Economic Capsule July 2010

Research & Development Unit July, 2010

Commercial Bank Records Impressive Growth in 1H, 2010 Group Results for the 06 Months ended 30.06.2010 for CBC, Seylan & Sampath Commercial Bank Conducts Awareness Programme on ‘Paymaster’ Commercial Bank to Promote Life Insurance with Union Assurance AA (lka) for Commercial Bank Sri Lanka's Six Regional Development Banks Merge Amana in to Commercial Banking IIFL gets Broking License in Sri Lanka Logan Rockefeller Enters Sri Lanka Branch Openings Sri Lanka Appoints Rating Advisors Sri Lanka International Sovereign Bond Issue of USD 1,000 mn in 2010 Provincial Gross Domestic Product – 2008 / 2009 Movements in the Capital Market 2005-2010 Snippets Analysis & Forecast Financial Sector News C O N T E N T S ECONOMIC CAPSULE – JULY, 2010 Economy & Business News

Back to Contents Commercial Bank Records Impressive Growth in 1H >> << Sri Lanka's Six Regional Development Banks Merge Amana in to Commercial Banking >> << IIFL gets Broking License in Sri Lanka << Logan Rockefeller Enters Sri Lanka Commercial Bank Conducts Awareness Programme on ‘Paymaster’ >> Branch Openings >> >>> Financial Sector News - Financial Sector News - Financial Sector News

Among the principal contributors to this growth was a 27.74 % growth in net interest income attributed to efficient management of interest expenses, which reduced by 24.13 % in the period under review, during which period interest income too declined by 7.57 %. Back to Contents Commercial Bank Records Impressive Growth in 1H, 2010 Research & Development Unit Continued improvements in key performance indicators in the second quarter of 2010 have enabled the Commercial Bank Group to record noteworthy profit growth for the six months ended 30 th June, despite a drop in foreign exchange income. The Group, comprising Commercial Bank PLC, its subsidiaries and associates has reported profit before tax of Rs 4,038.5 mn, an increase of Rs 598.2 mn or 17.39 % over the corresponding period of last year. Profit after tax was up 14.84 % to Rs 2,314.0 mn. Group (Rs. Mn.) 30.06.10 30.06.09 % Growth Profit Before Tax (after vat) 4,038.5 3,440.3 17.39 Profit After Tax 2,314.0 2,014.9 14.84 Total Deposits 242,241.3 234,730.7 3.20 Total Gross Loans Advances 186,363.1 182,741.8 1.98

Back to Contents Group Results for the 06 Months ended 30.06.2010 for CBC, HNB, Sampath & Seylan Research & Development Unit Rs. Mn. PBT (after VAT) PAT Total Deposits Total Gross Loans & Advances Total Assets 30.06.10 Growth % 30.06.10 Growth % 30.06.10 Growth % 30.06.10 Growth % 30.06.10 Growth % CBC 4,038.5  17.39 2,314.0  14.84 242,241.3  3.20 186,363.1  1.98 338,172.1  4.84 HNB 3,039.1  13.25 1,888.5  10.03 216,369.3  1.19 177,633.9  2.13 295,179.3  2.67 SAM 1,884.8  19.27 1,365.6  60.79 139,689.0  10.89 105,757.0  6.09 171,939.7  8.82 SEY 801.3  901.88 483.5  1,188.51 106,983.5  1.48 91,549.7  (0.94) 142,854.9  4.07

Back to Contents Commercial Bank Conducts Awareness Programme on ‘Paymaster’ Research & Development Unit Commercial Bank to Promote Life Insurance with Union Assurance Representatives of more than 60 corporate entities participated in an awareness programme conducted recently by Commercial Bank on ‘Paymaster’ electronic payment mechanism. The event was attended by customers in Katunayake Free Trade Zone and Pannala area. Commercial Bank recently entered in to a Memorandum of Understanding with Union Assurance PLC to offer Life Insurance products to the Bank’s existing and potential customers. The agreement envisages that the Bank will offer insurance solutions based on Education, Investment, Retirement, Health and Protection. The Bank’s extended branch network will enhance convenience to customers to purchase insurance products and to pay premiums

