Tuesday 31 July 2018

Sri Lankan shares snap losing spree to end higher

Reuters: Sri Lankan shares ended their losing spree to close higher on Tuesday as investors picked up battered blue-chip stocks, but lean first-quarter corporate results dampened sentiment.

The Colombo stock index ended 0.3 percent firmer at 6,147.27, edging up from its lowest close since July 12 hit on Monday. The bourse dropped 3.5 percent so far this year.

The index fell 0.47 percent last week, marking its first weekly decline in three.

Turnover stood at 409.9 million rupees ($2.57 million), less than this year’s daily average of 856.1 million rupees.

“We can see the local buying interest coming in to the market at the psychological support level of 6100 levels,” said Dimantha Mathew, head of research, First Capital Holdings.

“It is a good sign that the selling pressure is not there and we can see some select buying interest coming in to the market.”

Foreign investors sold equities net worth 731,474 rupees on Tuesday, extending the year-to-date net foreign outflow to 2.5 billion rupees worth of equities so far this year.

A downward revision in economic growth estimate earlier this month by the central bank hurt sentiment, analysts said.

Economic growth in 2018 is likely to be between 4 percent and 4.5 percent, falling short of an earlier estimate of 5 percent, Central Bank Governor Indrajit Coomaraswamy said earlier this month.

Shares in Nestle Lanka Plc ended 2.9 percent higher, while Ceylon Tobacco Company Plc ended 1.3 percent firmer, Ceylinco Insurance Plc closed 3.1 percent up and Carson Cumberbatch Plc ended up 0.9 percent.

($1 = 159.5500 Sri Lankan rupees) 

(Reporting by Ranga Sirilal, Editing by Sherry Jacob-Phillips)

Union Bank (UBC) continues to stagnate 4 years after historic TPG investment

LBO – Colombo Stock Exchange listed Union Bank of Colombo (UBC) reported lacklustre results for the quarter ended June 2018. These results have been a continuation of the slow performance the company has displayed over the last several years.

Although showing decent growth in revenue, operating income, and profit after tax, the bank still lags its competitors in the most important performance metric.

Return on equity (ROE) continues to trend below 3%, in an environment where yields of government securities are double digit, and other banking institutions have ROE’s in the high double digits.

Approximate ROE’s of Sri Lanka’s Banks:

Commercial Bank – 16%

Sampath Bank – 21%

Hatton National Bank – 16%

Seylan Bank – 12%

Nations Trust Bank – 24%

Union Bank of Colombo – 3%

Almost four years ago, a subsidiary of Texas Pacific Group (one of the worlds largest private equity firms) invested close to US$100mn for a 70% stake in UBC at a share price of Rs15.3.

Today, the stock languishes at Rs12.4 with the Sri Lankan currency having devalued significantly during that time period. Book value is Rs16/share indicating that investors are losing confidence in the business.

So far, the investment has been a loser for TPG, however, not nearly as much as a dud it has been to investors in UBC’s IPO almost 7 years ago. This IPO was heavily oversubscribed at a price of Rs25, leaving investors who have held on with large losses.

Based on past results, it is unclear how the bank will raise its ROE to that of its peers. Analysts say the bank continues to be in ‘risk off’ mode, failing to aggressively pursue increases in deposit base and loan books in line its more successful competitors.

Moody’s affirms ratings of BOC, HNB & Sampath; maintains negative outlook

LBO - Moody’s Investors Service has affirmed the local currency deposit ratings of Bank of Ceylon (BOC), Hatton National Bank Ltd. (HNB) and Sampath Bank PLC at B1/NP.

The foreign currency issuer rating and deposit ratings of these banks are also affirmed at B1 and B2/NP respectively.

Moody’s has also affirmed the Baseline Credit Assessments (BCAs) and adjusted BCAs of these banks at b1. As a result, their local and foreign currency Counterparty Risk Ratings (CRRs) are affirmed at Ba3/NP. Their Counterparty Risk Assessments (CRAs) are also affirmed at Ba3(cr)/NP(cr).

The rating outlooks of the banks, where applicable, are maintained at negative. The rating action follows the affirmation of Sri Lanka’s B1 sovereign rating and negative outlook on 26 July 2018.

Moody’s affirms Sri Lanka’s ratings at B1; maintains negative outlook

LBO – Moody’s Investors Service has today affirmed the Government of Sri Lanka’s foreign currency issuer and senior unsecured ratings at B1 and maintained the negative outlook.

Moody’s Investors Service said the decision to affirm the rating at B1 reflects Sri Lanka’s progress in implementing the planned reform program, which entails fiscal consolidation and a build-up foreign exchange reserves buffers, ahead of the end of the IMF Extended Fund Facility program in June 2019, along with the moderate per capita income levels, and stronger institutions relative to many similarly-rated sovereigns.

“This is balanced against Moody’s expectation that the sovereign’s fiscal strength will remain very low and government liquidity and external vulnerability risk will remain rating constraints,” Moody’s Investors Service said.

“The decision to maintain the negative outlook reflects Sri Lanka’s ongoing high vulnerability to a potential tightening in external and domestic financing conditions, given relatively large borrowing needs, reliance on external funding and still low reserves adequacy.”

That feature dominates Sri Lanka’s credit profile, Moody’s Investors Service said in a statement.

According to Moody’s, the government could face significantly tighter refinancing conditions at some point during the next few years, which would quickly lead to much weaker debt affordability and a higher debt burden, especially if the currency depreciated at the same time.

