Sri Lanka’s twelve month treasury bill yields down

June 17, 2015 (LBO) – Sri Lanka’s three and six month treasury bill yields close flat at Wednesday’s auction with the twelve month yield down by one basis point, data from the state debt office showed.

3-month yield was unchanged at 6.08 percent with 14,905 million rupees were accepted from 21,185 million rupees of bids.

6-month yield was unchanged at 6.18 percent after 6,737 million rupees were accepted from 19,727 million rupees.

12-month yield was dropped by one basis point to 6.28 percent with 3,225 million rupees were accepted from 17,075 million rupees of bids.

It was decided to accept 24,867 million rupees from the whole auction that received 57,987 million rupees of bids.

Sri Lankan shares edge up; foreign investors exit Keells

Sri Lankan shares edged up on Wednesday, helped by index heavyweight John Keells, which managed to eke out gains despite heavy foreign selling, while local investors were cautious ahead of a parliamentary election.

The main stock index ended 0.07 percent or 5.11 points up at 7,049.71, edging up from its two-month low hit on Tuesday.

The market saw net foreign outflow of 786.7 million rupees ($5.87 million), extending net foreign outflow for the past 16 sessions to 3.32 billion rupees. The bourse, however, has seen net inflows of 2.62 billion rupees into equities so far in 2015.

Shares in conglomerate John Keells Holdings Plc, which saw a net foreign outflow of 5.1 million shares on Wednesday, ended 0.98 percent firmer, helping the overall index to end higher.

Analysts said foreign investors have been selling shares amid expectations the U.S. would hike key interest rates sooner than expected.

"Except strategic deals, there was low retail participation due to the political uncertainty," said Reshan Wediwardana, research analyst at First Capital Equities (Pvt) Ltd.

Analysts said investors are confused because there was no direction on interest rates, economic policies, and the date on the elections.

President Maithripala Sirisena's government has said it would dissolve parliament once some crucial reforms, including an electoral bill, are passed, but is yet to fix a date for the election.

Wednesday's turnover was 2.14 billion rupees, its highest since May 20 and well above this year's daily average of about 1.11 billion rupees. 

($1 = 134.0000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Anand Basu)

Sri Lanka's NDB Bank, Seylan Merger could create third largest bank

COLOMBO (EconomyNext) – A possible merger of NDB Bank and Seylan Bank could create Sri Lanka's third largest private bank with 521 billion in assets and 8.8 percent of loans and 7.5 percent of deposits in the country, an equities research report said.

Srimal Liyanage, analyst at Asia Securities told a business forum that it made sense for both NDB Bank and DFCC Bank to take-over Seylan.

NDB already had a 10 percent stake in Seylan Bank.

Liyanage said NDB's deposit base had a large fixed term share, while Seylan had a high current and savings accounts share, reducing cost of funds.

Seylan was also planning to add 75 more of which 25 were planned for this year which will help NDB reach a larger base of depositors and small and medium clients. Its non-performing loan ratio was down to 8.6 percent in the first quarter of 2015 from 12.4 percent in 2013.

Though the stock was trading around 102 rupees, Asia Securities said it was worth more as a take-over target.

Liyanage however advised caution as mergers are not easy in Sri Lanka.

Sri Lanka's central bank has tight single shareholder limits which analysts say is an automatic break against consolidation. Without a transparent and aggressive major shareholder to drive a take-over, any such process are also left to the management of a bank.

NDB started as a so-called development bank giving project loans from state-backed international credit lines, but is now turning more into commercial banking.

NDB Chief Executive Rajendra Theagarajah who has spoken in favour of consolidation in the past said he had not given up.

NDB and DFCC recently dropped a merger plan, which was partly pushed by the banking regulator.

Theagarajah said in his experience in a market like Sri Lanka expecting mergers to happen from mere market forces was not practical and a regulatory nudge may be needed.

Sri Lanka NDB Rs7.5bn debenture issue oversubscribed

COLOMBO (EconomyNext) – Sri Lanka’s National Development Bank said its 7.5 billion rupee debenture issue was oversubscribed during the early hours of the opening day, Wednesday.

It received applications for over 10 billion rupees, a stock exchange filing said.

The bank offered 75 million unsecured subordinated debentures with a par value of 100 rupees each with an option to issue another 25 million more if oversubscribed.

NDB Investment Bank acted as the financial advisors and managers to the debenture issue which was rated A+ (lka) by Fitch Ratings Lanka Limited.

Sri Lanka Fitch rates Pan Asia Banking's debt 'BBB'

COLOMBO (EconomyNext) - Fitch Ratings said it has assigned Pan Asia Banking Corporation Plc's proposed listed senior unsecured debentures of up to 4.0 billion rupees a National Long-Term rating of 'BBB(lka)(EXP)'.

The debentures are likely to have tenors of three and four years, with a combination of fixed-rate and floating-rate coupons, a statement said.

