Sri Lankan banking system outlook negative on macroeconomic risks: Moody’s

LBO - Moody’s Investors Service says that the outlook for Sri Lanka’s banking system is negative, with both asset quality and profitability under pressure with macroeconomic risks.

Srikanth Vadlamani, a Moody’s Vice President and Senior Credit Officer says the economy will only see a modest growth rebound as the government’s fiscal constraints continue to limit public investment and private spending, despite stronger goods and services exports.

Moody’s conclusions are contained in its just-released “Banking System Outlook: Sri Lanka, Macroeconomic risks from weak fiscal position and deteriorating bank asset quality underpin negative outlook”.

Moody’s outlook assesses five key factors: operating environment, stable; asset risk and capital, deteriorating/stable; profitability and efficiency, deteriorating; funding and liquidity, stable; and government support, deteriorating.

“Credit growth was very high over the last two years, with the credit multiplier (credit growth/GDP growth) shooting up to an average of 2x over 2015 and 2016, up from 1x in 2014,” says Vadlamani.

“As the loans made over this period start seasoning, asset quality will deteriorate. In addition, rising interest rates add to repayment burdens. However, increased loan loss reserves will provide some comfort,”

“In addition, profits will come under pressure as higher funding costs offset the benefits from higher loan rates, while credit costs move higher.”

Moody’s said at the same time, capital will remain stable as the banks are raising capital and reducing dividends to comply with Basel III requirements, though execution and market risks could derail fund-raising efforts.

“Under our baseline scenario analysis, capital, as defined by tangible common equity to risk weighted assets, will
decrease to 7.6% at end-2018 from 7.8% at end-2016, without any additional equity raising,” Moody’s said.

“The funding profiles of the banks are set to improve after weakening in recent quarters, as loan growth slows down.”

Moody’s further said Sri Lankan banks hold sizeable liquid assets to cover their liquidity needs and movements in deposits.

“The rated banks’ liquid assets averaged around 30% of tangible banking assets as of December 2016, thereby providing considerable buffers against funding risks,”

“On the other hand, a high debt burden and contingent liabilities relating to state-owned enterprises restrict the government’s capacity to support the banks.”

Sri Lanka govt securities demonstrate positive investor sentiments: Stan Chart economists

LBO - Foreign investor confidence in Sri Lanka has seen a notable increase with a warm response towards government securities, two leading economists from Standard Chartered Bank said.

Relatively high yield coupled with positive fiscal and policy outlook enhance the attractiveness of fixed income Government Securities of Sri Lanka.

Investors are less concerned about sensational political news, David Mann, chief economist, Asia of Standard Chartered Bank said in response to a question posed by LBO.

“Investors are positively disposed towards Sri Lanka due to the gradual progress in fiscal management, particularly in revenue side.”

During the recent past Sri Lanka suffered from poor tax collection, hitting a very low of 12 percent of Gross Domestic Product in 2015, down from 19 percent in early 1990’s.

Mann also commented positively on the success of the ongoing IMF program and demonstrated improvement in government revenue.

“The focus on revenue, instead of curtailing expenditure, is a more positive approach to fiscal management,” he said.

Mann also told LBO that Sri Lanka needs to attract FDI (Foreign Direct Investments) to tradable sectors and export oriented businesses to achieve sustained economic growth.

The FDI flow in the recent past has been mainly towards non-tradeable sectors such as hospitality and infrastructure.

Mann observed that to see an upward trend in FDI, Sri Lanka needs substantial improvements in ease of doing business and tax reforms among the other things.

The enactment of new Inland Revenue Act would be a significant driver of Sri Lanka as an investment destination and Mann adds that he does not expect a noteworthy improvement in FDI flows at least until 2018.

Saurav Anand, Economist, South Asia observed that the Central bank of Sri Lanka will have a managed depreciation of Sri Lankan Rupee. “This will likely eliminate shocks experienced in the past due to sudden depreciation of currency.”

Mann mentioned two possible “Black Swan” events – those occurrences that deviate beyond what is normally expected of a situation and that would be extremely difficult to predict- looming ahead of the global economy; North Korean situation spiraling out of contrail and Chinese economy collapsing.

Such events could pose cataclysmic challenges to the global economy, he said.

Melstacorp increases shareholding of Aitken Spence

Sri Lanka’s diversified Melstacorp has further increased its shareholding at Aitken Spence by 1.99 percent of the issued share capital of Aitken Spence.

Subsequent to this purchase Melstacorp and related parties together hold 199,992,329 shares which worked out to 49.038 percent of Aitken Spence.

Melstacorp said the transaction doesn’t trigger a mandatory offer as it is within the 2%. Subsequent to this purchase Melstacorp PLC and related parties together hold 199,092,329 shared which worked out to 49.038% of Aitken Spence PLC.
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Sri Lanka’s Carson eyes regional expansion with alliances, JVs

ECONOMYNEXT – Sri Lankan conglomerate Carson Cumberbatch PLC has said it is looking to expand in the south and south east Asian region through strategic alliances and joint ventures.

The group’s vision of becoming a ‘regional holding company’ is outlined in its ltest annual report.

“ . . . given the opportunities that exist within the rapidly developing economies in the region, we believe that our horizons in all our core businesses should extend to South and South East Asia,” the company told shareholders.

“As such, whilst Sri Lanka remains our priority, our strategic plans take in to account the need to mobilise resources and develop core competencies that will make our businesses competitive in the region,” the report said.

“An expansion in to the region will also benefit Sri Lanka. The future we envision will involve strategic alliances, joint ventures and other collaborative arrangements that will inject the necessary financial resources and the technical and management competencies required for our journey.”

The Carson group owns oil palm plantations in Indonesia, having sold estates in Malaysia, and also has entered the downstream edible oils and fats business with the acquisition of a specialty oils and fats manufacturing operation in Malaysia and a palm oil refinery in India.

Other businesses are beer brewing and retailing, portfolio and asset management, real estate and hotels.

Sri Lankan company profits grew slowly in June quarter

ECONOMYNEXT – Profits of companies listed on Sri Lanka’s stock exchange grew by 8.2% in the June 2017 quarter from a year ago with higher commodity and energy prices and floods affecting consumer spending, a brokerage said.

Total June quarter earnings of firms on the Colombo stock exchange of Rs54.9 billion were dominated by a “healthy performance” in the banks sector, up by 23% from a year ago, the food, beverage and tobacco sector, up 54, First Capital Equities said.

The capital goods sector, whose profits rose 23%, insurance firms whose earnings rose 36% and the health care equipment and services sector, where profits grew 22% from the year before also contributed to earnings growth in the quarter, they said in a report.

“However, the earnings growth was partially offset by negative earnings in Consumer Services Sector (-707%YoY), Energy Sector (-129%YoY) and narrowed earnings in Materials Sector (-30%),” it said.

The overall slow growth in the economy, increased commodity and energy prices and continued impact of floods influenced consumer spending, First Capital Equities said.

The June 2017 quarter profit growth was slightly higher than that of the March quarter, of 7.1%, but lower than earnings growth of 10.5% in the March quarter and 26.7% in the December 2016 quarter.