Sri Lanka’s HNB to strengthen balance sheet with rights issue

(LBO) – Sri Lanka’s Hatton National Bank is to issue up to 70,082,228 new ordinary shares by way of a rights issue, the company said in a stock exchange filing.

Subject to exchange and shareholder approval, the bank is to issue 55,995,792 ordinary voting shares at 220 rupees each in the ratio of one share for every six shares held.

Under this rights issue, the bank is also issuing 14,086,436 ordinary non-voting shares at 190 rupees each in the ratio of one share for every six.

The bank stated that the number of new shares could increase if any shares are issued to employees of the bank under Employee Share Option Plan.

HNB further said these proceeds will be utilized to strengthen the capital base and balance sheet of the bank and to support the overall business growth of the bank.

The current stated capital of Hatton National Bank is 16,798,244,894 rupees.

Sri Lankan shares close at 11-mth high; foreign buying boosts sentiment

Reuters: Sri Lankan shares closed at a more than 11-month high in heavy trading on Friday as foreign buying for 26 sessions in a row took net inflows into equities to 13.9 billion rupees ($91.39 million) and boosted sentiment.

Foreign investors bought shares worth 708.2 million rupees on a net basis in the session, bringing the year-to-date net equity inflows to 16.4 billion rupees.

The Colombo stock index gained 0.59 percent at 6,610.46, its highest close since May 20. The index added 1.1 percent this week, marking its fifth winning week.

A vote on Thursday in the European Parliament in favour of Sri Lanka gaining a trade concession also brought cheer to the market, traders said.

"Continuous foreign buying and the European Parliament vote helped boost retail investor sentiment. Retail investors bought some shares related to garments," Prashan Fernando, CEO at Acuity Stockbrokers said.

"We believe the market will gain in the next week too."

The index has climbed 10.6 percent in the 21 sessions through Friday, having risen for 18 sessions in that period.

Turnover stood at 1.97 billion rupees, more than double of this year's daily average of 908 million rupees.

Market heavyweight John Keells Holdings gained 1 percent, while garment manufacturers Hayleys Fabric Plc and Teejay Lanka Plc rose 1.8 percent and 2 percent, respectively.

($1 = 152.1000 Sri Lankan rupees) 

(Reporting by Shihar Aneez; Editing by Amrutha Gayathri)

EU Parliament rejects motion to deny GSP+ for Sri Lanka

(LBO) – Sri Lanka won the vote in Brussels by 436 against and 119 in favor for the motion to deny GSP plus for Sri Lanka.

A group of EU parliamentarians last week forwarded a motion to deny Sri Lanka access to GSP Plus, citing the slow pace of essential reforms in Sri Lanka.

Foreign Affairs Deputy Minister Dr. Harsha de Silva, who is currently in Brussels, met number of Parliamentarians to lobby EU counterparts on Sri Lanka’s application for GSP Plus.

The European Parliament is made up of 751 members elected in the 28 member states of the enlarged European Union.

The EU is Sri Lanka’s biggest export market, accounting for nearly one-third of Sri Lanka’s global exports and in 2015, total bilateral trade amounted to 4.7 billion euros.

The GSP+ scheme is designed to help developing countries by granting full removal of tariffs on over 66 percent of tariff lines covering a very wide array of products including, for example, textiles and fisheries.

The GSP Regulation sets strict and clear criteria for granting GSP+.

Fitch assigns ‘BBB+(lka)’to DSI Group

Fitch Ratings has assigned DSI Samson Group,a National LongTerm Rating of ‘BBB+(lka)’. The Outlook is Stable.

DSG’s rating reflects leading positions in the domestic rubber tyre and footwear markets, which are supported by its wellknown brand, and an unmatched distribution network of 313 retail and wholesale points and six franchisees.

DSG’s market share also benefits from high tariffs on imports of tyres and footwear. These strengths are counterbalanced by increasing competition from imported footwear products and the weak local currency, which raises the costs of imported raw materials.

DSG is the market leader in the bicycle, motorcycle and three wheeler tyres industry in Sri Lanka, with a 45% export market exposure as of financial year end March 31,2016 (FY16). Furthermore, the company also holds the leading market position in the footwear segment despite competition from imported products.

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New CB rules may boost capital, mergers for small NBFIs - Fitch

New Central Bank regulations to increase minimum core capital levels for all licensed finance companies could spur small companies to improve their capital buffers and may reignite industry consolidation, Fitch Ratings said. 

Fitch believes the new directive is likely to address the need for higher capital buffers for the non-bank financial institutions (NBFI) sector as a whole to ensure financial system stability, given our expectation of a deterioration in asset quality and capitalisation in the sector following aggressive loan book growth in recent years and persistent weak operating conditions. 

The Central Bank directive in February 2017 requiring all licensed finance companies to increase their minimum core capital levels to Rs 2.5 billion by end-2020 in stages from the current Rs 400 million, with the first target of Rs 1 billion to be reached by January 1, 2018. 

Capitalisation for the NBFI sector remains relatively low, with the core capital ratio at around 11.7% at end-September 2016. This level of capitalisation is similar to that of the banking sector, but we feel insufficient, as NBFIs have higher risk appetite than banks.