Concurrently, the local-currency bond and deposit ceilings remain unchanged at Ba1. The foreign-currency bond ceiling is unchanged at Ba2 and the foreign currency deposit ceiling at B2.

RATINGS RATIONALE

RATIONALE FOR THE RATING AFFIRMATION AT B1

RELATIVELY STRONG INSTITUTIONS AND ONGOING REFORMS BOLSTER REFINANCING CAPACITY


Under its IMF Extended Fund Facility Program, Sri Lanka continues to advance reforms that support fiscal consolidation and attempt to reduce external vulnerabilities. Progress in fiscal consolidation and in building up of reserves buffers strengthens the credit profile by providing greater assurance of Sri Lanka’s ability to refinance its domestic and external debt at affordable costs.

The government’s commitment to continuing to broaden and deepen its revenue base including through implementation of the Inland Revenue Act (IRA), which came into effect in April 2018, will bolster revenue generation. Moreover, legislative measures pursuant to changes in the Fiscal Management Responsibility Act aim to apply fiscal rules that ensure deficit and debt consolidation efforts endure beyond the conclusion of the IMF program.

In addition, the planned changes to the Monetary Law Act should strengthen the credibility and effectiveness of Sri Lanka’s monetary policy, helping the central bank anchor inflation expectations and prevent fiscal dominance. If effective, this would contribute to stabilising the cost of debt at lower levels and as a result enhance fiscal flexibility.

The Active Liability Management Act (ALMA) will provide the government with some flexibility to smooth the timing of its debt refinancing operations within a given year. Over time, effective use of the ALMA may allow the Sri Lankan government to smooth somewhat the consecutive large debt maturities over the period 2019-2023 and to prevent the recurrence of such a concentration in future. During the next few years, however, the gains will be limited given the high frequency of debt repayments.

In addition, the government plans to further diversify external funding sources through the issuance of Chinese renminbi or Japanese yen denominated bonds, as well as loans from other bilateral or multilateral lenders.

PERSISTENTLY HIGH GOVERNMENT DEBT BURDEN, LOW DEBT AFFORDABILITY AND STILL LOW

RESERVES ADEQUACY REMAIN KEY CREDIT WEAKNESSES


Balancing Sri Lanka’s credit strengths is very low fiscal strength, which will remain a key source of risk over the next few years, despite prospects for further narrowing of the budget deficit and gradual decline in government debt as a share of GDP. The country’s reliance on external financing without commensurate foreign exchange inflows also means that Sri Lanka’s external position remains fragile, despite a build-up in foreign exchange reserves recently.

As a baseline, Moody’s assumes broadly stable overall financing conditions for the government. Under this assumption, together with continued fiscal consolidation after the end of the IMF program, albeit at a slower pace, Moody’s expects the government’s debt burden to continue to decline over the remainder of the decade.

However, even in the absence of shocks debt will only fall slowly, to around 70% of GDP by the turn of the decade, from 77% of GDP in 2017.

Moody’s estimates that government gross borrowing requirements, incorporating projections on fiscal deficits and maturing government debt repayments, to reach about 18.5% of GDP in 2018 and, in the baseline, forecasts them to fall to a still-high level of 13% by 2020. A significant proportion of the government’s debt is financed at short maturities, including Treasury bills equivalent to around 12.5% of outstanding domestic debt, or about 5% of GDP in 2017.

Given a relatively narrow domestic financing market, the government remains reliant on external bilateral and commercial lenders’ continued willingness to refinance large amounts of foreign currency debt. Moody’s estimates that the government will have made principal payments on external debt of around $3.8 billion per year, on average, from 2016-18.

Despite Moody’s expectation of a further rise in the level and an improvement in the quality of foreign exchange reserves, persistently low reserves adequacy denotes vulnerability to a shift in foreign financing conditions. Moody’s estimates that Sri Lanka’s External Vulnerability Indicator (EVI), the ratio of external debt payments due over the next year to foreign exchange reserves, will continue to hover around 150% in the next few years, well above the median level of B-rated sovereigns.

The government’s strategy is to shift some of its funding to domestic, local currency investors, given lower debt repayments on domestic Treasury bonds in coming years. Moody’s expects Treasury bond maturities to fall to around 2% of GDP, on average per year over the period from 2019-2023, from about 4% of GDP in 2018, providing some space for the government to increase local-currency borrowings to finance the fiscal deficit.

But while this will help reduce exchange rate risk, given local currency interest rates are much higher than the average cost of external debt, debt affordability will remain weak. Interest payments will continue to absorb 37%-40% of revenue in the next couple of years, and will remain highly sensitive to either a rise in the cost of debt and/or a slower revenue increase than currently assumed.

RATIONALE FOR MAINTAINING THE NEGATIVE OUTLOOK

The negative outlook reflects Moody’s view that Sri Lanka’s credit profile is dominated by the government’s and country’s elevated exposure to refinancing risk. Sri Lanka could face significantly tighter external refinancing conditions at some point during the next five years, which would quickly lead to much weaker debt affordability, especially if the currency were to depreciate as a result.

With a persistently high debt burden, weak debt affordability, large borrowing needs and low foreign reserve adequacy, Sri Lanka’s vulnerability to a shift in domestic and external financing conditions is high.

In particular, every year between 2019 and 2023, the government will need to make principal payments on external debt of around $3.5 billion per year (about $17 billion overall), in addition to financing part of the budget deficit externally. For the economy as a whole, part of the current account deficit corresponds to private sector activities also financed externally. Moody’s expects the overall current account deficit to be around 2.5% of GDP in the next few years, or around $2.6 billion on average per year.

