Our Strategy
Operating Environment
The Bank continually reviews its operating environment to make informed decisions that ensure its long-term success. The PESTEL framework is used to gain an in-depth understanding of the factors that influence the operations-including evolving economic and global trends, shifting customer needs and preferences, the potential impact of technological advancements and other developments in the competitive financial services landscape. This helps to identify potential opportunities, effectively mitigate risks and adapt strategies and operations to the shifting market conditions.
GLOBAL CONTEXT
The global economy displayed a moderate, resilient growth trend during 2024, with declining inflation levels. Although growth trajectories varied across regions, overall global GDP was estimated to have reached 3.2%.
Asia was a key driver of global economic growth during the year, driven by strong exports, growing domestic demand and declining inflation. The United States grew at 2.8% during 2024. The Eurozone faced a slower recovery and grew by 0.8%. This was due to the geopolitical tensions and uncertainty that pervaded due to policy shifts.
Despite its current resilience, the global economy faces significant risks from global fragmentation, and heightened geopolitical risks.
LOCAL CONTEXT
Having experienced a series of turbulent periods, significant stabilisation was witnessed in the latter part of 2024.
GDP growth reached 5.5% in 3Q - 2024, with agriculture, industry, and services on a growth trajectory. Rapid macroeconomic stabilisation improved short-term growth prospects for the economy. Long-term resilience of the economy hinges on sustained structural reforms alongside fiscal, financial, and monetary policies. The steady growth of the economy is expected to be continued while a GDP growth of 5.0% is expected in 2025.
Sri Lanka restructured its International Sovereign Bonds (ISBs) in December 2024. Accordingly, Sri Lanka received grace periods until 2028, for capital repayments with reduced interest, and progressive amortisation with final repayments in 2043. With the conclusion of IMF third review, the total IMF financial support disbursed amounted to about USD 1.3 billion to support Sri Lanka economic reforms.
Fitch Ratings upgraded Sri Lanka's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'CCC+' from 'RD' (Restricted Default) at end of December 2024. Credit ratings agency, Moody's followed suite, raising the long-term foreign currency issuer rating to 'Caa1' from 'Ca' at the same time.
The Government's Economic Transformation Bill aims to transform Sri Lanka into a highly competitive, export-driven, digital economy, achieving Net Zero status by 2050, with deeper global economic integration. Its targets aim for stable macroeconomic balances, sustainable debt, modernised agriculture to enhance productivity and exports, that will drive inclusive economic growth.
The Sri Lankan economy demonstrated resilience and recovery with the GDP expanding.
The Sri Lankan Rupee appreciated by 10% against the USD to LKR 292.58 during 2024. This was mainly driven by enhanced inflows from worker remittances, tourism earnings and export conversions.
Average headline and core inflation remained contained, supported by the downward adjustments in administered prices, currency appreciation, improved supply conditions, and subdued demand.
Lending and deposit rates along with yields on Government securities declined significantly followed by stabilisation.
The CBSL shifted to a single policy rate system with an Overnight Policy Rate (OPR) with effect from 27 November 2024.
The OPR replaces the previous dual rate systems with the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR).
EXTERNAL SECTOR
The External Sector of the Sri Lankan economy improved in 2024, with robust inflows to the current account for the second consecutive year strengthening reserves.
In the face of substantial fiscal reforms, Sri Lanka's public finances have strengthened significantly during the year.
BALANCE OF PAYMENTS
Balance of Payments (BoP) experienced a surplus in the first eight months of 2024, but the year ended with a deficit. The country's reserves increased, while the rupee appreciated against the US dollar.
RESERVES
Gross official reserves stood at USD 6.1 billion at the end of December 2024, driven by sizable foreign exchange purchases by the CBSL.
The current account is expected to remain positive, bolstered by a resurgence in tourism and remittances. However, some import restrictions are yet to be relaxed.
IMPROVED TAX REVENUES
On the fiscal front, the primary balance achieved a surplus, supported by a significant (10%) increase in tax revenue in the first three quarters.
