Fitch confirms 9 Sri Lankan banks, downgrades Sampath

EconomyNext - Fitch Ratings said it has confirmed the ratings on nine of Sri Lanka's banks, maintaining a Stable Outlook for the banking sector, but downgraded Sampath Bank.

The Sri Lankan banking sector’s credit profile is not likely to deteriorate materially even though there could be downside pressure on asset quality and profitability, a statement said.

The rating agency said the downgrade of Sampath Bank reflects its weakening capitalisation relative to peers, which offset benefits from the growth of its franchise.

The statement by Fitch Ratings is given below.

Fitch Ratings-Colombo-08 July 2015: Fitch Ratings has affirmed the ratings on nine of Sri Lanka's banks.

The Long-Term Issuer Default Ratings (IDRs) on National Savings Bank and Bank of Ceylon (BOC) have been affirmed at 'BB-' and their National Long-Term Ratings have been affirmed at 'AAA(lka)' and 'AA+(lka)', respectively.

Fitch has also affirmed the National Long-Term Rating of People's Bank at 'AA+(lka)'.

At the same time, Fitch has affirmed the Long-Term IDRs of DFCC Bank PLC at 'B+' and the National Long-Term Ratings of DFCC and DFCC Vardhana Bank PLC at 'AA-(lka)'. National Development Bank PLC's (NDB) National Long-Term Rating was affirmed at 'AA-(lka)'. Fitch also affirmed NDB's Long-Term IDR at 'B+' and subsequently withdrew the rating due to commercial reasons.

Furthermore, Fitch has affirmed the National Long-Term Rating of Commercial Bank of Ceylon PLC (Commercial) at 'AA(lka)', Hatton National Bank PLC (HNB) at 'AA-(lka)' and Seylan Bank PLC at 'A-(lka)'.

Fitch has downgraded the National Long-Term Rating of Sampath Bank PLC to 'A+(lka)' from 'AA-(lka).

KEY RATING DRIVERS

IDRS, VRS, NATIONAL RATINGS AND SENIOR DEBT
Fitch maintains a Stable Outlook for the Sri Lankan banking sector. This is because the sector credit profile is not likely to deteriorate materially even though there could be downside pressure on asset quality and profitability. The operating environment is a key rating driver for the Sri Lankan banking sector given its potential volatility. The sector outlook was revised from Negative to Stable in December 2014.

Banks With Sovereign-Support Driven Long-Term Ratings

The IDRs and the National Long-Term Ratings of National Savings Bank and BOC, and the National Long-Term Rating of People's Bank reflect Fitch's expectation of extraordinary support from the government of Sri Lanka (BB-/Stable). Their Stable Outlook mirrors the Stable Outlook on the sovereign's rating.

Fitch believes that state support for National Savings Bank stems from its policy mandate of mobilising retail savings and primarily investing them in government securities. The National Savings Bank Act contains an explicit deposit guarantee and Fitch is of the view that the authorities would support, in case of need, the bank's depositors and its senior unsecured creditors to maintain confidence and systemic stability. Fitch has not assigned a Viability Rating (VR) to National Savings Bank as it is a policy bank.

Fitch expects support for BOC and People's Bank to stem from their high systemic importance, quasi-sovereign status, role as key lenders to the government and full government ownership.

The senior debt of National Savings Bank and BOC is rated at the same level as the banks' Long-Term Foreign Currency IDRs as the notes rank equally with their other senior unsecured obligations.

BOC's VR reflects its thin capitalisation and weak asset quality. This is counterbalanced by its strong domestic funding franchise, which is underpinned by its state linkages.

The National Long-Term Ratings of Seylan Bank reflects Fitch's view that the state would provide it extraordinary support in case of need because the regulator has classified it as one of six domestic systemically important banks. Fitch assigns Seylan Bank a lower support-driven rating because it has a smaller market share compared with its larger peers.

Banks with Long-Term Ratings Driven by Intrinsic Strength

Fitch considers Commercial Bank as the strongest bank in this peer group. Its rating captures its more measured risk appetite, solid franchise, sound track record, and strong funding profile. The bank's provision coverage has been improving and asset quality has remained satisfactory. The ratings reflect our expectation that its operations in Bangladesh will remain small.

HNB's rating reflects its strong franchise, satisfactory capitalisation, established track record and higher risk appetite compared to better-rated peers. Its senior debentures carry the same rating as they rank equal with other unsecured obligations.

The downgrade of Sampath Bank's National Long-Term Rating reflects the weakening of its capitalisation relative to peers, which offset benefits from the growth of its franchise. Fitch expects that this trend will continue as the bank is not likely to be able to sustain growth purely through retained earnings. The bank's Fitch Core Capital ratio declined to 10.6% at end-March 2015 from 13.1% at end-December 2013. Its regulatory Tier 1 ratio also deteriorated to 8.3% from 10.1% over the same period while the Tier 1 ratio of its direct peers remained above 11%. The weakening was mainly due to a shift in Sampath Bank's loan book towards consumer and retail loans which carry a higher risk weight. Pawning advances, which were zero risk weighted, decreased to 6.6% of loans at end-March 2015 from 19.4% at end-2013.