In general, the government’s ongoing progress on fiscal consolidation relies on further effective implementation of revenue reforms, which has only started. The need to maintain sizeable primary surpluses over time and beyond the IMF program will test the government’s resolve, especially if GDP growth remains relatively muted.

Moreover, despite very substantial export potential, Sri Lanka has not yet managed to broaden its export base on a sustained basis.

Further, against the backdrop of a fractious political environment, persistent disruptive politics may lead to delays in legislative approval of future reforms and could potentially slow or sidetrack effective implementation of newly passed reforms. As a result, perceptions that the country’s twin deficits could widen again could reduce investors’ appetite for investment in Sri Lankan debt.

WHAT COULD CHANGE THE RATING UP

The negative outlook signals that an upgrade is unlikely.

Moody’s would consider returning the outlook to stable should it conclude that external and domestic refinancing risks were likely to diminish.

That conclusion could be prompted by a faster and more sustained buildup of non-debt creating foreign exchange inflows than currently expected, which together with the demonstrated effectiveness of liability management strategies to smoothen and lengthen maturity payments, would significantly lower external vulnerability risks.

Over time, the implementation of further significant fiscal reforms that markedly raised government revenue and improved debt affordability and thus fiscal strength could also prompt Moody’s to stabilise the outlook.

WHAT COULD CHANGE THE RATING DOWN

Moody’s would consider downgrading the rating if it were to conclude that external and domestic refinancing capacity will not improve, and that Sri Lanka was likely to face difficulties in refinancing its domestic or external debt at affordable costs. Evidence that implementation of key policies is not effective, including further fiscal consolidation, monetary policy independence from fiscal developments, diversification of financing sources or liability management would likely have a negative impact on Sri Lanka’s access to and cost of finance.

In particular, a marked weakening in reserve adequacy from already low levels, which could stem from a loss of investor confidence and thereby capital outflows, would put downward pressure on the rating. A halt or reversal in fiscal consolidation that raised prospects of a higher government debt burden and prevented the expected decline in gross borrowing requirements could also prompt a downgrade.

Economic data and rating committee minutes
GDP per capita (PPP basis, US$): 12,811 (2017 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.3% (2017 Actual) (also known as GDP Growth)
Inflation Rate (National CPI, % change Dec/Dec): 7.3% (2017 Actual)
Gen. Gov. Financial Balance/GDP: -5.5% (2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.6% (2017 Actual) (also known as External Balance)
External debt/GDP: 59.4% (2017 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.

On 24 July 2018, a rating committee was called to discuss the rating of the Sri Lanka, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutional strength/ framework, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The issuer’s susceptibility to event risks has not materially changed.

CSE listed Kingsbury hotel (SERV) reports a loss, revenue flat

LBO – The Colombo Stock Exchange listed Kingsbury hotel (SERV) reported a small loss of Rs7mn for the quarter ended June 2018. Revenue was flat, up just 1%.

These results were actually better than the prior year June quarter where the property lost Rs26mn.

The Kingsbury is a Hayleys group subsidiary. Hayley’s is controlled by Sri Lankan tycoon Dhammika Perera, considered in some circles as Sri Lanka’s richest man.

The property underwent an extensive refurbishment after Hayleys bought it over from Nahil Wijesuriya. Despite the refurbishment, returns of the property have been lacklustre.

Performance of the June quarters in 2018 and 2017 were actually worse than 2016 and 2015 where the hotel made profits of Rs39 and Rs54 million respectively in the June quarter.

Tourism in the legacy city hotel sector is weakening with new properties such as the Movenpick and Shangri La coming online in Colombo. These new properties are much younger than the older 5-star hotels like the Kingsbury (previously Intercontinental), whose original dates of construction were decades ago.

United Motors (UML) reports another profit decline, despite vehicle import boom

LBO – Colombo Stock Exchange (CSE) listed United Motors Lanka (UML) reported revenue and profit declines for the quarter ended June 2018.

UML reported profit of just Rs94mn on revenue of Rs3.34bn. Profits were down 17% and revenue was down 14% year over year for the quarter.

Profits of UML have been on the decline for the last several years, despite the vehicle import boom that has occurred due to changes to the import tax structure on vehicles.

For the last few years, June quarter profits at UML have been as follows:
2018 – Rs94mn
2017 – Rs113mn
2016 – Rs295mn
2015 – Rs350mn

Analysts say that due to having the wrong product mix, UML is now generating returns below the cost of capital. On a huge asset base of almost Rs12bn, the company is making low single digit returns on equity.

In the past UML has been one of the best dividend paying stocks in the market, but with recent results weakening, analysts say that it is likely dividend payments will not be as robust as they have been in the past.

Sri Lanka's People's Leasing June quarter profits up 25-pct

ECONOMYNEXT - Profits at Sri Lanka's listed People's Leasing and Finance grew 25.3 percent from a year earlier to 997 million rupees in the June 2018 quarter on improving interest margins, interim accounts showed.

The finance company which is a unit of state-controlled People's Bank reported earnings of 63 cents a share in the quarter, interim accounts filed with the Colombo Stock Exchange showed.

People's Leasing and Finance closed 10 cents lower at 15.20 rupees on Monday.

In the June quarter, interest income increased 16.5 percent from a year earlier to 7.5 billion rupees, and interest expenses grew a slower 5.4 percent to 3.7 billion rupees expanding net interest income by 30 percent to 3.8 billion rupees.

Net earned premiums from an insurance subsidiary increased 16 percent to 1.1 billion rupees.

