Moody's confirms three Sri Lankan banks ratings; outlooks downgraded

ECONOMYNEXT - Moody's Investors Service said it has confirmed the long-term ratings of three Sri Lankan banks - Bank of Ceylon, Hatton National Bank, and Sampath Bank – and lowered their ratings outlooks to negative from stable.

The rating actions follow the affirmation of Sri Lanka's B1 sovereign rating, and the lowering of the outlook on the sovereign rating to negative from stable on 20 June 2016, a statement said.

“In Moody's view, the operating conditions for Sri Lanka's banks have weakened because of lower-than expected policy effectiveness,,” it ssaid. As a result, Moody's has changed Sri Lanka's Macro Profile to "Moderate -" from "Moderate".

The full statement follows:

Singapore, June 21, 2016 -- Moody's Investors Service has affirmed the long-term ratings of three banks in Sri Lanka (B1 negative).

Moody's has also revised their ratings outlooks to negative from stable.

The rating actions follow the affirmation of Sri Lanka's B1 sovereign rating, and the change in outlook on the sovereign rating to negative from stable on 20 June 2016.

The affected banks are: (1) Bank of Ceylon; (2) Hatton National Bank Ltd.; and (3) Sampath Bank PLC.

The baseline credit assessments (BCAs) and Adjusted BCAs of the three banks were affirmed at b1.

The counterparty risk assessments (CRAs) of the three banks were affirmed at Ba3(cr)/NP(cr).

In Moody's view, the operating conditions for Sri Lanka's banks have weakened because of lower-than expected policy effectiveness. As a result, Moody's has changed Sri Lanka's Macro Profile to "Moderate -" from "Moderate".

The full list of ratings and assessments affected by this rating action can be found at the end of this press release.

RATINGS RATIONALE

The credit ratings on the three banks were affirmed and their outlooks changed to negative because Moody's affirmed Sri Lanka's B1 sovereign rating and changed its outlook to negative from stable on 20 June 2016.

The ratings and outlooks of banks typically follow the ratings and outlooks of their respective governments if the banks' ratings are positioned at the same level as capped by the sovereign rating, which is the case for Bank of Ceylon, Hatton National Bank Ltd. and Sampath Bank PLC.

Typically, such linkages between the sovereign credit profile and the credit metrics of the domestic banks are driven by the banks' large investments in sovereign bonds.

The key drivers of Sri Lanka's sovereign outlook change to negative from stable are: (1) Moody's expectation of a further weakening in some of Sri Lanka's fiscal metrics in an environment of subdued GDP growth; and (2) the possibility that the effectiveness of the fiscal reforms envisaged by the government may be lower than we currently expect, which could further weaken fiscal and economic performance.

More details on the sovereign rating action are available at the issuer page of the Government of Sri Lanka on www.moodys.com.

Moody's has also changed its Macro Profile for Sri Lanka to "Moderate -" from "Moderate", reflecting our view that operating conditions have weakened for Sri Lankan banks. In particular, Moody's has lowered its "institutional strength" score for Sri Lanka's Macro Profile. The fiscal consolidation path targeted by the authorities and outlined in the IMF program is ambitious; sustaining such efforts will challenge the government's institutional capacities and might affect GDP growth over the short term. The decrease in score for Sri Lanka's Macro Profile has had no impact on the BCAs of the three Sri Lankan banks.

RATIONALE BEHIND THE AFFIRMATION OF BANKS' BCAs, ADJUSTED BCAs, AND CRAs
Moody's has affirmed the b1 BCAs and b1 Adjusted BCAs of the three banks.

For Bank of Ceylon, its b1 BCA was affirmed owing to the bank's broadly stable asset quality with a 3.8% problem loans ratio at end-March 2016, as well as Moody's expectation that its profitability will increase because of lower loan loss provisions and improved margins. Moody's also expects that the bank's capital buffer will remain stable, albeit low, at 6.05%, calculated as tangible common equity / adjusted risk weighted assets (TCE ratio) as of the same date.

