Sri Lanka's Sampath Bank rated B1 by Moody's

ECONOMYNEXT - Moody's Investors Service said it had given a 'B1' rating to Sri Lanka's Sampath Bank Plc.

The rating agency said Sampath's asset quality was strong, profitability was high funding and liquidity was healthy relative to peers but had weak capital levels.

Sampath was raising new capital.

Its foreign currency load to deposit ratio was also high at 135 percent.

The full statement is reproduced below:

Moody's assigns first-time B1 Issuer ratings to Sampath Bank; outlook stable

Global Credit Research - 24 Feb 2016

Singapore, February 24, 2016 -- Moody's Investors Service, ("Moody's") has assigned an issuer and long term local currency deposit rating of B1 to Sampath Bank PLC and short-term ratings of non prime.

Moody's has also assigned the bank with a CR Assessment of Ba3(cr).

The assigned long-term foreign currency deposit rating is B2 and is constrained by the foreign currency deposit ceiling for Sri Lanka.

At the same time, Moody's has assigned a baseline credit assessment (BCA) of b1.

All the ratings have a stable outlook.

RATINGS RATIONALE

The B1 issuer ratings reflect Sampath Bank's baseline credit assessment (BCA) of b1.

The b1 BCA is driven by the bank's (1) strong track record in asset quality, (2) high profitability metrics, (3) healthy funding and liquidity profiles relative to its peers, and (4) weak capital levels.

The BCA of the bank is constrained by the Sri Lankan government's sovereign rating of B1.

Sampath Bank has healthy asset quality metrics, with a gross nonperforming loan (NPL) ratio of 1.71%, loan loss coverage of 120% at end September 2015, and compares well with other Sri Lankan banks..

At the same time, our evaluation of the bank's asset quality also factors in its high credit concentration - a structural feature of the banking system in Sri Lanka - as well as strong growth in the non-pawning part of the loan book, which recorded a 28% compound annual growth rate over the last two years.

Profitability is the bank's key credit strength, with its average ROA over the last three years staying at 1.4%. In addition, there is reasonable potential for profitability to further increase.

The bank has reported a much higher cost-income ratio ( cost component includes financial services value added tax and nation building tax), than peers, at 59% for 9m2015. As operating revenue growth picks up in line with loan growth, cost-income ratio may trend down. This would increase profitability.

The bank's capital levels are low, with a common equity tier one (CET1) ratio of only 7.98% at end-September 2015. In this respect, it is lower than its peers in Sri Lanka, as well as other similarly rated banks.

Moody's expects a capital raise over the next 18 months, as the bank needs to increase its capital levels to comply with Basel 3 norms. However, even with the capital raise, we expect the bank's capital levels to be just above the minimum norms.

The bank has a strong retail funding franchise, with a 48% CASA ratio at end-September 2015. Overall liquidity levels are also adequate, with its loan to deposit ratio (LDR) at 95%. On the other hand, a key weakness for the bank is the funding of its foreign currency book, where its LDR stood at 135%.

The bank's long-term ratings are at the sovereign rating for Sri Lanka and thus, the ratings are unlikely to receive a further upgrade unless Sri Lanka's sovereign rating is upgraded.

Sampath Bank's BCA could be raised if Sri Lanka's sovereign rating is upgraded.

Conversely, the bank's BCA could be lowered due to the following: (1) a material decrease in the Moody'sadjusted capital adequacy ratio (tangible common equity/risk-weighted assets); (2) a tangible deterioration in asset quality or risk-adjusted profitability; and (3) a downgrade of Sri Lanka's sovereign B1 rating, which will also result in a downgrade of Sampath Bank's B1 deposit rating.

The principal methodology used in these ratings was Banks published in January 2016. Please see the Ratings Methodologies page on www.moodys.com for methodology.

Headquartered in Colombo, Sampath Bank PLC had total assets of LKR503 billion (USD3.5 billion) at end-September 2015.

