Sri Lankan shares hit 2-mth closing low ahead of cbank rates decision

Reuters: Sri Lankan shares fell for a fourth straight session to hit a two-month closing low on Thursday as investors turned cautious ahead of a rate announcement by the central bank.

The central bank will announce June monetary policy rates at 1230 GMT on Friday and the market broadly expects rates to be left steady for a fourth straight month, although a possible rate hike is not ruled out.

A decision by Moody's to revise downwards Sri Lanka's outlook on its sovereign rating and a government proposal to reintroduce capital gains tax also weighed on investor sentiment, brokers said.

The benchmark Colombo stock index ended 0.35 percent lower, or down 22.74 points, at 6,398.06, its lowest close since April 25. The index has shed 1 percent so far this week.

"Market participation is very low as investors are taking a wait and see approach, especially with the Moody's downgrade, capital gains talks, high interest rates and how government will implement reforms to retain the IMF loan," said Yohan Samarakkody, head of research, SC Securities (Pvt) Ltd.

Sri Lanka's cabinet on June 15 approved a proposal to reintroduce the capital gains tax, especially on land sales.

Moody's Investors Service on Monday revised down 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.

Treasury bill yields rose between 1 and 3 basis points at a weekly auction on Wednesday. They have risen between 7 and 43 basis points since the central bank left the key policy rates steady on May 20.

Overseas funds offloaded 279 million rupees ($1.90 million) worth of equities on Thursday, extending the year to date net foreign outflow to 6.02 billion rupees worth of shares so far this year.

Turnover stood at 822.03 million rupees, more than this year's daily average of around 753.1 million rupees.

Shares in conglomerate John Keells Holdings Plc fell 1.20 percent, while Lanka ORIX Leasing Company Plc dropped 4.42 percent. ($1 = 146.9000 Sri Lankan rupees) (Reporting by Ranga Sirilal and Shihar Aneez; Editing by Biju Dwarakanath)

Fitch Downgrades NDB; Affirms 8 Sri Lanka Banks, Negative Outlook on DFCC, Sampath

Author LBO

(LBO) – Sri Lanka’s National Development Bank PLC’s (NDB) national long­ term rating has been downgraded to ‘A+(lka)’ from ‘AA­(lka)’, Fitch rating said in a statement.

The ratings on eight other Sri Lanka banks have been affirmed.

The outlooks have been revised on DFCC Bank PLC’s (DFCC) and Sampath Bank PLC’s (Sampath) national long­term ratings to negative, the agency said.

The full statement follows:
Fitch Ratings has downgraded National Development Bank PLC’s (NDB) National Long­Term Rating to ‘A+(lka)’ from ‘AA­(lka)’.

The ratings on eight other Sri Lanka banks have been affirmed.

The agency also revised the Outlook on DFCC Bank PLC’s (DFCC) and Sampath Bank PLC’s (Sampath) National Long­Term Ratings to Negative.

The Long­Term Issuer Default Ratings (IDRs) on National Savings Bank (NSB) and Bank of Ceylon (Bank of Ceylon) have been affirmed at ‘B+’ and their National Long­Term Ratings have been affirmed at ‘AAA(lka)’ and ‘AA+(lka)’, respectively.

The Outlooks on the IDRs of NSB and Bank of Ceylon have been maintained at Negative while the Outlooks on their National Long­Term Ratings have been maintained at Stable.

Fitch has also affirmed the National Long­Term Rating of People’s Bank (Sri Lanka) (People’s Bank) at ‘AA+(lka)’ with a Stable Outlook.

Furthermore, Fitch has affirmed the National Long­Term Rating of Commercial Bank of Ceylon PLC (CB) at ‘AA(lka)’, Hatton National Bank PLC (HNB) at ‘AA­(lka)’, and Seylan Bank PLC (Seylan) at ‘A­(lka)’.

DFCC’s Support Rating Floor (SRF) was revised to ‘B­’ from ‘B’. A full list of rating actions is included at the end of this rating action commentary.