Bad loans provisioning grew 56 percent to 859 million rupees.

Personnel costs increased 29 percent to 972 rupees, while benefits, claims and underwriting expenses of the insurance subsidiary grew 20.4 percent to 821 million rupees.

Income tax expenses grew 31.5 percent to 388 million rupees.

People's Leasing and Finance's loan book expanded 3.7 percent from the previous March quarter to 148 billion rupees at end June 2018.

Deposits grew 0.4 percent to 69.7 billion rupees in the same period.

Debt securities issued increased 22 percent to 32 billion rupees while bank borrowings declined 12.6 percent to 27.4 billion rupees.

Sri Lanka's NDB Bank June quarter profits up 70-pct

ECONOMYNEXT - Profits at Sri Lanka's NDB Bank grew 70 percent from a year earlier to 1.3 billion rupees on improving net interest income margins, interim accounts showed.

The bank reported earnings of 7.15 rupees in the quarter, interim accounts filed with the Colombo Stock Exchange showed.

A NDB Bank share last traded at 114 rupees.

In the six months to end June 2018 earnings per share was 13.64 rupees on profits of 2.4 billion rupees, up 63 percent from a year earlier as net interest income rose 41 percent to 6.9 billion rupees.

In the June quarter, interest income grew 14.2 percent from a year earlier to 9.2 billion rupees, interest expenses rising 4.3 percent to 7 billion rupees saw net interest income expand 41 percent 3.5 billion rupees.

Net fee and commission income increased 17.3 percent in the quarter to 947 million rupees.

Bad loans provisioning grew 17.7 percent to 507.7 million rupees.

Personnel expenses were up 39 percent to 1.2 billion rupees and other costs rose 7.6 percent to 895 million rupees.

NDB Bank's loan book expanded 10 percent from end December 2017 to 301.5 billion rupees at end June 2018, and deposits grew 9 percent to 296.8 billion rupees.

Non-performing loans were 1.7 percent of total loans, up from 0.94 percent in the December 2017 quarter.

Tier I capital adequacy was at 9.85 percent at end June 2018, above the 7.875 percent regulatory minimum, but lower than 10.49 percent six months earlier.

Total capital adequacy was 13.87 percent end June down from 15.18 percent six months earlier, but above the regulatory minimum of 11.875 percent.

The Board of Directors have proposed to raise 6.2 billion rupees from a rights issue to strengthen regulatory capital requirements. The rights issue is subject to regulatory approval, the bank said.

Sri Lanka's John Keells Hotels June quarter losses deepen 14-pct

ECONOMYNEXT - Losses at Sri Lanka's listed John Keells Hotels expanded 14 percent from a year earlier to 263.5 million rupees on falling revenues at resorts managed by the group in the island and The Maldives, interim accounts showed.

The hotels company reported a loss of 18 cents a share in the quarter, interim accounts filed with the Colombo Stock Exchange showed. The share closed 20 cents higher on Friday at 8.50 rupees.

Revenue fell 11 percent to 2.1 billion rupees in the quarter, and cost of sales fell 11 percent to 814.9 million rupees, leading to a 11 percent contraction in gross profits to 1.3 billion rupees.

Revenue from Sri Lankan resorts fell 8.5 percent to 1 billion rupees despite improving occupancy rates, and losses fell 74 percent to 59.4 million rupees.

"The Sri Lankan Resorts segment recorded an improvement in occupancies despite the increased competition within the sector," Chairman of the parent company John Keells Holdings said in a statement in the group's financial report for the June 2018 quarter.

Revenues from Maldives fell 12.6 percent to 1.1 billion rupees, and losses ballooned to 204 million rupees, compared to a 2.2 million loss a year earlier.

"The Maldivian Resorts segment recorded an improvement in average room rates, although profitability was impacted by lower occupancies and the partial closure of Ellaidhoo Maldives by Cinnamon for refurbishment,

"However, occupancies at our hotels in the Maldives remained above the industry average during the quarter under review," he said.

In the June quarter, administrative expenses fell 17 percent to 1.1 billion rupees and distribution expenses decreased 14 percent to 67.5 million rupees.

Other operating expenses rose 43 percent to 430.3 million rupees including a one-off impairment loss of financial assets of 154 million rupees due to the closure of Cinnamon Hakuraa Huraa for refurbishment.

Another property Ellaidhoo Maldives by Cinnamon is partially closed for refurbishment until next September.

Net finance expenses grew 43 percent to 11.3 million rupees.

Tax expenses rose 515 percent to 27.4 million rupees, due to a 6.6 million tax reversal a year earlier.

John Keells Hotels said it was refurbishing Bentota Beach Hotel in Sri Lanka with costs estimated at 3 billion rupees, as well as The Nuwara Eliya Hotel estimated at 3.7 billion rupees.

The capital requirement to refurbish the two Maldivian properties is estimated at 12.1 million US dollars (nearly 2 billion rupees).

In the quarter John Keells Hotels increased its shareholding in Ceylon Holiday Resorts Ltd from 99.09 percent to 99.31 percent with an investment of 817 million rupees by subscribing to a rights issue.

Sri Lanka's Vallibel Finance June net profits up 31-pct

ECONOMYNEXT - Profits at Sri Lanka's listed Vallibel Finance grew 31 percent from a year earlier to 263.9 million rupees on improving net interest income despite higher bad loan provisioning and taxes, interim accounts showed.

The finance company reported earnings of 19.05 rupees a share in the quarter, according to interim financial accounts filed with the Colombo Stock Exchange. The share gained 80 percent on Friday to close at 68.80 rupees.