Back to Contents AA (lka) for Commercial Bank Research & Development Unit Fitch Ratings Lanka has downgraded Commercial Bank’s National Long-term rating to 'AA (lka)' from 'AA+ (lka)' while stating that the Outlook as Stable. According to Fitch, the downgrade was due to relative deterioration in the Bank’s credit profile in terms of its asset quality and solvency indicators. However the AA (lka) rating of Commercial Bank has not been exceeded by any other local commercial bank, while being matched by only two other local commercial banks. CBC AA (lka) NTB A (lka) BoC AA (lka) Peoples Bank A (lka) NDB AA (lka) Seylan BBB + (lka) DFCC Vardhana AA - (lka) PABC BBB - (lka) HNB AA - (lka) Union Bank BB + (lka) Sampath AA - (lka)

Back to Contents Sri Lanka's Six Regional Development Banks Merge Research & Development Unit Sri Lanka's state-run Regional Development Banks (RDBs) are to merge, getting access to foreign funds, and diversify from agriculture into other areas like tourism and lend in the former north-east war zone. Regional Development Bank (RDB) was formed by merging regional development banks of the island's regions of Rajarata, Ruhuna, Wayamba, Uva, Kadurata and Sabaragamuwa. The bank is jointly owned by the Sri Lankan treasury, and state-owned Bank of Ceylon, People's Bank and National Savings Bank. Bank’s current position Expansion plans According to RDB chairperson Ms. Janaki Kuruppu, RDB plans to expand lending to the north and east, which are recovering from a 30-year ethnic war which ended in May 2009. RDB apart from its main business of providing loans to the agriculture sector, now will focus on other sectors like tourism which is booming with the end of the war. Stated capital of Rs. 3.2 bn Deposit base of Rs. 39 bn Asset base of Rs. 42 bn , with nearly Rs. 38 bn as loans and advances, and the rest in government securities. 3.2 mn customer base is predominantly from the agriculture sector with average loan value between 75,000 to 100,000 rupees. 50 % of RDB's 251 branches are now connected via an IT network.

Back to Contents Amana in to Commercial Banking Research & Development Unit Amana Bank Ltd. has raised Rs. 3.2 bn in capital through a private placement by selling 631.9 million 5.00 rupee shares to both foreign and local investors. Amana Bank is part of Sri Lanka's Amana Islamic finance group that already has insurance and merchant banking units and wants to get into commercial banking with a post-war economic boom anticipated in the island. Amana group has a deposit base of seven billion rupees and a lending portfolio of three billion with a network of 14 branches and Amana will be the first fully-fledged (Islamic finance) commercial bank to operate on the Sharia principal. Amana Bank wants to attract funds from the cash-rich Middle East which is looking for investments for its surplus cash generated from oil and to fund badly needed infrastructure projects in the island.

Back to Contents IIFL gets Broking License in Sri Lanka Research & Development Unit The India Infoline Ltd., (IIFL) has received the clearance from the Securities and Exchange Commission (SEC) to start stock broking operations in Sri Lanka. With the approval, IIFL becomes the first foreign broker to enter the market in recent years. IIFL straddles the entire financial services space with offerings ranging from equity research, equities and derivatives trading, commodities trading, portfolio management services, mutual funds, life insurance, fixed deposits, as well as investment banking. The company has a network of over 2100 business locations (branches and sub-brokers) spread across more than 450 cities and towns India in addition to offices in USA, Dubai and Singapore. Logan Rockefeller Enters Sri Lanka New York based Logan Rockefeller Global (LR Global) is planning to invest USD 20 mn in Sri Lanka through a newly set up local unit, which itself is planning a public listing as early as next year. LR Global Lanka Asset Management Company intends to bring significant portfolio investments to Sri Lanka. It will support companies to list in the market making sizable investments, pre-Initial Public Offering (IPO) as well as secondary market investments in the stock market. The investment company has offices in Singapore, Vietnam, Thailand, Cambodia, Papua New Guinea & Bangladesh

