Pan Asia Bank bottom line narrows 12% during June quarter

The mid-sized bank, Pan Asia Banking Corporation PLC, has reported a decline in its profits for the April-June quarter amid higher cost of funds and poor asset quality in a higher interest rate environment. 

According to the interim financial accounts filed with the Colombo bourse, the bank, with an asset base of about Rs.130 billion, reported earnings of Rs.2.51 a share or Rs.263.5 million for the quarter under review, down 12 percent year-on-year (YoY).

The financials showed that the core-banking operations had suffered a blow from the higher interest rates as the net interest income edged down by 3.0 percent YoY.

The bank had a net interest income of Rs.1.17 billion for the period as the interest expense rose by as much as 29 percent YoY, while the interest income rose by only 17 percent YoY during the same period.

The margins came under pressure as the net interest margin fell by 14 basis points to 3.73 percent YoY. 

The most notable was the increase in bad loans as the non-performing loans ratio jumped to 6.26 percent from 4.74 percent in December 2016. The bank has been consistently bringing down its non-performing loan ratio during the last three years but the June quarter marks a reversal.

This could be attributed to the increase in sour loans amid some lackluster growth in the loans and receivables.

The loans and receivables grew by not more than Rs.1.8 billion during the six months to June 30, 2017, despite Pan Asia Bank’s competitors were seen growing their loans faster.
The bank had a gross loans and receivables book of Rs.102.9 billion by June
30, 2017.

Meanwhile, the deposits grew by Rs.6.6. billion to Rs.98.1 billion, largely from the medium-term deposits as the low-cost deposit portfolio saw its size diminishing further.

Lower current and savings accounts (CASA) appears to be also an issue for the bank in fighting the higher cost of funds, which has been pinching its margins.

The bank in March 2017 raised a little over Rs.2.0 billion via a rights issue to stay in line with the Central Bank’s interim minimum capital requirements.

With the rights issue proceeds, the bank is now well compliance with the BASEL III minimum capital rules but fresh capital would be required going forward to fund growth in the medium term.

Meanwhile, for the six months ended June 30, 2017, the bank reported earnings of Rs.2.96 a share or Rs.616.8 million, up 2.0 percent from a year earlier.

Prasanna appointed as new Chairman

Pan Asia Bank last Friday announced the appointment of G.A.R. Dimuth Prasanna as its Chairman with effect from July 30, 2017.

His appointment comes in the wake of the retirement of Eshana De Silva, who functioned in the top post less than a year.

De Silva completed his nine-year service period as a Director of Pan Asia Bank on July 29, as per the corporate governance rules of the Central Bank.

De Silva held almost seven million Pan Asia Bank shares at the time of his retirement.
Prasanna was appointed to Pan Asia Bank as a Director in May 2012 and as Deputy Chairman in September 2016, up to January 25, 2017.

He is Chairman of Grandmark (Pvt.) Ltd and is Managing Director of Wise Property Solutions (Pvt.) Ltd.

He also serves as a Director on the boards of Royal Ceramics Lanka PLC, Royal Porcelain (Pvt.) Ltd, Rocell Bathware Ltd, Country Energy (Pvt.) Ltd, La Fortresse (Pvt.) Ltd, Delmege Forsyth & Co. (Exports) (Pvt.) Ltd, Delmege Insurance Brokers (Pvt.) Ltd, Rocell Properties Ltd, Delmege Coir (Pvt.) Ltd, Delship Services (Pvt.) Ltd, Delmege Freight Services (Pvt.) Ltd, Delmege Air Services (Pvt.) Ltd, Lewis Brown Air Services (Pvt.) Ltd, Hayleys Global Beverages (Pvt.) Ltd and Lanka Tiles PLC.

He has wide experience in various businesses and business management.

Prasanna held 34,801 Pan Asia Bank shares at the time of his appointment as Chairman.

