The document provides an economic capsule with summaries of news in the financial sector, economic and business news, and analysis and forecasts. Key points include: - Commercial Bank reported a pre-tax profit of over Rs. 6 billion for the first half of 2014 and total assets reached Rs. 683.579 billion as of June 2014. - The Central Bank of Sri Lanka entered into an investment agreement with the People's Bank of China to diversify reserves into Chinese renminbi assets. - Sri Lanka's trade deficit contracted by 20.1% in the first half of 2014 as exports grew 16.8% while imports declined 1.2%. Foreign direct investment rose 51% and gross official reserves reached $9.

1. Economic Capsule
August 2014
Research & Development Unit

2. C O N T E N T S
FINANCIAL SECTOR NEWS 
 Commercial Bank’s 6-month Pre-tax Profit Surpasses Rs. 6 bn Mark
 Commercial Bank Partners with DIMO to Offer Special Leasing Packages
 Commercial Bank Upgrades Corporate Online Banking
ECONOMIC & BUSINESS NEWS 
 Central Bank Enters into an Investment Agreement with People’s Bank of China
 External Sector Performance – 1H, 2014
 FDIs
 Sri Lanka’s High External Funding Remains Rating Weakness: Fitch
 IFC Invests in Cargills Foods
 Floating Market, Open for Business
ANALYSIS & FORECAST

3. BANKING NEWS

4. < Research & Development Unit >
Commercial Bank’s 6-month Pre-tax
Profit Surpasses Rs. 6 bn Mark
 Commercial Bank has reported a noteworthy performance, posting profit before tax of Rs 6.474 bn and net
profit after tax of Rs 4.479 bn for the first half of 2014.
 The Bank’s profit before financial VAT and NBT was up 1.92% to Rs 7.587 bn. The imposition of Nation
Building Tax (NBT) from 1st January 2014 resulted in the Bank’s NBT for the six months amounting to Rs
159 mn. Financial VAT and NBT together totalled Rs 1.113 bn for the first half 2014, an increase of 18.88%.
These factors contributed to the marginal drop in the profit before tax of Rs 6.474 bn for the period under
review. However, the profit after tax of Rs 4.479 bn reflected an increase of Rs 7.5 mn.
 The Bank’s total assets reached Rs. 683.579 bn as at 30th June 2014, a growth of Rs 125.468 bn or 22.48%
over the corresponding period last year and Rs. 76.973 bn or 12.69% since December 31, 2013.
 Loans and receivables totalled to Rs 438 bn at the end of the period under review, an increase of Rs 18.7
bn or 4.46% since December 31, 2013, and a growth of Rs 48 bn or 12.33%, over corresponding period last
year.
 The focus on recoveries enabled the Bank to reduce both the Gross NPL ratio and the Net NPL ratio to
4.32% and 2.48% as at end June 2014 from 4.40% and 2.54% respectively as at end March 2014 despite
industry NPL levels remaining high at 6.2%.
 Total deposits grew by Rs 38.216 bn or 8.21% over the six months at an average of more than Rs 6.4 bn a
month, to Rs 503.563 bn as at June 30, 2014. Deposit growth over the corresponding period of last year
was Rs 74 bn or 17.23%.

5. < Research & Development Unit >
Commercial Bank Partners with DIMO to Offer
Special Leasing Packages
 The Commercial Bank of Ceylon has once again
partnered with Diesel and Motor Engineering PLC
(DIMO) to offer attractive leasing options for TATA
commercial vehicles in a sixth month promotion
commencing August 2014.
 Under the agreement, DIMO will provide substantial
discounts to Commercial Bank customers to lease TATA
vehicles. The Bank will provide low interest rates and
monthly rentals for leasing facilities. The vehicles
covered under the special scheme include TATA trucks
and buses.
 A special insurance cover through Commercial
Bancassurance has also been introduced for customers
who lease vehicles through the Bank. This cover
requires a low insurance premium.