Sri Lanka LOLC group borrows US247mn from FMO, ADB led loans

ECONOMYNEXT - Sri Lanka's LOLC group has borrowed 247 million US dollars from three syndicated loans led by the FMO, a Dutch development agency and the Asian Development Bank for on lending to its customers, officials said.

Commercial Leasing and Finance Plc, will get 153.1 million US dollars in a syndicated loan led by FMO, a Dutch development lender.

FMO is giving 113.9 million dollars and 11 others are making up the balance.

The OPEC fund for International Development (OFID) - USD 20 million);
Finnfund- the Finnish Fund for Industrial Cooperation (USD 11 million);
Proparco – a subsidiary of the Agence Française de Développement (AFD) - USD 10 million
BIO - the Belgian Investment Company for Developing Countries - USD 7 million)
DEG – the German Investment and Development Corporation - USD20 million
OeEB the Austrian Development Bank - USD 10 million
ResponsAbility Investments AG - USD 12 million
Blue Orchard Finance - USD 10.1 million
Symbiotics - USD 9.0 million
Dutch Oikocredit - USD 5 million
ACTIAM USD 5 million.

FMO is mandated lead arranger for the deal.

Linda Broekhuizen, Chief Investment Officer of FMO said the LOLC's focus on funding smaller businesses were a key reason for the syndication.

LOLC Finance Plc, another unit is getting a 69 million dollar loan led by Asian Development Bank, with the ADB itself giving 39 million dollars and Middle Eastern banks making up the balance.

Tranche A is for a period of 7 years and has been funded by ADB.

Tranche B is for 3 years has been funded Emirates NBD Bank, Bank Muscat, First Gulf Bank, National Bank of Oman and Rakbank.

ADB was lender of record for both the tranches. Bank Muscat and First Gulf Bank was the mandated lead arrangers for tranche B, with Dubai Based Investment Bank, Alpen Capital ME Limited acting as financial advisor.

LOLC chief executive Kapila Jayawardene said it was the first time Middle Eastern banks were financing a non-bank lender in Sri Lanka.

ADB is also giving another 35 million US dollars to LOLC Micro Credit Limited.

LOLC will also get technical assistance for capacity building.

Nestlé Lanka December net up 4.2-pct, malted drinks market share grows

ECONOMYNEXT - Nestlé Lanka, the Sri Lankan unit of the Swiss food multinational, said December 2015 quarter net profit rose 4.2 percent to 641 million rupees from a year ago.

Sales grew 10.1 percent to 8.8 billion rupees in the quarter, according to interim accounts filed with the stock exchange.

The firm reported earnings per share of 11.92 rupees for the quarter.

For the full-year ending 31 December 2015, EPS was 76.77 rupees with net profit up 8.9 percent to 4.1 billion rupees.

The annual profit growth was “supported by strategic portfolio optimisation and focus on driving efficiencies across the value chain,” a company statement said.

Nestlé Lanka’s annual sales grew nine percent to 35.9 billion rupees, fuelled by its Nestomalt, Milo and Maggi brands, it said.

Nestomalt was a “key growth driver” for the company with the brand increasing its market share, especially among rural consumers, Nestlé Lanka said.

“These are strong results for what has been a challenging year,” Nestlé Lanka chief executive Shivani Hegde said.

Sri Lanka’s Dialog, Asiri in health e-commerce deal

ECONOMYNEXT – Sri Lanka’s Dialog Axiata and Asiri Hospitals have entered into a joint venture agreement in their electronic commerce business in the health sector, the companies said in separate stock exchange filings.

The agreement is between Digital Holdings Lanka, a wholly owned subsidiary of Dialog Axiata, Asiri Hospitals and their joint venture Digital Health (Pvt) Ltd.

Asiri Hospitals and Dialog last year said they had formed the Digital Health joint venture with the aim of developing and operating electronic commerce infrastructure for Sri Lanka’s healthcare sector.