KEY RATING DRIVERS IDRS, NATIONAL RATINGS AND SENIOR DEBT

The rating actions follow Fitch’s periodic review of the large banks peer group. Fitch downgraded its assessment of Sri Lankan banks’ operating environment to ‘b+’ from ‘bb­’ and assigned a negative outlook.

Fitch believes operating conditions have become more challenging ­ as signalled by the downgrade of the sovereign rating to ‘B+’ from ‘BB­’ in February 2016 ­ and expects increased volatility to add pressure on the banks’ credit metrics.

However, Fitch maintains a stable outlook for the Sri Lankan banking sector for 2016, as a material deterioration in the sector’s credit profile is not expected in the short-term.

Fitch believes the underlying operating conditions supporting sector performance are likely to remain intact and pressure on the economic environment is likely to be contained through tighter monetary policy.

The operating environment is a key rating driver for the Sri Lankan banking sector. It constrains the Viability Rating (VR) of some banks, as it is rare for a VR to be assigned significantly above the sovereign rating, however well banks score on other factors.

Banks With Long­Term Ratings Driven by Sovereign­Support The IDRs and National Long­Term Ratings of NSB and Bank of Ceylon, and the National Long­Term Rating of People’s Bank, reflect Fitch’s expectation of extraordinary support from the sovereign (B+/Negative).

Fitch believes state support for NSB 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 senior unsecured creditors to maintain confidence and systemic stability.

Fitch has not assigned a VR to NSB, as it is considered to be a policy bank. Fitch expects support for Bank of Ceylon and People’s Bank to stem from their high systemic importance, quasi­sovereign status, role as key lenders to the government and full state ownership.

The Negative Outlook on Bank of Ceylon’s and NSB’s IDRs reflect the Negative Outlook on the sovereign’s rating.

The Outlook on Bank of Ceylon’s, NSB’s and People’s Bank’s National Long­Term Ratings is Stable as their national ratings reflect the banks’ creditworthiness relative to the best credit in Sri Lanka. The ratings of Bank of Ceylon, NSB and People’s Bank are unlikely to be affected unless Fitch’s expectations of sovereign support change.

The US Dollar senior unsecured notes issued by NSB and Bank of Ceylon are rated at the same level as the banks’ Long­Term Foreign­Currency IDRs, as the notes rank equally with other senior unsecured obligations. The notes have a Recovery Rating of ‘RR4’.

Bank of Ceylon’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. Fitch considers state support as Bank of Ceylon’s primary rating driver, even though its VR is at the same level as its SRF.

The National Long­Term Rating of Seylan reflects Fitch’s expectation of state support due to its state shareholding, which came about in the aftermath of the bank’s crisis in December 2008, and higher share of banking sector deposits relative to some peers.

Seylan has a lower support­driven rating due to its smaller market share compared with larger peers. Fitch believes Seylan’s standalone financial strength has improved, reaching the same level as it support­driven rating.

Seylan’s senior debt is rated at the same level as its National Long­Term Rating, as the debentures rank equally with other senior unsecured obligations.

Banks With Long­Term Ratings Driven by Intrinsic Strength The downgrade of NDB’s National Long­Term Rating reflects the decline in its capitalisation alongside continued strong loan growth, and weaker profitability. Fitch’s expectation that the bank’s higher risk appetite could dilute the benefit of a capital infusion has been incorporated in the rating action.

NDB’s ratings reflect its satisfactory asset quality, weaker franchise and lower capitalisation relative to higherrated peers.

The Outlook on DFCC’s National Long­Term Rating has been revised to Negative to reflect weakening capital buffers that stem from weaker asset quality metrics, increased loan growth and below­average internal capital generation.

The Negative Outlook on DFCC’s IDR reflects Fitch’s approach of generally capping bank ratings at the sovereign rating level. This is because of the likely adverse impact on the bank’s credit profile from the sovereign’s deteriorating credit profile and increasing risks in the domestic operating environment. DFCC’s VR captures its developing commercial banking franchise and still high capitalisation.

