Sri Lankan shares at over 10-wk closing high; banks in focus

(Reuters) - The Sri Lankan share index ended at its highest level in more than 10 weeks on Tuesday, led by blue chips amid strong interest from banks and financials after the central bank said private sector credit growth would rebound in the second quarter.

The main stock index gained for a fifth straight day and ended 0.08 percent, or 4.80 points, firmer at 6,191.83, the highest close since Feb. 3.

Expectation of private sector credit growth buoyed sentiment, said a stockbroker.

Before the market opened, the central bank kept policy rates steady at multi-year lows, as expected, and expressed confidence that private sector credit growth would rebound in the second quarter and push up the pace of economic expansion.

The day's turnover was 547.2 million rupees ($4.19 million), less than this year's daily average of 967.8 million rupees.

The bourse saw net foreign inflows for a ninth straight session. Offshore investors bought 179.3 million rupees worth of stocks, though they have sold a net 7.7 billion rupees of shares so far this year.

Hatton National Bank, the island nation's second-largest private lender by market capitalisation, and National Development Bank gained 1.29 percent and 1.4 percent, respectively.

Stockbrokers expect the nation's $19.85 billion bourse to gain in the short term due to prevailing lower interest rates.

Analysts, however, said foreign investors could shift from the island nation's risky assets if Sri Lanka does not cooperate in an international probe by the Office of the United Nations' High Commissioner for Human Rights into the country's alleged war crimes and human rights abuses.

Sri Lanka's foreign minister had said earlier this month that the country would not cooperate with the inquiry.

($1 = 130.6200 Sri Lanka Rupees)

(Reporting by Shihar Aneez and Ranga Sirilal; Editing by Subhranshu Sahu)

Investments in shares: EPF loses billions

Auditor General H.A.S. Smaraweera in his review of the 2011 annual report of the Employees Provident Fund (EPF) said Sri Lanka’s main social security fund had lost nearly Rs.11.7 billion through investments in 58 private institutions.

He said these losses had resulted in a 1 % decrease on benefits payable to 2.5 million EPF members in 2011.

“There has been a 1% decrease on the benefits payable to the members in 2011 as compared with 2010. This is a decrease on investment income of Rs.5,049.303,683 in 2011,” Mr. Samaraweera stated in his audit review of October 10, 2013.

Out of the long term and short term investments amounting to Rs.63,169,398,923 made by the EPF in 76 companies in the share market by January 15, 2013, the value of investments made in 58 companies amounting to Rs.54,006,955,606 had diminished by Rs.ll,737,841,979.

“Some 500 million rupees invested in 1,863,676 units of an airline company in 2010 had not yielded any income to the fund since the date of investment. In its response, the Central Bank said it was confident of future profits from the companies with the losses decreasing gradually,” the Auditor General’s report noted.

Commenting on unsound or risky investments in private company equities, the Auditor General pointed out that Rs.2,975 million invested in 29,750,000 units of an electricity generating company from April 2007 to November 2008 had not yielded any income to the Fund in 2008, 2009 and 2010 while Rs,540,909,091 had been received twice in the year 2011 as dividend income Nearly Rs.205,489,613 was used to purchase 5,091,200 shares in a Finance Company from February 23, February 2011 to November l, 2011 and the loss of Rs.4,285,937,284 as revealed in the last published accounts of the Company had not been taken into consideration and at the time it was decided to invest in this finance company.

Even during the year under review this company had lost Rs.3,830,135,175. The company shares had been purchased at an average price of Rs.40.36 a share when the market price of a share was Rs.24. The Fund had not received any income from the investment since the date of investment.

The auditor General’s report states that fund had invested a sum of Rs.680,232,419 in 20,942,989 shares of a communications company and the share of that company had not been offered for sale in the stock market since 2009. As such the Fund could not earn capital profits even though dividends amounting to 3.39 per cent in 2008 and 2009 and 0.81 per cent in 2010 and 1.67 per cent in 2011 had been received during the period of investment such income was not commensurate with the investment. In this connection, the Central Bank of Sri Lanka informed that as the communication field would further develop in Sri Lanka it is believed that the dividends and the capital profits receivable by the Fund from the company would increase.

‘The EPF has not received any income whatsoever for the investment of Rs.3,555,864,821 in the year ending December 31 2011 from the shares of 11 companies,” Mr. Samaraweera said.

In keeping with Central Bank’s Monetary Board instructions to increase the investments in the Hotels and Transport Sectors, investment of Rs.3,882,771,148 in 18 Hotels as at December 31 2010 and Rs,7,219,711,548 in 16 Hotels as at December 31 2011 had been made. An income of Rs.50,807,109 or 1.31% had been received in 2011 on the investment made as at December 31 2010 while Rs.173,616,783 or 2.4% was received in the 2012 for the investment made as at December 31, 2011.

