Amendments to DFCC Act passed by Cabinet to pave way for NDB merger

By Duruthu Edirimuni Chandrasekera

Amendments allowing DFCC Bank’s impending merger with NDB has been passed by the Cabinet, industry sources said.

“These amendments will facilitate DFCC to become a company, thereby aiding the merger with NDB,” an industry source told the Business Times. He added that this will be similar to the parliamentary approval which was sought to enable NDB to get incorporated under the Companies Act, to facilitate the merger with NDB Bank some years ago.

“This is required by the Central Bank to issue a commercial banking licence. NDB was set up as a wholly state-owned institution by Act of Parliament in January 1979 as was DFCC. The proposal to set up DFCC was first presented by the first World Bank mission, which visited the country in 1952. The structure that was created at the incorporation of DFCC was designed through a collaborative effort between the Government and the World Bank which saw DFCC incorporated via an Act of Parliament,” the source said.

Both NDB and DFCC announced in a joint announcement in July that they have engaged Boston Consulting Group (BCG) India as their consultants to assist with the merger.

NDB and its Group companies reported a strong performance with its Profit Attributable to Shareholders crossing the Rs 2 billion mark for the six months ended 30 June 2014, its CEO Rajendra Theagarajah said at an investor Forum on Monday.

Group Profit Before Income Tax recorded a 42 per cent year-on-year growth to reach Rs. 2.9 billion for the first half of 2014, whilst the Group Profit After Tax recorded an increase of 57 per cent to reach Rs. 2.1 billion.

Group Total Operating Income of Rs.6.3 billion recorded a 17 per cent growth on a year-on-year basis, with three constituents of operating income, namely, Net Interest Income (NII), Net Fee and Commission Income and Net Gains from Trading recording a year-on-year increase of 16 per cent, 15 per cent and 38 per cent, respectively.

The bank’s impairment charges for loans and other losses of Rs. 222 million increased by 49 per cent over the prior period, and were primarily due to the increase in impairment provision on an individual basis, Faizan Osmand, CFO – NDB said.

The bank’s operating expenses recorded a 9 per cent increase over the prior period, and the cost to income ratio recorded a record low of 42.6 per cent.

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CB to allow above-normal investments in banks

By Duruthu Edirimuni Chandrasekera

The Central Bank (CB) will in future sanction large investments by single entities as it did in the case of TPG, the USA-based global private investment firm that is taking a 70 per cent stake in Union Bank (UB), a top CB official said.

“Anyone going beyond 10 per cent (investing above 10 per cent stake in a bank) has to obtain Monetary Board (MB) approval and in this case we welcomed TPG’s investment through its affiliate Culture Financial Holdings Ltd in UB as it will make this bank stronger,” Nivard Cabraal, Governor CB told the Business Times. UB announced on Thursday that it has finalised an investment agreement with the US-based global investment giant TPG in which the latter is investing US$.117 million in the local bank.

Currently a single investor or group cannot hold more than 10 per cent in a bank and needs to have the CB approval for a higher stake, which is generally up to 15 per cent.

Meanwhile the CB is yet to respond to the request made by John Keells to retain its 30 per cent in Nations Trust Bank PLC (NTB), according to sources. When asked about this Mr. Cabraal said that these are case by case approvals. “Based on that particular case we will grant approval,” he said.

CB brought in minimum ownership of banks to promote better corporate governance and to reduce the concentration of ownership and to address conflicts of interest that may arise due to large shareholdings. Current rules say that a single entities’ material share ownership is generally limited to 15 per cent of a bank’s share capital with CB approval.

“In this case (UBC – TPG) there’s no concentration risk,” Mr. Cabraal said, adding that it’s one thing to have a large investment in one bank and ‘quite another’ to have large investments in several banks. Harry Jayawardena and Dhammika Perera, both businessmen are those who have surpassed the single shareholder limits in banks.