Its weaker asset quality compared with better­rated peers weighs on its rating. DFCC’s US dollar notes are rated at the same level as its Long­Term Foreign­Currency IDR. The notes have a Recovery Rating of ‘RR4’. DFCC’s Sri Lanka rupee­denominated senior debt is rated at the same level as its National Long­Term Rating, as the debentures rank equally with other senior unsecured obligations.

Sampath’s Outlook has been revised to Negative as Fitch expects the bank’s capitalisation to worsen beyond previous expectations. Fitch does not believe Sampath can sustain its capitalisation purely through retained earnings. The bank’s ratings reflect its lower capitalisation and higher risk appetite relative to peers, which counterbalance its satisfactory asset quality and improving franchise.

The bank’s regulatory Tier 1 capital­adequacy ratio continued to deteriorate and stood at 7.6% by end­March 2016 (end­2015: 8%; end­2014: 9%). The National Long­Term Rating of CB reflects its measured risk appetite relative to peers, strong funding profile, solid domestic franchise and sound performance.

The ratings reflect Fitch’s expectation that its non­domestic operations will remain small. The National Long­Term Rating of HNB reflects its strong domestic franchise, satisfactory capitalisation and strong performance, counterbalanced by a higher risk appetite as seen through sustained high loan growth that has put pressure on its funding and liquidity profile. HNB’s senior debentures carry the same rating, as they rank equal with other unsecured obligations.

SUPPORT RATING AND SUPPORT RATING FLOOR

The SRs and SRFs of privately owned DFCC reflect its relative lower systemic importance, in Fitch’s view. The SR and SRFs of NSB and Bank of Ceylon reflect the state’s ability and propensity to provide support to the banks given their high importance to the government and high systemic importance.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

NDB’s, DFCC’s, Sampath’s, Bank of Ceylon’s, Seylan’s, CB’s and HNB’s old­style Basel II Sri Lanka rupee­denominated subordinated debt is rated one notch below their National Long­Term Ratings to reflect the subordination to senior unsecured creditors.

RATING SENSITIVITIES IDRS, NATIONAL RATINGS AND SENIOR DEBT
The banks’ credit profiles are sensitive to changes in the operating environment. Fitch may take negative rating action if the banks’ appetite for risk­taking and pressure on key credit metrics increases amid challenging operating conditions that raises capital impairment risks which are not counterbalanced through adequate capital buffers.

Fitch may take positive rating action if stronger risk management and higher capital buffers enhance the resilience of the banks’ balance sheets, but this is only likely to happen in the medium term. Banks With Long­Term Ratings Driven by Sovereign Support Any change in the sovereign rating or perception of state support to NSB, Bank of Ceylon and People’s Bank could result in a change in their SRFs.

Fitch may downgrade NSB’s National Long­Term Rating if there is a reduced expectation of state support through, for instance, the removal of preferential support, or a substantial change in its policy role or deviation from mandated core activities indicating its reduced importance to the government.

A downgrade of Bank of Ceylon’s IDRs will only result from a downgrade of its VR and SRF. Visible demonstration of preferential support for Bank of Ceylon and People’s Bank in the form of an explicit guarantee may be instrumental to an upgrade of their National Long­Term Ratings. NSB’s and Bank of Ceylon’s senior debt ratings are sensitive to changes in the banks’ Long­Term IDRs.

The Recovery Ratings of NSB and Bank of Ceylon are sensitive to Fitch’s assessment of potential recoveries for creditors in case of default or non­performance. Bank of Ceylon’s VR may come under pressure if there is a continued decline in capitalisation through a surge in lending or further decline in asset quality alongside high dividend payouts.

Further deterioration in the operating environment reflected in a decline in Bank of Ceylon’s key credit metrics could negatively affect its VR. A downgrade of Seylan’s rating could result from a reassessment of state support and a material reversal in recent improvements to its asset quality, together with a weakening financial profile.

In the absence of changes to Fitch’s support assessment, an upgrade of Seylan’s rating would be contingent on further improvements in its standalone profile through improved asset quality and provisioning, mainly stemming from recovery of legacy NPLs. Seylan should also maintain other credit metrics in line with higher­rated peers to warrant an upgrade.