6. < Research & Development Unit >
Commercial Bank Upgrades
Corporate Online Banking
 Corporate customers of Commercial Bank’s Online Banking service, now enjoy several new benefits with the latest
release offered via www.combank.lk.
 This includes the latest security enhancements for the benefit of the bank’s corporate customers such as two layer
login; secure image upload where a user can upload a favourite image in to the Online Banking portal so that it would
be displayed when signing on, facilitating verification of the site prior to entering a password; and a virtual key board
that gives the user the option to use an on screen key board to avoid stealing of passwords.
 This latest release has many other value additions. It is capable of allowing single/dual or multi-level authorisation
facility for payments, helping large companies to automate many of their payments. The system is also capable of
applying payment limits according to the signature rules of various companies. Further, this system is also capable of
allowing corporates to schedule their bill payments to be effected on a future date/actual due date.
 Viewing images of deposited and presented cheques is also possible now for users of this facility. This is the first time
a bank in Sri Lanka has enabled its customers to view images of their deposited clearing cheques through an online
banking platform. Registering of regular payment beneficiaries and executing payments to them 365 days of the year is
also now possible. Submission of Letter of Credit applications with supporting document uploading too is possible.
The bank has also enabled a corporate administrator facility for companies to manage their internal user authorities as
and when required, conveniently without having to contact the bank.

7. Economic & Business News

8. < Research & Development Unit >
Central Bank Enters into an Investment
Agreement with People’s Bank of China
 The Central Bank of Sri Lanka and the People’s Bank of China had entered into a Bilateral Investment
Agreement on Bond Investment on the 25th August 2014, which enables the Central Bank of Sri Lanka
to further diversify its reserves management activities into Chinese Renminbi denominated assets. As
a result, the Central Bank of Sri Lanka could now access one of the largest and growing securities
markets in the world, while also enhancing the cooperation between the two central banks, and the
two countries.
Governor of the Central Bank of Sri Lanka, Mr. Ajith
Nivard Cabraal exchanged the Bilateral Investment
Agreement with the Governor of the People’s Bank of
China, Mr. Zhou Xiaochuan, at a special signing
ceremony held at People’s Bank of China, Beijing.

9. < Research & Development Unit >
External Sector Performance – 1H, 2014
Jan-June
2013
US$ mn
Jan- June
2014
US$ mn
Growth
Jan- June
(%)
Exports 4,656.4 5,438.9 16.8
Agricultural Products 1,117.3 1,356.7 21.4
Tea 684.2 797.0 16.5
Industrial Products 3,521.9 4,030.1 14.4
Textiles and Garments 2,000.8 2,412.9 20.6
Mineral Products 11.5 45.2 294.1
Imports 9,094.1 8,985.0 -1.2
Consumer Goods 1,524.5 1,599.4 4.9
Intermediate Goods 5,399.4 5,558.8 3.0
Fuel 2,219.5 2,460.7 10.9
Textiles and Textile Articles 965.9 1,048.8 8.6
Investment Goods 2,163.3 1,820.7 -15.8
Deficit in the Trade Account -4,437.6 -3,546.1 -20.1
Workers’ Remittances 3,039.0 3,360.0 10.6
Earnings from Tourism 785.4 1,050.9 33.8
 The cumulative trade deficit
contracted by 20.1%, as a result of a
16.8% growth in export earnings and a
1.2%decline in import expenditure
during the first half of 2014.
 The overall BOP is estimated to have
recorded a healthy surplus of USD
1,953.6mn during the first half of 2014,
compared to a deficit of USD 169.2 mn
during the corresponding period of
2013.
 Sri Lanka’s gross official reserves,
reached USD 9.2 bn by end June. In
terms of months of imports, gross
official reserves were equivalent to 6.1
months of imports by end June 2014.

