Basel Three compliance seen as having implications for local banks

By Hiran H.Senewiratne

"The maintaining of a capital adequacy ratio under the Basel Three international compliance requirement from next year would have some implications for the local banking sector, Sampath Bank Managing Director Nanda Fernando said.

" The Basel Three international compliance requirement of maintaining a minimum capital adequacy ratio will become mandatory for all banks in the country and it would have some issues for the sector since those banks have to increase their capital, Fernando told the media yesterday..

He said that Sampath Bank has the capability for this adaptation because of the Bank's financial stability and because of the confidence of the Bank's customers in it.

Fernando also said that next year would be a challenging year for the sector because of the anticipated increase of US Federal Reserve interest rates since the US economy and the dollar are growing strong.

" This would have some challenges for the national economy but could be managed if we take measures to stabilize the rupee with proper and prudent regulatory measures, Fernando said.

The Sampath Bank Managing Director also said the interest rates and the rupee will not depreciate next year, as in the case of this year, because the Central Bank and the Ministry of Finance will take proper measures to control the situation.

Sampath Bank, launched in 1987, is now a leading commercial bank in the country with more than 200 branches island-wide. It has 4000 employees and positions itself as a post innovative and modern bank in Sri Lanka.

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Tax uncertainty hovers over listed debentures

By Azhar Razak

A state of uncertainty and lack of clarity prevails over the tax-free concession presently applicable to incomes received from listed corporate debentures as the recently enacted Budget 2017 has plainly stated this concession is removed but not given details, industry officials said last week.

The Budget 2017 presented by Finance Minister Ravi Karunanayake said "the present exemption on certain dividends and interest or profits from investment on listed securities (corporate debt securities etc.) and other instruments will be removed". The Budget however did not specify the exact date this removal will be made effective or whether it will apply to both current and newly listed debentures.

"We still don’t know whether the Budget proposal will be applied immediately, or January 1 or April 1 .The next big question we have is whether this proposal will only apply to new debentures which are going to be listed in the future or will it take retrospective effect and include listed debentures offered in the past?" several stock market analysts who spoke to the Sunday Island on condition of anonymity, opined.

Since 2013, listed corporate debentures on the Colombo Stock Exchange has been a major attraction for investors mainly due to the totally tax free concession accorded to them. There is no Withholding Tax or Income Tax. For example, if a company pays Rs.100 as interest for a listed debenture, the debenture holder will get that entire Rs.100 and he does not need to declare the same as part of his taxable income.

On the other hand, if the debenture is not listed on the Colombo Stock Exchange, Withholding Tax (WHT) which is deducted at source will be applied. In addition, the interest income earned by a non-listed entity will be categorized as a taxable income and the corporate tax component applied.

Senior Vice President at Acquity Stockbrokers, Shehan Cooray, said they have made representations to the Treasury and are presently awaiting an outcome on that. However, elaborating on what the Budget statement had meant, he said listed debentures will no longer be tax free or rather WHT will in future be applicable on debentures.

"So, on the coupons or interest there will be a 14% tax and there is no notional tax which means in addition to the 14%, you can’t set off that against your final tax liability. So, on the remainder you will be paying at the individual tax rate applicable such as corporate tax," Cooray noted.

However, he said that the government might not apply the tax with retrospective effect but they may be applicable to the future coupons on the already listed debentures.

Chief Executive Officer of the NDB Investment Bank Limited, Darshan Perera , confirmed that they also made representations to the Finance Ministry on the issue.

"But apart from what was said in the Budget there is no clarity or change in the position from the government’s point of view on this so far," he said.

Last year 25 corporates raised as much as Rs.83.4 billion via listed debentures while the corresponding amount for 2014 was Rs. 54.2 billion and Rs. 68.3 billion in 2013. It has also been reported that during the last three months, eight issuers of whom five were banks raised as much as Rs.49 billion through listed debentures. The most recent was the Bank of Ceylon’s Rs.5 billion issue which was oversubscribed on opening day last week.

The main players in structuring issues in the listed debenture market are Acuity Stockbrokers Pvt Ltd., Capital Alliance and NDB Investment Bank. Agora Securities (Pvt) Ltd., Arevaand First Capital Holdings Plc also handled issues this year. Commercial Bank and People’s Bank are involved in related party issues.

The listed debentures are seldom traded on the Colombo bourse with investors preferring to hold them for tax free interest. Most such issues have been oversubscribed on opening day.

"They were an attractive parking place for spare cash particularly by companies," an analyst said. "Other fixed income instruments like fixed deposits attracted 28% tax. This is not so for individual investors."