Seylan’s senior debt ratings will move in tandem with its National Long­Term Rating. Banks with Long­Term Ratings Driven by Intrinsic Strength NDB’s National Long­Term Rating may be downgraded if the bank is not able to sustain its capitalisation at a level commensurate with its risk profile. Drivers for an upgrade are the quantum of a potential capital injection and its sensible deployment alongside the sustainability of a sufficient capital buffer to counterbalance weaknesses in NDB’s credit profile.

Fitch does not see upside potential for NDB’s ratings in the near term, as the bank is likely to face difficulty sustaining a capital buffer in line with higher­rated peers due to its higher risk appetite and operating environment­related risks. The Outlook on DFCC’s National Long­Term Rating may be revised to Stable if the bank can sustain capital buffers to sufficiently cushion its weaker asset quality amid higher operating environment­related risks and counterbalance its developing franchise relative to more established peers.

Fitch expects project finance to remain integral to the bank’s business and, as such, expects the bank to maintain higher capitalisation to offset the higher risk of this business. DFCC’s IDRs and National Long­Term Rating could be downgraded if there is a sustained deterioration in its capitalisation or further weakening of the operating environment. DFCC’s RR is sensitive to Fitch’s assessment of potential recoveries for creditors in case of default or non­performance.

A downgrade of Sampath’s National Long­Term Rating could result from a sustained decline in capitalisation, further increase in risk­taking or a sharp decline in asset quality. Fitch would revise Sampath’s Outlook to Stable if there is a capital infusion and the bank maintains sufficient capital buffers commensurate with its risk profile and operating environment­related risks. Enhanced resilience against a volatile operating environment could be positive for CB’s National LongTerm rating.

The bank’s 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 deviation from its measured risk appetite, both viewed by Fitch as key factors that differentiate CB from its lower ­rated peers, would be negative. An upgrade of HNB’s National Long ­Term Rating is contingent on the bank achieving sustained improvements in its financial profile, in particular in terms of its funding, and a moderation of its risk appetite. A rating downgrade could result from a significant increase in risk­ taking and operating environment­ related risks, unless sufficiently mitigated through capital and financial performance. Further weakening of HNB’s liquidity position could also negatively affect its rating.

SUPPORT RATING AND SUPPORT RATING FLOOR

Reduced propensity of the government to support systemically important banks could result in a downgrade in the assigned SRs and SRFs, but Fitch sees this to be unlikely in the medium­term. A change in the sovereign’s ratings could also lead to a change in the SRs and SRFs of the banks.

SUBORDINATED DEBT
Subordinated debt ratings will move in tandem with the banks’ National Long­Term Ratings.

