Sri Lankan shares steady at 1-month closing low

Reuters: Sri Lankan shares ended steady at their lowest close in a month on Wednesday as investors cautiously awaited directions from next month's national budget and a flurry of corporate results.

The benchmark index of the Colombo Stock Exchange ended 0.02 percent firmer at 6,444.39, hovering at its lowest close since Sept. 20 hit in the previous session.

"Everybody is waiting for the budget and (and to see) if the government will impose capital gain tax on equities," said Hussain Gani, deputy CEO at Softlogic Securities.

"Institutional investors are holding their positions (given their) experience of many surprises in the last year budget."

Stockbrokers said the market was also gradually factoring in political concerns after the head of Sri Lanka's anti-corruption body resigned on Monday, a few days after President Maithripala Sirisena implied that the agency was favouring the rival party of his prime minister.

This is likely to delay one of the promises of Sirisena's coalition government to eliminate corruption and implement rule of law, and might also hurt business confidence, analysts said.

Turnover stood at 483.4 million rupees ($3.29 million), less than this year's daily average of around 741 million rupees.

Foreign investors, who have sold a net 2.1 billion rupees worth of shares so far this year, bought a net 147 million rupees worth equities on Tuesday. Top conglomerate John Keells Holdings Plc ended 0.67 percent firmer.

Sri Lanka's quarterly earnings season started last week but the bulk of locally listed firms will not report until late October or early November.

($1 = 146.9000 Sri Lankan rupees)

(Reporting by Shihar Aneez; editing by Mark Heinrich)

Colombo Stock Exchange Market Review – 19th Oct 2016

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Colombo Stock Exchange Trade Summary 19-Oct-2016

Colombo bourse closed flat on Wednesday amid the increase in treasury yields after six weeks. All Share index advanced to 6,461 mark in the morning session but closed the day at 6,444.39 with a gain of 1.52 index points or 0.02% while 20-scrip S&P SL index advanced by 5.31 index points or 0.15% to end at 3,597.05. 

Price gains in high caps, John Keells Holdings (closed at LKR 151.00, +0.7%), Commercial Leasing & Finance (closed at LKR 3.80, +5.6%), Commercial Bank (closed at LKR 146.50, +0.4%) spearhead the gains but losses in Asian Hotels & Properties (closed at LKR 58.00, -2.2%) & Sri Lanka Telecom (closed at LKR 35.90, -0.8%) impacted the index performance. 

Daily market turnover was LKR 483mn in absence of negotiated transactions. John Keells Holdings was the top contributor to the turnover with LKR 141mn followed by Hatton National Bank non-voting (LKR 37mn), Central Finance (LKR 29mn) and ACL Cables (LKR 26mn). 

High investor activity was witnessed in Central Investments & Finance (CIFL), subsequent to the monetary board’s approval on the resolution mechanism for repayment of depositors of CIFL and two other finance companies. According to Central Bank, once the repayment plan is legally finalized companies will be dealt with through applicable laws for liquidation. Stock hit intra-day low of LKR 1.20 but managed to closed at LKR 1.40 (-6.7%) before the imposition of trading halt.

Scripts of Bairaha Farms inclined to LKR 192.00 (+1.2%) supported by favorable earnings (+81%Yoy) for the September quarter. Furthermore, LB Finance quarter profits increased by 20%YoY and stock closed with a gain of 0.9% at LKR 128.00. Ceylon Grain Elevators, Bogala Graphite and John Keells Holdings were among most traded counters.

Market breadth was negative where out of 200 scripts, 70 slipped, 51 advanced while 79 remained unchanged.

Foreign investors continued to remain on buy side for the seventh straight session with a net foreign inflow of LKR 147mn. Foreign participation was 36%. Net foreign inflows were seen in John Keells Holdings (LKR 126mn), ACL Cables (LKR 26mn), Commercial Bank (LKR 20mn) while net foreign outflow was mainly seen in Commercial Bank non-voting (LKR 18mn).

Meanwhile, at the treasury bill auction, three month rate increased by 5bps to 8.60% and six month rate advanced to 9.46% (+7bps). One year treasury yield improved by 8bps to 10.19%. CBSL received bids amounting to LKR 41.8bn and it was decided to accept LKR 4.2bn worth of Treasury bills.
Source: LSL

Commercial Bank’s Rs5bn debenture issue opens on Oct 24

(LBO) – Sri Lanka’s Commercial Bank of Ceylon second issue of debentures for 2016 is to open on 24th October, the bank said in a statement.

