HNB Group bullish on Asia and Africa

Colombo Stock Exchange (CSE) Chairman Vajira Kulatilaka; Mithila Mendis - CEO of thinkCube; CSE CEO Rajeeva Bandaranaike and Head of Market Development at CSE Niroshan Wijesundere at Thursday’s launch of the CSE Educational Portal.

The HNB Group has set its sight on regional expansion with Asia and Africa on its radar, a top official says. ”Last year we lent US $50 million ( to a certain company) in Cambodia, to show that intent. Similarly we gave $5 million to the energy sector in Africa,” Jonathan Alles, Managing Director/CEO HNB told the Business Times. He said that last year large equity investments were also done in Asia and Africa. HNB group which recorded a pre-tax profit of Rs. 16.2 billion and a post tax profit of Rs. 11 billion for the year ended 31st December 2015 is also upbeat about the trip to China early last month with the Central Bank (CB) Governor Arjuna Mahendran.

“It was an extremely useful trip. The fact that global giants are interested in Sri Lanka and want to partner with local banks at an infrastructure lending level is phenomenal,” Mr. Alles said, adding that he’s due to meet a major Chinese bank in Colombo. HNB Bank posted a profit before tax of Rs. 15 billion and a profit after tax (PAT) of Rs. 10.4 billion for the same period. This is the first time the bank surpassed the Rs. 10 billion landmark in PAT, driven by a more than 25per cent growth in both advances and deposits. Both Advances and deposits of the bank increased by over Rs. 100 billion, once again the highest in the bank’s history whilst the NPA ratio improved to 2.43 per cent, the lowest in the past few decades.

It is significant that this NPA was achieved whilst attaining a loan growth of 20 per cent, the bank said in a media release. The growth in advances was propelled by a 30 per cent growth in Corporate Banking, 25 per cent growth in SME, 65 per cent growth in leasing and a 67 per cent growth in personal loans, the release said, adding that the bank’s CASA ratio also remained strong at 42 per cent, despite the shift witnessed from low cost deposits towards higher yielding fixed deposits during the year. “The bank’s commission income for 2015 grew by 18.4 per cent to Rs. 5.8 billion with major contributions coming from merchant acquisitions, guarantees and trade business.

Fee income generated from electronic channels witnessed significant growth during 2015,” it said adding that free income grew by 23.1per cent with the commission income from HNB Grameen and Acuity contributing significantly and complimenting the performance of the bank on commission income. It said that during the year 2014, the bank realised a capital gain of Rs. 889 million on account of the sale of shares held in Visa and MasterCard. “The absence of any realised capital gains from equity investments in 2015, resulted in lower net gain from financial investments for the period under review,” it said, adding that the volatility of exchange rates during the year and the significant depreciation of the Rupee, aided the bank to record substantial growth in exchange income.”

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Lion Brewery restructuring certain processes to combat profitability drop

The Lion Brewery Ceylon PLC (Lion Brewery) has restructured certain processes in the company to combat its dent on profitability in the wake of harsh taxation, officials say. ”We have re-thought certain things in the company and we won’t return to the same levels of profitability as in the month of September 2015, but it’ll be better than in December,” Suresh Shah CEO Lion Brewery told the Business Times. He said that in the first week of October during 3QFY15, the tax on mild beer was increased by 27 per cent and that of strong beer by 32 per cent. “In the third week of November strong beer taxes were increased by a further 29 per cent.

A relatively small reduction in the tax on mild beer was announced in November but was quickly reversed within a few days. Thus taken together, within a period of two months, the excise tax on strong beer was increased by 70 per cent whilst that of mild beer was increased by 27 per cent and arrack tax by 24 per cent.” These tax increases were ostensibly to increase Government revenue, but that wasn’t to be. Beer tax, which stood at Rs. 2.2 billion in September 2015 was down 18 per cent to Rs 1.8 billion by December 2015, the first full month after the double tax increase on the industry, he said.