The ratings on DFCC and its 99% owned subsidiary DFCC Vardhana Bank capture the consolidated group's adequate capitalisation and its developing commercial banking franchise. Fitch has equalised the ratings of the two banks due to their strong and increasing integration.

DFCC's US dollar notes are rated at the same level as its Long-Term Foreign-Currency IDR and its Sri Lanka rupee-denominated senior debt is rated at the same level as DFCC's National Long-Term Rating as the securities constitute unsecured and unsubordinated obligations of the issuer. Fitch has assigned a Recovery Rating of 'RR4' to the US dollar notes to reflect average recovery prospects under both a standalone and consolidated basis.

The affirmation of NDB's ratings reflect its better asset quality compared with peers and long and stable operating history, counterbalanced by its rapid growth as a commercial bank.

SUPPORT RATING AND SUPPORT RATING FLOOR

The Support Ratings (SRs) and Support Rating Floors (SRFs) of state-owned National Savings Bank, BOC, and People's Bank reflect their high importance to the government and high systemic importance. The SRs and SRFs of privately-owned DFCC and NDB reflect their lower systemic importance.

SUBORDINATED DEBT

The old style Basel II Sri Lanka rupee-denominated subordinated notes of BOC, DFCC, DFCC Vardhana Bank, NDB, Commercial Bank, HNB, Sampath Bank and Seylan Bank are rated one notch below their National Long-Term Ratings to reflect the subordination to senior unsecured creditors.

RATING SENSITIVITIES

IDRS, VRS, NATIONAL RATINGS AND SENIOR DEBT

The banks are sensitive to changes in the operating environment, which would often be reflected in changes in the sovereign rating. Significant capital impairment risks, possibly due to higher risk taking or a protracted macroeconomic deterioration, could result in negative rating actions on the banks if Fitch believes that this could result in a material erosion of capital buffers.

Banks with Sovereign-Support Driven Long-Term Ratings

Any change in Sri Lanka's sovereign rating or the perception of state support to National Savings Bank, BOC and People's Bank could result in a change in these entities' ratings. For National Savings Bank, a reduced expectation of state support through, for instance, the removal of preferential support, or a substantial change in its policy role and/or deviation from mandated core activities indicating its reduced importance to the government, could also result in a downgrade of the bank's National Rating. Visible demonstration of preferential support for BOC and People's Bank in the form of an explicit guarantee will be instrumental to an upgrade of their National Long-Term Ratings.

A continued decline in capitalisation through a surge in lending or a further decline in asset quality alongside high dividend payouts could place downward pressure on BOC's VR.

Seylan's support-driven National Ratings are sensitive to changes around the sovereign's ability and propensity to provide support. Fitch would consider an upgrade on Seylan's ratings if the bank's standalone rating - currently at a notch below its support-driven rating - moves above the support-driven rating through a significant and sustained improvement in asset quality and provisioning, and its other credit metrics are in line with that of higher-rated peers.

Banks with Long-Term Ratings Driven By Intrinsic Strength

Sustained improvements in Commercial Bank's asset quality and enhanced resilience against a volatile operating environment could be positive for the rating. Its ratings could be downgraded if its ability to withstand cyclical asset quality deterioration declines due to lower earnings and capitalisation. In addition, any marked weakening in its deposit franchise and a deviation from its measured risk appetite, both viewed by Fitch as key factors that differentiate Commercial from its lower-rated peers, would be negative.

Upside potential for HNB's ratings stems from a lower risk appetite and sustained improvements in its financial profile, in particular asset quality and funding. A material increase in risk taking, unless sufficiently mitigated through capital and financial performance, could result in a rating downgrade.

Fitch views the upside potential of Sampath Bank's ratings as limited as long as the trend of higher risk taking and declining capitalisation persists. A sharp decline in its asset quality could result in a further rating downgrade.

Rating upgrades for DFCC and DFCC Vardhana Bank would be contingent on a materially stronger commercial banking franchise while maintaining strong credit metrics. The ratings could be downgraded if there is a sustained and substantial increase in risk appetite that could materially weaken the group's strong capital position. In addition DFCC Vardhana Bank's ratings are sensitive to a decline in its strategic importance to DFCC, which Fitch considers unlikely as the two entities have said they plan to merge.

Fitch believes that NDB's capitalisation and its National Long-Term Rating would come under pressure if the bank sustains its growth momentum, in the absence of other mitigating factors. The consolidation of NDB's franchise together with the maintenance of strong credit metrics could result in an upgrade of NDB's rating.