An industry analyst said that mandatory ownership limits will matter less, if mandatory governance rules ensure autonomy of boards and management, while defining their responsibilities and guaranteeing accountability. “Relaxing ownership limits either in theory or in practice, without enforceable governance, is a high risk strategy,” he added.

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CB considers JKH request to retain NTB stake above minimum 10% threshold

By Duruthu Edirimuni Chandrasekera

The Central Bank (CB) is considering an application by John Keells Holdings PLC (JKH) to retain its 30 per cent stake in Nations Trust Bank PLC (NTB), industry sources said.

Currently a single investor or group cannot hold more than 10 per cent in a bank and needs to have CB approval for a higher stake. Some years ago, the regulator had granted time to the conglomerate to reduce its stake to 10 per cent to be in line with banks’ minimum shareholder limits.

“JKH wrote to CB saying that it wants to retain the 30 per cent and CB has responded saying that they are considering this request,” a NTB official told the Business Times, on the sidelines of a media briefing on Wednesday to announce its half yearly results.

NTB is also in talks with some finance companies for acquisition in a bid to support the government’s financial sector consolidation efforts.

“We are now in the process of negotiating with those companies to form an alliance to support the Central Bank guidelines even though our bank is financially sound and need not compulsorily follow such a ruling because we are above the Central Bank’s requirement to be merged with another financial entity,” NTB CEO Renuka Fernando said announcing the results at a media conference.

NTB reported a bottom line growth of 18.1 per cent year on year to Rs. 1,157.2 million backed by stronger 2Q14 earnings, she said, adding that timely re-pricing of its liabilities and improving CASA (current and savings account ratio) mix was the main resultant of reduction in interest cost. NTB managed to increase the loan book by 10.8 per cent year on year in 2Q14.

Ms. Fernando said that credit growth has been a big challenge for the bank with industry growth rates at 0.96 per cent, but she noted that NTB has been able to maintain its numbers above the industry standard by a considerable amount. “Credit growth has been a big challenge for us. It’s our bread and butter as a bank. We are hopeful even though it has been challenging overall. It always gets better in the second half of the year than the first half. The numbers won’t be as ambitious as we thought but there will be an improvement.”

However given the declining interest rates, excess liquidity and competition led to declining yields in interest generating assets. This saw interest income decline by 1.6 per cent year on year to Rs. 5,012.5 million in 2 Q14 but given faster drop in interest costs NTB’s Net Interest Margins saw a slight improvement by 2 basis points to 5.7 per cent. 

“Higher impairment charges and introducing new tax levies slowed bottom line growth over the corresponding period,” Ms. Fernando said.

Net fees and commission income grew by 6.7 per cent year on year to Rs. 640.5 million due to the strong performance in the credit card portfolio, she added.

The bank’s gross nonperforming loans (NPL) ratio increased to 4.8 per cent while net NPL ratio rose by 36 basis points to 3.1 per cent.

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Damp mood

Ceylon FT: The Central Bank kept monetary policy rates on hold for a straight seventh month last Friday after loosening its monetary policy stance 19 months ago as private sector sentiment continues to be low.

Inflation rose to 3.6% in July 2014, up from 2.8% a year ago on rising food prices and the Central Bank on Friday said inflation was expected to remain benign despite the drought.
It said market interest rates have begun to decline but private sector credit growth decelerated to 2% by the end of June.

Economists point out that the private sector was not borrowing for expansion as it was adopting a wait-and-see approach with the country still recovering from a balance of payments crisis triggered in 2011. Since December 2012, the Central Bank has been loosening its monetary policy stance; but it has been the government that has largely benefitted by the move. Many speakers at the Sri Lanka Economic Summit held earlier this month said poor rule of law was deterring both local and foreign investors.

"Credit obtained by the private sector is expected to increase gradually with high levels of liquidity in the domestic money market, low short-term lending rates and declining longer-term rates," the Central Bank said releasing its Monetary Policy statement for the month of August 2014.