In the same month, when consumers first felt the full impact of the double tax increase, the company experienced a significant drop in the both volumes and profits. Thus policy makers at the Finance Ministry have successfully deprived the Government of revenue and undermined corporate and shareholder value of a public quoted company with – literally – two strokes of the pen, he has said in a statement on the company’s results. “But that is not all. The volume lost by the beer industry has been picked up by the toddy and arrack sectors.

Toddy is thought of as a poor man’s drink which comes from coconut sap. It is certainly cheap since it is taxed at a mere Rs. 30 per litre (strong beer which has approximately the same alcohol content attract a tax of Rs. 315 a litre whilst mild beer with a lower alcohol content is taxed at Rs. 190 per litre). However, the extent of coconut sap in commercially available bottled toddy is anybody’s guess. Available information suggests that this so called toddy is made mostly of a chemical cocktail.”

The recent tax increase on beer has pushed a significant segment of consumers into a product that is unhygienic and into an industry that may not necessarily pay its taxes. Arrack is the other sector that has gained from the beer industry’s loss, the Lion Brewery CEO has charged in his annual statement. He has said that in Sri Lanka the tax per mililitre of alcohol is inversely proportionate to the alcohol content in the beverage. Thus in per ml of alcohol terms, mild beer attracts a higher tax than strong beer which in turn attracts a higher tax than arrack. In this modern day and age this is a shocking policy anomaly.

On both occasions referred to earlier the Ministry of Finance was briefed on the multiple concerns pertaining to the toddy industry, but nothing happened. The recent excise duty amendments have led to greater consumption of products which are either unhygienic or of a higher alcohol content, has enhanced returns in two sectors where tax evasion is perceived to be widely prevalent, has reduced government revenue and has destroyed value in the beer sector. “Thus in one swoop, consumer health, government revenue and industry profitability have all been compromised.”

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Sunshine Holdings keen on its own pharma plant but unclear policies in the way

Sunshine Holdings PLC (Sunshine) is in the process of evaluating the setting up its own pharmaceutical manufacturing plant, but is treading carefully as state policies are still unclear, a top official says. ”We haven’t made a concrete plan as the policies such as the buy-back agreements aren’t clear,” Vish Govindasamy, Chairman Sunshine told the Business Times. The newly-formulated National Medicinal Drug Regulatory Authority Bill contains provisions encouraging local manufacturers to start their plants, but details and nitty-gritty on this proposal are yet to be announced.

Sunshine is aggressive on its retail rollout and expansion of retail footprint is on the cards. “We want to open 26 more stores by FY18 and the emphasis is on growing high margins in Wellness and Beauty segments while focusing on superior customer service,” the chairman said.
“In Healthcare, we want to continue the growth momentum and there’ll be new agencies launched along with one new retail outlet.” In their FMCG segment, the company wants to expand distribution and do a product portfolio rationalisation.

During the quarter Healthcare overtook agriculture to become the largest contributor to group top line with a contribution of 43 per cent against 38 per cent, previously. On the other hand, palm oil segment which is the largest contributor to Sunshine’s bottomline saw margins contracting to 42 per cent from 52 per cent as a result of a dip in palm oil prices. In the Packaging business, Sunshine wants to focus on new export orders and there’s a strong order book with high plant utilisation for 4Q, he said.

There’re two new plants under construction in the energy sector bringing their total capacity to 7.2 Mega Watts. The tea segment which made net losses in Q1 FY 16 and Q2 FY 16 managed to record an Earnings Before Interest and Taxes (EBIT) of Rs. 62 million during Q3 FY 16. Cutting down on output and focusing on improving quality assisted this segment to turn around as a profit generator during the period, analysts said.

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Stock market to bring in more portfolio cash in the wake of ratings downgrades

By Duruthu Edirimuni Chandrasekera

On the back of country downgrades by Fitch Ratings, capital market stakeholders are gearing to carry out aggressive country promotions starting with Sri Lanka Investment Summit – Uncovering Opportunities in Asia’s Rising Gem’ on 15 March in Singapore, inustry experts said. Vajira Kulatilleke, Chairman Colombo Stock Exchange (CSE) told the Business Times that this ratings downgrade is a wake-up call to the industry and that it’s time to make the most of it. “With such ratings, the currency depreciation will follow which will strengthen the US Dollar and this (is) actually good for firms which export,” he said.

