Sri Lankan shares snap losing spree to end higher

Reuters: Sri Lankan shares ended their losing spree to close higher on Tuesday as investors picked up battered blue-chip stocks, but lean first-quarter corporate results dampened sentiment.

The Colombo stock index ended 0.3 percent firmer at 6,147.27, edging up from its lowest close since July 12 hit on Monday. The bourse dropped 3.5 percent so far this year.

The index fell 0.47 percent last week, marking its first weekly decline in three.

Turnover stood at 409.9 million rupees ($2.57 million), less than this year’s daily average of 856.1 million rupees.

“We can see the local buying interest coming in to the market at the psychological support level of 6100 levels,” said Dimantha Mathew, head of research, First Capital Holdings.

“It is a good sign that the selling pressure is not there and we can see some select buying interest coming in to the market.”

Foreign investors sold equities net worth 731,474 rupees on Tuesday, extending the year-to-date net foreign outflow to 2.5 billion rupees worth of equities so far this year.

A downward revision in economic growth estimate earlier this month by the central bank hurt sentiment, analysts said.

Economic growth in 2018 is likely to be between 4 percent and 4.5 percent, falling short of an earlier estimate of 5 percent, Central Bank Governor Indrajit Coomaraswamy said earlier this month.

Shares in Nestle Lanka Plc ended 2.9 percent higher, while Ceylon Tobacco Company Plc ended 1.3 percent firmer, Ceylinco Insurance Plc closed 3.1 percent up and Carson Cumberbatch Plc ended up 0.9 percent.

($1 = 159.5500 Sri Lankan rupees) 

(Reporting by Ranga Sirilal, Editing by Sherry Jacob-Phillips)

Union Bank (UBC) continues to stagnate 4 years after historic TPG investment

LBO – Colombo Stock Exchange listed Union Bank of Colombo (UBC) reported lacklustre results for the quarter ended June 2018. These results have been a continuation of the slow performance the company has displayed over the last several years.

Although showing decent growth in revenue, operating income, and profit after tax, the bank still lags its competitors in the most important performance metric.

Return on equity (ROE) continues to trend below 3%, in an environment where yields of government securities are double digit, and other banking institutions have ROE’s in the high double digits.

Approximate ROE’s of Sri Lanka’s Banks:

Commercial Bank – 16%

Sampath Bank – 21%

Hatton National Bank – 16%

Seylan Bank – 12%

Nations Trust Bank – 24%

Union Bank of Colombo – 3%

Almost four years ago, a subsidiary of Texas Pacific Group (one of the worlds largest private equity firms) invested close to US$100mn for a 70% stake in UBC at a share price of Rs15.3.

Today, the stock languishes at Rs12.4 with the Sri Lankan currency having devalued significantly during that time period. Book value is Rs16/share indicating that investors are losing confidence in the business.

So far, the investment has been a loser for TPG, however, not nearly as much as a dud it has been to investors in UBC’s IPO almost 7 years ago. This IPO was heavily oversubscribed at a price of Rs25, leaving investors who have held on with large losses.

Based on past results, it is unclear how the bank will raise its ROE to that of its peers. Analysts say the bank continues to be in ‘risk off’ mode, failing to aggressively pursue increases in deposit base and loan books in line its more successful competitors.

Moody’s affirms ratings of BOC, HNB & Sampath; maintains negative outlook

LBO - Moody’s Investors Service has affirmed the local currency deposit ratings of Bank of Ceylon (BOC), Hatton National Bank Ltd. (HNB) and Sampath Bank PLC at B1/NP.

The foreign currency issuer rating and deposit ratings of these banks are also affirmed at B1 and B2/NP respectively.

Moody’s has also affirmed the Baseline Credit Assessments (BCAs) and adjusted BCAs of these banks at b1. As a result, their local and foreign currency Counterparty Risk Ratings (CRRs) are affirmed at Ba3/NP. Their Counterparty Risk Assessments (CRAs) are also affirmed at Ba3(cr)/NP(cr).

The rating outlooks of the banks, where applicable, are maintained at negative. The rating action follows the affirmation of Sri Lanka’s B1 sovereign rating and negative outlook on 26 July 2018.

Moody’s affirms Sri Lanka’s ratings at B1; maintains negative outlook

LBO – Moody’s Investors Service has today affirmed the Government of Sri Lanka’s foreign currency issuer and senior unsecured ratings at B1 and maintained the negative outlook.

Moody’s Investors Service said the decision to affirm the rating at B1 reflects Sri Lanka’s progress in implementing the planned reform program, which entails fiscal consolidation and a build-up foreign exchange reserves buffers, ahead of the end of the IMF Extended Fund Facility program in June 2019, along with the moderate per capita income levels, and stronger institutions relative to many similarly-rated sovereigns.