For Hatton National Bank Ltd., its BCA was affirmed because of the bank's moderate capital adequacy position with a TCE ratio of 10.3% at end-March 2016. In addition, it has healthy profitability with a return on average assets of 1.8% for 1Q 2016. The BCA also captures the bank's tight liquidity profile as seen in the high loans to-deposits ratio of 98% at end-March. The bank's asset quality improved in 2015 and early 2016, with problem loans of 2.4% as of the same date. Moody's notes that the bank's rapid credit growth of 26% in 2015 could mask asset quality challenges because a large proportion of loans is unseasoned.

The BCA of Sampath Bank PLC was affirmed because of the bank's healthy asset quality; a problem loans ratio of 1.64% at end-2015 and problem loans coverage of 111%. Similar to Hatton National Bank, Sampath Bank reported very high loan growth of 24% in 2015, which could mask asset quality challenges.
Profitability remains a key credit strength of the bank, with its return on average assets over the last three years averaging at 1.23%. The bank's capital levels are low, with a TCE ratio of 6.9% end-2015.

The Counterparty Risk Assessments of the three banks were affirmed because of the respective affirmation of these banks' Adjusted BCAs.

WHAT COULD MOVE THE RATING UP/DOWN

Given the revision of the sovereign rating outlook to negative from stable, there is no potential for an upward revision of the long-term credit ratings of the three Sri Lankan banks. This is because the banks' long-term ratings are positioned at the same level as Sri Lanka's sovereign B1 rating.

A downgrade of Sri Lanka's sovereign rating will result in a downgrade of the long-term credit ratings of the three Sri Lankan banks.

The BCAs of the three banks could be lowered if there is a material deterioration in solvency factors, such as asset quality, profitability and capital. Tighter liquidity and an increased reliance on market funding will also be negative for the BCAs.

Sri Lankan shares fall after Moody's outlook revision; rates, outflows weigh

Reuters: Sri Lankan shares fell on Tuesday for a second straight session, a day after Moody's revised down its outlook on the country's sovereign rating and as continued foreign outflows and rising interest rates weighed on investor sentiment.

Investors were also concerned over a government proposal to reintroduce capital gains tax, brokers said.

Moody's Investors Service on Monday changed Sri Lanka's outlook to negative from stable, citing further weakening in some fiscal metrics in an environment of subdued GDP growth, which could lead to renewed balance of payments pressure.

Overseas funds offloaded a net 18 million rupees worth of equities on Tuesday, extending the year-to-date net foreign outflow to 5.79 billion rupees worth of shares.

The benchmark Colombo stock index ended down 0.22 percent, or 14.24 points, at 6,446.88. The bourse shed nearly 1 percent last week.

"Index is moving here and there on low volumes," said Dimantha Mathew, head of research, First Capital Equities (Pvt) Ltd.

"Interest rates are moving up. This is the issue, and there is not much display of interest in the market. Things are not looking that great."

Turnover stood at 474.9 million rupees ($3.26 million), well below this year's daily average of around 754.2 million rupees.

On Thursday, the bourse fell 1 percent as concerns over a government decision to reintroduce capital gains tax kept investors on the sidelines.

Sri Lanka's cabinet on Wednesday approved a proposal to reintroduce the tax, especially on land sales, with a cabinet spokesman saying no decision had been taken on whether the tax would apply to capital gains in the share market.

Shares in Lanka ORIX Leasing Company Plc fell 3.3 percent, while Commercial Leasing & Finance Plc dropped 5.41 percent and conglomerate John Keells Holdings Plc slipped 0.56 percent.

Treasury bill yields rose between 1 and 4 basis points at a weekly auction on Wednesday. They have risen between 6 and 40 basis points since the central bank left the key policy rates steady on May 20.

The average prime lending rate edged up 24 basis points to 10.47 percent in the week ended June 10. Stockbrokers have said rising interest rates could be detrimental to risk assets if they jump beyond 12 percent.

($1 = 145.5000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Sherry Jacob-Phillips)

Moody’s change Lanka’s rating outlook to negative

Moody’s Investors Service yesterday affirmed the government of Sri Lanka’s foreign currency issuer and senior unsecured sovereign ratings at B1 and changed the outlook to negative from stable.

Two key drivers underpin the change in outlook to negative from stable. The first was the expectation of a further weakening in some of Sri Lanka’s fiscal metrics in an environment of subdued GDP growth which could lead to renewed balance of payments pressure .The second was the possibility that the effectiveness of the fiscal reforms envisaged by the government may be lower than Fitch currently expect, which could further weaken fiscal and economic performance.