In the quarter, interest income grew 26.4 percent from a year earlier to 1.8 billion rupees and interest expenses increased by a slower 24.8 percent to 1 billion rupees, expanding net interest income by 28.5 percent to 771.9 million rupees.

Net fee and commission income grew 54.4 percent to 80 million rupees and other operating income was up 30 percent to 109.7 million rupees.

Bad loans provisioning increased 45.4 percent to 38.9 million rupees.

Personnel costs grew 28.6 percent to 220.8 million rupees, Administrative expenses rose 20.5 percent to 33.2 million rupees and other operating expenses grew 10 percent to 150.5 million rupees.

Value added tax on financial services increased 38.3 percent to 104 million rupees and income tax cost grew 53.7 percent to 150.1 million rupees.

Vallibel Finance's lending book including leases and hire purchase expanded 29 percent from a year earlier to 33.4 billion rupees.

Non-performing loans fell to 2.5 percent of total loans at end June 2018, down from 2.9 percent a year earlier.

Customer deposits grew a slower 19 percent in the period to 22.4 billion rupees while the company's interest bearing borrowings had increased 18.7 percent to 9.5 billion rupees.

Core capital adequacy was at 12.64 percent at end June 2018, up from 9.52 percent a year earlier, above the regulatory minimum of 5 percent.

Total capital adequacy was at 12.64 percent, down from 9.52 percent a year earlier, but above the 10 percent regulatory requirement.

Sri Lanka's DFCC Bank June net profit down 52-pct

ECONOMYNEXT - Profits at Sri Lanka's listed DFCC Bank was down 52 percent from a year earlier to 736.8 million rupees on higher provisioning for bad loans, interim accounts showed.

The bank reported earnings of 2.78 rupees a share in the quarter, interim accounts filed with the stock exchange showed. Earnings for the six months to end June 2018 amounted to 6.88 rupees a share with revenue growing 14 percent from a year earlier to 20.1 billion rupees.

A DFCC Bank share closed 90 cents higher on Friday to 105 rupees.

In the June quarter, the bank reported interest income growth of 22 percent from a year earlier to 9.7 billion rupees with interest expenses growing a faster 24 percent to 6.5 billion rupees, leading to an 18 percent growth in net interest income to 3.2 billion rupees.

Interest margin has improved to 3.8 percent from 3.6 percent six months earlier.

Net fee and commission income grew 33 percent to 471.7 million rupees and gains from trading financial instruments grew 8 percent to 128.3 million rupees.

Bad loan provisioning ballooned 159 percent to 777 million rupees.

Non-performing loans were 3.14 percent of outstanding loans at end June 2018, up from 2.77 percent six months earlier.

Gains from financial investment fell 94 percent to 70.6 million rupees in the June 2018 quarter on account of a gain from divesting listed shares in Commercial Bank the previous year.

Personnel costs fell 2 percent to 897.3 million rupees, depreciation charges grew 12 percent to 126.8 million rupees and other expenses grew 4 percent to 612.8 million rupees.

DFCC Bank's loan book grew 11 percent from end December 2017 to 236.7 billion rupees at end June 2018. Deposits grew 8 percent in the same period to 207.5 billion rupees.

Foreign currency deposits were 20 percent of total deposits, down from 21.6 percent six months earlier. Foreign currency loans were 11 percent of total loans, up from 9.8 percent during the same period.

The bank's Tier I capital ratio was 11.05 percent end June 2018, down from 13.09 percent end December 2017 but was higher than the minimum regulatory requirement of 7.875 percent.

Total capital adequacy was at 16.561 percent compared to the regulatory minimum 11.875 percent, improving from 16.53 percent six months earlier.

Sri Lanka's JKH June net profit down 23-pct on consumption slump, losses at hotels

ECONOMYNEXT - Profits at Sri Lanka's listed John Keells Holdings fell 23 percent from a year earlier to 2.2 billion rupees in the June 2018 quarter weighed down by declining earnings at retail and consumer foods businesses and losses at hotels and resorts offsetting gains from bunkering, port operations, banking and insurance.

The group reported earnings of 1.58 rupees a share in the quarter, interim accounts filed with the stock exchange showed. The stock closed 2.70 rupees lower at 142 rupees on Friday.

In the June quarter revenue grew 12 percent from a year ago to 30.2 billion rupees, cost of sales grew a faster 22 percent to 24.6 billion rupees contracting gross profit by 17 percent to 5.6 billion rupees.

Administrative expenses fell 3 percent to 3.2 billion rupees while selling and distribution expenses grew 18 percent to 1.2 billion rupees and other operating costs increased 31 percent to 1 billion rupees.

Net finance income fell 30 percent to 2.3 billion rupees.

-Segment results-

John Keells Holdings' June quarter earnings were bolstered by profit growth at its transportation and financial services business units, which were offset by declining earnings at retail, consumer foods and property businesses (which includes the 850 million US dollar Cinnamon Life mixed development project) and losses from hotels managed by the group.

Profits at the transportation unit grew 4 percent from a year earlier to 842 million rupees on a 53 percent growth in revenue of 5 billion rupees.

"The increase in profitability is mainly attributable to the performance of the group’s bunkering, and ports and shipping businesses," Chairman Susantha Ratnayake said.

In the June quarter, container volumes handled at South Asia Gateway Terminals which the group has a stake in grew 24 percent, compared to a volume of growth 15 percent for the entre Port of Colombo, Ratnayake said.

Bunkering volumes had grown 20 percent in the quarter.