“This is balanced against Moody’s expectation that the sovereign’s fiscal strength will remain very low and government liquidity and external vulnerability risk will remain rating constraints,” Moody’s Investors Service said.

“The decision to maintain the negative outlook reflects Sri Lanka’s ongoing high vulnerability to a potential tightening in external and domestic financing conditions, given relatively large borrowing needs, reliance on external funding and still low reserves adequacy.”

That feature dominates Sri Lanka’s credit profile, Moody’s Investors Service said in a statement.

According to Moody’s, the government could face significantly tighter refinancing conditions at some point during the next few years, which would quickly lead to much weaker debt affordability and a higher debt burden, especially if the currency depreciated at the same time.

Concurrently, the local-currency bond and deposit ceilings remain unchanged at Ba1. The foreign-currency bond ceiling is unchanged at Ba2 and the foreign currency deposit ceiling at B2.

RATINGS RATIONALE

RATIONALE FOR THE RATING AFFIRMATION AT B1

RELATIVELY STRONG INSTITUTIONS AND ONGOING REFORMS BOLSTER REFINANCING CAPACITY

Under its IMF Extended Fund Facility Program, Sri Lanka continues to advance reforms that support fiscal consolidation and attempt to reduce external vulnerabilities. Progress in fiscal consolidation and in building up of reserves buffers strengthens the credit profile by providing greater assurance of Sri Lanka’s ability to refinance its domestic and external debt at affordable costs.

The government’s commitment to continuing to broaden and deepen its revenue base including through implementation of the Inland Revenue Act (IRA), which came into effect in April 2018, will bolster revenue generation. Moreover, legislative measures pursuant to changes in the Fiscal Management Responsibility Act aim to apply fiscal rules that ensure deficit and debt consolidation efforts endure beyond the conclusion of the IMF program.

In addition, the planned changes to the Monetary Law Act should strengthen the credibility and effectiveness of Sri Lanka’s monetary policy, helping the central bank anchor inflation expectations and prevent fiscal dominance. If effective, this would contribute to stabilising the cost of debt at lower levels and as a result enhance fiscal flexibility.

The Active Liability Management Act (ALMA) will provide the government with some flexibility to smooth the timing of its debt refinancing operations within a given year. Over time, effective use of the ALMA may allow the Sri Lankan government to smooth somewhat the consecutive large debt maturities over the period 2019-2023 and to prevent the recurrence of such a concentration in future. During the next few years, however, the gains will be limited given the high frequency of debt repayments.

In addition, the government plans to further diversify external funding sources through the issuance of Chinese renminbi or Japanese yen denominated bonds, as well as loans from other bilateral or multilateral lenders.

PERSISTENTLY HIGH GOVERNMENT DEBT BURDEN, LOW DEBT AFFORDABILITY AND STILL LOW

RESERVES ADEQUACY REMAIN KEY CREDIT WEAKNESSES

Balancing Sri Lanka’s credit strengths is very low fiscal strength, which will remain a key source of risk over the next few years, despite prospects for further narrowing of the budget deficit and gradual decline in government debt as a share of GDP. The country’s reliance on external financing without commensurate foreign exchange inflows also means that Sri Lanka’s external position remains fragile, despite a build-up in foreign exchange reserves recently.

As a baseline, Moody’s assumes broadly stable overall financing conditions for the government. Under this assumption, together with continued fiscal consolidation after the end of the IMF program, albeit at a slower pace, Moody’s expects the government’s debt burden to continue to decline over the remainder of the decade.

However, even in the absence of shocks debt will only fall slowly, to around 70% of GDP by the turn of the decade, from 77% of GDP in 2017.

Moody’s estimates that government gross borrowing requirements, incorporating projections on fiscal deficits and maturing government debt repayments, to reach about 18.5% of GDP in 2018 and, in the baseline, forecasts them to fall to a still-high level of 13% by 2020. A significant proportion of the government’s debt is financed at short maturities, including Treasury bills equivalent to around 12.5% of outstanding domestic debt, or about 5% of GDP in 2017.

Given a relatively narrow domestic financing market, the government remains reliant on external bilateral and commercial lenders’ continued willingness to refinance large amounts of foreign currency debt. Moody’s estimates that the government will have made principal payments on external debt of around $3.8 billion per year, on average, from 2016-18.