"Considering available information for the first half of the year, real economic growth is likely to remain broadly on target in 2014. Nevertheless, reflecting the continued low inflation environment, the Implicit GDP Deflator is expected to be lower than the originally projected level of 6%, and consequently, nominal GDP growth is expected to be lower than the initially projected rate of 14.3%. Accordingly, the Central Bank expects broad money to grow by around 13%, on a year-on-year basis by end 2014, compared to the previously expected 14% for 2014," the Central Bank said.

"The external sector strengthened further in recent months supported by timely and appropriate policies of the Central Bank and the government. Favourable developments in exports observed from June 2013 are expected to continue during the remainder of 2014. 

Higher inflows attributed to rising workers' remittances and receipts from tourism along with the lower trade deficit have positively impacted the external current account. Consequently, gross official reserves surpassed the historic milestone of US$ 9 billion, and currently stand at around US$ 9.2 billion. In the meantime, the Central Bank has purchased over US$ 1 billion from the domestic foreign exchange market on a net basis so far during the year," the bank said.

"In this background, the Monetary Board, at its meeting held on 14 August 2014, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at their current levels of 6.50% and 8%, respectively."

Private sector credit growth is expected to pick up 'very slowly' with second-tier corporates, small and medium enterprises and consumers finding it difficult to borrow, Standard Chartered Bank said in a new report in July.

In 2013 and so far this year, the biggest borrower from the domestic banking system has been the government. In 2013, the government took more than 70% of the new loans generated by the domestic banking system and in terms of net borrowings; the government emerged as the only borrower during the first five months of this year.

During the first five months of this year, the government received new loans amounting to Rs 50.2 billion from domestic sources including banks and the Central Bank.
The private sector, the engine of growth, has not borrowed on a net basis and settled Rs 56.1 billion during this period.

In May alone, the private sector settled Rs 3.3 billion and the government borrowed Rs 2.2 billion.

"The private sector has not been borrowing because there is a lot of uncertainty in the economy. One a net basis, the government sector emerges as the only borrower from the domestic financial market for the first five months of this year. Some of the foreign borrowings have been used to retire some of this debt," a financial market analyst said.

The growth for private sector credit from domestic banks fell further to 2.1% in May, down from 2.7% a month earlier and 10.2% a year ago.

Credit from domestic banks to the government grew at 22.1% in May, down marginally from Rs 22.7% a month ago and 49.4% a year ago.

Credit from the Central Bank saw declining growth rates of 38.7% in May, from 35.1% a month ago and 27.6% a year ago.

Credit to public corporations saw growth increase to 31.1% in May, up from 30.9% a month ago but down from 50.3% a year earlier.

Central Bank monetary policy easing since December 2012 has benefited the government and influential citizens more than ordinary citizens.

Ordinary savers saw interest rates fall sharply while interest on their loans fell marginally. 

However, the government and high net worth borrowers saw their lending rates fall sharply.

In May 2014, the average weighted lending rate of the commercial banking sector stood at 14.01%, down 225 basis points from a year ago.

The average weighted deposit rate stood at 7.74%, down 300 basis points from a year ago and the fixed deposit rate stood at 9.45%, down 445 basis points from a year ago.

The one year fixed deposit rate at State-owned National Savings Bank was 8%, down 450 
basis points from a year ago.

Lending rates for high net worth borrowers reach 8.17% in May, down 458 basis points from a year ago.

The 12-month benchmark Treasury bill yield was 7.02%, down 384 basis points from a year ago.

With the government forecasting the economy would grow from US$ 67 billion in 2013 to US$ 150 billion by 2020, the Chairman of the Ceylon Chamber of Commerce Suresh Shah earlier this week said the country needed to establish a culture of meritocracy in order to achieve this goal.

The Sri Lanka Economic Association has argued that the prevailing growth trajectory was unsustainable and the country risked getting into a debt trap if foreign direct investments and exports did not increase significantly, making rule of law and institutional integrity crucial factors for success.