The Bank is seeking to raise 5 billion rupees with an option to increase it by a further 2 billion to strengthen its Tier II capital and to raise long term funds for expansion.

The Listed, Rated, Unsecured, Subordinated, Redeemable Debentures in the denomination of 100 rupees will be offered in two tenures – Type A with a five year tenure and Type B with a 10 year tenure, the Bank said.

The five-year debentures will carry a fixed interest rate of 12 percent p.a. (AER 12.36%) payable semi-annually, while the ten-year debenture will offer a fixed interest rate of 12.25 percent p.a. (AER 12.63%), also payable semi-annually.

The minimum subscription per application is 10,000 rupees or 100 debentures. Applications in excess of the minimum subscription should be in multiples of 10,000 rupees or 100 debentures.

The debentures are rated AA- (lka) by Fitch Ratings Lanka Limited. Commercial Bank’s National Long-Term Rating has been affirmed at AA (lka)/Stable by Fitch Ratings Lanka Limited. The Investment Banking Division of Commercial Bank of Ceylon PLC is the Manager to the Issue.

More details of the debenture issue can be obtained from the prospectus on the Bank’s website www.combank.lk and the CSE’s website www.cse.lk and are available at all stockbrokers.

The issue will close in 14 market days of its opening date unless oversubscribed before the closing date.

Sri Lanka’s Fitch rates Seylan Bank senior debt A-(lka)(EXP)

Fitch Ratings has assigned Seylan Bank PLC’s (A-(lka)/Stable) proposed senior debenture issue of up to LKR8bn a National Long-Term Rating of ‘A-(lka)(EXP)’.

The debentures will have tenors of three and four years and carry fixed and floating coupons. The debentures are to be listed on the Colombo Stock Exchange, and the bank plans to use the proceeds to fund loan growth, strengthen its funding mix, reduce structural maturity mismatches, and reduce its short-term borrowings.

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

KEY RATING DRIVERS

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

The National Long-Term Rating of Seylan Bank 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 a higher share of banking-sector deposits relative to some peers. Seylan Bank has a lower support-driven rating than its larger peers, due to its smaller market share. Fitch believes Seylan Bank’s standalone financial strength has improved, reaching the same level as it support-driven rating.

RATING SENSITIVITIES

Seylan Bank’s senior debt ratings will move in tandem with its National Long-Term Rating.

A downgrade of Seylan Bank’s rating could result from a reassessment of state support and a substantial 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 Bank’s rating would be contingent on further improvements in its standalone profile through improved asset quality and provisioning, stemming mainly from recovery of legacy NPLs.

An upgrade would also be contingent upon Seylan Bank maintaining other credit metrics in line with higher-rated peers.

Fitch rates DFCC Bank subordinate debentures final A+(lka)

Fitch Ratings has assigned DFCC Bank PLC’s (DFCC; AA-(lka)/Negative) Basel II-compliant subordinated debentures of up to LKR7bn a final National Long-Term Rating of ‘A+(lka)’.

The final rating is the same as the expected rating assigned on 27 September 2016 and follows the receipt of documents conforming to information already received.

The debentures, with tenors of five and seven years and carry fixed coupons, will be listed on the Colombo Stock Exchange. DFCC expects to use the proceeds to strengthen its Tier II capital base and manage maturity mismatches.

KEY RATING DRIVERS

The subordinated debentures are rated one notch below DFCC’s National Long-Term Rating to reflect the subordination to senior unsecured debt.

DFCC’s rating captures its developing commercial banking franchise and still-high capitalisation. Its weaker asset-quality compared with better-rated peers weighs on its rating. The Negative Outlook on DFCC’s National Long-Term Rating reflects weakening capital buffers that stem from weaker asset-quality metrics, increased loan growth and below-average internal capital generation.

RATING SENSITIVITIES
The ratings on the debentures will move in tandem with DFCC’s National Long-Term Rating.

Sri Lanka’s HNB to raise Rs6bn from listed debenture

(LBO) – Sri Lanka’s Hatton National Bank is to raise 6.0 billion rupees from a listed debenture issue, the bank said in a stock exchange filing.