Financial services segment saw profits increase 131 percent to 550 million rupees with revenue growing 12.4 percent to 2.5 billion rupees.

"The increase in profitability was primarily due to Union Assurance PLC, driven by a growth of 13 percent in gross written premiums. Nations Trust Bank recorded an improvement in performance driven by steady loan growth during the quarter under review".

Hotels and resorts reported a 278 million rupee loss in the June quarter, compared to a profit of 179 million rupees a year ago, with revenue falling 10.5 percent to 4.4 billion rupees.

"The decline is mainly attributable to the lower profitability in our city hotels and a non-cash impact of 202 million rupees at Cinnamon Hakuraa Huraa Maldives, on account of an impairment loss on non-financial assets arising from the closure of the hotel for re-construction," Ratnayake said.

Another property in the Maldives, Ellaidhoo Maldives by Cinnamon is partially closed for on-going refurbishment.

The remaining segments of the group - retail, consumer foods, property, plantation and tech - reported declining profits.

Retail which contributes the most to group turnover, reported a 51 percent decline in profits to 235 million rupees despite a 20.5 percent growth in revenue of 13.1 billion rupees.

"Profitability was impacted by depressed basket values due to weak consumer sentiments and store expansion related costs".

Consumer foods profits fell 46 percent to 339 million rupees with revenues falling 4 percent from a year earlier to 3.7 billion rupees in the June quarter.

"The decline in profitability is on account of the beverages business which recorded a volume decline of 37 percent. This is due to the implementation of a sugar tax from November 2017, which resulted in substantial price increases across the industry".

The group is introducing a range of sugar-free fizzy drinks, juices, dairy products and bottled water to shore-up revenue.

Profits from Plantations and Information Technology reported as a single unit fell 28 percent to 1.2 billion rupees on a 9.8 percent growth in revenue of 1.4 billion rupees, mainly due to falling finance incomes.

Plantations' earnings were hit by falling tea prices and the IT businesses reported lower profits because the previous year included profits of the group’s BPO business which was divested in September 2017.

The property segment of the group reported an 85.5 percent decline in profits to 9 million rupees despite revenue growing 1.3 percent to 226 million rupees.

"The construction of Cinnamon Life is progressing with encouraging momentum, with approximately 62 percent of the floor area sold in the two residential towers.

"Tender submissions for the Tri-Zen residential development project are expected to be received in the ensuing quarter, whilst presales continue to be encouraging.

"In addition, the master planning of an 18-acre suburban site North of Colombo is also currently underway," Ratnayake said.

Sri Lanka's Seylan Bank June quarter profits down 26.5-pct

ECONOMYNEXT - Profits at Sri Lanka's listed Seylan Bank fell 26.5 percent from a year ago to 973.7 million rupees in the June 2018 quarter on falling foreign exchange and investment incomes and increasing taxes, despite improving margins and lower bad loan provisioning, interim accounts showed.

The bank reported earnings of 2.66 rupees a share in the quarter, interim accounts filed with the Colombo Stock Exchange showed. The share closed Friday at 79 rupees.

For the six months to end June 2018, the bank reported earnings of 5.41 rupees a share with net interest income growing 18.8 percent from a year earlier to 8.7 billion rupees and net fee and commission income growing 10.3 percent to 1.9 billion rupees.

Interest margins had narrowed to 4.14 percent at end June, down from 4.24 percent at end December 2017.

In the June 2018 quarter, Seylan Bank reported an 11.4 percent growth in interest income from a year earlier to 11.8 billion rupees with interest costs growing at a slower 7 percent to 7.4 billion rupees which saw net interest income expand 19.3 percent to 4.4 billion rupees.

Net fee and commission income had increased 6 percent from a year earlier to 959.2 million rupees in the June quarter.

Foreign exchange income fell 91.6 percent to 15.6 million rupees and gains from financial investments fell 99 percent to 2.1 million rupees. Other operating incomes had declined 92 percent to 46.2 million rupees.

Bad loans provisioning fell 4 percent to 799.1 million rupees in the quarter after increasing the previous March quarter.

For the six months to end June, bad loan provisioning was up 14 percent from a year earlier to 1.3 billion rupees. Net non-performing loans were 3.96 percent of total loans at end June, up from 3.10 percent six months earlier.

In the June quarter, personnel expenses increased by 9 percent to 1.4 billion rupees and other expenses rose 10 percent to 1.3 billion rupees.

Income tax expenses rose 22 percent to 395 million rupees.

Seylan Bank's loan boon expanded 8.54 percent from end December 2017 to 304.8 billion rupees at end June 2018, while customer deposits grew a slower 4.3 percent to 320.4 billion rupees.

The bank's total Tier I capital ratio was 10.33 percent at end June 2018, above the regulatory minimum of 7.855 percent, and was marginally lower from 10.39 percent at end December 2017.

Total capital ratio was 13.91 percent at end June 2018, up from 13.46 percent six months earlier. The regulatory minimum total capital ratio is 11.875 percent.

Sri Lanka's Lion Brewery regains beer market dominance, rating outlook lifted to 'Stable': Fitch

ECONOMYNEXT - Fitch Ratings said it has affirmed Sri Lanka's listed Lion Brewery's A+(lka) credit rating and revised the outlook to 'stable' from 'negative' on improving leverage from increasing sales and profitability with the beer maker seen strengthening its market leadership position in the island.

Lion Brewery has consolidated its market leadership by regaining the shelf space it lost due to the temporary halt in production following floods in May 2016, Fitch said in a statement Thursday.

