The Global Economy

Global activity strengthened during the second half of 2013 and is expected to improve further in 2014-15, largely on account of recovery in the advanced economies. Growth in the United States is expected to pick-up in 2014 and will be carried by final domestic demand, supported in part by a reduction in the fiscal drag as a result of the recent budget agreement.

The Euro area is turning the corner from recession to recovery. High debt, both public and private, and financial fragmentation will hold back domestic demand, while exports should further contribute to growth. In many emerging markets and developing economies, stronger external demand from advanced economies will lift growth, although domestic weaknesses remain a concern.

Source: IMF

The Sri Lankan Economy

In Sri Lanka, GDP growth in 2014 will be led by strong performance in tourism, services, and public and private construction. Indeed, a growing tourism boom should cause spin-off benefits in both construction and services as the hospitality sector expands to welcome more visitors from abroad. At the same time, we expect that wholesale and retail trade will be boosted from rising consumption rates, which will be buoyed by a more accommodating national monetary policy and the increased flow of remittances from Sri Lankans working overseas. Lastly, improved growth prospects in the US economy are likely to have a positive impact on Sri Lanka’s manufacturing sector through the coming year and beyond.

We also foresee an expansion of private-sector credit, following a reduction in policy rates and in the statutory reserve ratio, which will help to drive growth in 2014 and 2015.

The Banking Industry

According to Fitch Ratings, the 2014 outlook for most Sri Lankan banks remains stable. The agency forecasts that Sri Lanka’s real GDP growth will continue to be high, providing banks with opportunities for further market penetration while boosting their individual performance and profiles.

Fitch also expects the pace of credit expansion to accelerate, albeit moderately.

According to the Central Bank, in order to sustain the current positive economic outlook and ensure stability in the financial system, Sri Lanka’s banking sector must develop a new vision for the future. By 2016, the Central Bank expects at least five Sri Lankan banks to have an asset base of over Rs. 1 Tn. each, along with strengthened presence in all regions of the country.

Sri Lanka’s State-owned banks are expected to make significant contributions to building a strong and dynamic financial services sector. At the same time, foreign-owned banks will be invited to play a stronger role in the national economy. Those banks that currently have assets of less than 100 Bn. Rupees will be expected to grow beyond this threshold through organic development, as well as through consolidations or mergers with other banks or non-banking financial institutions. Further, it is also expected to form a large development bank by merging two banks currently operating independently specialised in development banking.

In the near future, the regulatory framework for risk management and monitoring mechanisms will be further strengthened by the following measures:

• Migrate to the advanced methodologies set out by the Basel II Capital Adequacy Framework requirements, implementing the Standardised approach for calculating capital charge for operational risk under Pillar 1.
• Adopt the Basel III Capital Standards in order to achieve:
  • an increase in the quality and quantity of bank capital.
  • introduction of a capital conservation buffer, during periods of comparative prosperity, that can be used to absorb shocks in times of economic stress.
  • activation of a counter-cyclical buffer to prevent excessive credit growth.
• Implement a stress-testing framework.
• Introduce a new liquidity risk management framework through the introduction of the Basel III Liquidity Coverage Ratio.
• Introduce a regulatory framework for property valuation of licensed banks.
• Introduce prudent measures to regulate the exposure of the banking system to assess markets and other potential economic shocks and concentrations.

2014 Budget Proposals Relating to the Banking Sector

Nation Building Tax (NBT)

Banking and financial services, which were previously exempt from NBT, are now subject to this business tax on profits attributable to financial VAT. This proposal was introduced with the cessation of the transfers to the Investment Fund Account (IFA).

Tax Concessions

Qualifying payment relief will be granted, for a period of three years, on the costs incurred by any bank in acquiring another financial institution through a merger or acquisition.

Any bank, finance company, insurance and manufacturing activities liable to tax at 28% will be given a half tax holiday of 3 years provided such company is listed its shares on the CSE by April 2014.

The Strategic Direction of the Bank

From our founding in 1969 through early 1990, Commercial Bank was a preferred bank for trade finance, thanks largely to the business heritage of our predecessor institutions. Since then we have grown to become a truly national bank - one that many consider the benchmark for Sri Lanka’s private banking industry.

Today, our bank is firmly established in all areas of commercial banking and other related services. Having ventured offshore with our acquisition of Credit Agricole Indosuez operation in Bangladesh,
we are now the only Sri Lankan bank with a fully-fledged branch network in a foreign country.

Our journey to the top of Sri Lanka’s banking industry was guided by a well-formulated strategy and disciplined planning. We recently tabled Commercial Bank’s 30th Corporate Plan and Budget, covering the five-year period from 2014 through 2018. The plan includes profit and service-centre targets for the coming year and outlines a time frame and specific strategies designed to expand market share. Each of the Bank’s principal divisions - Personal Banking, Corporate Banking, Treasury and International Operations - as well as our key support service areas, all carry out comprehensive SWOT analyses prior to formulating their own strategies (some of which are detailed earlier in this Report). At the same time, because banking depends on the public trust, Commercial Bank’s business strategy is complemented by a wide-ranging marketing and communications strategy designed to further build our corporate brand image.

In line with the vision set out by the Central Bank, the Sri Lankan banking sector is undergoing major structural changes. The ultimate goal is to ensure that the country’s banks and non-banking financial institutions are well-positioned to cater to US $ 100 Mn. economy while effectively managing risk. As we enter 2014, the banking landscape of Sri Lanka is poised to change significantly - and Commercial Bank is ideally positioned to evolve with it, pursuing even higher levels of success.