Sri Lankan shares end lower on interest rate, foreign outflow worries

Reuters: Sri Lankan shares closed lower on Tuesday, slipping from a more than one-week high hit in the previous session, on concerns over rising interest rates and foreign fund outflows.

Treasury bill yields have risen between 16 and 36 basis points to near three-year highs in the last three weekly auctions through Wednesday despite the central bank leaving key policy rates steady for a third straight month on May 20.

Stockbrokers said a rise in interest rates could be detrimental to risky assets if they jumped beyond 12 percent. The average prime lending rate edged up 8 basis points to 10.23 percent in the week ended June 3.

Overseas funds have offloaded a net 5.76 billion rupees worth of equities so far this year, but they net bought 73.8 million rupees worth of shares on Tuesday.

The benchmark Colombo stock index ended 0.31 percent lower at 6,518.08, its lowest close since April 29 and slipping from its highest close since June 1 hit on Monday.

The index gained 0.17 percent last week, snapping a three-week losing streak.

Turnover stood at 825.4 million rupees ($5.70 million), the highest since May 27, and more than this year's daily average of around 772.1 million rupees.

Shares in Nestle Lanka Plc fell 1.40 percent, while Dialog Axiata Plc fell 1.82 percent. ($1 = 144.8000 Sri Lankan rupees) (Reporting by Ranga Sirilal and Shihar Aneez; Editing by Biju Dwarakanath)

Sri Lanka John Keells mulls more port investments

ECONOMYNEXT – Sri Lanka’s John Keells Group has said it's considering more investments in the ports business given government plans to build more cargo handling infrastructure.

The conglomerate has particularly indicated interest in the East Container Terminal (ECT) of Port of Colombo’s new South Harbour, for which the government has called for expressions of interest.

The ECT could complement operations of South Asia Gateway Terminals (SAGT), Colombo’s first privately operated container facility in which JKH has a big stake, the company told shareholders.

The new ECT is being built next to SAGT on its western side in the new harbour.

“The group will continue to evaluate opportunities in the transportation industry, particularly considering the government’s intent to promote private-public partnerships such as with the East Container Terminal (ECT) of the Port of Colombo,” JKH said in its annual report.

“The Group will look to leverage on this investment opportunity considering the overall prospects for the Port of Colombo and the ability for the ECT to cater to larger vessels, which will complement the operations of SAGT considering its back-to-back location that will facilitate operational efficiencies.”

JKH Chairman Susantha Ratnayake said that, although South Asia Gateway Terminals recorded a decline in volumes, as expected, due to continuous deployment of larger, more cost-effective vessels requiring a deep draft, overall volumes in the Port of Colombo continued to grow.

The new capacity was being absorbed rapidly with a total capacity utilisation close to 70 percent, he told shareholders.

“While this will result in future growth for SAGT, it also necessitates early development of the East Container Terminal, which is potentially a growth opportunity for our ports business,” Ratnayake said.

He noted that SAGT was ranked number one in South Asia and number four in the world for terminal productivity by the Journal of Commerce, USA, in September 2015.
(Colombo/June 13 2016)

Sri Lanka National Savings Bank 'B+/B' ratings confirmed

ECONOMYNEXT - S&P Global Ratings said it had confirmed its 'B+' long-term issuer credit rating on Sri Lanka’s National Savings Bank (NSB) with a negative outlook, and confirmed its 'B' short-term issuer credit rating.

At the same time, the rating agency confirmed the 'B+' long-term issuer rating on NSB's senior unsecured debt.

“We affirmed the rating on NSB because we equalise them with the sovereign credit rating on Sri Lanka (B+/Negative/B),” a statement said.

The full rating report follows:

SINGAPORE (S&P Global Ratings) June 10, 2016-- S&P Global Ratings said today that it had affirmed its 'B+' long-term issuer credit rating on National Savings Bank (NSB). The outlook is negative. We also affirmed our 'B' short-term issuer credit rating on the Sri Lanka-based bank. At the same time, we affirmed our 'B+' long-term issue ratings on NSB's senior unsecured debt.