Despite Moody’s expectation of a further rise in the level and an improvement in the quality of foreign exchange reserves, persistently low reserves adequacy denotes vulnerability to a shift in foreign financing conditions. Moody’s estimates that Sri Lanka’s External Vulnerability Indicator (EVI), the ratio of external debt payments due over the next year to foreign exchange reserves, will continue to hover around 150% in the next few years, well above the median level of B-rated sovereigns.

The government’s strategy is to shift some of its funding to domestic, local currency investors, given lower debt repayments on domestic Treasury bonds in coming years. Moody’s expects Treasury bond maturities to fall to around 2% of GDP, on average per year over the period from 2019-2023, from about 4% of GDP in 2018, providing some space for the government to increase local-currency borrowings to finance the fiscal deficit.

But while this will help reduce exchange rate risk, given local currency interest rates are much higher than the average cost of external debt, debt affordability will remain weak. Interest payments will continue to absorb 37%-40% of revenue in the next couple of years, and will remain highly sensitive to either a rise in the cost of debt and/or a slower revenue increase than currently assumed.

RATIONALE FOR MAINTAINING THE NEGATIVE OUTLOOK

The negative outlook reflects Moody’s view that Sri Lanka’s credit profile is dominated by the government’s and country’s elevated exposure to refinancing risk. Sri Lanka could face significantly tighter external refinancing conditions at some point during the next five years, which would quickly lead to much weaker debt affordability, especially if the currency were to depreciate as a result.

With a persistently high debt burden, weak debt affordability, large borrowing needs and low foreign reserve adequacy, Sri Lanka’s vulnerability to a shift in domestic and external financing conditions is high.

In particular, every year between 2019 and 2023, the government will need to make principal payments on external debt of around $3.5 billion per year (about $17 billion overall), in addition to financing part of the budget deficit externally. For the economy as a whole, part of the current account deficit corresponds to private sector activities also financed externally. Moody’s expects the overall current account deficit to be around 2.5% of GDP in the next few years, or around $2.6 billion on average per year.

In general, the government’s ongoing progress on fiscal consolidation relies on further effective implementation of revenue reforms, which has only started. The need to maintain sizeable primary surpluses over time and beyond the IMF program will test the government’s resolve, especially if GDP growth remains relatively muted.

Moreover, despite very substantial export potential, Sri Lanka has not yet managed to broaden its export base on a sustained basis.

Further, against the backdrop of a fractious political environment, persistent disruptive politics may lead to delays in legislative approval of future reforms and could potentially slow or sidetrack effective implementation of newly passed reforms. As a result, perceptions that the country’s twin deficits could widen again could reduce investors’ appetite for investment in Sri Lankan debt.

WHAT COULD CHANGE THE RATING UP

The negative outlook signals that an upgrade is unlikely.

Moody’s would consider returning the outlook to stable should it conclude that external and domestic refinancing risks were likely to diminish.

That conclusion could be prompted by a faster and more sustained buildup of non-debt creating foreign exchange inflows than currently expected, which together with the demonstrated effectiveness of liability management strategies to smoothen and lengthen maturity payments, would significantly lower external vulnerability risks.

Over time, the implementation of further significant fiscal reforms that markedly raised government revenue and improved debt affordability and thus fiscal strength could also prompt Moody’s to stabilise the outlook.

WHAT COULD CHANGE THE RATING DOWN

Moody’s would consider downgrading the rating if it were to conclude that external and domestic refinancing capacity will not improve, and that Sri Lanka was likely to face difficulties in refinancing its domestic or external debt at affordable costs. Evidence that implementation of key policies is not effective, including further fiscal consolidation, monetary policy independence from fiscal developments, diversification of financing sources or liability management would likely have a negative impact on Sri Lanka’s access to and cost of finance.

In particular, a marked weakening in reserve adequacy from already low levels, which could stem from a loss of investor confidence and thereby capital outflows, would put downward pressure on the rating. A halt or reversal in fiscal consolidation that raised prospects of a higher government debt burden and prevented the expected decline in gross borrowing requirements could also prompt a downgrade.

Economic data and rating committee minutes
GDP per capita (PPP basis, US$): 12,811 (2017 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.3% (2017 Actual) (also known as GDP Growth)
Inflation Rate (National CPI, % change Dec/Dec): 7.3% (2017 Actual)
Gen. Gov. Financial Balance/GDP: -5.5% (2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.6% (2017 Actual) (also known as External Balance)
External debt/GDP: 59.4% (2017 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.

On 24 July 2018, a rating committee was called to discuss the rating of the Sri Lanka, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutional strength/ framework, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The issuer’s susceptibility to event risks has not materially changed.