The assigned debt ratings are primarily sensitive to changes in the entities' long-term issuer ratings.

SUPPORT RATING AND SUPPORT RATING FLOOR

A reduced propensity of the government to support systemically important banks could result in a downgrade in the assigned SRs and SRFs, but we view this to be unlikely in the medium term. A change in the sovereign ratings could also lead to a change in these ratings.

SUBORDINATED DEBT

The assigned subordinated debt ratings will move in tandem with the banks' National Long-Term Ratings.

(Colombo/July 08, 2015)

Sri Lankan shares close at 3-month low

Sri Lankan shares closed at their lowest in three months, pulled down by market heavyweight John Keells Holdings Plc, as political uncertainty ahead of the Aug. 17 parliamentary elections weighed on investor sentiment.

The main stock index ended 0.63 percent weaker at 6,923.79, its lowest close since April 10 and the biggest single-day loss since June 3.

The day's turnover stood at 518 million rupees ($3.88 million), less than half of this year's daily average of 1.06 billion rupees.

"The market continues to come down with political uncertainty. What is happening is that not many investors are doing anything. That is why we see low turnover with continued foreign selling," said Dimantha Mathew, a research manager at First Capital Equities (Pvt) Ltd.

Shares in John Keells Holdings fell 2.67 percent, while Sri Lanka Telecom Plc fell 2.91 percent, dragging down the overall index.

President Maithripala Sirisena dissolved parliament on June 26 and scheduled elections for Aug. 17, in an effort to consolidate power and push through political reforms.

The market saw net foreign outflow of 2.57 million rupees on Wednesday, extending the net outflow for the past 30 sessions to 4.85 billion rupees.

However, foreign investors have been net buyers of 1.09 billion rupees worth of shares so far this year.

($1 = 133.6000 Sri Lankan rupees) 

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

Sri Lanka 3 and 6-month Treasuries yields rise at auction

ECONOMYNEXT – Sri Lanka's 3-month Treasury Bill yield rose 03 basis points to 6.14 percent and the 6-month yield rose 05 bps to 6.26 percent at Tuesday's auction, data from the state debt office showed.

The 12-month yield remained steady at 6.28 percent with 802 million rupees of bills sold after the debt office got bids for 13 billion rupees.

The debt office said it sold 12,918 million rupees of 3-month bills after getting bids for 37,428 million rupees, and sold 10,623 million rupees of 6-month bills after getting bids for 25,780 million rupees.

RPCs shed light on crop development in estates

Further to recent articles on the status of estates held by Regional Plantation Companies (RPCs), drawing parallels to the situation on estates post nationalization and later privatisation and with particular reference to crop development, the Planters’ Association of Ceylon clarifies and wishes to correct the narrative.

The Association points out those misleading statements are being made by ex-planters themselves, not realizing the overall detriment that these statements are causing the future well-being of the industry.

Situation of Plantations pre-privatisation and rationale for divestiture

In 1972 just prior to takeover and nationalization of plantations, British companies owned 26.5% (158,147 acres), Ceylonese companies owned 25.6% (150,889 acres), Ceylonese individuals owned 25.5% (152, 468 acres), Non-Ceylonese individuals owned 1.8% ( 10,856 acres), State owned 2.3% (13,350 acres) and the Smallholders owned 18.3% ( 107,667 acres). After takeover of plantations, Janatha Estates Development Board (JEDB) and Sri Lanka State Plantations Corporations (SLSPC) along with Up Country Development (Usa Wasama) and Youth Development (Jana Wasama) managed these lands of almost 130,000 Hectares of Tea, 64,000 Hectares of Rubber and 22,000 Hectares of Coconut.

They also controlled more than 400 tea and rubber factories and provided employment to nearly 450,000 workers or nearly 8% of the total workforce in the country.

The complex structure of plantation management and the smooth flow of products did not survive the bureaucratization, management musical chairs and base political interference in the estates.

Although there were very competent, professional and capable planters and administrators in the system they were stymied by the prevailing conditions, political interference, bureaucratic lockdowns and the centralization of management that nationalization inevitably brought.

According to the State Ministry of Plantation Industries, in the late 1980s, many Government Officials believed that the efficiency of the Estates could not be achieved under Public Sector Management and estates should be returned to the private sector.

The two Corporations continued to make heavy losses and except for a few profitable years, the management under JEDB and SLSPC put a burden on the government. The two Corporations performed poorly throughout most of their existence and relied heavily on government assistance to off-set mounting operational losses which had increased to about Rs. 1.5 billion per annum for both Corporations by 1992.

A cabinet appointed high level committee, led by Neville Piyadigama, confirmed in a report that the Treasury had to subsidize almost Rs. 400 million every month to the government plantations for their operational activities.