“So, for them this it’s an opportunity, but we must enhance exports as that base is still small,” he said. He added that it’s important at this juncture to attract more FDI. “This is what we should be focusing on.” Fitch Ratings downgraded Sri Lanka’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to ‘B+’ from ‘BB- reflecting increased refinancing risks on account of high upcoming external debt maturities, deterioration in Sri Lanka’s fiscal finances, depleting foreign-exchange reserves, and foreign-currency debt portion remaining high.

Rajeeva Bandaranaike, CEO CSE told the Business Times that the market has gone through worse times and that this is the time to engage in discussions with prospective investors to bring in funds. “We are geared up for this (Singapore) forum and we have plans for a few more in the coming months,” he said.

A top official of a conglomerate reminisced that the country has been through worse downgrades earlier, and it’s time to take stock of this situation. He said that most corporates will adopt a wait-and-see stance at this juncture. Jonathan Alles, Managing Director/CEO HNB told the Business Times that while these downgrades can be challenging, the bank will tour Singapore and Thailand to meet with prospective investors and will showcase the country along with HNB’s track record to them. “In April we’re off to New York,” he said. He added that the country requires external liquidity support from the IMF and other multilateral institutions. “If the IMF and the ADB which is due to come this week makes a firm commitment, we can get out of this situation in a shorter time.” Stockbrokers are also gearing to carry out their roadshows/ visits to their existing clients and prospective ones more aggressively. They said that meetings planned for this year will be dealt with more aggression and force. ”We need to get out of this rut,” a broker said

Rating downgrade increases risk to lenders to Sri Lanka

Sri Lanka’s ability to borrow from the international market over the short and long term will be greatly affected on account of worsening public spending and widening current account deficit, officials and economic experts said. The Fitch downgrading of the Sri Lankan sovereign to ‘B+’ from ‘BB-’ and assigned a Negative Outlook on 29 February 2016 will exert an impact on the country’s sovereign guarantee when seeking foreign borrowings, a senior government official who wished to remain anonymous told the Business Times.

Sri Lanka is also grappling with a wide current account deficit due to lowering in exports and a capital-intensive import bill following increased focus on infrastructure development in the country, he pointed out. If one consider the cumulative profits expatriated by the existing Board of Investment (BOI) companies and deduct them from the Foreign Direct Investment (FDI), the total FDI contribution of the BOI will be a “minus”figure, he said. As the total agreements signed this year to date is approximately US$35 million, then the real number can be even “minus $100 million” leave alone the cost of sustaining the BOI which can further run into millions more.

According to Fitch rating, Sri Lanka’s FDI remains below comparing the other countries in the region and this has resulted in an “unfavourable funding mix including short-term capital and debt financing, he added. Sri Lanka’s vulnerability to a shift in investor sentiment was evident when investors sold-off the equivalent of nearly US$ 2billion in local-currency government securities in 2015. A further outflow from treasury bills and treasury bonds, which account for about 31 percent of the country’s foreign reserves, could put more pressure on reserves.

Well-known economist Professor Sunimal Abeyratne of Colombo University told the Business Times, that the country should tackle present economic issues including the balance of payment weakening. He pointed out that Fitch ratings down grading will exert an impact on Sri Lanka’s businesses but the country could be able to overcome the present situation. Sri Lanka has faced a similar situation in 2009 where it was able to manage the economy through the IMF bailout package, he said adding that the then government had also borrowed from China for infrastructure and other development projects.