FULL LIST OF RATING ACTIONS

The rating actions are as follows: National Development Bank PLC: National Long­Term Rating downgraded to ‘A+(lka)’ from ‘AA­(lka)’; Stable Outlook Basel II compliant subordinated debentures downgraded to ‘A(lka)’ from ‘A+(lka)’ DFCC Bank PLC: Long­Term Foreign­Currency IDR affirmed at ‘B+’; Negative Outlook Long­Term Local­Currency IDR affirmed at ‘B+’; Negative Outlook Short-term Foreign­Currency IDR affirmed at ‘B’ National Long­Term Rating affirmed at ‘AA­(lka)’; Outlook revised to Negative from Stable Viability Rating affirmed at ‘b+’ Support Rating affirmed at ‘4’ Support Rating Floor revised to ‘B­’ from ‘B’ US dollar senior, unsecured notes affirmed at ‘B+’; Recovery Rating at ‘RR4’ Sri Lanka rupee ­denominated senior unsecured debentures affirmed at ‘AA­(lka)’ Basel II compliant Sri Lanka rupee­denominated subordinated debentures affirmed at ‘A+(lka)’ Sampath Bank PLC: National Long-term Rating affirmed at ‘A+(lka)’; Outlook revised to Negative from Stable Basel II compliant outstanding subordinated debentures affirmed at ‘A(lka)’ National Savings Bank: Long­Term Foreign­Currency IDR affirmed at ‘B+’; Negative Outlook Long­Term Local Currency IDR affirmed at ‘B+’; Negative Outlook Short­ Term Foreign­ Currency IDR affirmed at ‘B’ National Long­ Term Rating affirmed at ‘AAA(lka)’; Stable Outlook Support Rating affirmed at ‘4’ Support Rating Floor affirmed at ‘B+’ US dollar senior unsecured notes affirmed at ‘B+’; Recovery Rating at ‘RR4’ Bank of Ceylon: Long­Term Foreign­ Currency IDR affirmed at ‘B+’; Negative Outlook Long­Term Local ­Currency IDR affirmed at ‘B+’; Negative Outlook Short­Term Foreign­Currency IDR affirmed at ‘B’ National Long­Term Rating affirmed at ‘AA+(lka)’; Stable Outlook Viability Rating affirmed at ‘b+’ Support Rating affirmed at ‘4’ Support Rating Floor affirmed at ‘B+’ US dollar senior unsecured notes affirmed at ‘B+’; Recovery Rating at ‘RR4’ Basel II compliant Sri Lanka rupee­ denominated subordinated debentures affirmed at ‘AA(lka)’ People’s Bank (Sri Lanka): National Long­Term Rating affirmed at ‘AA+(lka)’; Outlook Stable Seylan Bank PLC: National Long­Term Rating affirmed at ‘A­(lka)’; Stable Outlook Sri Lanka rupee­ denominated senior unsecured debentures affirmed at ‘A­(lka)’ Basel II compliant subordinated debentures affirmed at ‘BBB+(lka)’ Commercial Bank of Ceylon PLC: National Long­Term Rating affirmed at ‘AA(lka)’; Stable Outlook Basel II compliant outstanding subordinated debentures affirmed at ‘AA­(lka)’ Hatton National Bank PLC: National Long­Term Rating affirmed at ‘AA­(lka)’; Stable Outlook Sri Lanka rupee­ denominated senior unsecured debentures affirmed at ‘AA­(lka)’ Basel II compliant outstanding subordinated debentures affirmed at ‘A+(lka)’

Sri Lanka flood insurance claims top Rs15bn, re-insurance costs to rise

ECONOMYNEXT - Sri Lanka's insurance claims from a recent flood could be around 15.5 billion rupees, which was manageable but long term weather related risks are rising pushing up re-insurance premiums. Fitch, a rating agency said.

"Insurance claims arising from recent flooding in Sri Lanka are likely to be manageable for most local insurers due to low retention levels, but changing weather patterns raise long-term risks," Fitch Ratings said.

"The agency expects the sector's underwriting profitability to weaken in 2016, although this is unlikely to threaten most insurers' credit profiles."

Fitch expects record-high claims to worsen the combined ratio of non-life insurers in 2016, with higher reinsurance premiums raising future expense ratios.

Sri Lanka's general insurance have low retention ratios on non-motor insurance with two thirds of fire cover, which also includes flood being re-insured.

Local regulations require insurers to cede 30 percent of their reinsurance to the National Insurance Trust Fund, with the balance reinsured with the global reinsurers.

NITF has estimated claims to be around 15.5 billion rupees, from a recent floods.

Natural catastrophe losses, such as floods, are covered under reinsurance treaties and excess-of-loss reinsurance covers.

The full statement is reproduced below:

Insurers Cope with Sri Lanka Floods, But Risks Increasing
Fitch Ratings-Colombo/Hong Kong-22 June 2016:

Insurance claims arising from recent flooding in Sri Lanka are likely to be manageable for most local insurers due to low retention levels, but changing weather patterns raise long-term risks, says Fitch Ratings. The agency expects the sector's underwriting profitability to weaken in 2016, although this is unlikely to threaten most insurers' credit profiles.

A severe tropical storm in mid-May caused flooding and landslides in several parts of the country, with areas along the Kelani River in the western province, north-east of the capital, Colombo, among the worst affected.