Digital Holdings owns 70 percent of the joint venture firm and Asiri Hospital Holdings the remaining 30 percent.

Sri Lanka vehicle purchases plunge after tax hike, leasing controls

ECONOMYNEXT - Sri Lanka's new vehicle registrations have plunged around 50 percent to 31,854 units in January 2016 from peaks seen in November 2015 before a budget hiked taxes and leasing restrictions were slapped a month later.

Total vehicles registration fell from 61,864 in November to 54,316 in December and 31,854 units in January, with Indian made Maruti, two wheelers and 3-wheeler bought by relatively less affluent people falling most, an analysis of vehicle registry data by by JB Securities, a Colombo-based brokerage shows.

Three wheeler registrations fell 67 percent to 3,440 units in January from 10,494 units in November and motor bike sales fell 29 percent to 21,287 units from 31,262 units in November.

Min-truck registrations fell 54 percent to 801 units in January from 1,613 units in December.

In the run up to the budget in November 2015 when taxes were expected to be hiked, buyers scrambled to import cars in an 'announcement effect.'

From December the central bank slapped a loan to value ratio of 70 percent on vehicles.

Sri Lanka's rulers have a habit of controlling imports after keeping interest rates low and printing money to finance the budget. The worst trade controls on the poor were placed in the 1970s when almost all Treasury bills issued were bought by the central bank with printed money.

Small car imports rose partly because state workers were given a 10,000 rupee monthly salary increase by the new administration as a vote buying exercise. Some state workers effectively 'securitized' the salary increase by leasing vehicles.

Economic analysts who saw the central bank starting printing money and warned of the impending balance of payments trouble also warned that vehicles imports - a favourite scapegoat - will be curbed.

Though it was widely expected that extra deposits would be required on import letters of credit of credit - a practice which falls foul of obligations to the International Monetary Fund - authorities this time placed a more damaging control on the poor.

JB Securities in a note to clients said motor cycles were bought on lease by self-employed person whose radius of employment was raised.

A three wheeler which cost 500,000 rupees before the budget could be bought for a 50,000 rupee down payment. After the budget it had gone up to 600,000 rupees.

The initial deposit had gone up to 180,000 rupees with the loan to value ratio coming down to 70 percent from 90 percent.

"Will this rule lead to the unintended consequence of depriving economic opportunity to lower income groups due to the lack of mobility?, JB Securities questioned.

Analysts say what is required to fix the balance of payments is not ad hoc administrative measures, but avoid manipulating interest rates and injecting nominal rupee reserves into the commercial banking system through central bank credit.

Banks will now extend credit to other areas. However banks have on their own raised deposit rates by around 200 basis points over the past few months. The Central Bank also hiked policy rates 50 basis points in a belatedly.

However analysts say BOP troubles could persist if the Central Bank continues to buy Treasury bills with printed money and inject excess demand to the economy.

Sri Lanka Treasuries auction fails despite rate hike

ECONOMYNEXT - Sri Lanka failed to sell the 22 billion rupees of maturing Treasury bills offered for auction on Wednesday selling only 9.2 billion rupees of paper, data from the debt office showed, raising fears that at least a part of the balance will be repaid with printed money.

There is an estimated 26 billion rupees of maturing bills due on Friday.

The debt office, which is a unit of the Central Bank said 6.8 billion rupees of 6-month bills were sold at 8.07 percent, up exactly 50 basis points and 2.3 billion rupees of 12-month bills were sold 8.50 percent, up 55 basis points.

Unlike in the 1990s the Central Bank no longer reveals the volume of money printed each week and market participants have to wait till Friday to find how much freshly minted liquidity hits the interbank market.

The Treasuries auction also failed last week with the central bank's Treasuries stock climbing from around 163 billion rupees to 184 billion rupees and excess liquidity went up from 14 billion rupees to 36 billion rupees.