At end-September 2016, finance companies’ reported six-month NPLs accounted for 5.4% of total advances, compared with the three-month ratio of 2.9% for the banking sector. Fitch estimates that the ratio could be much higher for the finance companies at a three months level.

The new rules follow a previous plan to bring about financial sector consolidation, which did not significantly reduce the number of finance companies. There were 58 NBFIs covered by the “Master Plan for the Consolidation of the Financial Sector” in 2014-2015, some of which merged with larger finance companies or were acquired by banks. The sector currently comprises 46 licensed finance companies, of which the 20 largest ones assets as of end September 2016.

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Corrective actions put economy into stabilisation

Unfavourable weather conditions,sluggish global economic recovery cause economy to grow at a slower rate

The Sri Lankan economy has showed early signs of stabilisation in 2016 in response to corrective actions adopted by the government and the Central Bank.

The Central Bank Economic Review released on Wednesday said unfavourable weather conditions and sluggish global economic recovery caused the economy to grow at a slower rate of 4.4 per cent in 2016 in real terms, in comparison to 4.8 per cent in the previous year, although a steady acceleration in quarterly growth was observed from the second quarter of the year amidst tightened fiscal and monetary policies.

Increased investment expenditure, especially in the construction sector, drove economic growth during the year, while consumption expenditure slowed in response to the policy environment in place.

The financial sector, in the meantime, continued to expand during the year whilst exhibiting resilience amidst challenging market conditions both globally and domestically.

Meanwhile, fiscal operations registered a notable improvement in both revenue and expenditure fronts, resulting in the containment of the overall budget deficit at the envisaged level of 5.4% of Gross Domestic Product (GDP).

In spite of these achievements, central government debt as a percentage of GDP increased, illustrating the narrowing fiscal manoeuvrability within the overall macroeconomic policy framework and highlighting the necessity of continued efforts to sustain the fiscal consolidation process.

In 2016, the Sri Lankan economy grew by 4.4 per cent in real terms, amidst numerous global and domestic challenges.1 Unfavourable weather conditions that prevailed during the year adversely impacted economic activity, primarily in the Agriculture sector.

Services related activities, which constitute 56.5 per cent of real GDP, grew by 4.2 per cent in 2016, on a year-on-year basis, supported by the expansion in financial services, insurance, telecommunications, as well as transportation, and wholesale and retail trade.

Industry related activities, which account for 26.8 per cent of real GDP, recorded a notable growth of 6.7 per cent, year-on-year, driven by the subsectors of construction, and mining and quarrying.

National savings also improved in 2016 as a result of the expansion in net current transfers from the rest of the world while net primary income from the rest of the world declined. Consequently, national savings as a percentage of nominal GDP improved to 28.9 per cent in 2016 compared to 26.0 per cent in 2015.

Sri Lanka’s external sector performance remained subdued in 2016, with foreign exchange outflows exceeding the moderate inflows during the year.

Meanwhile, Sri Lanka’s gross reserve asset position declined to US dollars 6.0 billion, as at end 2016, equivalent to 3.7 months of imports of goods and 3.1 months of imports of goods and services.

The decline in gross official reserves was primarily due to foreign currency debt service

payments, settlement of international foreign currency swap arrangements, repayments under the IMF Standby Arrangement (SBA) facility and the supply of liquidity to the domestic foreign exchange market, particularly in the first half of the year.

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Pan Asia Bank’s Q1 profit rises 16% to Rs. 353 m amid challenges

• Bank expresses confidence in meeting Rs. 10 billion core capital by year’s end 
• Return on equity high around 19% 
• Maintains NIM around 3.80% 
• Interest income rises 36% to Rs. 3.89 billion
• Overall efficiency level improves as cost-to-income falls, return on asset rises 

Sri Lanka’s fastest growing bank, Pan Asia Banking Corporation Plc, reported an after-tax profit of Rs. 353.4 million for its January-March quarter (1Q’17), recording an increase of 16% from the same period last year.

The performance was largely supported by a significant increase in fee and commission income, slightly lower tax liability and the closer tab kept on costs. However, core banking performance became subdued in response to the tighter credit conditions that remained throughout the period.

The bank’s earnings per share was Rs. 3.41 by the end of the 1Q ’17, slightly less than the Rs. 3.91 reported in the same period of 2016 due to the increase in the bank’s equity resulting from the Rs. 2.0 billion rights issue in March 2017 which was promptly oversubscribed.

Meanwhile, the income tax expense for the period came down by 12% to a little under Rs. 160 million for the quarter from a year ago as a result of effective tax management.

What is also notable is the fact that despite the new equity injection, the bank was able to maintain its Return on Equity (RoE) at 18.95%, which is among the highest in the industry, albeit slightly down from the 19.97% reported three months ago.

RoE is the mostly watched performance indicator to gauge the attractiveness of the banking sector and Pan Asia Bank during its last three years has consistently remained an outlier in the industry. This demonstrates the bank’s ability to generate robust performance, reporting higher quarterly earnings year-over-year, thus ensuring consistently higher returns for its shareholders.