CSE listed Kingsbury hotel (SERV) reports a loss, revenue flat

LBO – The Colombo Stock Exchange listed Kingsbury hotel (SERV) reported a small loss of Rs7mn for the quarter ended June 2018. Revenue was flat, up just 1%.

These results were actually better than the prior year June quarter where the property lost Rs26mn.

The Kingsbury is a Hayleys group subsidiary. Hayley’s is controlled by Sri Lankan tycoon Dhammika Perera, considered in some circles as Sri Lanka’s richest man.

The property underwent an extensive refurbishment after Hayleys bought it over from Nahil Wijesuriya. Despite the refurbishment, returns of the property have been lacklustre.

Performance of the June quarters in 2018 and 2017 were actually worse than 2016 and 2015 where the hotel made profits of Rs39 and Rs54 million respectively in the June quarter.

Tourism in the legacy city hotel sector is weakening with new properties such as the Movenpick and Shangri La coming online in Colombo. These new properties are much younger than the older 5-star hotels like the Kingsbury (previously Intercontinental), whose original dates of construction were decades ago.

United Motors (UML) reports another profit decline, despite vehicle import boom

LBO – Colombo Stock Exchange (CSE) listed United Motors Lanka (UML) reported revenue and profit declines for the quarter ended June 2018.

UML reported profit of just Rs94mn on revenue of Rs3.34bn. Profits were down 17% and revenue was down 14% year over year for the quarter.

Profits of UML have been on the decline for the last several years, despite the vehicle import boom that has occurred due to changes to the import tax structure on vehicles.

For the last few years, June quarter profits at UML have been as follows:
2018 – Rs94mn
2017 – Rs113mn
2016 – Rs295mn
2015 – Rs350mn

Analysts say that due to having the wrong product mix, UML is now generating returns below the cost of capital. On a huge asset base of almost Rs12bn, the company is making low single digit returns on equity.

In the past UML has been one of the best dividend paying stocks in the market, but with recent results weakening, analysts say that it is likely dividend payments will not be as robust as they have been in the past.

Sri Lanka's People's Leasing June quarter profits up 25-pct

ECONOMYNEXT - Profits at Sri Lanka's listed People's Leasing and Finance grew 25.3 percent from a year earlier to 997 million rupees in the June 2018 quarter on improving interest margins, interim accounts showed.

The finance company which is a unit of state-controlled People's Bank reported earnings of 63 cents a share in the quarter, interim accounts filed with the Colombo Stock Exchange showed.

People's Leasing and Finance closed 10 cents lower at 15.20 rupees on Monday.

In the June quarter, interest income increased 16.5 percent from a year earlier to 7.5 billion rupees, and interest expenses grew a slower 5.4 percent to 3.7 billion rupees expanding net interest income by 30 percent to 3.8 billion rupees.

Net earned premiums from an insurance subsidiary increased 16 percent to 1.1 billion rupees.

Bad loans provisioning grew 56 percent to 859 million rupees.

Personnel costs increased 29 percent to 972 rupees, while benefits, claims and underwriting expenses of the insurance subsidiary grew 20.4 percent to 821 million rupees.

Income tax expenses grew 31.5 percent to 388 million rupees.

People's Leasing and Finance's loan book expanded 3.7 percent from the previous March quarter to 148 billion rupees at end June 2018.

Deposits grew 0.4 percent to 69.7 billion rupees in the same period.

Debt securities issued increased 22 percent to 32 billion rupees while bank borrowings declined 12.6 percent to 27.4 billion rupees.

Sri Lanka's NDB Bank June quarter profits up 70-pct

ECONOMYNEXT - Profits at Sri Lanka's NDB Bank grew 70 percent from a year earlier to 1.3 billion rupees on improving net interest income margins, interim accounts showed.

The bank reported earnings of 7.15 rupees in the quarter, interim accounts filed with the Colombo Stock Exchange showed.

A NDB Bank share last traded at 114 rupees.

In the six months to end June 2018 earnings per share was 13.64 rupees on profits of 2.4 billion rupees, up 63 percent from a year earlier as net interest income rose 41 percent to 6.9 billion rupees.

In the June quarter, interest income grew 14.2 percent from a year earlier to 9.2 billion rupees, interest expenses rising 4.3 percent to 7 billion rupees saw net interest income expand 41 percent 3.5 billion rupees.

Net fee and commission income increased 17.3 percent in the quarter to 947 million rupees.

Bad loans provisioning grew 17.7 percent to 507.7 million rupees.

Personnel expenses were up 39 percent to 1.2 billion rupees and other costs rose 7.6 percent to 895 million rupees.