"Lion's 'A+(lka)' rating reflects its leading market position in the domestic beer industry, a well-established brand and extensive retail coverage," Fitch said.

The company's market position is protected to some extent by regulations in the form of stringent restrictions on advertising and limited issuance of new retail licenses,' the ratings agency said.

Fitch Ratings has revised Lion Brewery's outlook to 'Stable' from 'Negative' on improving leverage.

"Lion was able to improve its net leverage to 2.7-times as of end March 2018 down from 6.3-times end 2017, helped by the recovery in sales volumes and operating profitability," Fitch said.

Sales improved after the government reduced taxes on beer by 33-39 percent, while increasing taxes on hard liquor by 2 percent.

Earlier, taxes on beer had been 10 percent higher than taxes imposed on hard liquor.

Also, leverage will remain at low levels on a likely reduction in capital expenditure as the company has adequate capacity to meet growing demand over the medium term, Fitch said.

A Lion Brewery shares trading on the Colombo Stock Exchange closed Friday at 600 rupees.

Fitch Ratings statement in full:

Fitch Ratings has affirmed Sri Lanka-based Lion Brewery (Ceylon) PLC's National Long-Term Rating at 'A+(lka)'. The Outlook is revised to Stable from Negative. Fitch has also affirmed the National Long-Term Rating on Lion's outstanding senior unsecured debentures at 'A+(lka)'.

The Outlook was revised to Stable because we expect Lion to be able to maintain leverage (defined as lease-adjusted debt net of cash / operating EBITDAR) at less than 3.0x over the medium term. Lion was able to improve its net leverage to 2.7x as of 31 March 2018 (FYE18) from 6.3x at FYE17, helped by the recovery in sales volume and operating profitability. The recovery was underpinned by a revision in excise taxes, which was announced in the Sri Lankan government's budget on 9 November 2017. The revised regime taxes alcoholic beverages with lower alcohol content at reduced rates compared to spirits.

Fitch rates Lion on its standalone strength due to weak linkages between Lion and its ultimate parent, Carson Cumberbatch PLC, in line with Fitch's Parent and Subsidiary Rating Linkage criteria. Lion's 'A+(lka)' rating reflects its leading market position in the domestic beer industry, which is protected by stringent regulation, a well-established brand and extensive retail coverage. However, the domestic excise tax regime on alcoholic beverage sales changes frequently, which inhibits the industry's profitability.

KEY RATING DRIVERS

Recovery in Sales Volume: Fitch expects Lion's sales volume to improve in the medium term after excise duties were revised to tax manufacturers of hard liquor at higher rates than beer and wine makers. The Sri Lankan government reduced excise taxes on strong beer by 33%, mild beer by 39% while raising that on hard liquor by 2%, effective from 10 November 2017. Previously, excise duty per unit of alcohol of strong beer was 10% higher than that of hard liquor, which depressed Lion's sales volumes from November 2015 to October 2017, when the previous tax regime was in effect.

Balance Sheet to Strengthen: We believe that Lion's net leverage will remain below 3.0x, the level at which Fitch would consider negative rating action, in the medium term. This is mainly due to improving profitability and likely reduction in capex as the company has adequate brewing capacity to meet growing demand over the medium term. Fitch expects Lion's leverage to continue to improve from the FYE18 level, giving it more headroom for its 'A+(lka)' rating.

Improving EBITDAR Margin: Fitch expects Lion's EBITDAR margins to improve by around 100bp in FY19, from 27% in FY18, and to stabilise at around 29% from FY20, supported by better sales volume and operating conditions. Lion's EBITDAR margin recovered significantly in FY18 from a low of 19.5% in FY17 when manufacturing was halted temporarily due to floods and Lion had to import inventory at a higher cost. The margin recovery was driven by the company's efforts to recoup some of the lost sales volumes and operational efficiencies that reduced costs.

Lion's sales volumes and profitability were also helped by the change in the excise tax regime in November 2017.However, margins may be somewhat constrained in the near term because of the depreciating Sri Lanka rupee, which raises the cost of the one-third of Lion's key production inputs that are likely to be imported.

Market Leadership Position: Lion is the largest beer manufacturer in Sri Lanka, with significant market share in the domestic strong beer market. During FY18, Lion consolidated its market leadership by regaining the shelf space it lost in FY17 due to the temporary halt in production following floods in May 2016. Lion's strong market share is supported by its entrenched brand and widespread retail coverage, with access to 2,800 retail outlets around Sri Lanka. The company's market position is protected to some extent by regulations in the form of stringent restrictions on advertising and limited issuance of new retail licenses.

High Regulatory Risk: Domestic alcoholic beverage producers face frequent revisions to excise duties, which cause significant operating cash flow volatility. In 2015, the government increased the excise duties on alcohol twice, which led to tax on strong beer overtaking the tax on hard liquor on an equivalent-alcohol basis. This situation was reversed after 24 months, which resulted in hard liquor taxed at 38% more than both strong and mild beer on an equivalent-alcohol basis. We believe any further tax increases will be gradual considering the importance of the industry to government coffers. Excise duties from alcoholic beverage makers made up 7% of government tax revenue in 2017.

DERIVATION SUMMARY

Lion's rating is supported by its leading market position in the domestic beer industry, but counterbalanced by high regulatory risks in the form of frequent tax policy revisions that have previously caused operating cash flow volatility. Lion's business risk profile is weaker compared with its closest rating peer, Hemas Holdings PLC (AA-(lka)/Stable). Hemas is a well-diversified conglomerate with exposure to the defensive healthcare and the manufacturing of personal care and homecare products. Hemas also has a conservative approach to acquisitions and expansions and has lower leverage than Lion, supporting its higher rating.