In 1992, the estates managed by the JEDB and SLSPC were converted in to 23 Regional Plantation Companies (RPCs) under the Companies Act No 17 in a random method and not taking into account if the plantations were viable or not. Most of them were badly managed which compelled the government to privatize and delegate the burden of managing the estates by divesting them to the private sector management.

The findings of the Government Task Force given in the Report issued in 1990/1991 are that “the JEDB/SLSPC were facing a financial crisis in spite of the huge government subsidies to the Corporations, wherein almost Rs. 4,000 million in debt had been converted in to equity in the late 1990. In spite of this, the debt of the JEDB/SLSPC at the time of the final report, was approximately Rs. 3,300 million” (source Dr. Romesh Dias Bandaranaike, CEO, Plantation Restructuring Unit of the Ministry of Finance).

Crop development by RPCs since privatisation

The ‘Indenture of Lease’ which RPCs signed when they took on management of plantations did not stipulate a mandatory replanting quantam per annum.

In fact a replanting clause is not a condition as mentioned in the lease contract signed by the government of Sri Lanka and the RPCs in 1992.

A three per cent replanting rate was a suggestion as result of a discussion with the TRI, RPCs and the Golden Share Holders in 2012 at which TRI was not confident and admitted so, that given the current costs and expected returns, a replanting exercise was not economical and has no justification as an economic investment activity.

Notwithstanding limitations, constraints and difficulties over the years, RPCs have replanted their required extent very judiciously according to the estate and situation specific requirements of each individual Estate and company.

Following graph shows the extent of replanting undertaken by RPCs versus smallholders. It is a well known fact that RPCs manage not only tea plantations but rubber and oil palm as well. In the last 12 years from 2000 to 2012, RPCs have planted 48,086 hectares of rubber which is 98% of the total existing Rubber extent of both immature and mature rubber.

Furthermore, close to 20,000 hectares of commercial fuel wood has been planted apart from 7,000 hectare of oil palm along with additional large hectarage of cinnamon, coconut, coffee, fruit, dendro thermal trees, community forestry plots, ornamental trees, valuable timber and other useful tree crops.

RPCs have to be commended for their strategic effort in maximizing output from unyielding land.

Table below shows a macro view of the RPC performance from 1992 to 2014. The crisis related to the industry is one that originates from low prices at the auctions with the same ratio of tea price ratio versus daily labour wages, maintained as at 1992, the High Grown Sale Average in Colombo should be in the region of Rs. 660 per kilo.

The Government in realizing the gap has guaranteed a price of Rs. 80 per kilo of green leaf to the Smallholder to cover his cost of cultivation and accordingly the breakeven Gross Sale Average should be at least Rs 547 per kilo of tea.

Likewise the Government has granted a guaranteed price of Rs. 350 for a kilo of RR1 Sheet Rubber only for the Smallholder again, totally ignoring the key growers within the RPCs.

By discriminating the RPCs, government has failed to realize the dependency of almost 1 million resident populations on the plantation company’s survival.

Despite efforts of the Planters’ Association to bring this anomaly to the relevant authorities and political powers, there has been no response so far.

The Planters’ Association further wishes to highlight that despite having only 59% of the workers and 82% of the crop bearing extent compared with the time of privatization in 1992, RPCs increased crop production in 2014 by 12% in comparison with 1992, clearly demonstrating greater efficiency and commitment to best practices including good agricultural policy on the part of the RPCs.



www.dailynews.lk

Lanka Ashok Leyland (LAL) posts Rs 332 m net profit for 2014/15

Lanka Ashok Leyland (LAL) recorded an impressive Rs 8.2b revenue driven by demand for new vehicles.

This 18% increase in revenue over 2014 led to a 33% increase in gross profit which stood at Rs 919.9m, Lanka Ashok Leyland, Chief Executive Officer Umesh Gautam said in the company’s annual report for 2014-15.

Lanka Ashok Leyland was able to post a net profit after tax of Rs 332 m, a 102% increase from 2014’s net profit of Rs164.6mn.

The gross profit margin fell marginally to 9% from 10% last year as a result of an increased buildup of inventory in the last quarter of the year.Operational expenses remained flat at Rs 303.8m while an impairment charge of Rs 64.9m was recognized during the year resulting in a profit before interest and tax of Rs 701.3mn, an 8% increase year on year.

One of the key improvements this year has been the 74% reduction in finance expense which stood at Rs 87mn from Rs 332.7mn a year earlier.

While low interest rates prevailed during the financial year, this significant improvement is a culmination of the management’s efforts over the last few years to deleverage our balance sheet which has been a success by any measure.

As of 31st March 2015, our inventory has grown 25% to Rs 3.4 b while our borrowing has increased by a mere 4% to Rs 2.2 bn demonstrating the purposeful decoupling that management has pursued.
www.dailynews.lk