Back to Contents Branch Openings Research & Development Unit Indian Bank Plans Branch in Jaffna Indian Bank is planning to open a branch in Jaffna, Sri Lanka. Indian Bank already has a branch in Colombo and it is also looking at the possibility of opening a branch in Kandy as well 190 Kandy City Centre 191 Kilinochchi 180 Achchuvely 181 Thirunelvely 182 Eheliyagoda 142 Boralesgamuwa 143 Anamaduwa 144 Maradana 145 Buttala 146 Passara 147 Kilinochchi 148 Manipay 149 Kekirawa Bombuwela

Back to Contents Sri Lanka Appoints Rating Advisors >> >>> << Provincial Gross Domestic Product - 2009 Movements in the Capital Market 2005-2010 >> << Sri Lanka Tea Export Earnings to hit Record High Sri Lanka Removed from Cargo War Risk Insurance List >> << Seven EU Banks Fail Stress Tests << Sri Lanka Finance Firms to get more Liquidity: CBSL Economic & Business News – Economic & Business News – Economic & Business News

Back to Contents Sri Lanka Appoints Rating Advisors Research & Development Unit Sri Lanka has selected three leading international banks, as rating advisors for a period of four years starting July 2010 to assist and guide the GOSL to achieve its stated objective of attaining investment grade ratings by 2014. Sri Lanka International Sovereign Bond Issue of USD 1,000 mn in 2010 The Central Bank of Sri Lanka (CBSL), on behalf of the Government, plans to issue an International Sovereign Bond amounting to USD 1,000 mn. The issuance will be timed subject to market conditions probably later this year. After evaluation of the proposals received from seven international investment banks, the Government of Sri Lanka has selected the Hongkong and Shanghai Banking Corporation Limited (HSBC), Bank of America Merrill Lynch and the Royal Bank of Scotland (RBS) as Joint Lead Managers and Bookrunners for the proposed issuance. In addition, Bank of Ceylon has been appointed as a Co-manager to work with the three Joint Lead Managers to execute the proposed bond issuance. The proceeds from this Sovereign Bond issue would be utilized for infrastructure development activities carried out by the government and to restructure the existing government debt portfolio by retiring high cost domestic debt and short term foreign currency denominated debt. &

Back to Contents Provincial Gross Domestic Product – 2008 / 2009 Research & Development Unit In 2009 the GDP at current prices grew by 9.4 %, and reached Rs.4,825 bn with a per capita income of Rs. 235,945 equivalent to US$ 2,053. It’s disaggregation across provinces is given below; Salient Features of the Gross Domestic Product (at current market prices) by Provinces – 2008 1 and 2009 2 Year Western Central Southern Northern Eastern N. Western N. Central Uva S’gamuwa 1 Revised 2 Provisional 3 Ratio between per capita income of the province to that of all Island Source: CBSL Cont… Item / Province Island GDP (Rs.Bn) 2008 2,003 431 465 139 246 439 207 200 281 4,411 2009 2,178 465 492 159 281 495 232 220 303 4,825 GDP Growth (%) 2008 20.4 25.2 23.1 33.4 32.9 24.0 45.0 13.1 22.0 23.2 2009 8.7 8.1 5.9 14.1 14.0 12.8 12.1 10.0 7.8 9.4 GDP Share (%) 2008 45.4 9.8 10.5 3.2 5.6 9.9 4.7 4.5 6.4 100.0 2009 45.1 9.6 10.2 3.3 5.8 10.3 4.8 4.6 6.3 100.0 Per capita income (Rs. ‘000) 2008 348 164 190 119 163 191 171 155 148 218 2009 375 175 199 134 183 213 189 168 157 236 Per capita income ratio (3) (%) 2008 1.6 0.8 0.9 0.5 0.7 0.9 0.8 0.7 0.7 1.0 2009 1.6 0.7 0.8 0.6 0.8 0.9 0.8 0.7 0.7 1.0