The bank has decided to issue rated, subordinated, unsecured, redeemable debentures worth 5.0 billion rupees with an option to go up to 6.0 billion rupees.

NDB Investment Bank will be managing the debt issue while Acuity Partners will be co-managing the issue.

Date of opening of the subscription list is 25th October 2016.

Chevron Sri Lanka unit Sept net up 20-pct

ECONOMYNEXT - Chevron Lubricants Lanka’s September 2016 quarter net profit rose 20 percent to just over a billion rupees from a year ago, helped by lower base oil prices and increased consumption owing to a surge in vehicle imports.

Sales rose 8 percent to Rs3.2 billion, with the cost of sales rising at a slower rate, according to interim accounts filed with the stock exchange.

The accounts showed lower distribution costs and administrative expenses during the September 2016 quarter.

Earnings per share for the quarter rose to Rs4.17 from Rs3.48 the year before.

In the nine months to 30 September 2016, EPS rose to Rs11.82 from Rs9.89 a year ago.

The company has said it has benefitted from lower base oil prices and increased consumption owing to the sharp increase in vehicle imports.

Sri Lanka Fitch gives HNB's debt Final 'A+(lka)' rating

ECONOMYNEXT - Fitch Ratings Lanka said it has given Hatton National Bank's (HNB) proposed Basel II-compliant subordinated debentures of up to Rs6 billion a final National Long-Term Rating of 'A+(lka)'.

The debentures, which will have tenors of five and seven years, and carry fixed coupons, will be listed on the Colombo Stock Exchange. HNB expects to use the proceeds to strengthen its Tier II capital base, a statement said.

The proposed subordinated debentures are rated one notch below HNB's National Long-Term Rating to reflect the subordination to senior unsecured debt.

“HNB's National Long-Term Rating reflects its strong domestic franchise, satisfactory capitalisation and strong performance, which are counterbalanced by a higher risk appetite as seen in the sustained high loan growth that has put pressure on its funding and liquidity profile,” Fitch said.

The ratings on the debentures will move in tandem with HNB's National Long-Term Rating.

Sri Lanka Fitch downgrades PABC, confirms ratings of 04 small, mid-size banks

ECONOMYNEXT - Fitch Ratings Lanka has downgraded Pan Asia Banking Corporation's (PABC) National Long-Term Rating to 'BBB-(lka)' from 'BBB(lka)', saying above-industry loan growth had weakened its capitalisation.

The Outlook on PABC was revised to Stable from Negative, the rating agency said in a statement after Fitch's periodic review of Sri Lanka's small and mid-sized bank peer group.

The agency has also revised the Outlook on the National Long-Term Rating of Union Bank of Colombo (UB) to Positive from Stable, and affirmed its rating at 'BB+(lka)'.

The National Long-Term Ratings on Nations Trust Bank PLC (NTB), SANASA Development Bank PLC (SDB) and Amana Bank PLC (Amana) have been affirmed with a Stable Outlook.

The full report follows:

Fitch Ratings-Colombo-17 October 2016: Fitch Ratings Lanka has downgraded Pan Asia Banking Corporation PLC's (PABC) National Long-Term Rating to 'BBB-(lka)' from 'BBB(lka)'. The Outlook is revised to Stable from Negative. The agency has also revised the Outlook on the National Long-Term Rating of Union Bank of Colombo PLC (UB) to Positive from Stable, and affirmed its rating at 'BB+(lka)'. The National Long-Term Ratings on Nations Trust Bank PLC (NTB), SANASA Development Bank PLC (SDB) and Amana Bank PLC (Amana) have been affirmed with a Stable Outlook. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

NATIONAL RATINGS AND SENIOR DEBT

The rating actions follow Fitch's periodic review of Sri Lanka's small and mid-sized bank peer group.

The banks' operating environment has become more challenging - as signalled by the downgrade of the sovereign Long-Term Issuer Default Rating to 'B+' from 'BB-' on 29 February 2016. Fitch expects increased volatility in operating conditions to add pressure on the banks' credit metrics.

Fitch believes capitalisation is the main problem for the banks, due to weakening capital buffers from rapid loan-book growth and high exposure to retail and SME segments, which are more susceptible to deteriorating economic conditions. PABC and Amana are yet to meet the LKR10bn minimum capital requirement set by the regulator. Fitch believes capital-raising may also be a challenge amid increased country risk.