“PABC expects to use the proceeds to reduce structural maturity mismatches, diversify the funding mix and secure medium-term funding.”

The full rating report follows:

Fitch Ratings-Colombo/Hong Kong-17 June 2015: Fitch Ratings has today assigned Pan Asia Banking Corporation Plc's (PABC; BBB(lka)/Negative) proposed listed senior unsecured debentures of up to LKR4.0bn a National Long-Term rating of 'BBB(lka)(EXP)'.

The proposed issuance is likely to have tenors of three and four years, with a combination of fixed-rate and floating-rate coupons. PABC expects to use the proceeds to reduce structural maturity mismatches, diversify the funding mix and secure medium-term funding. The debentures are to be listed on the Colombo Stock Exchange.

Fitch will assign a final rating to the issue subject to the receipt of final transaction documents conforming to information already received

KEY RATING DRIVERS

The proposed issue is rated in line with PABC's National Long-Term Rating of 'BBB(lka)', as they will rank equally with the bank's other senior unsecured creditors.

PABC's rating reflects its weak capitalisation amid rapid growth in its loan book. The rating also takes into account the bank's weak asset quality relative to higher rated peers, moderate franchise and improving profitability due to an expanding current and savings account base that helped to drive higher net interest margins.

RATING SENSITIVITIES

The debt ratings will move in tandem with PABC's National Long-Term Rating.

Failure to reverse the trend of deterioration in the capital ratios by end-2015 and to materially enhance its loss absorption buffers would lead to a downgrade of PABC's rating.

However, the rating would remain at the current level if PABC is able to significantly and sustainably improve its capitalisation, mostly likely through a timely capital infusion and slower growth in its loan book.

Banks bullish on growth

* Total banking assets grew by 17.3% YoY to Rs. 6.97 b and accounted for 71.3% of country’s nominal GDP, says new report

* Gross loans and advances grew 13.7% YoY to Rs. 3.89 b while deposits grew 12.4% YoY to Rs. 4.68 b last year 

* Project loans fuelled growth in 2014 with the 12 local banks disbursing Rs. 419 b
Total borrowings in 2014 grew by 42.6% YoY to Rs. 1.44 b

By Uditha Jayasinghe
Sri Lanka’s banks are set to hit a growth stage, having withstood the global credit crunch, on strong asset consolidation and diversification, an analytical report released by Asia Securities showed yesterday.

In 2014, total banking assets grew by 17.3% YoY to Rs. 6.97 billion and accounted for 71.3% of the country’s nominal GDP. The growth was led by rupee lending activities mainly funded by deposits. 


 
Loan growth picked up towards the end of the year, resulting in a marginal drop in liquidity. Gross loans and advances grew 13.7% YoY to Rs. 3.89 billion while deposits grew 12.4% YoY to Rs. 4.68 billion last year, noted the report titled ‘Banks: An Evolving Story of Elephants and Cheetahs’.

Project loans fuelled growth in 2014 with the 12 local banks disbursing Rs. 419 billion during the year. Personal loan growth was poor due to the private banks reducing exposure to gold loans on the back of declining gold prices and non-performing loans. The dozen local banks aggregated pawning contracted by Rs. 189 billion during the year.

Deposit growth was constrained by stringent liquidity regulation resulting in banks looking towards other sources to support credit growth, according to the report that was published as part of Asia Securities Wealth Insight Series.

Due to the combined factors of low capacity in the domestic market, regulatory relaxation on foreign currency borrowing and the relatively cheaper cost pushed banks to increasingly borrow from foreign financial corporations.

Total borrowings in 2014 grew by 42.6% YoY to Rs. 1.44 billion as opposed to a growth of 26.2% YoY recorded in 2013. Foreign currency borrowing accounted for 59.8% of the total borrowing in 2014, whereas in 2008 it was just 33%.

“The sector is promising for investors through improving profitability with reduction in non-performing loans in 2014. Sector net profit grew by 17.9% in 2014 after recovering from a 9.8% contraction in 2013. The lag effect of revising rates of deposits against loans, gains on investment securities and lower provision requirements due to recovery of non-performing loans were the main contributors to the improvement,” the report noted.

Net interest income grew by 12.8% to YoY Rs. 221 billion in 2014 while non-interest income grew 14.5% YoY to Rs.98 billion. Total provisions dropped by 39.1%YoY to Rs. 11 billion and forex income increased to 14.5% YoY to Rs. 135 billion. Accordingly the Return of Equity (ROE) of the sector improved to 16.5% in 2014 from 16% in 2013.

“We expect the lag effect of revising deposit rates against the lending rate, exchange gains with rupee depreciation and reducing non-performing loans and impairment provisions with low exposure to gold with minimum guarantee by the Central Bank, to contribute positively on banking profits in 2015. Due to relatively slow credit growth in 2014, this resulted in an excess liquidity situation in the sector.”