Back to Contents Provincial Gross Domestic Product - 2009 Research & Development Unit GDP (Rs. Bn) 2,178 465 492 159 281 495 232 220 303

Back to Contents Movements in the Capital Market 2005-2010 Research & Development Unit

SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - - - - - - Back to Contents SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPE TS - SNIPPETS - - - - Sri Lanka Tea Export Earnings to hit Record High According to officials, Sri Lanka is expected to earn a record USD 1.4 bn from its tea exports in 2010 thanks to a bumper crop. Tea, Sri Lanka's biggest cash crop, earned Rs. 71.3 bn (USD 635 mn) in the first six months of 2010 compared with Rs. 58.2 bn in the corresponding period 2009. The commodity earned USD 1.3 bn in export sales in 2009, despite drought hitting production and shipments suffering from the effects of the global crash in 2008. Russia and former Soviet republics are the largest markets for Sri Lankan tea, accounting for nearly a fifth of total exports, followed by the Middle East and North African buyers. Sri Lanka Removed from Cargo War Risk Insurance List International insurers have removed Sri Lanka from their cargo war risk insurance list paving the way for reduced import costs, removal of surcharges and increasing business confidence. Sri Lanka has been removed from all marine war, and marine strikes risk of the Joint Cargo Committee - Global Cargo Watch List by Lloyd’s Market Association with effect from July 5, 2010. In addition, the Ground Risk of 2.6 (High Level) previously applicable for the entire ground in Sri Lanka is now confined only to the Vavuniya – Jaffna Section of the A-9 Highway . The removal of the island from the cargo war risk insurance list comes in the wake of Sri Lanka's removal from the marine hull war risk insurance list in June, 2010 by the Joint War Committee in London. Sri Lanka Finance Firms to get more Liquidity: CBSL As one of the key measures to deal with liquidity constraints confronted by a few registered finance companies (RFCs), the Central Bank of Sri Lanka (CBSL) introduced a Credit Guarantee Scheme from January 2010. Under such scheme, RFCs and specialized leasing companies are entitled to obtain loan facilities from banks against their real estate and financial assets, to enhance their liquidity position to conduct their normal business operations, with a credit guarantee being provided by the CBSL. Seven EU Banks Fail Stress Tests Seven of the 91 European banks that underwent stress tests have failed the healthchecks, according to the Committee of European Banking Supervisors (CEBS). They include five Spanish banks - Diada, Espiga, Banca Civica, Unnim and Cajasur. The other two were Germany's Hypo Real Estate and Greece's ATEbank. The tests assessed banks' ability to survive future economic shocks. The seven banks would need a total of 3.5 bn euros of new capital to meet the standards required. The stress tests were conducted on a bank-by-bank basis, in a move designed to reassure investors over the health of Europe's financial sectors. The most severe test looked at an adverse scenario, assuming a "double-dip" recession over the next two years, as well as a sovereign debt shock - some kind of financial crisis for European governments such as Greece. The seven banks failed because in this scenario, it was deemed that their "tier one" capital ratios - the strictest measure of capital - would fall below 6%, the threshold set for the test.