NDB Bank's loan book expanded 10 percent from end December 2017 to 301.5 billion rupees at end June 2018, and deposits grew 9 percent to 296.8 billion rupees.

Non-performing loans were 1.7 percent of total loans, up from 0.94 percent in the December 2017 quarter.

Tier I capital adequacy was at 9.85 percent at end June 2018, above the 7.875 percent regulatory minimum, but lower than 10.49 percent six months earlier.

Total capital adequacy was 13.87 percent end June down from 15.18 percent six months earlier, but above the regulatory minimum of 11.875 percent.

The Board of Directors have proposed to raise 6.2 billion rupees from a rights issue to strengthen regulatory capital requirements. The rights issue is subject to regulatory approval, the bank said.

Sri Lanka's John Keells Hotels June quarter losses deepen 14-pct

ECONOMYNEXT - Losses at Sri Lanka's listed John Keells Hotels expanded 14 percent from a year earlier to 263.5 million rupees on falling revenues at resorts managed by the group in the island and The Maldives, interim accounts showed.

The hotels company reported a loss of 18 cents a share in the quarter, interim accounts filed with the Colombo Stock Exchange showed. The share closed 20 cents higher on Friday at 8.50 rupees.

Revenue fell 11 percent to 2.1 billion rupees in the quarter, and cost of sales fell 11 percent to 814.9 million rupees, leading to a 11 percent contraction in gross profits to 1.3 billion rupees.

Revenue from Sri Lankan resorts fell 8.5 percent to 1 billion rupees despite improving occupancy rates, and losses fell 74 percent to 59.4 million rupees.

"The Sri Lankan Resorts segment recorded an improvement in occupancies despite the increased competition within the sector," Chairman of the parent company John Keells Holdings said in a statement in the group's financial report for the June 2018 quarter.

Revenues from Maldives fell 12.6 percent to 1.1 billion rupees, and losses ballooned to 204 million rupees, compared to a 2.2 million loss a year earlier.

"The Maldivian Resorts segment recorded an improvement in average room rates, although profitability was impacted by lower occupancies and the partial closure of Ellaidhoo Maldives by Cinnamon for refurbishment,

"However, occupancies at our hotels in the Maldives remained above the industry average during the quarter under review," he said.

In the June quarter, administrative expenses fell 17 percent to 1.1 billion rupees and distribution expenses decreased 14 percent to 67.5 million rupees.

Other operating expenses rose 43 percent to 430.3 million rupees including a one-off impairment loss of financial assets of 154 million rupees due to the closure of Cinnamon Hakuraa Huraa for refurbishment.

Another property Ellaidhoo Maldives by Cinnamon is partially closed for refurbishment until next September.

Net finance expenses grew 43 percent to 11.3 million rupees.

Tax expenses rose 515 percent to 27.4 million rupees, due to a 6.6 million tax reversal a year earlier.

John Keells Hotels said it was refurbishing Bentota Beach Hotel in Sri Lanka with costs estimated at 3 billion rupees, as well as The Nuwara Eliya Hotel estimated at 3.7 billion rupees.

The capital requirement to refurbish the two Maldivian properties is estimated at 12.1 million US dollars (nearly 2 billion rupees).

In the quarter John Keells Hotels increased its shareholding in Ceylon Holiday Resorts Ltd from 99.09 percent to 99.31 percent with an investment of 817 million rupees by subscribing to a rights issue.

Sri Lanka's Vallibel Finance June net profits up 31-pct

ECONOMYNEXT - Profits at Sri Lanka's listed Vallibel Finance grew 31 percent from a year earlier to 263.9 million rupees on improving net interest income despite higher bad loan provisioning and taxes, interim accounts showed.

The finance company reported earnings of 19.05 rupees a share in the quarter, according to interim financial accounts filed with the Colombo Stock Exchange. The share gained 80 percent on Friday to close at 68.80 rupees.

In the quarter, interest income grew 26.4 percent from a year earlier to 1.8 billion rupees and interest expenses increased by a slower 24.8 percent to 1 billion rupees, expanding net interest income by 28.5 percent to 771.9 million rupees.

Net fee and commission income grew 54.4 percent to 80 million rupees and other operating income was up 30 percent to 109.7 million rupees.

Bad loans provisioning increased 45.4 percent to 38.9 million rupees.

Personnel costs grew 28.6 percent to 220.8 million rupees, Administrative expenses rose 20.5 percent to 33.2 million rupees and other operating expenses grew 10 percent to 150.5 million rupees.

Value added tax on financial services increased 38.3 percent to 104 million rupees and income tax cost grew 53.7 percent to 150.1 million rupees.