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Pre-budget rush spikes vehicle registrations

Sri Lanka’s motor vehicle registrations in the majority of categories and specifically motobikes has recorded an acceleration during the month of November 2016 compared to a month earlier, an analysis by JB Securities released on Friday showed.

Accordingly, total cars registrations recorded 3,574 units in November up from 3,402 unit the previous month but down from a very high number of 10,084 a year months ago.

Brand new registrations recorded 2,098 units in the month, slightly down from 2,185 units in the previous month and significantly down from 6,732 units 12 months ago.

Pre-owned car registrations recorded 1,476 units in the month, up from 1,217 units the previous month. Toyota maintained its market share recording 708 units followed by Suzuki with 482 units and Honda with 233 units. Financing share was 65.6%.

The premium brand segment recorded 73 units in Nov., up from 61 units the previous month and slightly down from 74 units 12 months ago while the SUV segment recorded 476 units in November up from 451 units in October but down from 806 units 12 months ago.

Electric cars recorded 25 units in the month, slightly up from 23 units the previous month but massively down from 494 units 12 months ago. Hybrid registrations recorded 1,605 units in November up from 1,358 units the previous month but significantly down from 3,247 units 12 months ago.

Meanwhile, van registrations in Nov. recorded 100 units, down from 119 units the previous month and significantly down from 802 units 12 months ago.

Three-wheeler registrations recorded 6,098 units in Nov., significantly up from 4,495 units the previous month but significantly down from 13,668 units 12 months ago while two-wheeler registrations recorded 32,084 units in November up from 30,373 units the previous month and slightly up from 31,262 units 12 months ago.

Pickup trucks accounted for 529 units in Nov., up from 470 units the previous month and also up from 462 units 12 months ago. Tata was the market leader claiming a share of 65.2%. Financing share was 78.1%.

Buses recorded 217 units in Nov., down from 281 units the previous month and 244 units 12 months ago.

Maruti reclaims market leadership

India’s popular car brand, Maruti retained its market leadership in Sri Lanka during the month of November recording 751 units (Alto – 506, Celerio – 229) outdoing new entrant Renault Kwid, recent analysis showed. Renault Kwid, which became the market leader in October 2016 notching up 854 units claimed the second position with 582 units being registered.

The duo were followed by Nissan – 170 units (Go – 165), Perodua - 122 and Micro - 118 units.

"Small cars dominated the car registrations recording 1,930 units (92% share) while the financing share is a high 69.1%, in comparison for mid sized cars it is 57.8% and 33.9% for large cars," JB Securities said in a report. (AR)

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High Motor Vehicle Lenders Facing Challenges

Budget 2017 has created a challenging environment for NBFIs with high exposure to motor vehicle lending due to lowering of Loan-to-Value (LTV)(25% for Three Wheelers, 50% of Motor Cars and Vans) and increase of import duties, LOLC Securities said in an equity research report on Central Finance.

Further removal of income tax exemption on debentures’ interest income creates more level playing field with instruments such as Fixed Deposits, creating more opportunities for NBFI’s like CFIN to enhance its deposit base.

However with ongoing interest rate rise we see slow down of private sector credit creating a downward trend of leasing and loan volumes of NBFI sector while increased vehicle taxes and currency depreciation further intensifying the negativity. But CFIN historically has been maintaining a LTV ratio of 70-80% in its vehicles advances with a balanced vehicle leasing portfolio.

Thus we believe that impact of LTV rule will be limited for CFIN. CFIN on the other hand will benefit on increasing LTV of commercial vehicles to 90% and upcoming construction sector projects.

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Japanese buyer in BOC-Seylan deal shell-shocked

By Duruthu Edirimuni Chandrasekera

The Japanese buyer in the deal that went sour involving Seylan Bank’s 7.5 per cent stake in Bank of Ceylon (BOC) this week is shell-shocked.

Murtaza Jafferjee, CEO JB Securities which did the transaction, told the Business Times that his client, the Japanese investor is in Colombo now and is not a happy man. “The Japanese investor is totally shell shocked as to what has transpired. One is not sure in future when transacting with state controlled institutions as to where lies the ultimate authority,” he said. Largely dealing with foreign and local institutions and high net worth investors, Mr. Jafferjee said that what occurred is a blow to the capital market.

Meanwhile, the BOC directors except its chairman, who’s still in London, have made statements to the Criminal Investigations Department (CID) on this deal.

The BOC’s chairman left for London on Friday, Dec. 16. The board comprises Ronald C. Perera (chairman), S.R. Attygalle, Ranel T. Wijesinha, Charitha Nissanka Wijewardane, Asela Sanjaya Padmaperuma and Ajith Gunawardana.