Analysts warn that despite a 50 basis point rate hike, the monetary authority's habit of using central bank credit to finance the deficit will lead to continued pressure on the currency, as the newly created money generates imports.

The central bank is effectively printing money to prevent sovereign default. From time to time, there has also been foreign bond sales, which generates outflows, which are not directly related to domestic credit conditions.

When the early balance of payments crises started after the central bank was created with money printing powers in 1951, reports show that parliament's Public Accounts Committee had questioned officials closely though the knowledge seems to have been lost later.

The central bank was "forced by necessity" to be main subscriber of Treasury Bills, against its own advice to avoid the government defaulting on its payments, then Governor R W Rajapathirana was quoted as telling the Public Accounts Committee in a 1962 media report reproduced in Central Bank of Sri Lanka in Retrospect published in 2010.

Asked why he could not refuse to buy Treasury bills Governor Rajapathirana had said: "..suppose we refuse to buy and there are no other purchasers then the government has no money to pay its bills. That would be a more chaotic situation than the Central Bank buying Treasury bills."

PAC chairman R S V Poulier: Is it then correct to say that although the Monetary Board functioning in the proper capacity could not recommend the purchase of Treasury bills they had to do it because of the practical necessities?

Governor R W Rajapathirana: That is correct…

In 1968, during another period of balance of payment troubles, John Exter founder Governor of the Central Bank in a lecture at Institute of Chartered Accounts at Longdon Place had said:

"..[A] central bank should show restraint in its monetary policies, there should be a reasonable expansion of credit in the economy but the creation of excess credit by deficit financing were bound to cause inflation, balance of payments difficulties and generally unstable conditions."

Exter had pointed to Singapore and Hong Kong which had no exchange or trade controls and inflation was low.

"The thing about Hong Kong and Singapore was there were no Central Bank-like institutions…" he had said.

Monetary policy was determined by market conditions and were "no organization to disturb the stable dynamism of the economy."

Exter had slammed "The New Economics" of the then US administration, saying the edifice "could collapse like a pack of cards," and the consequences would be "disastrous for the world economy."

His prophesy came true when in 1971 the Bretton Woods system of soft-pegs collapsed ignominiously with gold and oil prices shooting up. 

Sri Lanka shares end lower as investors shun risky assets

Reuters: Sri Lankan shares edged down for a second straight session on Wednesday, hovering near a 22-month low, as investors preferred low-risk assets in line with global peers and as an interest rate hike last week continued to dampen sentiment.

Shares fell in Europe and Asia on Wednesday as oil prices dipped after Saudi Arabia effectively ruled out output cuts by major producers, lifting investor appetite for safe-haven assets such as the Japanese yen and gold.

Yields on 182-day and 364-day t bills rose 50-55 basis points at a weekly auction on Wednesday to a more-than two-year high, signalling a further rise in market interest rates.

The benchmark share index closed 0.18 percent weaker at 6,217.64, hovering near its lowest close since April 2014 which it hit on Thursday. It has fallen around 10 percent this year through Wednesday, amid a rise in market interest rates.

"Market is down mainly because of the negative effects of the rate hike," said Yohan Samarakkody, head of research, SC Securities (Pvt) Ltd. "It's not factored in immediately with low liquidity, but it will be factored in slowly."

The central bank raised key policy interest rates by 50 basis points on Friday from a record low, to prevent demand-driven inflationary pressure.

Turnover was 384.3 million rupees ($2.68 million), well below this year's daily average of 718.3 million rupees.

Foreign investors sold a net 4.3 million rupees worth of shares on Wednesday, extending the net foreign outflow to 1.47 billion rupees worth equities so far this year.

Shares in Commercial Leasing and Finance Plc fell 7.89 percent, while Sri Lanka Telecom Plc dropped 2.43 percent. 

($1 = 143.6000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Biju Dwarakanath)