The following analysis explores the Bank's response to the emerging developments in the local operating landscape.
| PESTEL FACTOR | IMPACT TO AND RESPONSE FROM |
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Political
The year 2024 was characterised by political changes stemming from two elections conducted and led to a subdued demand for credit and investments. |
BOC was cognisant of these developments and adopted a cautious approach to lending during the year 2024. |
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Economic
Sri Lanka's economy entered a strong trajectory signalling a path to recovery in 2024. Having navigated a series of economic crises, Sri Lanka is now transitioning into a post-crisis phase with renewed stability. |
Positive developments in the economic indicators created a stronger foundation for the Bank's expansion and development. |
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Social
Declining inflation levels eased the pressure on disposable incomes. Increase in outward migration was evident despite the improvements in the economy. |
The Bank witnessed growth for credit demand is gradually picking up. The Bank experienced brain drain and staff turnover. The flow of remittances increased in 2024 due to expatriates remitting earnings through formal channels and had a positive impact on the Bank. |
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Technology
The nation's digital transformation and the journey towards a cashless society continued to gain traction. The use of Artificial Intelligence (AI), Robotic Process Automation (RPA) for process improvements and efficiency gained momentum. The existing high mobile and internet penetration levels of the country created a strong foundation for e-commerce, digital banking, digital lending, peer to peer lending, mobile payments. |
The Bank witnessed a significant increase in digital adoption rates, 47% of customer initiated transactions were done through digital channels. The Bank explored process improvements leveraging IT. Greater focus was placed on mitigating IT security threats, cyber – attacks by setting in place stringent security measures. |
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| PESTEL FACTOR | IMPACT TO AND RESPONSE FROM |
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Environment and sustainability
Greater focus on environmental regulations and disclosure requirements. The urgency for climate action driven by the frequency and intensity of extreme weather events. Greater awareness of stakeholders to adopt sustainable practices. Focus to build long-term resilience by embedding and promoting sustainable business practices along the value chain. |
As a provider of finance across all sectors, BOC is committed to drive sustainable practices within and along its value chain. The Bank's ESMS system promotes and prioritises lending to sustainable business ventures and financing green loans is a key priority for the Bank. The Bank has over the years powered its branch network with green practices. The promotion of digital platforms for banking services has created sustainable operations. |
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Legal environment
The Banking (Amendment) Act is effective from 15 June 2024. The suspension of parate execution remains until end March 2025. The GOSL introduced a 3-phase plan to lift restrictions on vehicle imports. As of end-December 2024, phases 1 and 2 have been implemented. |
The Bank proactively monitored the developments in the legal landscape and ensured compliance with laws and regulations in a timely manner. |
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BANKING SECTOR OUTLOOK
The Sri Lankan banking sector stabilised demonstrating notable resilience amidst the easing of macroeconomic conditions. Prudent policy interventions with economic and financial reforms supported the recovery of banking sector performance during 2024.
The banking sector showed a strong growth in profitability and enhanced profitability levels elevated Return on Equity (ROE) and Return on Assets (ROA) of the banking sector for the year 2024.
Credit extended by domestic and foreign banks increased with greater volumes of credit disbursed to MSMEs involved in trade, manufacturing, tourism sectors. There was a gradual reduction in Stage 3 loans and the improved provision coverage on expected credit losses, albeit the Stage 3 Loans ratio remaining at an elevated level. Despite these developments, the sovereign exposure of the banking sector remained high, mainly due to increased exposure to Government securities.
Easing of economic stress across domestic and industrial sectors helped to improve liquidity and strengthened capital buffers. However, some sectors are yet to recover from the financial stress experienced during last few years and this will continue to influence the banking industry in 2025.
During the year, Banking (Amendment) Act No. 24 of 2024 was issued further strengthening the legal and regulatory framework of Licensed Banks. In addition, several other regulatory measures were introduced relating to large exposures, corporate governance and related party transactions.
The Resolution framework for the Banking industry was also further strengthened through Banking (special provisions) Act in 2024.
WHERE WE ARE HEADED
Sri Lanka's banking sector is poised for a period of renewed stability and growth, driven by a combination of factors including low interest rates, improving economic confidence and a declining inflationary environment creating a conducive landscape for credit expansion, business investment and overall economic recovery.
The reduction in interest rates has encouraged borrowing levels, stimulating both consumer and corporate credit demand. This is an impetus for businesses to invest and expand. Improved macroeconomic stability and rising investor confidence are strengthening deposit growth and capital flows into the sector.
Declining inflation has reinforced economic predictability, reducing pressure on interest margins while supporting sustainable lending practices. Additionally, the financial sector is expected to benefit from an improving external position, increased foreign direct investment, and a more stable exchange rate environment.