None of the board members was available for comment but a source close to the BOC board told the Business Times that the directors had told the CID that this sale was to augment the capital augmentation plans of BOC. “These plans are discussed at board meetings. The Seylan holding is a potential divestment as was stated in BOC’s annual report. It was a unanimous decision by BOC’s Investment Committee which was given the autonomy to dispose stakes in their portfolio,” the source explained at length.

He added that the capital augmentation strategies of the BOC at each board meeting are duly communicated to the Ministry of Public Enterprises on a separate document by the BOC. “So the Ministry was aware of it – more or less,” he said. However when queried about the Ministry of Public Enterprises circular that’s in question prohibiting acquisition or disposal of business assets or significant transactions in state entities without ministry permission, he said this 7.5 per cent in Seylan isn’t ‘significant’.

He refuted all claims that this was an ‘under-the-table’ transaction saying that the miscommunication is on the government’s part for not being clear about disposing state assets.

Analysts say that this transaction shrouded in controversy is raising issues about state policy, unclear direction and bad signals to the capital market.

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Central Bank (CB) orders curbs on Perpetual Treasuries

The Central Bank (CB) has ‘curtailed’ primary dealer, Perpetual Treasuries Ltd from trading in the capital market and declaring company dividends, following the company’s controversial deals in bond trading last year, informed sources said.

Earlier the CB had said that it would take action against Perpetual Treasuries but unspecified this at a recent media conference. The company continues to be listed as a primary market dealer in the most recent call for bids by the CB which is auctioning treasury bonds worth Rs. 57 billion on Tuesday, December 27. Meanwhile the US dollar hit Rs. 152 per 1$ earlier this week and then fell to Rs. 149-150 by Friday owning to the demand for dollars rising. “There is a demand because foreigners are selling off their securities to invest in US securities with interest rates going up there,” one dealer said.

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Drop in tourist arrivals in Q1 2017

By Sunimalee Dias

The airport closure is set to steer a drop in visitors to the island in first quarter 2017 just as Sri Lanka Tourism is gearing for a promotional drive and is drawing up new rules of how public private partnerships could work in future.

“Already we have recorded a drop in booking,” City Hoteliers Association President M. Shanthikumar told the Business Times adding that a drop was expected by about 8-10 per cent during the three months when the country’s busiest international airport, the Bandaranaike International Airport would be closed.

The airport will close from 8.30 am to 4.00 pm for flight take off and landings as the 30-year old runway is being resurfaced.

However, he noted that the industry is looking positive and with cooperative airport authorities, “we will manage.”

Growth is expected next year as arrivals are distributed among the hotels in the formal and informal sectors, Mr. Shanthikumar explained.

The long awaited promotional campaign is expected to kick off next year following the Tourism Minister John Amaratunga’s assurance to the industry in this regard.

This is being backed by Prime Minister Ranil Wickremesinghe’s detailed campaign programme for 2025 for an aggressive promotion for the industry’s growth. “We believe that the industry will grow and tourism should pick up. The inventories are growing therefore the promotions are important to sustain the business,” Mr. Shanthikumar explained.

In the meantime the private sector is currently working out a strategy to ensure that private sector involvement in state sector institutions would not get them into trouble by leaving out responsibilities that could warrant any obligation other than as advisors.

Lately, a number of tourism industry personalities had been pulled up for sanctioning state funds to be allocated for purposes other than tourism promotion, which even they were unaware of.

In this respect, the industry believes the Chairmen and Directors General of the respective state institutions should be held responsible for such funding allocations.

A guideline on how private sector board members would function in the absence of such responsibility is currently being worked out.

Meanwhile promotions for feeder markets are expected to continue while bringing in travellers from the Far East and Australia along with the Indian and Chinese markets.

“There is a lot more room to promote China,” Mr. Shanthikumar said since Sri Lanka is yet to receive a large bundle of the traffic that checks into hotels globally as more are expected to travel next year.

Segmentwise the industry expects to gain more from the Meetings Incentive Conference and Exhibitions (MICE) events in addition to more travellers targeted via charter operations that had resumed since the last couple of years and cruise and sports tourism.

Sri Lanka Association of Inbound Tour Operators (SLAITO) Secretary Nalin Jayasundere explained that charters from Scandinavia, Russia, the UK and Italian markets were attracted thereby reviving a dormant segment of the industry.

He explained that tour operators have “more confidence in Sri Lanka” to promote the destination.

However, there are expectations for more support from the Sri Lanka Tourism Development Authority (SLTDA) by carrying out joint promotions that would help look at the country more positively.