Since the end of the conflict the country has registered an average growth rate of 6.6%. But since 2006, the National Mean Household income has grown a mere 0.5%.
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HNB profits up 8%

Ceylon FT: Hatton National Bank PLC (HNB) reported a net profit of Rs 3.69 billion at group level during the first half of 2014, up 8% from a year ago. Net profit at bank level also grew by 8% to Rs 3.38 billion, interim financial results showed.

"This growthwas achieved despite lower margins experienced during H1 of 2014 as a result of the drop in lending rates and over Rs 1.5 billion of interest written off on account of pawning. The margins for the second half are expected to improve with re-pricing of deposits in line with the lending rates and the tapering off of the adverse impact from pawning," the bank said in a statement.

Despite industry credit growth continuing to remain sluggish with a year-on-year growth of 4.4%, the bank was successful in recording credit growth rate of 8.3% as at the end of the second quarter of the year. This growth was achieved notwithstanding a drop of approximately 40% in the pawning portfolio during the period, the bank said.

The strong brand image as well as efforts of an effective sales force enabled the Bank to improve the total deposit base by over Rs. 22Bn during the first half of 2014, with the growth in low cost deposit base accounting for over 68% of the total growth. As a result, the local currency CASA ratio improved to 41.5% as at end of Q2 2014.

Though net interest income witnessed a drop inline with the industry as a result of lower margins, the bank's continuing focus on enhancing fee based income enabled to record a robust growth of 20% in fee income with increase in card volumes, guarantee commission contributing towards the growth.

The increase in net gain from financial investments to Rs 1,074 million in the period under review was mainly due to the gains from disposal of shares held in Visa Inc and MasterCard Worldwide.

The impairment provision for the period recorded a significant improvement over the corresponding period of the previous year, propelled by the aggressive recovery efforts initiated by the bank. The reduction in impairment provision by approximately Rs 1.7 billion was largely due to provision reversals effected in H1 2014 on account of pawning. 

The focus on recoveries also resulted in the NPA ratio as at end of June 2014 improving to 4.06% in comparison to 4.53% recorded in March 2014 despite industry NPA levels remaining high at 6.2%.

The bank was successful in curtailing the increase in other expenses to 4% during the period. The increase recorded in personnel expenses was due to same being exceptionally low in 2013 as a result of the reversal of provision amounting to Rs 1.5 billion effected in H1 of 2013 on account of Employee Share Benefit Trust (ESBT), consequent to the decision to windup same during this period.

Accordingly, the Bank recorded a PBT of Rs 4.94 billion for the period compared to Rs 4.69 billion recorded in the corresponding period of the previous year while, the HNB group posted a PBT of Rs 5.27 billion as against the PBT of Rs 5 billion recorded a year ago.

HNB Managing Director/CEO Jonathan Alles said: "HNB has once again showcased its resilience backed by a very sustainable business model and strong strategic intent. Considering the expected changes in the macro conditions, the market potential and the opportunity for HNB to propel growth we have already commenced the process of formulating our strategic plan for the next three years. Our concerted efforts on driving a strong sales culture, continuously improving internal processes, achieving excellence in service delivery and leveraging on significant investments made in technology combined with the more positive outlook for the second half will undoubtedly enable HNB to reach greater heights in the future".

"HNB's recent announcement to acquire a 51% stake in Prime Grameen Micro Finance Ltd will complement the Bank's investments in insurance and capital markets and further strengthen the position of HNB Group in the financial services sector," Alles said.
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Nestlé Lanka Q2 profit nears Rs.1bn

Nestlé Lanka PLC, Sri Lanka’s leading Nutrition, Health and Wellness Company, recorded a revenue growth of 7.1% (YoY) for Q2 2014, posting a total revenue of Rs.8.1 billion in the second quarter of the year. The Company announced a net profit of Rs.976 million for the quarter benefiting from stable currency and commodity prices.