The country has bounced back from the 2009 economic situation with IMF assistance and similarly talks are under way with the IMF programme of assistance this time as well, he said. He expressed the belief that Sri Lanka will be able to get IMF support once again to gain a considerable economic growth with tight monetary and fiscal policy. Despite Fitch’s forecasts, the country can expect the economy to stabilise, growing up to a certain extent in 2016, and rising in 2017 with the renewal of EU GSP plus facility and support of the IMF and other foreign agencies like World Bank, the ADB etc, he said.

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Janashakthi eager for more purchases in general insurance

Hot on the heels of acquiring AIA General Insurance Lanka Ltd, Janashakthi Insurance PLC (Janashakthi) which reported a consolidated Gross Written Premium (GWP) of Rs. 10.664 billion for the year ended 31st December 2015 will take up similar opportunities like the AIA acquisition. Officials said that if such an opportunity presents itself to them they’ll certainly grab it. ”We’re open for more consolidation in this business,” Prakash Schaffter, Managing Director Janashakthi Insurance PLC told the Business Times. The insurer posted a Profit Before Tax (PBT) of Rs. 1,024 million for the period under review.

According to a media statement the company’s life insurance business recorded a Gross Written Premium of Rs. 2.550 billion. “This Year on Year (YoY) growth of close to 18 per cent was a result of changes made to the life sale and distribution structure and the basis for commission payments during FY2014. The non-life business achieved a Gross Written Premium of Rs. 8.113 billion, a YoY increase of over 19 per cent. Propelled largely by the growth witnessed in its motor insurance business, this further validates Janashakthi’s position as the insurer of choice amongst motorists.” It said that, Janashakthi disbursed in excess of Rs. 5 billion as claims through the year.

“The Company’s balance sheet grew by almost 52 per cent in FY2015 to Rs. 31.694 billion, with investments of Rs. 22.346 billion accounting for 71 per cent of assets. A reflection of its strong fundamentals and commitment to stakeholders, Janashakthi’s Life Fund grew by about 20 per cent to Rs. 8.782 billion during this period.” Janashakthi acquired a 100 per cent stake in AIA General Insurance Lanka Ltd in October 2015. Janashakthi had also assigned the leasehold rights of its land on Staple Street, Colombo 2 to Sanken Contraction Ltd., for Rs. 1.93 billion the statement said. “Having received a 50 per cent advance of Rs. 965 million on 23rd December, 2015, the transaction, which is expected to be completed by 25th March, 2016 it will generate Rs. 940 million in profits for the company.”

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Guardian Capital bullish on IT start-ups

Guardian Capital Partners PLC (formerly Watapota Investments PLC), an investment fund under the Carsons umbrella, is in the process of looking at a couple of deals to deploy their Rs. 438 million cash and is bullish on the IT sector concentrated around early stage start- up companies.

“We made a commitment to invest a sum of Rs. 10 million in Kashmi Singapore Pte Ltd, based in Singapore, which developed and runs a Peer to Peer mobile payment solution with embedded social media functionality, which enables cash transfers between individuals and vendors through a mobile app.

The company is promoted by a group of young Sri Lankan entrepreneurs, operating out of Singapore and Sri Lanka,” the annual statement says. The company will initially launch the product in Singapore and then it hopes to expand into other ASEAN countries like Malaysia and Indonesia. The promoters were funded by ‘Turn 8′, which is an incubator based in Dubai, and ‘Startupbootcamp Fintech Singapore’, a financial innovation focused accelerator in Singapore, during the product development stage.

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Cargills to consolidate dairy business after merging dairy firm

Cargills (Ceylon) PLC (CCP) has plans to expand the product portfolio in its dairy business after acquiring the balance shares of subsidiary Kotmale Holdings PLC (KHP) and merge it with Cargills Quality Dairies (Pvt) Ltd, a wholly owned subsidiary in the group, according to a top official.

He said that this will create a unified entity focusing on carrying out the dairy operations of the group.

“We’ll acquire the shares in KHP held by shareholders who did not accept the voluntary offer (at a price of 62.50 per share). The remaining shares were acquired by CCP, and the applications for transfer of these shares outside the trading system are pending with the SEC,” he said. At the conclusion of this process, CCP will be the sole shareholder of KHP and will proceed to seek a de-listing of the shares from the official list of the Colombo Stock Exchange and subsequently merge the operations of KHP with Cargills Quality Dairies, he said.