The downgrade of PABC's National Long-Term Rating reflects the continued deterioration in its capitalisation following above-industry loan growth (2015: 37% versus 21% for the industry, 2014: 27.2% versus 13.7%). The rating factors in Fitch's expectation of an equity infusion, as PABC is required to increase its minimum regulatory capital to LKR7.5bn by 1 January 2017 and LKR10bn by 1 January 2018. Fitch believes that the bank's earnings retention alone is not likely to be sufficient to achieve the capital standards, despite improved profitability.

PABC's regulatory NPL ratio improved to 4.4% at end-June 2016, from 5.7% at end-2014, mostly due to high loan growth, although the stock of NPLs also decreased marginally. ROA improved to 1.1%, from 0.6%, due to better revenue generation stemming from higher business volumes.

The Positive Outlook on UB's rating reflects the structural changes taking place through a shift in the risk profile of the bank's loan book. This stems from a higher exposure to corporates as opposed to SMEs in the past, which could support better asset quality. However, UB continued to sustain rapid loan growth of 51.5% in 2015 and 20.5% in 1H16. This could put pressure on asset-quality if not managed.

UB's rating reflects its still-small franchise, weak profitability and higher capitalisation compared with that of its peers. The bank accounted for just 1% of sector assets in 1H16 and is among the smallest licensed commercial banks in the sector. UB's profitability in terms of ROA has been gradually increasing (1H16: 0.67%, 2015: 0.41%), but remains low relative to peers. Fitch expects capitalisation to decline to levels more comparable with that of its peers in the medium-term, alongside rapid loan growth. Its Fitch Core Capital ratio decreased to 19.8% in 1H16, after being boosted to 35.8% at end-2014 following an LKR11.4bn capital injection from an affiliate of Texas Pacific Group (TPG). However, Fitch expects the bank to sustain stronger capitalisation in the medium-term than in the past.

UB reported a sharp decline in its gross NPL ratio to 2.90% in 1H16, from 3.55% at end-2015 and 8.25% at end-2014. This figure excludes NPLs at its subsidiary, UB Finance Company Ltd (UBF), formerly a distressed company. UBF accounted for 31.3% of the groups' total NPLs at 1H16. UBF's asset quality remains a significant drag on the group's asset quality, even though it has been improving.

NTB's ratings reflect its moderate franchise, high product concentration and declining capitalisation. The bank's product concentration relative to peers remain high, with leasing accounting for 23% of gross loans at end-June 2016, and credit cards accounting for 11%. Fitch believes these exposures could put pressure on NTB's asset quality. The bank's reported gross NPL ratio improved to 2.8% at end-June 2016, from 4.2% at end-2014, due mainly to recoveries and write-offs in the leasing portfolio. The ratio of the bank's reserves for impaired loans/gross loans stood at 1.7%, which was lower than that of its peers.

The bank's capitalisation, as measured by the Tier 1 regulatory capital ratio, decreased to 10.7% by end-June 2016, from 13.2% at end-2015 (end-2014: 14.2%). Fitch believes capitalisation could deteriorate further amid loan growth and the absence of capital-raising activity. A sustained decline in capitalisation could put pressure on NTB's ratings.

Fitch expects NTB's net interest margin (NIM) to moderate in the near-term due to the rising interest-rate environment and planned increase in exposure to lower-yielding customer segments. The bank's cost structure remains high compared with peers due to branch expansion, but we expect this to moderate with process improvements the bank has undertaken. NTB's low cost current account savings account (CASA) improved to 31% of overall deposits by end-June 2016, from 25% at end-2013, but lags behind that of higher-rated peers.

SDB's rating captures the bank's high-risk appetite in terms of its substantial exposure and rapid loan growth to the retail and lower-end SME segments. Fitch believes a capital injection would support SDB's rating, as internal capital generation is not likely to be sufficient to cushion the decline in capitalisation as a result of rapid loan book expansion. SDB's reported gross NPL ratio decreased to 2.34% in 1H16, from 3.76% at end-2014, largely due to rapid loan growth as the stock of NPLs remained flat. Fitch expects asset quality to deteriorate as the loans season. The bank continues to benefit from above-average NIM stemming from its loan book exposures, although the contraction in its NIM has lowered SDB's profitability.