The second quarter for the year 2014 saw Nestlé continue to uphold its commitment as a leader in nutrition, health and wellness by fortifying its Maggi Chicken noodles and Maggi Curry noodles with Vitamin A, in celebration of the brand’s 30th anniversary. Addressing the prevailing micronutrient deficiency of Vitamin A in Sri Lanka, this latest nutritional enhancement and follows the range’s Calcium fortification in 2009 and the inclusion of vegetables in the noodles seasoning in 2012. 

The food and beverage giant further enhanced its product portfolio with the launch of Nescafé Alegria, ‘Café style coffee made magically simple’; a coffee solution which offers an authentic, premium barista coffee experience with the simplicity, convenience and speed of a classic coffee machine.

Nestlé also continued to remain steadfast to its commitment of creating shared value in Q2. The Company has rolled out many initiatives over the years via its Nestlé Healthy Kids program to enhance theoretical knowledge on nutrition, health and wellness whilst promoting an active lifestyle amongst children in Sri Lanka. Further reinforcing this endeavor, Nestlé Lanka partnered with the International Association of Athletics Federation (IAAF) in May this year, to celebrate World Athletics Day by sponsoring selected activities to promote the importance of a healthy lifestyle.

“The second quarter of the year consisted of two important product innovations, namely the Maggi noodles range with Vitamin A fortification, a reaffirmation of our commitment towards providing ‘tasty nutrition’ to our consumers; followed by the launch of Nescafé Alegria, geared to add significant value to our existing portfolio. Despite continuous challenges in the marketplace, Nestlé Lanka has been successful in maintaining a good revenue growth and consolidating its position as a leader in Nutrition, Health and Wellness in the country. We remain cautiously optimistic while continuing our efforts to maintain our growth and performance for the remainder of the year,” said Managing Director of Nestlé Lanka PLC Ganesan Ampalavanar.

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Cargills profits tumble by 60%

Net Profit of Sri Lanka’s Cargills Group has declined by a sharp 60% to Rs. 649.6 million for the year ended 31st March 2014 from Rs. 1.6 billion a year ago, financials showed. Acknowledging the performance was below expectation, the Chairman of the group said it was largely due to the change in fair value of investment property, which was substantial in the previous year while group results were also impacted by increases in operating costs, taxation and finance costs.

“The 25% restriction on VAT exempted supplies imposed in the Budget of 2014 presented a substantial challenge to the core Retail sector. Further, the slowdown in the Agriculture sector combined with Construction sector growth not resulting in short-term consumer benefits has adversely impacted consumption across sectors,” the management noted.

According to Chairman of Cargills (Ceylon) PLC, Louis Page the Supermarket business of the group during the period under review was particularly challenged by the restriction on VAT exempted supplies. Page noted that at the time of imposition more than 40% of the business constituted of VAT exempted items such as rice, sugar, milk powder as well as fruit and vegetables which are also not price-marked. The additional VAT impact attributed to the 25% cap on VAT exempted turnover was Rs. 122.5 Mn from January to March 2014, the management pointed out.

“However the Company remained aligned to its price leadership positioning and did not pass this cost to the consumer. This resulted in the profitability of the sector being negatively impacted in the last quarter of the financial year,” Page told stakeholders in the company’s Annual Report 2013-2014 released last week.

He added that they were of the view that the cap on VAT exempted turnover only applicable to the retail trade should be reviewed with a more macroeconomic perspective taking into account the need to create and expand formalized and sustainable markets for VAT exempted local products. Meanwhile, Cargills Chairman Louis Page claimed that post-harvest practices adopted by the group has reduced food waste within its agriculture supply chain to 3-4% compared to national post-harvest waste that is as high as 30%. 

“It is heartening to see other players in the industry taking the same route with ultimately the consumer and the local producer benefiting from these efficiencies,” he pointed out.
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