Lion is placed four notches below Distilleries Company of Sri Lanka PLC (DIST, AAA(lka)/Stable) - the country's largest spirit manufacturer - reflecting DIST's considerably larger operating scale and dominant market position in spirits, which are more widely consumed domestically than beer. DIST has substantially stronger EBITDA margins than Lion as well as lower leverage.

Richard Pieris & Company PLC (A(lka)/Stable) is rated one notch below Lion, reflecting its weaker business risk profile due to significant exposure to the volatile agriculture segment.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer - Revenue to recover with a 23.4% increase in FY19; growth to moderate to a mid-single-digit rate on average over the next three years. - EBITDAR margin to modestly improve to 28.3% in FY19 and to stabilise at around 29.0% in the next three years. - Excise duty on strong and mild beer to remain unchanged during the next two years and increase by around 5% on average during in FY21 and FY22. - Capex at 4.3% and 8.0% of net revenue in FY18 and FY19, respectively then falling to 2.1% on average over the next two years, mainly for maintenance. - Dividend of LKR300 million per annum to shareholders in line with historical levels.

RATING SENSITIVITIES

Developments that May, Individually or Collectively, Lead to Positive Rating Action - A sustained reduction in Lion's lease-adjusted debt net of cash/EBITDAR to below 1.5x

Developments that May, Individually or Collectively, Lead to Negative Rating Action - An increase in Lion's lease-adjusted debt net of cash/EBITDAR over 3.0x for a sustained period

LIQUIDITY

Comfortable Liquidity Position: Lion had a comfortable liquidity position at end-March 2018, with unrestricted cash and cash equivalents of LKR8.1 billion and unutilised credit lines of LKR7.8 billion to meet LKR8.9 billion of debt maturing in the next 12 months. Lion's relatively defensive cash flows and consistent access to bank funding as one of Sri Lanka's largest listed corporates further supports liquidity.

Sri Lanka's Teejay Lanka June quarter net profits up 27-pct on GSP Plus

ECONOMYNEXT - Profits at Sri Lanka's listed fabric maker Teejay Lanka grew 27 percent from a year earlier to 279.3 million rupees in the June 2018 quarter on improving demand for clothing exports to Europe and the US, and capacity expansion at its mill in India, interim accounts showed.

The company which operates fabric mills in Sri Lanka and India reported earnings of 40 cents a share in the June quarter, accounts filed with the Colombo Stock Exchange showed.

"The increased turnover is the result of capacity expansion in India and an increased order book generated from both US and EU, yielding the benefits of GSP through a carefully managed European customer portfolio, further driven by new product launches to US customers," said Chairman Bill Lam.

Teejay Lanka closed 50 cents lower at 32.10 rupees on Wednesday.

Revenue grew 26 percent in the quarter to 6.8 billion rupees and cost of sales increased 27 percent to 6.1 billion rupees, leading to gross profits growing 15 percent to 697.1 million rupees.

Despite revenue growth, margins were impacted by rising cotton prices.

"To yield better margins the group is also continuously re-calibrating its product portfolio and has taken steps to increase prices which will come into effect in the 2nd half of the financial year," Lam said.

Business dynamics are changing rapidly with short life-cycle orders and more demand for discounted programmes, Lam said.

Teejay Lanka is looking to enter new markets in Asia and Africa.

Other income grew 97 percent from a year earlier to 61.3 million rupees in the June quarter

Distribution expenses grew 11 percent to 37.7 million rupees and administration costs increased 23 percent to 367 million rupees.

Net finance cost fell 52 percent to 5.4 million rupees.

Sri Lankan shares hit over 2-week low

Reuters: Sri Lankan shares extended losses to a fifth straight session on Monday as investors sold blue-chip stocks such as John Keells Holdings Plc after weak first-quarter numbers from the conglomerate dampened sentiment.

Conglomerate John Keels Holdings Plc after market hours on Thursday reported a 26 percent year-on-year fall in quarterly net profit.

The stocks, bond and foreign exchange markets were closed on Friday for a public holiday.

The Colombo stock index ended 0.41 percent weaker at 6,128.95, its lowest close since July 12, extending its year-to-date loss to 3.8 percent.

The index dropped 0.47 percent last week, its first weekly fall in three.

Turnover stood at 169.4 million rupees ($1.06 million), well below of this year’s daily average of 859.4 million rupees.

“The market came down manly on JKH as the earnings came down,” said Atchuthan Srirangan, assistant manager - research, First Capital Holdings Plc.

Shares of Keells fell 1.4 percent on Monday.

“Because the blue-chips are showing negative results, most of the investors are on the sidelines.”

Foreign investors bought equities net worth 1.4 million rupees on Monday. But they have been net sellers of 2.5 billion rupees worth of equities so far this year.

A downward revision in economic growth estimate earlier this month by the central bank has hurt sentiment, analysts have said.

Economic growth in 2018 is likely to be between 4 percent and 4.5 percent, falling short of an earlier estimate of 5 percent, Central Bank Governor Indrajit Coomaraswamy said earlier this month.

Shares in Hatton National Bank Plc ended 1.3 percent lower while Caltex Lubricant Lanka Plc closed 5.3 percent down and Sampath Bank Plc fell 1 percent. 

($1 = 159.5500 Sri Lankan rupees) 

(Reporting by Ranga Sirilal; Editing by Vyas Mohan)