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2 big Chinese Banks in fund talks with Com Bank

Commercial Bank (Commercial) which recorded a profit before tax of Rs. 17.144 billion for the 12 months ended December 31, 2015, is in discussion on funding assistance with two Chinese Banks, after it went on a delegation early last month with the Centra Bank (CB) Governor Arjuna Mahendran. ”They have requested for appointments to discuss on setting up funding lines for major development projects, etc,” the bank’s Managing Director/CEO Jegan Durairatnam told the Business Times.

In another development, the bank is ready to set-up the Commercial Bank of the Maldives next month, he said. “We own 55 per cent in this entity (now a joint venture) and Tree Top investment in the Maldives own the balance,” he added. In September 2015, the bank received regulatory approval for the establishment of a fully-fledged Tier II Bank in the Republic of Maldives. The bank also received license to operate a fully owned Money Transfer Operation in Italy recently.

Commercial saw a post-tax profit of Rs. 11.903 billion for 2015, a growth of 6.47per cent despite lower margins, reduced capital gains and higher tax commitments. The bank’s loan book increased by Rs. 102.684 billion or 25.33 per cent to Rs. 508.115 billion, a media statement said adding that this is the first time that the bank’s loan book achieved a net growth of more than Rs. 100 billion in a year. ”Total assets grew by a noteworthy Rs. 84.195 billion or 10.58 per cent over the 12 months to Rs. 879.805 billion at December 31, 2015. Deposits from customers increased by Rs. 94.740 billion at an average of Rs. 7.9 billion a month to Rs. 624.102 billion at the end of 2015, reflecting Year-on-Year growth of 17.90 per cent.”

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Kelani Cables to forge ahead with expansions into a new country each year

Kelani Cables PLC, a manufacturer and distributor of power and telecommunication cables and enamelled winding wires, is re-considering entering Australia with their products while also eyeing other countries to expand into, officials said. Earlier plans to venture into Australia didn’t work out, the company said. Last year the company went to Seychelles and this year Kelani Cables plans to start a fully fledged office in Bangladesh, they said. “We want to go into an additional country each year,” an official told the Business Times. He said this is in line with their long term strategy.

The new 277 perches land, adjoining their premises in Kelaniya is being developed to relocate the cutting and rewinding unit, central warehouse, etc and much needed cable drum storage yard, he said. “These initiatives will certainly improve our internal efforts to serve the customer better and reduce costs etc.” The gross profit in the company grew by 18.1 per cent over last year. Profit before tax recorded a growth of 43.3 per cent and the bottom line grew by 51.6 per cent. The company has recorded a sales turnover of Rs.6.2 billion the highest in the history of the company.

“Our Operational and Engineering team completely refurbished a Laying up line to manufacture Aerial Bundled Cables for the CEB. It was a very commendable effort by the Engineering and Technical staff to undertake such a task and they have demonstrated their capabilities and commitment to the company. Since then our capacity to manufacture ABC Cables has increased fourfold,” Chairman of the company Upali Madanayake Chairman has said in his annual statement.

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Pan Asia Bank concerned over rising interest

The Pan Asia Banking Corporation PLC (PABC) saw its post tax profit for the year ended December 31, 2015 (FY15) increasing by 151 per cent to surpass the key milestone of achieving a billion rupee profit, but has expressed concern over rising interest rates, offcials said. ”Rising interest rates and predictions on further hikes remain a concern,” an official told the Business Times. The bank closed the year with a post tax profit of Rs. 1.04 billion supported by the above average growth in gross loans and advances, higher margins and improved efficiency. The bank has grown its net loans and receivables by 40 per cent or Rs. 23.9 billion during the year to Rs. 84.2 billion, which is by far the highest growth in net loans and advances recorded by a licensed commercial bank in 2015, a media statement said.