At the same time, Sri Lanka’s B1 rating is supported by the economy’s robust growth potential and higher income levels than similarly-rated sovereigns.

With the effective implementation of some of the fiscal policy measures and other structural reforms planned under the IMF programme, the government would be able to tap a significant potential revenue base.

“The first driver of the negative outlook on Sri Lanka’s B1 ratings is our expectation that the government’s debt burden will increase further, from high levels, which could intensify external vulnerabilities and refinancing risks.”

“If there was a further marked deterioration in fiscal metrics combined with heightened balance of payment pressures, Sri Lanka’s overall credit metrics would weaken compared to other B1-rated sovereigns,” Fitch said.

Moody’s expects a more moderate reduction in budget deficits than outlined in the projections published as part of the International Monetary Fund’s (IMF) Extended Fund Facility (EFF).

This reflects the difficulties in rapidly raising revenues after years of decline in the efficiency of tax collection and administration. “We forecast that the budget deficit will narrow to slightly under 5% of GDP by 2020, from 7.4% in 2015 and compared with 3.5% projected by the IMF as part of the EFF.

“In addition, a number of state-owned enterprises are under financial stress, pointing to sizeable contingent liability risk for the government. Some of these risks have already crystallised with the government taking responsibility for SriLankan Airlines’ (unrated) liabilities, worth Rs. 461 billion.”

“These liabilities will inflate government debt, at least temporarily. With nominal GDP growth slower than in the last decade, persistent sizeable deficits will raise the government’s debt burden.”

“We expect government debt to rise to just under 80% of GDP and subsequently fall to around 75% by the end of the decade, above the IMF’s projections (68.2% in 2020) and debt levels of similarly rated sovereigns.”
www.dailynews.lk

Sri Lankan shares edge down on interest rates, foreign outflows

Reuters: Sri Lankan shares edged down on Monday as investor sentiment took a hit on continued foreign fund outflows and rising interest rates, brokers said.

Investors were also concerned over a government proposal to reintroduce capital gains tax, brokers said.

Overseas funds offloaded a net 137.8 million rupees worth of equities on Monday, extending the year-to-date net foreign outflow to 5.77 billion rupees worth of shares.

The benchmark Colombo stock index ended 0.08 percent weaker at 6,461.12. The bourse shed nearly 1 percent last week.

"The market is very slow and nothing much is happening. Market is hovering here and there and investors' interest doesn't seems to be on either side," said Dimantha Mathew, head of research at First Capital Equities (Pvt) Ltd.

"Interest rates have started to impact the market. But investors are not selling either thinking the rates could come down a bit with expected inflows."

Turnover stood at 381.9 million rupees ($2.62 million), well below this year's daily average of around 756.7 million rupees.

On Thursday, the bourse fell 1 percent as concerns over a government decision to reintroduce capital gains tax kept investors on the sidelines.

Sri Lanka's cabinet approved a proposal to reintroduce the tax on Wednesday, especially on land sales, with a cabinet spokesman saying no decision had been taken on whether the tax would apply to capital gains in the share market.

Shares in Commercial Leasing & Finance Plc fell 5.13 percent, while Peoples Leasing Plc fell 2.05 percent while biggest listed lender Commercial Bank of Ceylon Plc fell 0.31 percent.

Treasury bill yields rose between 1 and 4 basis points at a weekly auction on Wednesday. They have risen between 6 and 40 basis points since the central bank left key policy rates steady for on May 20.

The average prime lending rate edged up 24 basis points to 10.47 percent in the week ended June 10. Stockbrokers have said rising interest rates could be detrimental to risk assets if they jump beyond 12 percent. 

($1 = 145.5000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Sunil Nair)

South East Asia’s first 4.5G demo clocks 1GBps on Dialog’s LTE network

Sri Lanka established yet another milestone on the region’s Broadband Technology landscape with an exposition of South East Asia’s first 4.5G demonstration featuring download speeds in excess of 1Gbps (Gigabits per Second).