The affirmation of Amana's National Long-Term Rating reflects our expectation that the bank will increase its capital to meet the minimum level as directed by the Central Bank of Sri Lanka. In July 2015, the regulator granted approval for an extended timeline to comply with the minimum capital requirement which requires a minimum of LKR7.5bn and LKR10bn to be achieved by 1 January 2017 and 1 January 2018, respectively.

Amana's rating reflects its small and developing domestic franchise and limited operating history. It also captures Amana's relatively high-risk appetite, primarily indicated through rapid growth in the retail and SME segments. This could put pressure on the bank's asset quality if economic conditions deteriorate. Amana's NPL ratio has remained at less than 1% since end-December 2015, supported by rapid loan book growth, while absolute NPLs have moved up moderately. Fitch deems the placement of Amana's excess funds in overseas financial institutions to be less liquid than domestic government securities although tenors on these placements have been shortened. The bank has maintained a stable CASA base relative to peers, with a CASA of over 50%.

PABC's and NTB's senior debentures carry the same rating as their National Long-Term ratings, as they rank equal with other unsecured obligations.

SUBORDINATED DEBT

PABC's and NTB's old-style Basel II Sri Lanka rupee-denominated subordinated debt is rated one notch below their National Long-Term Ratings to reflect the subordination to senior unsecured creditors.

RATING SENSITIVITIES

NATIONAL RATINGS AND SENIOR DEBT

An upgrade of PABC's rating is contingent upon the bank achieving a sustained and significant improvement in its capitalisation, alongside a moderation in risk appetite. PABC's rating would be downgraded if loss-absorption buffers further deteriorate, either through aggressive loan book growth or greater share of unprovided NPLs.

The upgrade of UB's rating is contingent upon the bank's ability to manage the risk that could stem from continued high loan growth, with a sustained improvement in asset quality and better risk management. The upgrade would also depend on an improvement in UB's still-developing franchise alongside sustainable and improved performance similar to higher-rated peers. Capital impairment risks stemming from sustained rapid loan expansion or deterioration in asset quality could put pressure on UB's rating.

An upgrade of NTB's rating is contingent upon the bank lowering product concentration, significantly improved capitalisation and enhanced funding stability, alongside progress in building a strong commercial banking franchise. Weaker capitalisation or an increased risk appetite, as evident through aggressive loan growth and weaker asset quality, could result in a downgrade

SDB's rating could be downgraded if there is a continued deterioration in capitalisation, either through aggressive loan growth or greater unprovided NPLs. An upgrade would be contingent upon moderation of its risk appetite and sustainable improvements in asset quality and profitability.

Amana's rating may be downgraded if it fails to satisfy regulatory minimum capital requirements in a timely manner. A rating upgrade is contingent upon the expansion of Amana's franchise and improved and sustained financial profile, similar to higher-rated peers.

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

SUBORDINATED DEBT

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

The rating actions are as follows:

Pan Asia Banking Corporation PLC

National Long-Term Rating downgraded to 'BBB-(lka)' with a Stable Outlook, from 'BBB(lka)' with a Negative Outlook

Senior debenture rating downgraded to 'BBB-(lka)', from 'BBB(lka)'

Subordinated debenture rating downgraded to 'BB+(lka)', from 'BBB-(lka)'

Union Bank of Colombo PLC

National Long-Term Rating affirmed at 'BB+(lka); Outlook revised to Positive from Stable

Nations Trust Bank PLC

National Long-Term Rating affirmed at 'A(lka)'; Stable Outlook

Basel II-compliant subordinated debentures affirmed at 'A-(lka)'

Proposed Basel II-compliant subordinated debentures affirmed at 'A-(EXP)(lka)'

SANASA Development Bank PLC

National Long-Term Rating affirmed at 'BB+(lka)'; Stable Outlook

Amana Bank PLC

National Long-Term Rating affirmed at 'BB(lka)'; Stable Outlook

Sri Lanka president accepts bribery chief's resignation

ECONOMYNEXT - Sri Lanka President Maithripala Sirisena informed his cabinet on Tuesday that he decided to accept the bribery commission director general's resignation after he questioned her integrity.

Maithripala Sirisena is due to make a fresh appointment shortly.