Meanwhile, there are expectations of improvement in working out entrance fees to tourist sites by informing travel agents well ahead of making the bookings without haphazard charges being implemented.

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CB should hike interest rates faster than desired to limit capital outflows, Moody’s says

Sri Lanka’s (B1 negative) elevated debt burden, large fiscal deficits and high external borrowing costs continue to expose the country to potential shocks, Moody’s Investors Service says in a new report.

While the programme with the International Monetary Fund (IMF) has helped establish an ambitious roadmap to fiscal consolidation and structural reform, implementation will be challenging. The negative growth impact of tight fiscal and monetary policy and subdued external demand, combined with uncertain effectiveness of tax-broadening measures, could limit the efficacy of the government’s reform efforts aimed at consolidation of public finances and shoring up the country’s balance of payments, it said.

“Given its weak fiscal position and demands for growth-enhancing public expenditure on infrastructure and development programmes, plans to increase government revenues will play an important role in bolstering debt sustainability and the overall sovereign credit profile. Revenue mobilisation efforts will likewise be key to creating fiscal space for increased spending and deficit reduction, while tempering external vulnerabilities. The government’s 2017 budget proposal is broadly consistent with its fiscal consolidation roadmap with the IMF, and illustrates its commitment to fiscal consolidation and to the IMF programme. The budget relies on significant increases in tax revenues to drive a material narrowing of the deficit, through a mix of implemented and planned measures,” the report added.

It could be difficult for the government to pursue fiscal consolidation at the pace it envisages. The significant fiscal tightening currently envisaged, combined with likely relatively tight monetary policy, may dampen GDP growth to a greater extent than currently projected by the government. Moreover, if the government does not manage to implement tax policy and administrative reforms in full, it could cut back on expenditure to meet its fiscal targets. That would also weigh on GDP growth, which in turn would lower revenue collection.

“Given Sri Lanka’s weak fiscal position and need for growth-enhancing public expenditure on infrastructure and development programmes, plans to increase government revenues will play an important role in bolstering debt sustainability and the overall sovereign credit profile. Revenue mobilization efforts will likewise be key to creating fiscal space for increased spending and deficit reduction, while tempering external vulnerabilities,” it said.

The report said that the government projects tax revenues to rise to 13.5 per cent of GDP in 2017 from 11.6 per cent in 2016. That marks a 27 per cent year-over-year rise, compared to only a 5.6 per cent in in 2016. The expected increase is reflected in all major tax components, through a combination of tax rate hikes and exemption exclusions.

The most significant contribution to the overall increase in tax revenues is projected to come from excise, with related revenues to increase by nearly 30 per cent, representing about 32 per cent of total tax revenues. New excise duties will be introduced and some revised while the government expects the efficiency of excise collection to increase through e-invoicing.

The second largest increase stems from higher income tax receipts, accounting for 25 per cent of the total tax revenue rise. Income tax is projected to rise by 42 per cent representing about 18 per cent of total tax revenues.

Receipts from value-added tax (VAT) are projected to rise by nearly 21 per cent to represent about 21 per cent of total tax revenues, consistent with a full year of VAT at the 15 per cent rate following the re-instatement of the rate hike in November 2016, the report said.

“We project GDP growth to be lower, rising to 5.2 per cent in 2018 from 5 per cent in 2017, similar to the IMF projections – 4.8 per cent and 4.9 per cent in 2017 and 2018, respectively. Our real GDP growth forecast takes into account the likely impact of fiscal consolidation and tighter monetary policy over the next few years. A concerted government effort on regaining competitiveness and resumption of foreign direct investment and development of key projects, including the Colombo Port City and Hambantota port, would enhance Sri Lanka’s export potential and eventually contribute to higher exports. However, in a global environment of prolonged slow trade, the returns on such policy may be limited,” the report said.

“On the monetary policy front, we believe the Central Bank of Sri Lanka’s objectives of price stability and moderate credit growth will likely result in relatively high interest rates and generally tighter financing conditions. This will add to the factors weighing on private domestic investment in the near term. In addition, Sri Lanka’s relatively low level of foreign exchange reserves further complicates monetary policy, as the central bank may need to hike rates faster than desired in order to limit capital outflows or attract portfolio inflows in an environment where US interest rates are rising and global investors are generally retreating from emerging markets,” it said.