10. < Research & Development Unit >
FDIs
 According to Government sources
Foreign Direct Investments (FDIs)
had risen by 51% to USD 817 mn
(cumulative) for 1H, 2014 from a year
earlier, and the government is
planning to woo more by issuing
privilege cards to investors.
 A plan to incentivise investments
with the issuance of privilege cards –
Gold, Silver and Bronze (based on
the invested amount) along with a
host of other benefits, including a
green channel at Immigration, has
been revealed by the Investment
Promotion Minister.

11.  Rating agency Fitch projects Sri Lanka (BB-/Stable) will cut its gross external funding requirement (GXFR) the most
between 2012 and 2014, relative to its foreign reserves, and warned its high levels of GXFR remains a credit and rating
weakness. A year after the “taper tantrum,” emerging Asian sovereigns with the biggest external funding needs are
generally reducing their degree of external vulnerability, although only modestly in most cases.
< Research & Development Unit >
Sri Lanka’s High External Funding Remains
Rating Weakness: Fitch
 Fitch Ratings expects external liquidity will
become an increasingly important rating driver
for emerging Asian sovereigns over the next 24
months as the Fed gradually withdraws
monetary accommodation.
Fitch expects policy management by emerging
Asian sovereigns will be of central importance
in determining their credit outlook.
 A less generous external funding environment
is likely to lead to continued pressure on
sovereigns to run relatively tight policy to
compress imports and reduce the need for
foreign capital. Structural reform could help to
bolster external competitiveness and raise
exports, but this may be difficult to implement
over the short to medium term.

12. < Research & Development Unit >
IFC Invests in Cargills Foods
 Cargills (Ceylon) PLC has entered into an agreement with the International
Finance Corporation (IFC) for an equity investment of Rs. 2.5 bn into its retail
branch, Cargills Foods Company (CFC).
 IFC will invest Rs. 2.5 bn (USD 20 mn) to subscribe for an 8% stake in the
share capital of CFC. The IFC investment was based on a pre-money equity
valuation of Rs. 29,325 mn for CFC as at the date of subscription and
translates into a post-money valuation of Rs. 31,875 m for the retail company
only.
 According to the company’s Annual Report, the move comes as part of the
restructuring exercise rolled out during 2013/14. Last year the Group
embarked on a restructuring process with a view to establish business
specific companies and strengthen the efforts of the management to optimise
resources and expertise as well as create opportunities for value creation
including attracting direct capital to the Group.

13.  The Floating Market which sits between the long distance private bus terminal in Pettah and the Fort
railway station contains 92 stalls including a restaurant and refreshment stalls. In addition to the
private shopping stalls it will also house a number of selected state institutions that will offer local
produce, gems and jewellery etc.
 The first of its kind market in the country, the Floating Market will offer people a unique shopping and
dining experience in a beautiful setting. Stalls are built on the banks of a canal of the Beira Lake.
Floating platforms selling vegetables and fruit are one of the attractions of the market.
< Research & Development Unit >
Floating Market, Open for Business

14. Analysis & Forecast

15. < Research & Development Unit >
Inflation
Cont…
 Currently, favorable supply-side developments, such as a ramp-up in agricultural
production from the northern and eastern areas, are helping to contain inflation to the
mid-single digit range.
 Present trends indicate that inflation is likely to remain within the CBSL’s 4-6% target
range, and private credit growth is likely to remain well below its 16% y/y target for year-end.
The YTD decline in inflation has been much sharper than what had been expected –
largely because the impact of the drought in Q4-2013 has been less than what was
anticipated.
Interest Rate
 During 2013, monetary policy had been progressively eased with a view to assisting the
country’s growth prospects. Interest rates had recorded a decreasing trend following
the 50 basis points reduction in policy rates by the CBSL in May 2013 and this trend was
supported by the 200 basis points reduction in SRR in July, 2013.
 Market interest rates have continued to adjust downwards. Short term interest rates,
including the average weighted prime lending rate (AWPR) have decreased to historic
low levels while longer term lending rates such as interest rates on housing loans and
leasing are adjusting downwards. Deposit rates, which fell in tandem with policy interest
rates, appear to have stabilised at their new levels.