Maintaining the interest rate spread and the deposit growth will be difficult for banks in a low interest situation mid to long term, the report added. As a result the study sees Sri Lankan banks diversifying in to non-interest income generating financial services, such as external trade services, asset management, credit/debit cards, forex dealing, equity and fixed income.

In 2014 commercial banks recorded an improved non-interest to net interest income ratio of around 45%, mainly driven by trading in Government securities in 2014.

“Loan growth remains challenging in the short-term with increasing uncertainty in the political and economic environment due to upcoming policy changes and elections. The slowdown in infrastructure, construction and subcontracting sectors would affect the growth in project loans in 2015. Loan growth was sluggish in the first half of 2014 with banks reducing exposure in gold loans, however, the growth revived in the second half mainly due to increasing project loans. Total amount of loans disbursed by the 12 banks that contributed to 85% of the total loan growth in 2014 was Rs. 419 billion,” it said.
Sri Lanka’s banks have managed to remain largely unaffected by the global credit crunch. 

At present there are 25 licensed commercial banks and nine licensed specialised banks registered in the country operating through 6,554 branches island-wide.

SMEs to drive loan growth
Since an estimated 90% of businesses registered in Sri Lanka are Small and Medium Enterprises (SMEs) recording an annual turnover below Rs. 600 million, they provide an important growth segment to banks, the report noted.

As the country already has a strong SME presence, it will be the engine of growth in the future, but the report warns is yet to gain a material presence in terms of value in the credit market.

“One the back of major economic expansion in the post-war environment, policy changes, and a decline in project loans, the SME sector has become a prime focus for all private banks. Domestic credit to private sector as a percentage of GDP in the country remains low at 29.2% far below regional peers showing that the potential for private sector credit growth in the country is significant.

The Asia Securities report also observes Sri Lanka’s foreign direct investment remains relatively low when compared with regional economies.

Lacklustre deposit increase holds back credit
Slowing deposit growth due to declining interest rates have resulted in banking sector deposits growing by 12.4% in 2014 against loan growth of 13.7%.

Even though this is a growth of 18% when compared with 2013 it is unlikely to promote significant growth in 2015, Asia Securities stated in its report. With statutory deposit and liquidity requirements, the larger banks had to borrow to cater to the credit growth due to lack of branch expansion opportunities. However, smaller banks who did not have an island wide presence and successfully executed their expansion plans secured an above average deposit growth, the report observed.

“Our channel checks indicate that the optimum level of branches to have an efficient presence in the country is around 220-250, which Commercial Bank and HNB have reached and recorded an average deposit and credit growth,” it said. 

Sampath Bank in the meantime, with a lower branch network, recorded and above average deposit and credit growth following its branch expansion strategy lending to excess liquidity, which was then utilised to settle part of its foreign borrowings in 2014.

Asia Securities also recommends banks should raise additional capital to cater to increasing banking activities with economic growth. Currently the country’s banking industry is fairly capitalised to its assets with a bank capital to asset ratio of 8.2%, broadly in line with its regional peers.
www.ft.lk

Laugfs invests Rs. 600 m in a blending facility

* Plant operational from September

* Caters to South Asian markets

By Charumini de Silva

Laugfs Lubricants Ltd. yesterday confirmed a Rs. 600 million investment to commence operations of its own state-of-the-art blending plant in Malwatte, a senior official said.

The first phase of the blending facility is located on a four acre land in the Malwatte Free Trade Zone and will be operational from September this year, with a view of catering to regional markets, Laugfs Lubricants Managing Director Thilak de Silva told the Daily FT.

“Being the only Sri Lankan lubricant company, we see great potential in the industry,” he added.

The company has been incorporated as a Board of Investment (BOI) approved project, equipped with advanced technology and cutting edge R&D facilities and the plant will be geared to manufacture new generation engine oils and other industrial lubricants to serve growing industry needs.

He said as a conglomerate with strong Sri Lankan roots, Laugfs Lubricants is proud to offer products made to the highest international standards that can confidently compete with international brands.

Commenting on brand expansion plans overseas, de Silva said: “Initially we will be looking at South Asia. We are in a better position to produce a whole range of products at our new facility.

Thereafter our intention is to cater to international companies assuring a globally competitive lubricant brand.”

With this new facility, Laugfs will be in better shape to produce half of the current requirement in one shift. “The gradual progress of the company would assess the second phase expansion in the years to come, thereby supporting rapidly growing market demand,” he noted.

Laugfs Lubricants markets Laugfs Oil, a trusted brand offering a range of new generation automobile and industrial lubricant products. It is the only Sri Lankan lubricant company to hold licenses from the American Petroleum Institute (API), which defines global industry standards for motor oils.

Laugfs Lubricants also has Original Equipment Manufacturer (OEM) approvals for Volvo, Renault and Porsche vehicles, testament to its superior quality. Laugfs Oil products are currently blended in Singapore to global standards using high quality Group II Plus base oils and performance additives technology.
www.ft.lk