Commenting on the results in 2015, the bank’s Director and Chief Executive Officer Dimantha Seneviratne was quoted as saying, “This performance reflects the immense potential of Pan Asia Bank and our contribution to the economy where we have disbursed our funds in to all sectors and regions in the country. Our Retail, SME and Corporate segments reached out to all areas of the country uplifting many industries and living standards of the people whilst creating financial inclusion”. In order to support its lending drive, the bank raised Rs. 4 billion in debentures at very competitive rates which was oversubscribed on the opening day itself the statement said.

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ODEL to delist?

Odel PLC, acquired by Softlogic Group a few years ago, is likely to be de-listed from the Colombo Stock Exchange (CSE), according to market sources.

As at December 31, 2015 Odel’s freefloat was at 6.3 per cent and the CSE’s minimum requirement to be on the second board is 10 per cent. Since the start of this year, Softlogic Retail has purchased Odel shares on several occasions. “On five occasions in January, Softlogic had bought 56,150 shares ranging from prices between Rs. 19 to Rs. 22. 

This was even after it had passed the minimum requirement. This is a strong conclusion that this company will be taken off the CSE,” an analyst said.

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Seylan in merger talks with NDB

By Duruthu Edirimuni Chandrasekera

If successful, it would be the third largest local private bank after Commercial and HNB

The National Development Bank (NDB) would hopefully be third time lucky in trying to find a bride. This time it has proposed to Seylan Bank and initiated discussions on a possible merger, officials involved in the process, said. NDB which holds 10 per cent stock in Seylan has initiated this discussion some months ago, according to them. “These are at very preliminary stages and we’d like to see where this goes,” an NDB official told the Business Times. While venturing into commercial banking only in the past few years after being a solid state-led development bank, its interest in Seylan lies with expanding retail and corporate trade sectors, analyst said.

If merged, this new entity will be the third largest bank behind Commercial Bank and HNB, industry analysts said. This will amount to the new entity possessing Rs 521 billion in assets and 8.8 per cent of loans and 7.5 per cent of deposits, analysts said. These discussions have come after the NDB, DFCC and DFCC Vardhana banks’ consolidation strategy, according to the 2013 Budget statement, was dropped two years ago. These talks fell through in the midst of the last regime’s efforts to create a large development bank.

An earlier effort by NDB in 2007 happened when it proposed a merger between them and the Commercial Bank but it didn’t materialise with the entire staff of the Commercial Bank, opposing the move as being not beneficial to the bank. Three trade unions representing the staff- Ceylon Bank Employees Union, the Association of Commercial Bank Executives and Staff Association of Commercial Bank opposed this. During the past regime, a Master Plan on the Consolidation of the Financial Sector was presented in January 2014 designed for the reforming of the institutions belonging banks and non-bank financial institutions (NBFIs), which together account for 65 per cent of the financial sector of the country.

But in the post-Rajapaksa era, a committee, headed by Dinesh Weerakkody examining proposed financial reforms in the banking sector appointed soon after the advent of the new regime said that, “Mergers to be carried out within a stipulated time frame as stipulated in the Central Bank (CB) master plan will have even less chance of succeeding and therefore should be avoided in the future. When banks consolidate voluntarily, they take the needed measures to protect their own interests and would not participate in any Merger or Acquisition unless it is driven to benefit all stakeholders.”

It also added that mergers should occur only among consenting parties and on a voluntary basis, subject to economically viable and sustainable criteria that encourage institutions to consolidate. While some analysts say that the small financial institutions are generally more exposed to internal and external shocks and tend to threaten the stability of the entire financial system of the country, Central Bank Governor Arjuna Mahendran disagrees. He told the Business Times that in terms of finance companies, better run are the smaller ones. ”The larger these entities are, the less they are able to merge. I am questioning mergers.” Those who proposed the banking sector consolidation say that when larger banks grow, it will be difficult for smaller banks to remain competitive, and therefore, small banks are encouraged to merge with strong partners.

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