In keeping with the decision of the Monetary Board, Rs.810,321,610 was invested by 31 May 2010 in a Hotel Company which had incurred losses amounting to Rs.520.49 million, Rs,405,38 million, Rs.298.85 million and Rs.147,02 million in 2007, 2008, 2009 and 2010 respectively and had unfavourable earnings ratios of 3.15, 3.45, 1.09 and 0.13 during the respective years. The loans payable by this Company by that date amounted to Rs.6.28 billion (approximately). The Fund had not received any income whatsoever since then.

Out of the 16 Hotel Companies referred to above, in which the Fund had invested Rs,7,560,267,157 as at June 30, 2012, the market value of the shares of 13 companies had decreased by Rs,1,605,197,185 and the Fund faced the risk in earning capital gains by the sale of the shares of those companies. In this connection, the Central Bank of Sri Lanka said looking at the progress in the tourism industry, an increase of the prices of shares of all Hotel Companies can be expected along with the share market reaching normalcy, the AG’s report said. (Sandun A.Jayasekera)

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Sri Lanka stocks close higher

Apr 22, 2014 (LBO) - Sri Lanka's stocks close 0.08 percent higher with index heavy stocks gaining amid net foreign buying, brokers said.

The Colombo benchmark All Share Price Index closed 4.80 points higher at 6,191.83 up 0.08 percent. The S&P SL20 closed 2.48 points higher at 3,397.42, up 0.07 percent.

Turnover was 551.13 million rupees, down from 816.06 million rupees a day earlier with 83 stocks close positive against 96 negative.

John Keells Holdings closed 90 cents higher at 239.90 rupees with market transactions of 103.44 million rupees contributing to 19 percent of the daily turnover.

JKH’s W0022 warrants closed 1.20 rupees higher at 70.20 rupees and its W0023 warrants closed 1.10 rupees higher at 75.00 rupees.

Commercial Bank closed 40 cents higher at 127.90 rupees with an off market transaction of 58.03 million rupees contributing to 11 percent of the turnover.

Piramal Glass Ceylon closed 20 cents higher at 3.90 rupees and Orient Garments closed 2.90 rupees higher at 14.80 rupees, trading heavily on the market.

Foreign investors bought 226.05 million rupees worth shares while selling 46.75 million rupees worth shares.

Ceylon Tobacco Company closed 20.40 rupees higher at 1,118.20 rupees, contributing most to the index gain.

Aitken Spence Hotel Holdings closed 2.40 rupees higher at 75.90 rupees and Asian Hotels and Properties closed 10 cents higher at 65.10 rupees.

Hatton National Bank closed 2.00 rupees higher at 157.00 rupees and National Development Bank closed 2.60 rupees higher at 188.00 rupees.

Colombo Dockyard closed 6.60 rupees higher at 189.60 rupees and Distilleries closed 50 cents higher at 205.50 rupees.

Carson Cumberbatch closed 11.60 rupees lower at 378.40 rupees and Chevron Lubricants Lanka closed 5.00 rupees lower at 268.00 rupees

Hemas Holdings closed 1.00 rupee lower at 42.00 rupees and Bukit Darah closed flat at 571.50 rupees.

Sri Lanka rates unchanged; lower state borrowings to boost credit: Central Bank

Apr 22, 2014 (LBO) - Sri Lanka's central bank held policy rates unchanged in April saying reduced central government and state enterprise borrowings has created conditions for private credit to pick up.

The central bank held the rate at which money is drained from banks at 6.5 percent and the rate at which cash is injected at 8.0 percent.

With excess liquidity in markets and money being drained daily amid weaker credit, the 6.5 percent standing repo rate is now active and overnight risk free bank rates is 6.50 percent and the un-backed rate at 6.90 percent.

Inflation
The Central Bank said the rates were appropriate with inflation at 4.2 percent in March, up slightly from 3.1 percent in February,

"Looking ahead, although some price pressures may be felt due to supply disruptions brought by drought conditions, inflation is expected to remain at mid single digits throughout the year supported by favourable inflation expectations, and subdued demand conditions," the April monetary policy statement said.

In a country with free trade, a drought may temporarily push up a price index but does not cause inflation unless it is accommodated in some way with looser monetary policy.

Higher prices in some sectors may squeeze the prices in others when the so-called 'supply shock' is not is not accommodated.

In Sri Lanka rice is hit by import taxes and kept at rates higher than the rest of the world and potatoes are also taxed to give rents to landowners and a farming lobby backed by economic nationalism.

Rice taxes have been relaxed ahead of the drought though prices are now up. Meanwhile traders have been slapped with price controls.

Sri Lanka's inflation has been low with credit weak and excess liquidity being drained by the Central Bank, with some analysts saying inflation would be lower if the exchange rate was allowed to appreciate.

Credit
The government had borrowed 43.3 billion rupees from the banking system in the first two months of the year but overdrafts at state banks had been repaid with proceeds of a billion US dollar bond.

State energy enterprises had also repaid loans from state banks.