While the government has demonstrated its commitment to fiscal and structural change, substantial implementation challenges remain, which could slow or derail the reform process. Moving forward, fractious politics and a substantive policy agenda which also includes reform of the constitution and further progress on reconciliation could limit progress on revenue and SOE reforms, resulting in weaker growth, slower fiscal consolidation and losses from SOEs crystallizing on the sovereign’s balance sheet. If this happened, foreign investors’ confidence may be undermined. This could combine with the expected normalisation of interest rates in the US to result in lower capital inflows in, or capital outflows out, of Sri Lanka. Pressure on the fragile balance of payments would increase. In this scenario, the Central Bank of Sri Lanka’s policy of less frequent foreign exchange rate intervention could also be tested, it said.

“Looking forward, medium-term risks remain as foreign debt repayment obligations are large, especially those due between 2019 and 2022. Meanwhile, the Central Bank of Sri Lanka currently borrows a large portion of its reserves through temporary forex swap arrangements with domestic commercial banks, which are subject to rollover risk. As of 30 October 2016, the central bank had a total short foreign currency forward position of $2.81 billion, with combined residual maturity of one month to one year. The IMF has advised Sri Lanka to unwind these swap positions. At this stage, it is not clear how this will be achieved in an environment of fragile capital inflows that may drain rather than inflate foreign exchange reserves,” it added.

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Temporary BIA Jan-Apr closure set to drop passenger traffic by 12%

The re-construction of the Bandaranaike International Airport’s runway, at an estimated cost of Rs.7.2 billion, is likely to result in a drop in arrivals and departures by about 12.8 per cent with the cancellation of about 10 flights per day and rescheduling of others.

SriLankan Airlines has cancelled six flights per day and others about four per day during the period the BIA would be closed from January 6 – April 6 between 8.30 am and 4.00 pm, Transport and Aviation Minister Nimal Siripala De Silva said at a media briefing held at the BIA at Katunayake.

The minister noted that the cost of the construction of the 30-year old runway at the BIA will be borne by the Airport and Aviation Services Ltd. (AASL).

The national carrier would stop over at Mattala for its four weekly flights to Beijing and Shanghai for approximately three hours during which time passengers would be allowed to go off board and be provided a meal before leaving for its final destination, the airline’s CEO Suren Ratwatte told the Business Times.

He noted that SriLankan Airlines would have to incur an addition loss in revenue of US$60 million as a result of this closure.

The BIA will witness a drop in arrivals and departures by about 12.8 per cent due to the airport closure, AASL Executive Director Johanne Jayaratne told the Business Times.

He noted that foreign airlines will stay at their point of origin when operating to Colombo on the rescheduled timings due to the closure for the 3-month period.

Due to the closure, there would be 14 flights taking off and landing at the BIA during the peak hour of 7.00 am – 8.00 am with the most number of flights operating after opening recorded between 7.00 pm and 8.00 pm amounting to eight, he explained.

The arrival time of passengers would be determined by the respective airlines but it is expected that arrival at the airport was likely to be at least four hours ahead of departure.

The rush hour would also witness 65 check-in counters in operation compared to the existing 55; the 17 immigration counters would have its manpower increased with about four more added to the departures.

Minister De Silva noted that due to a lack of required immigration staff the government has asked authorities to even bring back retired employees to be engaged during the 3-month period. Customs department would also increase its staff at the BIA.

In addition to ease the congestion at the airport, the airline staff have been allocated a separate passageway to get to their flights early overcoming the congestion.

The government has requested the public to reduce the number of persons accompanying passengers to the airport in a bid to ease the congestion except for those in need of special assistance like the aged and the differently abled.

A concerted traffic plan would be in operation to ease traffic to the airport by teaming up with the Minuwangoda, Katunayaka and airport police in a bid to encourage the use of alternative routes.

The Minister noted that Mattala had not been favoured by any of the international airlines and this airport would continue to be used for emergency operations as at present.

Mattala costs the BIA an expenditure of Rs.3.6 billion in loan repayment and Rs.74 million for staff salary payments.

The government is looking at a 3-year, long-term plan to build on the infrastructure development surrounding the Mattala airport, the minister said.

“The government has no state funds to commit for the development of Mattala. We might have to go for a venture for Mattala similar to the Hambantota port,” the Minister said.

Under the Expression of Interest for Mattala about seven were evaluated and five shortlisted with selections scheduled to take place next month.

Mattala airport has received at least two proposals, not from Chinese parties, to take over entire operations of the facility while others were for the conduct of Maintenance Repair and Overhaul (MRO) and as a training facility among others. - (SD)

Immigration under camera scrutiny

Security cameras have been placed at immigration counters by the airport authorities amidst opposition from staff.

Airport and Aviation Service Ltd. Executive Director Johanne Jayaratne said that the security cameras at the immigration counters fixed were now operational since about a couple of months ago.

Immigration officers had opposed fixing the security cameras where their counters were located.

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