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Sri Lanka's Lion Brewery downgraded after taxes favour hard liquor

ECONOMYNEXT - Fitch Ratings has downgraded the rating of Lion Brewery to 'A+(lka)' from 'AA-(lka)' Sri Lanka's largest beer maker on lower sales volumes triggered by recent tax hikes, which drove up hard liquor sales by 27 percent.

The outlook is negative.

Many consumers switched to small bottles of arrack after taxes on so-called 'strong beer' was hiked by the current administration.

Among top producers include Distilleries Corporation and W M Mendis, a firm connected to Sri Lanka's Perpetual group.

Lion's net leverage worsened to 6.3x during the financial year ended-March 2017 (FY17), from 1.9x at end-FY16, as the beer volume dropped by more than 50% due to successive tax increases and a six-month halt in domestic production due to floods in 2016, Fitch said.

The rating agency said beer industry volumes contracted from 2014 to 2016, as 'excise duties per unit of alcohol of strong beer surpassed that of hard liquor due to tax increases in 2015'.

A tax on beer cans was also introduced from November 2016, prompting consumers to switch to hard liquor, the rating agency said. Strong beer made up 75 percent of Lion Beer sales.

The full report is reproduced below:

Fitch Downgrades Lion Brewery to 'A+(lka)'; Outlook Negative 

Fitch Ratings-Colombo-31 July 2017: 

Fitch Ratings has downgraded Sri Lanka's Lion Brewery (Ceylon) PLC's National Long-Term Rating to 'A+(lka)' from 'AA-(lka)'. The Outlook is Negative. The agency has also downgraded the National Long-Term Rating on Lion's outstanding senior unsecured debentures to 'A+(lka)' from 'AA-(lka)'.

The downgrade reflects Fitch's expectations that Lion's net leverage, defined as lease-adjusted debt net of cash/operating EBITDAR, is unlikely to fall below 2.0x over the next three years due to lower beer sales from the higher taxes imposed over the last 18 months. We do not expect Lion's EBITDA to recover to historical levels over the same period. The Negative Outlook reflects the potential for further downgrades should Lion's sales volume not recover enough in the next 18 months to reduce leverage to less than 3.0x.

Lion's net leverage worsened to 6.3x during the financial year ended-March 2017 (FY17), from 1.9x at end-FY16, as the beer volume dropped by more than 50% due to successive tax increases and a six-month halt in domestic production due to floods in 2016.

KEY RATING DRIVERS

Shift in Market Dynamics: Beer industry volumes saw large contraction between 2014 to 2016, while hard-liquor volume increased by almost 27%, as excise duties per unit of alcohol of strong beer surpassed that of hard liquor due to tax increases in 2015. In addition, the reinstatement of VAT on alcohol products and the introduction of taxes on beer cans with effect from November 2016 prompted consumers to substitute strong beer, which has an alcohol content of more than 8%, with the consumption of hard liquor. Strong beer accounted for more than 75% of Lion's sales volume in FY17.

Lower EBITDA Margins: Fitch expects Lion's EBITDAR margins to recover to around 24% in FY18, from 20% in FY17, after they were diluted due to a decline in the demand for beer caused by multiple tax increases and floods interrupting production in mid-2016, which led to Lion resorting to costlier imports. Fitch expects production to normalise and sales volume to improve as the company regains most of the retail shelf-space it lost last year. However, margins may remain below historical levels over the medium term because the excise duties on a unit of pure alcohol in beer surpassed that of hard liquor after the back-to-back tax increases, which could pressure beer volumes. We do not expect Lion to further increase beer prices as it may impede volume growth.

Market Leadership: Lion has a leading market position in the domestic beer industry. Its market share is supported by its entrenched brand and widespread retail coverage, with access to more than 2,250 outlets around Sri Lanka. Lion's market share is protected to some extent by extensive industry entry barriers stemming from stringent restrictions on advertising and retail licenses. 

Lion also benefits from ample production capacity, which exceeds 1.5 million hectolitres per annum, and is sufficient to meet demand over the medium term.