National Insurance Trust Fund (NITF), the state-owned local reinsurer, estimates claims from the disaster of around LKR15.5bn (USD107m).

Fitch expects record-high claims to worsen the combined ratio of non-life insurers in 2016, with higher reinsurance premiums raising future expense ratios. In addition, lower profitability, stemming from higher claims, could affect capitalisation of some lower-capitalised insurers. Fitch says the credit profiles of rated entities, Sri Lanka Insurance Corporation Limited (AA(lka)/Stable), HNB General Insurance Limited (A(lka)/Stable) and Continental Insurance Lanka Limited (A-(lka)/Stable), are likely to remain intact despite these challenges.

Sri Lankan non-life insurers have low retention in the non-motor segment, with more than two thirds of the fire class, which typically covers flood-related policies, being reinsured. Fire class accounted for just 5% of total non-life net written premium in 2015. Local regulations require insurers to cede 30% of their reinsurance to NITF, with the balance reinsured with the global reinsurance market. Natural catastrophe losses, such as floods, are covered under reinsurance treaties and excess-of-loss reinsurance covers.

Fitch says the foods are likely to raise awareness and increase demand for non-life insurance. Sri Lanka's uninsured population is high, with non-life penetration at around 0.6% of GDP. The non-life insurance market is dominated by motor insurance (65% of gross written premiums in 2015). Motor is covered under excess-of-loss reinsurance covers in the event of natural catastrophe.

Changing weather patterns, leading to increased frequency and severity of errant rainfall, raise long-term risks and highlight the need for insurance and proper pricing of such risk, as well as robust flood defence mechanisms, Fitch says. In early April 2016, the government obtained its first natural disaster cover from NITF, insuring itself against LKR10bn, with the first claim coming just six weeks later from the May floods.

The Government of Sri Lanka Disaster Management Centre says the May floods, reportedly the worst in 25 years, affected over 300,000 people, leaving 203 dead or missing and over 5,000 houses damaged. Production and storage facilities of several large companies were damaged and business has been interrupted. According to NITF, a handful of large commercial claims are expected to account for over half of total claims.

Sri Lanka Govt. plans to increase cigarette tax to 90%

Health Minister Dr. Rajitha Senaratne yesterday outlined plans to bring in a new proposal to increase taxes of cigarettes to 90% of their purchase price, in what he described as an attempt to reduce smoking in the country.

Dr. Senaratne in his capacity as the Cabinet Spokesman told reporters that he would draft a Cabinet paper to increase taxes on cigarettes from the present 67%-72% to 90% of purchase price.

Such a move would likely result in tobacco companies increasing their prices as well.

“I feel very strong about this measure and feel that the people of Sri Lanka would benefit from such a step. All the money raised from these taxes will be directly used for public healthcare services,” he said.

The Health Minister also defended the increase of VAT on private healthcare, insisting that the Government plans to make all outpatient costs even at private hospitals free of VAT and revert to the previous system.

Responding to questions over inconsistent Government policies Dr. Senaratne insisted the ‘Yahapalanaya’ establishment was one that “listens to the people,” and called for more transparency in the Budget formulation process.

“The detailed clauses of the Budget are not presented to Cabinet members. We are simply given a policy outline. Ministers also hear the full Budget when it is presented in Parliament by the Finance Minister. This is why there are debates on the Budget before it is passed. But under the previous Government, the President was also the Finance Minister so the space for dissent was limited. In this Government there is space for discussion and change. That is how it should be,” he said.

In the first half of 2015 Ceylon Tobacco Company (CTC) contributed Rs. 43.7 billion to the Government as excise and other taxes. This is an increase of 18% in comparison to the same period last year and was primarily driven by an excise-led price increase experienced in October 2014 along with higher volumes during the first six months of 2015. The price increases announced ahead of the 2016 Budget was expected to deliver 10% more revenue to the Government.

Responding to questions the Cabinet Spokesman was also confident Prime Minister Ranil Wickremesinghe would stick to a statement made when he met civil society activities over the weekend to remove Central Bank Governor Arjuna Mahendran. 

www.ft.lk