Back to Contents Inflation >> >>> << Exchange Rates << Interest Rates The Impact of the Loss of GSP + on SL Economy >> The Impact of the Loss of GSP + on SL Economy >> Inflation >> << Exchange Rates << Interest Rates Analysis & Forecast – Analysis & Forecast – Analysis & Forecast – Analysis & Forecast

Back to Contents Analysis & Forecast Research & Development Unit Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (base=2002) (CCPI) continued to decline, for the fifth consecutive month, reaching 4.3% in July 2010, while annual average inflation slightly increased to 4.2%. The CCPI remains highly sensitive to global commodity prices, particularly petroleum prices. According to IMF projections, the price of oil is expected to be USD 75.3 a barrel for 2010 and USD 77.5 a barrel for 2011. Core inflation that measures the price movements of non‐food and non‐energy items in the Colombo Consumer Price Index (CCPI) basket stood at 6.7% on a point‐to‐point basis in June 2010, while on an annual average basis it recorded 6.3%. We expect the CCPI to increase to an annual average of 8.0% by end 2010. Inflation Interest Rates The government’s budget deficit recorded a high 9.9% of GDP in 2009. The government is planning to achieve a lower budget deficit of 8% for 2010. The rate of inflation has continued to come down and is expected to remain on single digits at least till the end of the year. Since February, 2007 the Repo & RRepo of the Central bank of Sri Lanka has been brought down continuously, with the latest revision being effected on 10 July, 2010. Please see table: The above developments have helped to keep interest rates in check. Private sector credit demand has been picking-up After posting y-o-y declines since April, 2009, private sector credit demand had entered positive territory in March, 2010 and recorded a y-o-y growth of 3.5 % by end May, 2010 (1.6 % Ó in April, 0.1% Ó in March) in contrast to a contraction of 5.7 % at end 2009. If this trend continues, It will exert upward pressure on interest rates. Cont… Date of Change Repo(%) RRepo(%) 23.02.2007 10.500 12.000 11.02.2009 10.250 11.750 22.04.2009 9.000 11.750 16.06.2009 8.500 11.000 11.09.2009 8.000 10.500 18.11.2009 7.500 9.750 As at 10 July 2010 7.250 9.500

Back to Contents Analysis & Forecast Research & Development Unit Prime lending rates are likely to marginally ease further to stimulate credit growth before picking up by year end on the back of sustained high public sector borrowings and an expected pick up in private sector credit. Interest Rates (cont…) Exchange Rate The stabilization of the exchange rate which was witnessed in 2009 is expected to be continued in the backdrop of foreign exchange inflows exceeding foreign exchange outflows. Foreign fund inflows, improved remittances and earnings from tourism have managed to mitigate a widening trade deficit. This has contributed to strengthen the rupee. The LKR/USD exchange rate is expected to record around Rs. 112/- per US dollar by the end of 2010.

Back to Contents The Impact of the Loss of GSP + on SL Economy Research & Development Unit A drop in exports will reduce employment, but at present there’s a labour shortage in the apparel industry to the tune of 25,000 people. Apparel exports are expected to drop by 10-15% in 2010 to around USD 2.7 - 2.8 bn, compared to 2009. Loss of the GSP Plus benefits would mean Sri Lankan exporters will lose duty free access to EU markets and their shipments would be charged an import duty of about 9.6%. Some buyers in the EU might be willing to pay the import duty or share it with local manufacturers and others not willing to do so might move their buying to other countries. Despite the fall in inflation from double-digit levels and also of interest rates, cost of running operations in the apparel sector has gone up 10-12 % over the past year. Ways to mitigate the loss of GSP Plus include the search for new markets and improved productivity. Even if there's a five percent increase in other markets that would help. The apparel industry is preparing a five-year strategic plan that targets exports of USD 4 bn by 2015. The possible loss of a GSP deal with the United States would not affect the apparel industry as apparel and textiles do not qualify under the deal According to industry sources, the end of a trade deal giving duty free market access to Europe will not be a 'catastrophe' though it would squeeze already thin profit margins, and large scale factory closures or lay-offs are not anticipated. JAAF is looking at ways to mitigate the loss of the GSP Plus deal when it ends in August, 2010. One-third of Sri Lankan exports qualify for GSP Plus.

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. The views expressed in Economic Capsule are not necessarily those of the Management of Commercial Bank of Ceylon PLC “ The misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” Joan Robinson

Economic Capsule July 2010

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Economic Capsule July 2010