In spite of the mounting pressure on banking sector margins as a whole, the bank was largely able to maintain its Net Interest Margin (NIM) at 3.79%, higher than the industry average of around 3.4% although slightly down from its December mark of 3.87%.

Speaking on the bank’s recent performance, the bank’s newly-appointed Director/Chief Executive Officer Nimal Tillekeratne said this performance was a true reflection of the bank’s ability to report consistently higher financial performance even amid challenging conditions.

“I am happy to announce our financial performance for the first quarter because the bank operated under less than favourable conditions such as rising interest rates, a slowdown in demand for new loans and a risk of new addition to non-performing loans.

“Early identification of market developments, management foresight and the proactive and prudent decision-making of the bank enabled us to generate superior financial performance even in tough times.

Now that we have proved that we can deliver even under trying conditions, I am very confident that Pan Asia Bank can continue to deliver exceptional performances exceeding stakeholder expectations,” Tillekeratne said in the earnings release.

Commenting further on the recent issue of rights, he stated that the bank could meet the minimum core capital requirement of Rs. 10 billion by the end of 2017 with the strong earnings forecast for the remainder of the year.

By the end of 31 March 2017, the bank had a core capital base of Rs. 8.7 billion and a total capital base of Rs. 10.5 billion.

Speaking on the future direction of the bank, he said: “We have developed our new three-year strategy with a clear focus on serving the diverse financial needs of Sri Lanka’s growing middle income class and also to uplift the Micro and Small and Medium Enterprises segment that are considered the lifeblood of Sri Lanka’s economy.

“We are currently rolling out these strategies with the guidance of the Board of Directors, an able management team and the efficient execution by all the staff members across our 83 branches spread across all parts of the island and I am confident Pan Asia Bank is now on its path to becoming a formidable mid-sized commercial bank in Sri Lanka.”

Core banking performance

The bank’s core banking performance was impacted by the tightening of monetary and fiscal conditions because higher interest rates and higher indirect taxes dampened the demand for new loans.

Although the interest income rose by a strong 36% to Rs. 3.89 billion from a year ago, the corresponding interest expense grew by an even higher 54% year-on-year (yoy) to Rs. 2.68 billion, resulting in Net Interest Income (NII) of Rs. 1.21 billion, a modest increase of 7% from a year earlier. This is mainly due to the fact that the rise in deposit rates outweighed the rise in lending rates as the bank had to offer attractive interest rates to mobilise deposits.

The low-cost deposit base measured by the Current and Savings Account (CASA) ratio also declined to 19.6% from 20.3% in December as mid-term deposits grew much faster.

Other income acted as an anchor

Net fee and commission income acted as an important anchor to guard against tightened NIIs as such income grew by a strong 63% yoy to Rs. 339.95 million.

This is predominantly due to credit-related fee income and partly due to the fee income from credit cards.

The bank will continue to explore all avenues to grow its fee and commission income base which will serve as a strong buffer against tightening margins.

The bank is now driving its trade finance portfolio with a renewed focus leveraging its unmatched service quality to the importer and exporter fraternity in the country.

Continued improvement in efficiency

As a result of productivity and efficiency enhancement activities pursued during the last four years, the bank was able to bring down its cost-to-income ratio - a key banking sector efficiency indicator - to 54.24% from 56.03% three months ago.

Meanwhile, return on assets also rose to 1.11% from 1.05% in December.

This is a significant achievement given the general increase in the prices of the economy as well as the recent increase in value added tax.

The staff cost rose by a little under 10%, mainly due to the increased salaries and other emoluments while the other expenses rose by 16% due to the generally increase in price levels and indirect taxes.

The bank is now on an aggressive staff rationalisation program which will see excess head office staff being redeployed to the branch network which will be expanded up to 100 within the next 18 months.

Further, the new management remains committed to streamlining the processes and workflow automation to increase efficiency in all processes to enhance cost savings, speed of deliver and service quality to deliver a better customer experience.

Stronger balance sheet

The bank’s total assets remained largely unchanged at Rs. 129.12 billion during the January-March quarter as growth in both loans and deposits slowed down in response to higher interest rates.

Both loans and advances and deposits grew by a little over Rs. 2.0 billion to Rs. 100.5 billion and Rs.93.8 billion respectively.

Meanwhile, both Tier I and Tier II capital adequacy ratios received a boost from the recent rights issue proceeds of Rs. 2.0 billion and by the end of 31 March 2017, the two ratios stood at 11.07% and 13.83% respectively, significantly up from 8.37% and 11.40% in December 2016.

With the strengthening of capital buffers the bank is now well positioned to expand its asset base much faster than before.

The asset quality came under slight pressure due to new additions to Non-Performing Loans (NPL) amid a slowdown in loans. Therefore the gross NPL ratio rose to 5.63% from 4.74% in December but the bank is confident that the ratio can be brought down with the appropriate strategies already in place.

With a fresh direction under its new CEO and the new strategic plan which in now in place, Pan Asia Bank is now well poised for robust growth during the next three years.
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