"Continued fiscal consolidation, together with the sovereign bond issuance that took place in April 2014, is expected to ease public sector’s reliance on bank financing in the coming months," the Central Bank said.

"The resulting release of funds for private investments bolstered by sufficient market liquidity levels would provide the necessary stimulus to strengthen private sector activity and in turn, as expected, expand credit growth from the second quarter onwards."

Sri Lanka raised interests sharply in 2012 to ward of a balance of payments crisis triggered by heavy borrowings by state enterprises from state banks amid a general credit bubble.

In February private sector credit growth had slowed to 4.4 percent from 5.2 percent in January.

Many over-leveraged private firms had reduced leverage following the end of a credit bubble and slowing economic activity.

The Central Bank said a part of the reduction in credit came from reduced gold-backed loans which had also risen sharply during a worldwide gold price bubble. But gold prices fell during 2013, leaving banks exposed and taking steps to provide for losses.

Some banks were also exposed to margin loans given during a stock market bubble.

Analysts a period of consolidation where bad debts acquired during the bubble are purged would leave banks in a stronger footing to fund a recovery and is part of a business or credit cycle.

Dunamis Capital gets 'BBB+' rating

Ceylon FT: RAM Ratings Lanka has assigned Dunamis Capital PLC respective long- and short-term corporate credit ratings of BBB+ and P2.

"Concurrently, we have assigned an initial issue rating of BBB to the Company's proposed LKR1 billion Senior, Unsecured, Redeemable Debentures. The long-term rating has a stable outlook," the ratings agency said in a statement.

Dunamis is a holding company with interests in primary dealing, stock brokering, margin trading, debt structuring, asset management, property development and manufacturing. 

The Company and its subsidiaries are collectively referred to as the Group.

The Company's primary income generator is its financial services arm, held by First Capital Holdings PLC (FCH) (rated BBB+/P2 by RAM Ratings Lanka). The bulk of FCH's revenue and profits is generated by primary dealer First Capital Treasuries Limited (FC Treasuries). FC Treasuries is among the pioneer primary dealers in Sri Lanka, appointed by the Monetary Board of the Central Bank of Sri Lanka (CBSL) to deal with the CBSL as counterparty in the primary market and to trade in government securities in the secondary market.

Dunamis' ratings are upheld by the Company's exposure to minimal credit risk as most of the Group's trading and investment securities is......comprised of FCH's investments in government securities, which carry minimal credit risk.

Meanwhile, FC Treasuries' capitalisation levels are deemed good, supported by a risk-weighted capital adequacy ratio which comfortably surpassed the industry average in FY March 2013 and served as a sufficient buffer to absorb any loss arising from fluctuating interest rates.

Elsewhere, reflective of FCH's liquidity position, Dunamis' liquidity position is deemed good. Although a high proportion of the Group's investments consist of highly liquid government securities, most of it has been pledged against REPO borrowings; approximately LKR 230 million of its trading securities are unencumbered. We also note that the liquidity risk stemming from the Company's property development arm is insignificant due to its minimal investments in this segment.

Meanwhile, we also opine that FC Treasuries – the Group's largest revenue contributor – has an adequate risk-management and monitoring framework. This is reflected in its risk measures, such as stop loss limits and the adoption of a modified duration formula measures the impact of a 1% movement in interest rates on the value of the trading portfolio), which are more conservative than that of its However, it is also noted that a primary dealer is exposed to the inherent volatility of the securities industry, which in turn is dependent on a range of factors including interest rates, government monetary policy, the state of the economy and government borrowing requirements.

Portfolio values fluctuate in line with interest rate, which is reflected in FC Treasuries' fluctuating performance over the years and FCH's earnings profile. On this note, due to Dunamis' heavy reliance on FCH (or its financial services subsidiaries) Dunamis' earnings profile is further rendered volatile.

Dunamis' subsidiary Kelsey Developments PLC is loss making. Meanwhile, The Montessori Workshop (Pvt) Limited (Montessori Workshop) which made pre-tax losses in FY March 2013, was disposed of in January 2013.

However, we also note that Kelsey made a pre-tax profit for the quarter ended September 2013, owing to intra-group property transfers.

The management has recently ventured into the manufacture of synthetic leather, which is primarily targeted at furniture, footwear and other leather product manufacturers in the country. While acknowledging that the venture will diversify Dunamis' existing business profile and cash flow sources, thus alleviating its dependency on its financial services arm, we note that the requisite gestation period may hamper the Group's performance in the immediate term.

The ratings for Dunamis' debenture issue, has been notched down by 1 due to the structural subordination of Dunamis' debts to that of its subsidiaries. As Dunamis is a nonoperating investment holding company, we note that Dunamis' priority debts (debts relating to its major operating subsidiary, FCH) as a percentage of the Group's total assets (excluding money market instruments) is envisaged to exceed the threshold of 30% of the Group's total assets (excluding money market instruments) as at FY Mar 2014 stemming from the LKR1 billion debenture issuance, thus giving rise to structural subordination," RAM Ratings said.
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