During Tuesday's closed-door cabinet meeting, Sirisena sought to explain his frustration with the bribery commission headed by Dilrukshi Wickramasinghe, the FCID and the CID.

The President was particularly miffed that there were 15 rookie police investigators invited to watch senior minister A. H. M. Fowzie being questioned by the bribery commission.

The president has vehemently denied that he was trying to protect former defence secretary Gotabhaya Rajapaksa who was summoned to court last month to answer allegations that he defrauded the state of Rs11,400 million.

Sirisena told his cabinet that in his outburst on Wednesday, he had only spoken about the "indignity" allegedly suffered by three ex-navy admirals who were charged along with Gotabhaya Rajapaksa.

Contrary to popular belief, Sirisena has insisted that his problem with the government of Prime Minister Ranil Wickremesinghe was the failure of the administration to well and truly nail Gotabhaya for all his alleged sins.

Dilrukshi Wickamasinghe's resignation has helped both sides to save face and move on, and salvage the unity government, sources close to both sides said on Tuesday.

Prime Minister Ranil Wickremesinghe, who is currently in Belgium, is known to be following developments at home closely.

However, the release by his office of a picture of him tasting gourmet chocolates in Brussels while a dangerous row raged in Colombo was seen as in poor taste.

Enjoying the sweet treats with the Prime Minister was Law and Order minister Sagala Ratnayake whose actions are being questioned after President Sirisena's highly publicised public outburst against the police.

Speaker Karu Jayasuriya, who is also the Chairman of the Constitutional Council, which appoints chairmen and members of independent commissions established in line with the 19th amendment to the constitution, has tried to defuse tensions by glossing over the main issues.

"Several chairmen and members questioned if higher echelons of government had any concerns about the work," the Speaker said in a statement issued on Monday

Bribery commission DG Wickramasinghe became the first member of an independent body to resign in protest over interference by the executive into the work of the anti-graft commission, whose independence is guaranteed by the constitution.

The Speaker did not refer to Wickramasinghe's resignation, but said there was no disagreement between Sirisena and Wickremesinghe over the functioning of the independent bodies.

Jayasuriya urged all independent bodies to continue their work, saying the people had high hopes that the institutions will deliver results.

Killer profits for Sri Lanka primary dealer from bids made with central bank funds

ECONOMYNEXT - Sri Lanka's Perpetual Treasuries Plc, a primary dealer in government securities, had placed bids of tens of billions of rupees at bond auctions without funds of their own and defaulted on cash borrowed from the central bank, a leaked report said.

Perpetual Treasuries had won bids for 42 billion rupees at a controversial bond auction in March 2016 and defaulted on 11 billion rupees taken from the Central Bank, a draft investigation report published on LankaTruth, an online publication said.

Naked Bets

The report, which the central bank acknowledged had been leaked, said placing bets of tens of billions of rupees at auction without money to cover them, endangered the entire government securities market.

The March 2016 bond auctions were among the most controversial, as the state debt office, a unit of the central bank, offered 65 billion rupees of bonds and accepted 127 billion rupees sending yields soaring.

Rates later plunged giving billions of rupees of profits to the buyers as the prices on the underlying bonds rose.

The report said Perpetual Treasuries made profits of 4.6 billion rupees in April and May 2016 buying bonds at rates as high as 14.68 percent partly leveraged with central bank money borrowed at 8.0 and 8.50 percent and selling them off.

This means Perpetual had been borrowing money from the central bank at lower rates and loaning it back to the state at almost the double the rate, pocketing profits on the way.

Critics had said that offering smaller amounts at an auction, misleading the market and then accepting more bids amounts to a rigging of the auction and favouring those with inside knowledge.

The first such large scale auction came to public attention in February 2015, though volumes had been varied earlier. In that auction, where Perpetual also figured, money from state-run Bank of Ceylon was used.

Controversial Auction

Perpetual Treasuries, is a firm connected to Arjun Aloysius, son-in-law of Sri Lanka's former Central Bank Governor Arjuna Mahendran who had denied wrong doing.

At an auction on March 29, 2016, the central bank offered 40 billion rupees of bonds, but sold 27 billion rupees of bonds over the original volume, giving 26.4 billion rupees of securities to Perpetual, the report shows.

