Plan, which offered Executive Officers of the Bank above in Grade III and above the chance to become material stakeholders in our success.

• Successfully structuring a pension buyback strategy to ensure the long-term financial health of our business.
• Making customer convenience the first priority for all operational initiatives, from the expansion of our ATM and branch networks, to our pioneering supermarket and holiday banking programmes, to our innovative championship of Internet-based and, more recently, mobile banking.
• Above all, delivering consistent, substantive value to shareholders, year after year:
  • An investment in Bank stock at the end of 1995 realised a compound Annual Growth Rate (CAGR) of over 13% (i.e., with the benefit of all rights, bonus issues and splits, and considering the time value of money) to the end of 2011.
  • Profit after tax has maintained a CAGR above 22% through the past 15 years.
  • Profit per employee, a key measure of the efficiency of our operations, has risen more than eightfold in that time.
  • Return on average shareholders’ funds has grown at a CAGR of nearly 23%.
  • The Bank’s dividend payout ratio has nearly tripled to 60%.
  • Total assets have increased more than 17 times to Rs. 442.9 Bn.

The foregoing is merely a snapshot of all that we’ve accomplished together. It is gratifying to know that the deep personal satisfaction I feel in being associated with these achievements is magnified exponentially in the pride of all those who worked side by side to make them happen.

Looking Back, Looking Forward

In closing, I would like to express my sincere gratitude to all members of the Board of Directors, past and present, for their support and guidance over the past 15 years. The road has not always been easy, but the results we’ve produced together, and the professional and personal bonds we’ve formed along the way, have made every step of the journey worthwhile.

I wish to make special mention of three highly valued Board Members who retired at the end of the year under review: our former Chairman, Mr. M.J.C. Amarasuriya; our former Deputy Chairman, Mr. B.R.L. Fernando; and one of our longest-serving Directors, Dr. H.S. Wanasinghe. These three gentlemen have been tireless in sharing their expertise and wise counsel over the years, and in return I can only offer my heartfelt thanks on behalf of all employees, shareholders and the entire enterprise that they have helped to guide. They will be missed, but their legacy will remain.

Of course, no such message would be complete without extending my thanks to the Governor and officers at all levels of the Central Bank of Sri Lanka. Over the years, they have approached their regulatory role in a spirit of co-operation and mutual respect that has ensured the best possible working relationship.

I would also like to take this opportunity to welcome the Managing Director Designate, Ravi Dias. I share with our Board the firm belief that for this role, the best path of succession leads from within. Ravi, having spent his entire working career at the Bank, has an intimate knowledge of our operations, our people, our customers, our key partners and the complex environment in which we operate. The helm is in highly capable hands.

Finally, and most emphatically, I want to convey the personal debt I feel toward all of the fellow employees I’ve had the pleasure to work with nearly 30 years. I have relied on you, I have learned from you, and I have felt proud to be associated with the successes you have achieved. The future strength of the Bank remains where it has always been - with its people.

As this Annual Report makes clear, Commercial Bank was founded on principles of openness, transparency and sound governance. That these values continue to earn trust and confidence is evidenced by the steadfast support of shareholders - most recently, in the success of our latest rights issue at a time when most comparable issues were struggling for support.

Even more important, we know that a firm commitment to our founding principles - to being a Bank for everybody, devoted to the communities where we live, work and do business - will ensure that Commercial Bank continues to prosper alongside the customers who ultimately define our success. The Bank we’ve built together is a robust platform from which we will explore promising opportunities and meet whatever new challenges the future may hold.



A.L. Gooneratne
Managing Director

Colombo
February 09, 2012