The ground breaking technology capability test was carried out on the Huawei Technologies’ LTE infrastructure of Dialog Axiata, the country’s leading 4G Network Provider. The demonstration established the capability of the network to deliver throughputs in excess of 1 Gbps on the LTE Radio (Air) Interface, setting a solid foundation for the future evolution of the nation’s 4G services to a technology generation well ahead of neighboring markets.

Following the 4.5G technology capability test, Sri Lanka joins a select circle of 20 countries where 4.5G capabilities have been demonstrated.

In 2014, Sri Lanka became the first country in South Asia to Launch Commercial 4G services, when Dialog Axiata launched its pioneering 4G services on FD-LTE and TD-LTE technologies. Dialog’s 4G LTE networks have since evolved to deliver burst speeds up to 100 MBps and provides a population coverage in excess of 50% with respect to ultra-high speed 4G services. Following aggressively in the footsteps of the company’s 3G-HSPA network which provides a population coverage in excess of 83%, Dialog’s 4G LTE Services are expected to provide ultra high speed broadband coverage to all populated areas of the country in the near future.

The ITU names Sri Lanka as exhibiting the lowest broadband tariffs in the Asia Pacific Region, while Akamai, in its report of ‘State of the Internet – Connectivity’ points to Sri Lanka leading the region if not the world in terms of the affordability, availability, quality and inclusivity of broadband services. - Dialog

www.island.lk

Sri Lanka banking sector ‘Multiple shocks dampen beat’

Click here to view Detailed Report

FC Research expects the banking sector to have a slow phase during 2016E-18E with slow GDP growth, tax attacks, sluggish credit growth and rising non-performing loans. Hence we expect our banking sector universe to provide 15% average return over 1-Year period slightly slower than the expected market return.

Slow GDP growth and Tax Attack: The current tight monetary policy and tax increase are unlikely to help the GDP growth numbers to improve. We expect 2Q & 3Q2016 GDP also to remain weak while growth is likely to pick up towards 4Q2016 amidst the rise in the construction led by government starting off most of the stalled projects. VAT has been increased to 15% resulting in an incremental impact for the banking sector.

Credit growth to slow down to 16%: We expect private sector credit growth to slow down to 16% during 2016E gradually slowing down while 1H2016 continuing to remain on the high side. CBSL is comfortable with credit growth of 12%-15% in the sector. However, private sector credit growth shot up to 25% for 2015 amidst lose monetary stance.

NPLs to be on the rise in 2H2016 onwards: We expect Banking sector non-performing loans to increase with increase in the interest rate and weak economic condition: Non-performing loans and GDP always have a negative relationship. Downturn in the economy growth, real exchange rate appreciation and the rise in real interest rate contributes to increase in the Non-Performing loans.

Banking Sector on a HOLD with 15% avg. return over 1-Year Period: With Average sector return at 15%, current interest rates make valuations unattractive on expected return (Refer 5.1) despite comparatively cheap frontier market valuations. Banking Sector HOLD. We recommend a STRONG BUY on SAMP and NTB, BUY on COMB.X, HOLD on COMB.N, HNB.X, SEYB.N and SEYB.X. HNB.N and NDB are recommended as a SELL. - FC Research
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Sri Lanka’s Central Bank to sell USD250mn development bonds

(LBO) – The Central Bank will issue 250 million US dollars development bonds with a tenor of 1 year and 7 months, 2 years and 7 months and 4 years to local and foreign investors.

The Debt Department said the subscription will be at a floating rate of 6 month LIBOR for USD plus a margin through competitive bidding or at a fixed rate to be determined through competitive bidding.

Minimum investment is 10,000 US dollars with additional investments in multiples of 10,000 US dollars.

The issue will be open for subscription from 21 to 27 June and has a date of settlement of 30 June 2016.

The recent development bonds issue amounting to 200 million US dollars oversubscribed with over 516 million US dollars of bids received from investors.

The central bank accepted 250.04 million US dollars in one year bond at a floating rate of six month LIBOR (94 bp) plus 438.01 basis points.

Development bonds are to be issued by the Public Debt Department of Central Bank and exempted from income tax paid in Sri Lanka.

Foreigners, non resident or dual citizen Sri Lankans, NRFC/RFC account holders, authorized dealers in foreign exchange, primary dealers in government securities, BOI specified companies and specified insurance companies are among eligible investors.