The leaked investigation report showed that after offering 10 billion rupees of 14-year bonds (maturing in 2030) in March 2016, the central bank actually sold 28.7 billion rupees worth of bonds, giving Perpetual Treasuries 10.31 billion rupees of securities, the entire volume it had asked for and more than the total offered in the maturity.

In 10-year bonds maturing in 2026, it was given 7.6 billion rupees of securities, after upsizing the volume sold from 10 billion to 17 billion rupees. Perpetual had bid for 10.3 billion rupees.

Perpetual was also given 8.45 billion rupees in 9-year bonds maturing in 2025, after it subscribed for 8.6 billion. A total of 21 billion rupees of 2025 bonds were sold after only offering 10 billion at first.

Perpetual only bid a billion rupees and got only 50 million rupees in four-year bonds, where 10 billion was offered and 10.2 billion sold.

The longer the tenor, the larger the capital gains (and big losses to the state) to be made when rates fall.

In a March 31 auction, Perpetual had not submitted any bids for short tenure two- and four-year bonds. But it had got 15 billion rupees of 12-year bonds maturing in 2028, after bidding for 15.7 billion rupees. For five-year bonds the firm had bid 5.1 billion rupees and got 625 million rupees of securities.

No Funds

The money for the winning bids had to be paid on April 01.

The probe report said the firm had to pay 36 billion rupees for the bonds, but it did not have enough funds.

Perpetual Treasuries had asked for 22 billion rupees at an open market operations (OMO) cash auction where the central bank gives overnight liquidity (printed money) against securities, for banks and dealers who may face a cash shortfall.

During the day on April 01, Perpetual had also borrowed 19.98 billion from an intra-day liquidity facility, which has to be settled by the end of the day.

The investigation report said Perpetual was unable to provide securities of 11.1 billion rupees to fully cover its bid at the OMO auction to get the cash.

The primary dealer had then defaulted on the 11 billion rupees from the intra-day liquidity facility. The firm had been fined for both actions.

The report did not say whether it was the first time a bank or a dealer had defaulted on an intra-day liquidity loan and also failed to provide securities to cover a deal at the OMO auction.

Risky Deals

The investigation report said Perpetual Treasuries had made large bids at auctions without enough funds to cover them, hurting the entire market.

"Such high risk taking can result in a stand alone PD (a primary dealer not connected to a commercial bank) facing liquidity and settlement risks causing negative consequences on the confidence of the government securities market," the report noted.

Perpetual Treasuries had made profits of 4.6 billion rupees in April and May 2016, by borrowing from the central bank's windows, the report said.

From April 01 to April 08 2016, Perpetual had borrowed 66 billion rupees from the Central Bank to fund its portfolio. It was 75 percent of the total borrowings by all primary dealers.

From January 2015 to May 2016, Perpetual had made profits of 9.8 billion rupees, the report said.

The profits were also booked by selling the bonds to Pan Asia Bank, DFCC and the EPF. In the case of DFCC and Pan Asia, the firm had bought back securities, sometimes on the same day, which needed to be probed further, the report said.

The report also recommended a deeper probe of the activities of the EPF.

Sri Lanka's new Central Bank Governor Indrajit Coomaraswamy had already stopped the practice of misleading the market by announcing low volumes and accepting bids for much higher amounts and has said auctions would be further reformed after looking at international best practices.

The central bank said last Friday that its governing board "noted with concern the sharp disparity in the performance of primary dealers" and "certain issues related to the pattern of trading activities."

Meanwhile a probe report by Sri Lanka Parliament's committee on public enterprises is also due to be submitted to the speaker later this month.

Entrust, 3 Sri Lanka finance company depositors to be repaid: central bank

ECONOMYNEXT - Sri Lanka's Central Bank said customers of Entrust Securities, a primary dealer in government securities, and three finance companies will be repaid.

The Central Bank said Rs8.5 billion of investments made at Entrust Securities by 24 funds and investors, which were not covered by government securities, will be repaid.

At The Standard Credit Finance Ltd., City Finance Corporation Ltd. and Central Investments and Finance Plc, Rs4,848 million will be repaid to 11,878 depositors "annually from 2017 over a reasonable period of time with a fair interest rate during this repayment period", the Central Bank said.

The Central Bank said Entrust was made insolvent by fraudulent activities.

The Central Bank said it will set up a new enforcement division in the department of non-bank financial institutions to take legal action against directors and managers who engage in fraud.