We affirmed the ratings on NSB because we equalize them with the sovereign credit rating on Sri Lanka (B+/Negative/B).

The government fully owns NSB. We consider the bank to be a key public policy institution, benefiting from ongoing and potential extraordinary support from the government. This approach is based on our methodology of rating government-related entities. However, our rating on NSB incorporates no uplift because of this factor, given that the bank's 'b+' stand-alone credit profile (SACP) is already equal to the sovereign rating.

"We believe the Sri Lankan government is almost certain to provide extraordinary support to NSB, if needed," said S&P Global Ratings credit analyst Amit Pandey.

Our view is based on our assessment of the critical importance of NSB's policy role and its integral link with the government. This support is legalized through an act of parliament (the National Savings Bank Act), through which the bank was established in 1972.

NSB is integrally linked to the sovereign through the government's sole ownership. The government maintains full control over the bank's management by appointing its chairman and board of directors. It also exercises a high degree of control over the bank's strategic and budgetary decisions. The government guarantees all NSB's deposits and savings certificates.

In our opinion, the bank's critical role stems from its function as a pseudo-funding vehicle for the government. The National Savings Bank Act requires the bank to invest at least 60% of its deposits in government securities. Four entities of national significance in the savings movement were combined to form NSB. The bank's key objective is to mobilize retail savings to obtain a higher investment rate and sustain Sri Lanka's GDP growth.

NSB's SACP reflects the bank's challenging operating environment, very weak capitalization, and volatile earnings. NSB's satisfactory business position and robust funding and liquidity temper these weaknesses.

"The negative outlook on NSB reflects the outlook on the sovereign credit rating on Sri Lanka and our expectation that the bank's role for, and link to, the government will remain unchanged over the next few years," said Mr. Pandey.

We do not rate financial institutions in Sri Lanka above the sovereign because of the direct and indirect influence that the sovereign in distress would have on their operations, including their ability to service foreign-currency obligations.

In our view, the sovereign credit factors are relevant for NSB because: (1) the bank is subject to government policy and regulation; (2) it invests a sizable portion of its assets in government securities or credit; (3) a high proportion of its revenue comes from domestic operations that are susceptible to deterioration in macroeconomic environment typically associated with sovereign stress; and (4) it relies on the government to derive foreign currency to repay or hedge its foreign currency liabilities.

We could downgrade NSB if we lower the sovereign credit rating. We could lower our ratings on Sri Lanka in the next 12 months if we see no tangible signs of a substantial and sustained reversal of the weakening of external and fiscal credit metrics we currently project.

S&P confirms Sri Lankan DFCC Bank's 'B/B' ratings

ECONOMYNEXT - S&P Global Ratings said it had affirmed its 'B' long-term issuer credit rating on Sri Lanka’s DFCC Bank with a negative outlook, and confirmed its 'B' short-term issuer credit rating.

The rating agency said it also confirmed its 'B' long-term issue rating on DFCC's senior unsecured debt.

"We affirmed the rating because we expect DFCC to maintain its satisfactory business position and earnings over the next 12 months," said S&P Global Ratings credit analyst Amit Pandey in a statement.

The full statement follows:

SINGAPORE (S&P Global Ratings) June 10, 2016-- S&P Global Ratings said today that it had affirmed its 'B' long-term issuer credit rating on DFCC Bank. The outlook is negative. We also affirmed our 'B' short-term issuer credit rating on the Sri Lanka-based bank. We also affirmed our 'B' long-term issue ratings on DFCC's senior unsecured debt.

"We affirmed the ratings because we expect DFCC to maintain its satisfactory business position and earnings over the next 12 months," said S&P Global Ratings credit analyst Amit Pandey.

