Management Discussion and Analysis

The Future

The Global Economy

The global economy although still beset by the fall out in recent times, is expected to grow by 3.5% in 2013. This growth will be powered by the emerging and developing economies, largely based in Asia. World commodity prices will fall in 2013 as middling economic growth will fail to stir enough demand to keep pace with raw material production.

The Local Economy

Sri Lankan economy is expected to continue its growth momentum in 2013 as well. Country's growth prospects are likely to improve whilst the rate of inflation will remain at single digit level. Ensuring that inflation stays on course to remain in mid-single digit territory over the next 5 years is a priority for Sri Lanka to achieve the medium term growth targets.

The Banking Sector

The following developments/changes will have a considerable impact on the banking landscape of the country in the ensuing year.

Streamlining SLFRS Implementation

The Bank has prepared the Financial Statements on SLFRS as at December 31, 2012 being the first year after migration to new accounting standards. As expected, many areas need to be refined and fine tuned; assumptions need to be validated and back tested. The banking fraternity need to invest resources to implement the standards to its true spirit in the years to come.

Overseas Borrowing

In the wake of budgetary relief to the corporate sector permitting foreign currency borrowings, it is likely that a majority of banks may resort to this method to tap the overseas market for low cost borrowings to supplement deposit mobilisation efforts. Banks are encouraged to access stable wholesale funding sources without relying only on short term customer deposits. Therefore, banks are expected to raise significant Tier I and Tier II capital from foreign sources by building strong Balance Sheets.

Mergers and Acquisitions

According to CBSL's Road Map for Sri Lanka the country is targeting the achievement of a US $ 100 Bn. economy by the year 2016. Banks will have a critical role to play in this endeavour. The size of the Balance Sheet of even the larger domestic banks is still smaller than those of regional banks and not in comparable terms with major international banks. In the
Sri Lankan banking sector, only two banks appear in the rankings of the 1000 best banks in the world as ranked by the Banker Magazine. In fact, Commercial Bank is one of them. Since there are several small banks in the sector, the competitive edge for them would lie within the concept of mergers with larger players in the market.

Implementation of ICCAP

The Banks in the country are expected to implement ICCAP, part of the supervisory review process under Pillar II of Basel II with effect from 2013. In addition to the Credit, Market and Operational Risk under Pillar I of Basel II, the banks are required to carry out capital computation incorporating a host of other risks such as residual risk, credit concentration risk, interest rate risk in the banking book, liquidity risk, reputational risk and strategic risk. Further, the banks are required to carry out stress testing to gauge the impact of adverse economic conditions on their CAR. It is expected to have a 2% - 3% reduction in
the CAR as experienced by the countries who have complied with the Pillar II requirements.

Migrating to the Advanced Approaches of Basel II

Banks are being encouraged to move into the advanced approaches of Basel II, more specifically to adopt internally developed models for credit and market risk. Further, the CBSL has issued guidelines for the implementation of operational risk under the Standardised method which should be effective from 2013. Instead of calculating the operational risk-based on the gross average turnover, banks are required to identify the income-based on eight business lines as defined in Basel II and calculate the operational risk-based on the beta factor of each business line provided by the Basel guidelines.

Development of Debt Market

Interest income earned from a listed corporate debt has been exempted through provisions contained in the National Budget for 2013. The measure was introduced to promote the debt market in the country. This is a long felt grievance of the investment community and with this move, the Government expects a sound debt market to operate, allowing corporates to go for direct borrowing bypassing the banking system.

Special Levy Imposed on Financial Institutions

A Special Levy of 1% is to be imposed on the profits of all Banks, Insurance and Financial Institutions. This levy is to be directed towards implementing a crop insurance scheme for farmers through a National Trust Fund.

Income Tax and Other Exemptions for SMEs

The Government has announced a host of concessions to promote the SME sector with numerous tax concessions. These benefits are intended to promote the SME sector, which makes the highest contribution to the economy, while employing the largest number of people in the country. The growth of this sector would augur well for the economy and the banks in particular.

The Bank's Strategic Map

Strategic Direction of the Bank

The Commercial Bank, has evolved from a specialised trade financier catering to the business community, to a truly national bank, offering a gamut of services and products to the widest of clientele from high end corporate to the micro sector entrepreneur.

The Bank considers its Corporate Plan and Budget to be the quintessential guide to its positioning and performance. 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 Corporate Plan and Budget for 2013 through 2017 comprehensively details the Bank's present status and maps out strategies to consolidate its niche position in the private sector banking market while capitalising on future opportunities. The plan also incorporates 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 which are supported by Information Technology, Human Resources, Integrated Risk Management and Marketing.

Strategies to the Future

The Bank has formulated several core strategies from which other specific strategies emanate; all are geared to advance into the future with confidence and success coinciding with the country's core economic strategies.

Core Strategies

• The Bank will pursue the adoption and deployment of the latest technology which will manifest itself through significant investment in IT, leading to upgraded IT platforms, more process automation, growth in e-based products and channel migration among others.
• We will encourage and deploy high levels of innovation in terms of increasing volume growth from new products and pursuing new investments while improving the operational efficiency.
• Another core strategy is customer centricity. The desired outcomes would be - distinct positioning and building of brand equity, enhancing customer satisfaction levels, reducing customer complaints and stimulation of new products to satisfy different customer segments.
• An important strategic requirement will be the pursuit of overseas expansion in terms of regional expansion, investment made outside the country, growth of business and profits from overseas operations and placement of more BPOs to handle remittances, all these initiatives would reduce the dependence on Sri Lankan economy.

Specific Strategies

These will include strategic analysis and rationalisation of the branch network, particularly the opening of new branches, leveraging technology to automate and enhance capacities of automated systems thereby offering customers greater convenience, improving online credit monitoring systems to minimise NPAs, completing Treasury automation, enhancing loan approval process and data management by completing Loan Originating System, implementing mobile bank and inter-bank payments, improving brand loyalty and promoting one-bank-one-family concept.