16. < Research & Development Unit >
Credit to Private Sector
 Total credit growth has declined substantially from the peak rates seen in
late 2011/early 2012. From the start of 2012 until May 2014, total credit
growth declined by 35ppt to 5.1% y/y. Of this decline, roughly 60% can be
attributed to a fall in private credit growth (currently 2.0% y/y), 30% to
slower government credit growth, and the remaining 10% to a drop in
credit to public corporations. The decline in private credit growth has been
even more pronounced than expected.
 Weak private credit growth can be primarily attributed to a significant
decline in loans to the consumer sector, which account for 30% of total
private-sector loans. Of the 28ppt fall in private credit growth since the
start of 2012, 40% can be attributed to a decline in consumer loan growth.
This decline in loan growth to the consumer sector is masking some
improvements in private-sector lending (e.g., in the industrial and services
sectors).
 The fall in consumer loan growth is driven by a fall in pawning-related
loans (which constitute the bulk of personal loans), in light of the 30% fall
in gold prices since the end of 2012. During the credit boom in 2011,
consumer loans were the largest contributor to private credit growth.
Swings in consumer loan growth tend to have a significant impact on total
private credit growth.
Cont…

17. < Research & Development Unit >
Exchange Rate
 The domestic foreign exchange market has remained relatively stable
year-to-date, with the Sri Lankan rupee marginally appreciating by 0.45
% against the US dollar during the year up to 18 August 2014.
 IMF analysis indicates that the exchange rate is broadly in line with
fundamentals, and the analysis saw merit in CBSL’s purchases to build
its reserves, which remain on the lower end of most reserve adequacy
metrics. However, IMF has also cautioned that the persistent stability of
the rupee (vis-à-vis the US dollar) that has arisen as a side effect of
foreign exchange absorption by the CBSL since the fourth quarter of
2013 carries risks. First, it may create the perception that the rupee is
implicitly fixed—a point supported by the shift in exchange rate
classification from “managed float” to “stabilized” under the IMF’s
Annual Report on Exchange Rate Arrangements. This perception could
lead market participants and firms to hold un-hedged foreign exchange
risk on their balance sheets. Second, should external balance continue
to improve and inflation remains low, it could gradually lead to
increasing currency misalignment.
 Therefore, sufficient exchange rate flexibility will be required to adjust to
fundamental pressures, while intervention will have to be limited to
accumulation of reserves and smoothing short-term volatility according
to the IMF.
Cont…

18. < Research & Development Unit >
Global Economic
Prospects
 The global growth for 2014 is expected to be 3.4%, reflecting the
impact of the weak first quarter, particularly in the US and a less
optimistic outlook for several emerging markets. Global growth is
expected to rebound from the second quarter of 2014.
 The IMF points to the fact that although global recovery continues,
it is nevertheless at an uneven pace, and that downside risks
remain. The update therefore emphasizes the need for continued
policy efforts to secure a more robust recovery.
 Global growth decelerated more than expected in the first quarter
of 2014, largely because of temporary setbacks, including a sharp
correction to an earlier inventory buildup and the effects of a harsh
winter on domestic demand in the United States.
 Growth was adversely affected in China as policies were tightened
to dampen credit growth and housing market activity. Growth
moderated in other emerging markets due to softer external
demand and also because of slower-than-expected investment
growth.

19. Recharge your mind and body.
Rejuvenate your spirit and soul.
The views expressed in Economic Capsule are not necessarily those of the Management of Commercial Bank of Ceylon PLC
The information contained in this presentation has been drawn from sources that we believe to be reliable. However, while we have taken reasonable care to maintain accuracy/completeness of the
information, it should be noted that Commercial Bank of Ceylon PLC and/or its employees should not be held responsible, for providing the information or for losses or damages, financial or otherwise,
suffered in consequence of using such information for whatever purpose.