Sunday 18 February 2018

Sri Lanka's The Finance Losses up 24-pct, balance sheet gap Rs16bn

ECONOMYNEXT - Losses at Sri Lanka's troubled The Finance Company expanded 24 percent to 598.2 million rupees in the December 2017 quarter, and a hole in the balance sheet expanded by 1.6 billion rupees to 16 billion in the past 9 months.

Losses in the quarter were 3.73 rupees a share. In the nine months to end December 2017, losses were 10.50 rupees a share, on a total loss of 1.7 billion rupees, up 41 percent from a year earlier.

The Finance shares gained 10 cents on Friday closing at 5 rupees on Friday.

Interest income in the quarter grew 6 percent to 866.9 million rupees, interest expenses increases 20 percent to 1.1 billion rupees, ballooning net interest losses by 122 percent to 248.8 million rupees.

The company has 30 billion rupees of deposits and 5.0 billion borrowings but only 22.4 billion rupees of assets of which over 4 billion rupees are not interest bearing.

Fees and commission income grew 29 percent 19.3 million rupees and other income fell 49 percent to 12.1 million rupees.

Bad loan provisioning increased 34 percent to 117.7 million rupees.

Operating expenses including personnel increased 16 percent to 263.9 million rupees.

The Finance Company's book value, or shareholder funds, was a negative 16 billion rupees as at end December 2017, up 12 percent from March.

The Finance Company's loan book expanded 28 percent in this period to 4.9 billion rupees, its hire purchase portfolio shrank 10 percent to 4.6 billion rupees, leasing fell 28 percent to 729 million rupees.

Financial investments fell 2.2 percent to 6.2 billion rupees. Real estate investments fell 18 percent to 805.8 million rupees.

Ceylinco Crisis


The Finance's problems began with the collapse of Golden Key, over 10 years ago, when interest rates rose after a period of high inflation fired by deficit spending and loose monetary policy.

The Finance was incorporated in 1940 and later became part of the now defunct Ceylinco Group, controlled by Justin Kotelawala.

Ceylinco Group was founded in the late 1930s by Hugh Weerasekere and Cyril E. S. Perera, who relinquished control over to Kotelawala in the 60s.

The Ceylinco crisis began under Kotelawala’s son Lalith, when the Golden Key Credit Card Company, an unregulated credit card issuer, collapsed, unable to settle 26 billion rupees in unauthorised customer deposits.

The Finance faced a run on deposits, and worse, borrowers stopped servicing loans.

The central bank took control through a management agent, but the firm continues to bleed money.

For one, the company had invested heavily in property, which couldn’t be liquidated fast enough.

The Finance also had loans to Ceylinco group companies, which were not paid back.

In 2010, the Central Bank converted 10 percent of The Finance’s deposits worth 2 billion rupees into non-voting shares and raised another 1.6 billion rupees via a public offer.

The Employees Provident Fund managed by the Central Bank was forced to invest in 5.1 million shares. The Finance shares were trading on the stock exchange at 37 rupees at end-March 2011. Today, a share is worth 5 rupees, losing 86.5 percent in value since.

The company’s 19 billion rupee pre-crisis loan book deteriorated rapidly to 7 billion rupees in the three years to 2012. Its deposit base fell by a quarter to 21 billion rupees. The Finance reported a 9 percent negative interest margin that year.

In the two years to 2014, the loan book grew 14 percent to 8 billion rupees, but deposits rose to 24 billion rupees. Its annual report that year hailed high growth in deposits as a sign of growing public confidence, but this only pushed negative interest margins further into the red at 14 percent.

To help reduce negative interest expenses, in December 2014, the Central Bank granted a 6 billion rupee low-cost loan to The Finance, mostly invested in government securities.

That year, The Finance’s board finalised a five-year business plan (2014/15 to 2019/20) approved by the Central Bank detailing a strategy to revive the company with low-cost deposit mobilisation, converting non-yielding real estate into yielding assets or selling them to finance long -term business loans, and improving the collection of 3.8 billion rupees worth of Ceylinco Group loans.

The company also has some real estate. The firm had land and real estate assets worth 1.7 billion rupees at end-March 2017 in its books, down 73 percent from 6.5 billion rupees in 2011 after provisioning for losses.

Despite appreciating land prices, there is a growing gap in the balance sheet.

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