Vallibel Finance's lending book including leases and hire purchase expanded 29 percent from a year earlier to 33.4 billion rupees.

Non-performing loans fell to 2.5 percent of total loans at end June 2018, down from 2.9 percent a year earlier.

Customer deposits grew a slower 19 percent in the period to 22.4 billion rupees while the company's interest bearing borrowings had increased 18.7 percent to 9.5 billion rupees.

Core capital adequacy was at 12.64 percent at end June 2018, up from 9.52 percent a year earlier, above the regulatory minimum of 5 percent.

Total capital adequacy was at 12.64 percent, down from 9.52 percent a year earlier, but above the 10 percent regulatory requirement.

Sri Lanka's DFCC Bank June net profit down 52-pct

ECONOMYNEXT - Profits at Sri Lanka's listed DFCC Bank was down 52 percent from a year earlier to 736.8 million rupees on higher provisioning for bad loans, interim accounts showed.

The bank reported earnings of 2.78 rupees a share in the quarter, interim accounts filed with the stock exchange showed. Earnings for the six months to end June 2018 amounted to 6.88 rupees a share with revenue growing 14 percent from a year earlier to 20.1 billion rupees.

A DFCC Bank share closed 90 cents higher on Friday to 105 rupees.

In the June quarter, the bank reported interest income growth of 22 percent from a year earlier to 9.7 billion rupees with interest expenses growing a faster 24 percent to 6.5 billion rupees, leading to an 18 percent growth in net interest income to 3.2 billion rupees.

Interest margin has improved to 3.8 percent from 3.6 percent six months earlier.

Net fee and commission income grew 33 percent to 471.7 million rupees and gains from trading financial instruments grew 8 percent to 128.3 million rupees.

Bad loan provisioning ballooned 159 percent to 777 million rupees.

Non-performing loans were 3.14 percent of outstanding loans at end June 2018, up from 2.77 percent six months earlier.

Gains from financial investment fell 94 percent to 70.6 million rupees in the June 2018 quarter on account of a gain from divesting listed shares in Commercial Bank the previous year.

Personnel costs fell 2 percent to 897.3 million rupees, depreciation charges grew 12 percent to 126.8 million rupees and other expenses grew 4 percent to 612.8 million rupees.

DFCC Bank's loan book grew 11 percent from end December 2017 to 236.7 billion rupees at end June 2018. Deposits grew 8 percent in the same period to 207.5 billion rupees.

Foreign currency deposits were 20 percent of total deposits, down from 21.6 percent six months earlier. Foreign currency loans were 11 percent of total loans, up from 9.8 percent during the same period.

The bank's Tier I capital ratio was 11.05 percent end June 2018, down from 13.09 percent end December 2017 but was higher than the minimum regulatory requirement of 7.875 percent.

Total capital adequacy was at 16.561 percent compared to the regulatory minimum 11.875 percent, improving from 16.53 percent six months earlier.

Sri Lanka's JKH June net profit down 23-pct on consumption slump, losses at hotels

ECONOMYNEXT - Profits at Sri Lanka's listed John Keells Holdings fell 23 percent from a year earlier to 2.2 billion rupees in the June 2018 quarter weighed down by declining earnings at retail and consumer foods businesses and losses at hotels and resorts offsetting gains from bunkering, port operations, banking and insurance.

The group reported earnings of 1.58 rupees a share in the quarter, interim accounts filed with the stock exchange showed. The stock closed 2.70 rupees lower at 142 rupees on Friday.

In the June quarter revenue grew 12 percent from a year ago to 30.2 billion rupees, cost of sales grew a faster 22 percent to 24.6 billion rupees contracting gross profit by 17 percent to 5.6 billion rupees.

Administrative expenses fell 3 percent to 3.2 billion rupees while selling and distribution expenses grew 18 percent to 1.2 billion rupees and other operating costs increased 31 percent to 1 billion rupees.

Net finance income fell 30 percent to 2.3 billion rupees.

-Segment results-

John Keells Holdings' June quarter earnings were bolstered by profit growth at its transportation and financial services business units, which were offset by declining earnings at retail, consumer foods and property businesses (which includes the 850 million US dollar Cinnamon Life mixed development project) and losses from hotels managed by the group.

Profits at the transportation unit grew 4 percent from a year earlier to 842 million rupees on a 53 percent growth in revenue of 5 billion rupees.

"The increase in profitability is mainly attributable to the performance of the group’s bunkering, and ports and shipping businesses," Chairman Susantha Ratnayake said.

In the June quarter, container volumes handled at South Asia Gateway Terminals which the group has a stake in grew 24 percent, compared to a volume of growth 15 percent for the entre Port of Colombo, Ratnayake said.