Volatile Regulatory Framework: Frequent tax hikes and introductions inhibit the industry's profitability. The government has consistently used excise taxes as a tool to boost revenue to bridge budget deficits; consequently, from October 2015 to November 2016 the industry - especially beer makers - was taxed from multiple fronts through higher excise duties, the introduction of beer-can taxes and reinstatement of VAT, dampening the competitiveness of beer. Fitch does not expect further drastic tax increases that could weaken demand, especially given the sector's large contribution to government's tax revenue.

DERIVATION SUMMARY

Lion's rating is supported by its leading market position in the domestic beer industry, but counterbalanced by high regulatory risks in the form of frequent tax policy revisions that have caused operating cash flow volatility. Lion's business risk profile is weaker compared with its closest rating peer, Hemas Holdings PLC (AA-(lka)/Stable). Hemas is a well-diversified conglomerate with exposure to the defensive healthcare and fast-moving consumer goods sectors. Hemas also has a conservative approach to acquisitions and expansions and has lower leverage than Lion, supporting its higher rating.

Lion is placed four notches below the Distilleries Company of Sri Lanka PLC (DIST, AAA(lka)/Rating Watch Negative) - the country's largest spirit manufacturer - reflecting DIST's stronger market position as well as its stronger margins and lower leverage than Lion. The Rating Watch Negative reflects potentially higher financial risks following a September 2016 group restructure.

Sunshine Holdings PLC (A(lka)/Stable) and Richard Pieris & Company PLC (A(lka)/Stable) are rated one notch below Lion, reflecting their significant exposure to the structurally declining agriculture segment and lower EBITDA margins. Sunshine also faces regulatory risks in its pharmaceutical distribution division, which act as a short-term rating constraint.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Lion include:

- revenue to recover with a 1.5-fold increase over FY18 and FY19

- EBITDAR margins to normalise at 24% over the next two years, but remain lower than historical levels of the high twenties due to heavy taxation on beer inhibiting volume and profitability

- excise duty on strong and mild beer to remain unchanged during FY18 and increase by over 5% on average during in FY19 and FY20

- capex at 12% of net revenue in FY18 then remain low at 2.5% on average over FY19 and FY20, as Lion's production is only likely to ramp-up to FY16 levels of around 96 million litres in FY21 

- no dividends during FY18, then reverting to historical levels

RATING SENSITIVITIES

Developments that May, Individually or Collectively, Lead to Negative Rating Action

- If Lion is unable to lower its adjusted net debt/operating EBITDAR to 3.0x by FY19
Developments that May, Individually or Collectively, Lead to Positive Rating Action

- We may revise the Outlook to Stable if there is a meaningful improvement in sales volume that leads to adjusted net debt/operating EBITDAR falling below 3.0x on a sustained basis

LIQUIDITY

Adequate Liquidity: Lion has a comfortable liquidity position, with an unrestricted cash balance of LKR7.6 billion as of FYE17 and unutilised credit lines of LKR5.1 billion to meet LKR4.5 billion of contractual maturities falling due in the next 12 months. Lion's strong market position in the domestic beer industry and consistent access to bank funding because it is one of Sri Lanka's largest listed corporates further support liquidity.

Of total gross debt of LKR18.9 billion as at end-March 2017, 41% relates to revolving loans - including the overdraft facility- and term loan facilities account for 34%. Lion had LKR3.9 billion of debentures in issue as at FYE17 (21% of total gross debt), with maturities ranging between FY19 and FY20. Debentures with a face value of LKR799.4 million were redeemed during FY17.

Sri Lankan shares hit over 12-wk closing low led by telcos, beverages

Reuters: Sri Lankan shares fell on Monday to a more than 12-week closing low in thin trade as investors sold telecommunication and beverages stocks and as a right issue mopped up liquidity, but foreign investors were net buyers for a thirteenth straight session.

The Colombo stock index ended 0.43 percent weaker at 6,637.39, its lowest close since May 4. The bourse fell 1.63 percent during the month, but is up 6.57 percent so far this year.