We consider it unlikely that DFCC would be immune to increasing sovereign credit pressures on Sri Lanka (B+/Negative/B) and the broader operating environment. We reflect these risks in our view that the economic risk trend and industry risk trend for Sri Lanka's banking sector have become negative.

DFCC's business position reflects the bank's satisfactory business stability, diversification, management, and strategy, compared with that of peers in emerging markets.

We expect DFCC's pre-diversification risk-adjusted capital (RAC) ratio to be 5%-5.5% for next 12-18 months. We estimate the bank's loan growth to be 13%-15% and dividend payout ratio to be about 35% over the next couple of years. We anticipate that the bank's net interest margin will improve marginally because the interest rate cycle in Sri Lanka has turned, with higher policy and market rates. At the same time, we forecast higher credit costs due to economic headwinds in Sri Lanka.

DFCC's risk position reflects the bank's higher exposure to the small and midsize and project finance sectors, which are susceptible to economic downturns and execution risks. The bank also has some single name concentration risk. However, we note that the bank has limited exposure to riskier segments, such as pawning, and has taken steps to improve risk management processes.

"Our negative outlook on DFCC reflects our view that the bank faces increasing risks stemming from Sri Lanka's weakening external and fiscal performance," said Mr. Pandey.

We could lower our ratings on DFCC if we downgrade Sri Lanka. We could lower our ratings on Sri Lanka in the next 12 months if we see no tangible signs of a substantial and sustained reversal of the weakening of external and fiscal credit metrics we currently project. In this scenario, we believe that the systemic risks facing Sri Lankan banks would also have increased. And consequently, we would expect to revise the assessment of the banking sector's anchor stand-alone credit profile to 'b+' from 'bb-', resulting in DFCC's downgrade.

We could also lower the ratings on DFCC if the bank's capitalization weakens, such that the pre-diversification RAC ratio falls below 5%, even if the systemic risks facing Sri Lanka's banking sector remain unchanged, in our view. DFCC's capitalization may deteriorate if the bank is not able to replenish its capital to support growth and dividend payouts or its profitability is weaker than our expectations.

We could revise the outlook on DFCC to stable if the risks to the sovereign credit ratings subside while DFCC maintains its pre-diversification RAC ratio above 5%.

Sri Lanka sells USD250mn one-year development bonds

(LBO) – The issue of Sri Lanka development bonds amounting to 200 million US dollars has been oversubscribed with over 516 million US dollars of bids received from investors.

The central bank has 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.

The Central Bank has received 67 million US dollars of bids for the two year floating rate bond among other small bids received for the auction.

The issue was open for subscription from 7 to 13 June and the Central Bank planned to issue 200 million US dollars development bonds with a tenor of 1 year, 2 years, 3 years and 5 years to local and foreign investors.

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

Senkadagala Finance’s Senior Debt rated ‘BBB+(lka)(EXP)’

Fitch Ratings has assigned Senkadagala Finance’s proposed issue of senior unsecured redeemable debentures of up to Rs 2 bn an expected National Long Term rating of ‘BBB+(lka)(EXP)’.

The debentures will have tenors of two to four years and carry fixed and floating coupons. The debentures are to be listed on the Colombo Stock Exchange and the company plans to use the proceeds to fund loan growth, diversify its funding mix and reduce structural maturity mismatches.

The final rating is subject to the receipt of final documentation conforming to information already received.

The proposed debentures are rated at the same level as SFC’s National LongTerm Rating as they will constitute direct, unconditional, unsecured and unsubordinated obligations of SFC.

SFC’s rating reflects the satisfactory credit profile that it has maintained through economic cycles, itsrelatively strong franchise amongst finance companies in Sri Lanka and access to longer-term institutional funding. These are counterbalanced by its deposit franchise and capitalisation, which are weaker compared with higher rated peers.

The rating on the proposed debentures will move in tandem with SFC’s National LongTerm Rating.
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