Bunkering volumes had grown 20 percent in the quarter.

Financial services segment saw profits increase 131 percent to 550 million rupees with revenue growing 12.4 percent to 2.5 billion rupees.

"The increase in profitability was primarily due to Union Assurance PLC, driven by a growth of 13 percent in gross written premiums. Nations Trust Bank recorded an improvement in performance driven by steady loan growth during the quarter under review".

Hotels and resorts reported a 278 million rupee loss in the June quarter, compared to a profit of 179 million rupees a year ago, with revenue falling 10.5 percent to 4.4 billion rupees.

"The decline is mainly attributable to the lower profitability in our city hotels and a non-cash impact of 202 million rupees at Cinnamon Hakuraa Huraa Maldives, on account of an impairment loss on non-financial assets arising from the closure of the hotel for re-construction," Ratnayake said.

Another property in the Maldives, Ellaidhoo Maldives by Cinnamon is partially closed for on-going refurbishment.

The remaining segments of the group - retail, consumer foods, property, plantation and tech - reported declining profits.

Retail which contributes the most to group turnover, reported a 51 percent decline in profits to 235 million rupees despite a 20.5 percent growth in revenue of 13.1 billion rupees.

"Profitability was impacted by depressed basket values due to weak consumer sentiments and store expansion related costs".

Consumer foods profits fell 46 percent to 339 million rupees with revenues falling 4 percent from a year earlier to 3.7 billion rupees in the June quarter.

"The decline in profitability is on account of the beverages business which recorded a volume decline of 37 percent. This is due to the implementation of a sugar tax from November 2017, which resulted in substantial price increases across the industry".

The group is introducing a range of sugar-free fizzy drinks, juices, dairy products and bottled water to shore-up revenue.

Profits from Plantations and Information Technology reported as a single unit fell 28 percent to 1.2 billion rupees on a 9.8 percent growth in revenue of 1.4 billion rupees, mainly due to falling finance incomes.

Plantations' earnings were hit by falling tea prices and the IT businesses reported lower profits because the previous year included profits of the group’s BPO business which was divested in September 2017.

The property segment of the group reported an 85.5 percent decline in profits to 9 million rupees despite revenue growing 1.3 percent to 226 million rupees.

"The construction of Cinnamon Life is progressing with encouraging momentum, with approximately 62 percent of the floor area sold in the two residential towers.

"Tender submissions for the Tri-Zen residential development project are expected to be received in the ensuing quarter, whilst presales continue to be encouraging.

"In addition, the master planning of an 18-acre suburban site North of Colombo is also currently underway," Ratnayake said.

Sri Lanka's Seylan Bank June quarter profits down 26.5-pct

ECONOMYNEXT - Profits at Sri Lanka's listed Seylan Bank fell 26.5 percent from a year ago to 973.7 million rupees in the June 2018 quarter on falling foreign exchange and investment incomes and increasing taxes, despite improving margins and lower bad loan provisioning, interim accounts showed.

The bank reported earnings of 2.66 rupees a share in the quarter, interim accounts filed with the Colombo Stock Exchange showed. The share closed Friday at 79 rupees.

For the six months to end June 2018, the bank reported earnings of 5.41 rupees a share with net interest income growing 18.8 percent from a year earlier to 8.7 billion rupees and net fee and commission income growing 10.3 percent to 1.9 billion rupees.

Interest margins had narrowed to 4.14 percent at end June, down from 4.24 percent at end December 2017.

In the June 2018 quarter, Seylan Bank reported an 11.4 percent growth in interest income from a year earlier to 11.8 billion rupees with interest costs growing at a slower 7 percent to 7.4 billion rupees which saw net interest income expand 19.3 percent to 4.4 billion rupees.

Net fee and commission income had increased 6 percent from a year earlier to 959.2 million rupees in the June quarter.

Foreign exchange income fell 91.6 percent to 15.6 million rupees and gains from financial investments fell 99 percent to 2.1 million rupees. Other operating incomes had declined 92 percent to 46.2 million rupees.

Bad loans provisioning fell 4 percent to 799.1 million rupees in the quarter after increasing the previous March quarter.

For the six months to end June, bad loan provisioning was up 14 percent from a year earlier to 1.3 billion rupees. Net non-performing loans were 3.96 percent of total loans at end June, up from 3.10 percent six months earlier.

In the June quarter, personnel expenses increased by 9 percent to 1.4 billion rupees and other expenses rose 10 percent to 1.3 billion rupees.

Income tax expenses rose 22 percent to 395 million rupees.