Shares of large cap Ceylon Tobacco Company Plc fell 0.87 percent, while Dialog Axiata Plc lost 2.54 percent and Valibel One Plc ended 4.04 percent weaker.

Turnover stood at 508.2 million rupees ($3.31 million), well below this year's daily average of around 893 million rupees.

Private lender Sampath Bank Plc announced a rights issuance of one new share for every six existing shares.

"The market dipped a bit on telecoms. The rights issue mopped up the liquidity, but market is looking positive," said Hussain Ghani, associate director at Asia Securities.

Foreign investors net bought shares worth 121.8 million rupees on Monday, extending the year-to-date net foreign inflow to 25.8 billion rupees. 

($1 = 153.5000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal; Editing by Biju Dwarakanath)

AIA operating profit up 16 %, interim dividend up 17 %

AIA has delivered an excellent set of results in the first half of 2017 with record VONB growth of 42 per cent to US$1,753 million.

The Board has declared a 17 per cent increase in the interim dividend for 2017. This reflects AIA’s excellent financial results in the first half as well as our confidence in the outlook for the Group.

“AIA has significant competitive advantages created over our long history in Asia. We have a clear strategy that is working well and is fully aligned with the substantial opportunities presented by the extraordinary social changes and substantial economic growth taking place across the region. Our strong track record of value creation is the direct outcome of our many experienced teams working collectively to deliver our strategic priorities. We will continue to challenge ourselves and our strategy to ensure we capture the many significant opportunities that the region presents – well into the future.

“Today’s announcement is the first time I have reported our financial results since I assumed the role of Group Chief Executive at the beginning of June and I am delighted that we have delivered a very strong performance. AIA is an exceptional company with outstanding people and a unique franchise. I look to the future with great enthusiasm as we continue to realise AIA’s full potential in Asia and generate sustainable value for our customers and shareholders,” said Ng Keng Hooi, AIA’s Group Chief Executive and President.

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Sinhaputhra records post tax profit of Rs 154 mn

Sinhaputra Finance has reported an increase of 84% in pre tax profit compared to the previous year, despite allowing for a provision of Rs. 329 mn. The effect of this provision was a reduction in capital funds which now stands at Rs 1.1 bn.

During the last 39 years, there have been no less than six economic busts, some stretching for long periods. Sinhaputhra’s responses have been modulated during these ups and downs and safeguarding depositor’s assets have always been the centre of concern during these periods.

Managing Director Ravana Wijeyeratne said, “whilst this cautious growth pattern of the company has been reflected in its mature asset quality and a realistic consideration of the nation’s debt repayment capacity, it has also allowed the company to build its human capital and core competencies in response to these real issues rather than being seduced by risky opportunities during periods of dizzying growth periods that would mask such underlying issues with glossy ratios, but may result in future problems.”

Ali Asger Shabbir buys over CFT

Dr. Ali Asger Shabbir purchased 85,557,022 ordinary shares of Ceylon and Foreign Trades PLC (CFT) at a price of Rs. 5 per share thereby increasing his stake to 61.027%.

Dr. Shabbir confirmed the purchase and mandatory offer to acquire the balance issued and fully paid voting shares of CFT in a corporate disclosure sent to the Colombo Stock Exchange yesterday. Ceylon and Foreign Trades PLC traces its history back to 1949, one year after the country gained independence from British rule, when a group of pioneering businessman banded together to form this company.

CFT is one of the oldest trading companies in Sri Lanka, which was established in 1949 and became a publicly quoted company in 1978.

CFT, an asset rich company which is mainly into real estate, at present owns a two-acre warehousing complex at Bloemandal Road, Colombo, a 96-perch plot of land in Sedawatta, a five-acre property in Grandpass which is known as the Unilever property and 22% ownership in On’ally Holdings PLC which is a public quoted company with substantial real estate interest in the country including Unity Plaza, becoming it’s second largest shareholder.

The Net Asset Value of CFT amounts to Rs. 12.54 per share as per the latest published interim accounts which is a significant discount to its market trading price.
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