"Furthermore, action will be taken to address lapses in the Central Bank, and to strengthen regulatory and supervisory mechanisms on priority basis to ensure the safety and soundness of existing institutions," the Central Bank said.

The full statement is reproduced below:

Central Bank resolves four insolvent financial institutions to protect depositors and promote the financial system stability

As announced to the public on 10.10.2016, the Monetary Board at its meeting held on 14.10.2016 considered resolution issues pertaining to a number of non-bank financial institutions in the context of relevant legal provisions in the interest of protecting the public trust in the financial system. Accordingly, the Monetary Board approved a resolution mechanism for repayment of depositors of three finance companies and legitimate investors in government securities-linked investments in Entrust Securities PLC.

The three finance companies are The Standard Credit Finance Ltd., City Finance Corporation Ltd. and Central Investments and Finance PLC. All three companies got into a chronic financial position in 2008 and 2009 due to fraud and mismanagement of funds and, therefore, these companies did not have assets to pay off deposits. All restructuring efforts made by the Central Bank, from time to time, could not produce envisaged results as those who managed these companies failed to arrange an infusion of new capital.

As a result, these companies became insolvent and were out of business since then. The Entrust Securities PLC, a company with a primary dealer license to trade government securities, got into a chronic liquidity and insolvency crisis during latter part of 2015 as a result of fraudulent use of funds placed by customers for investment in government securities. The Central Bank on January 4, 2016 suspended the Board of Directors of the Entrust and vested its operations in the National Saving Bank to protect the investors.

The Monetary Board reviewed the lack of progress so far and took cognizance of the fact that there was no further room to revive these companies to enable them to repay depositors and investors in the foreseeable future. Given the long-delay involved so far, the Monetary Board approved the company resolution plans submitted by the Department of Supervision of Non-banking Financial Institutions to repay deposits and investments annually commencing from 2017 over a reasonable period of time with a fair interest rate during this repayment period.

In the case of the three finance companies, repayment will cover Rs. 4,868 mn of nearly 11,878 depositors. In the case of the Entrust, investments secured with government securities amounting to Rs. 3,100 mn belonging to 107 investors will be settled in the coming weeks. In respect of unsecured investments in the Entrust amounting to Rs. 8,508 mn belonging to 24 individuals and entities, government securities will be allocated and be repaid under the repayment plan to be implemented with the managing support of the Seylan Bank PLC.

The Central Bank will complete the required administrative procedures and communicate details to all those depositors and investors. Once the repayment plan is legally finalized, those companies will be dealt with through applicable laws for liquidation. The Monetary Board is of the view that this is the only option that now remains as there are no assets in these companies and no investors have been willing to revive these companies and repay above depositors and investors.

As part of the resolution plans, the Central Bank will set up a new Enforcement Division in the Department of Supervision of Non-bank Financial Institutions to institute legal action against Directors and managers who have been responsible for the fraud and misappropriation of funds and to make every effort to recover such funds from them. In the case of the Entrust, the law enforcement authorities, in association with the Central Bank, have already initiated legal actions. The Enforcement Division will also introduce a routine procedure to take legal action against parties who have committed similar fraudulent practices in existing companies, in the event such instances are detected by the examination staff. Further, action will be taken to address lapses in the Central Bank and to strengthen regulatory and supervisory mechanisms on a priority basis to ensure the safety and soundness of existing institutions.

However, it is important to stress that the regulation and supervision do not mean a guarantee for each and every deposit and investment made by the public in banks and financial institutions. Those who make such deposits and investments and those who undertake businesses based on these funds are primarily responsible for their business decisions regarding prudent management of their funds. In fact, almost all funds placed in the above distressed companies have been mobilized through unauthorized financial products. Even large depositors and investors have been negligent in not undertaking the normal due diligence on risks and return, despite being sufficiently knowledgeable and skillful to do so. The responsibility of the Central Bank is only to provide an external safeguard through regulation and supervision to the extent permitted in law while facilitating institutions to carry on their businesses essential for the economy and general public in a safe and sound manner in a stable financial system.

Therefore, all those who are stakeholders to these resolution plans are kindly requested to co-operate with the Central Bank in order to end this long-standing issue in the public interest. In the event of non-cooperation, the Central Bank will have no option but to reluctantly permit these companies to be wound up under the law.