Seylan Bank's loan boon expanded 8.54 percent from end December 2017 to 304.8 billion rupees at end June 2018, while customer deposits grew a slower 4.3 percent to 320.4 billion rupees.

The bank's total Tier I capital ratio was 10.33 percent at end June 2018, above the regulatory minimum of 7.855 percent, and was marginally lower from 10.39 percent at end December 2017.

Total capital ratio was 13.91 percent at end June 2018, up from 13.46 percent six months earlier. The regulatory minimum total capital ratio is 11.875 percent.

Sri Lanka's Lion Brewery regains beer market dominance, rating outlook lifted to 'Stable': Fitch

ECONOMYNEXT - Fitch Ratings said it has affirmed Sri Lanka's listed Lion Brewery's A+(lka) credit rating and revised the outlook to 'stable' from 'negative' on improving leverage from increasing sales and profitability with the beer maker seen strengthening its market leadership position in the island.

Lion Brewery has consolidated its market leadership by regaining the shelf space it lost due to the temporary halt in production following floods in May 2016, Fitch said in a statement Thursday.

"Lion's 'A+(lka)' rating reflects its leading market position in the domestic beer industry, a well-established brand and extensive retail coverage," Fitch said.

The company's market position is protected to some extent by regulations in the form of stringent restrictions on advertising and limited issuance of new retail licenses,' the ratings agency said.

Fitch Ratings has revised Lion Brewery's outlook to 'Stable' from 'Negative' on improving leverage.

"Lion was able to improve its net leverage to 2.7-times as of end March 2018 down from 6.3-times end 2017, helped by the recovery in sales volumes and operating profitability," Fitch said.

Sales improved after the government reduced taxes on beer by 33-39 percent, while increasing taxes on hard liquor by 2 percent.

Earlier, taxes on beer had been 10 percent higher than taxes imposed on hard liquor.

Also, leverage will remain at low levels on a likely reduction in capital expenditure as the company has adequate capacity to meet growing demand over the medium term, Fitch said.

A Lion Brewery shares trading on the Colombo Stock Exchange closed Friday at 600 rupees.

Fitch Ratings statement in full:

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

The Outlook was revised to Stable because we expect Lion to be able to maintain leverage (defined as lease-adjusted debt net of cash / operating EBITDAR) at less than 3.0x over the medium term. Lion was able to improve its net leverage to 2.7x as of 31 March 2018 (FYE18) from 6.3x at FYE17, helped by the recovery in sales volume and operating profitability. The recovery was underpinned by a revision in excise taxes, which was announced in the Sri Lankan government's budget on 9 November 2017. The revised regime taxes alcoholic beverages with lower alcohol content at reduced rates compared to spirits.

Fitch rates Lion on its standalone strength due to weak linkages between Lion and its ultimate parent, Carson Cumberbatch PLC, in line with Fitch's Parent and Subsidiary Rating Linkage criteria. Lion's 'A+(lka)' rating reflects its leading market position in the domestic beer industry, which is protected by stringent regulation, a well-established brand and extensive retail coverage. However, the domestic excise tax regime on alcoholic beverage sales changes frequently, which inhibits the industry's profitability.

KEY RATING DRIVERS

Recovery in Sales Volume: Fitch expects Lion's sales volume to improve in the medium term after excise duties were revised to tax manufacturers of hard liquor at higher rates than beer and wine makers. The Sri Lankan government reduced excise taxes on strong beer by 33%, mild beer by 39% while raising that on hard liquor by 2%, effective from 10 November 2017. Previously, excise duty per unit of alcohol of strong beer was 10% higher than that of hard liquor, which depressed Lion's sales volumes from November 2015 to October 2017, when the previous tax regime was in effect.

Balance Sheet to Strengthen: We believe that Lion's net leverage will remain below 3.0x, the level at which Fitch would consider negative rating action, in the medium term. This is mainly due to improving profitability and likely reduction in capex as the company has adequate brewing capacity to meet growing demand over the medium term. Fitch expects Lion's leverage to continue to improve from the FYE18 level, giving it more headroom for its 'A+(lka)' rating.

Improving EBITDAR Margin: Fitch expects Lion's EBITDAR margins to improve by around 100bp in FY19, from 27% in FY18, and to stabilise at around 29% from FY20, supported by better sales volume and operating conditions. Lion's EBITDAR margin recovered significantly in FY18 from a low of 19.5% in FY17 when manufacturing was halted temporarily due to floods and Lion had to import inventory at a higher cost. The margin recovery was driven by the company's efforts to recoup some of the lost sales volumes and operational efficiencies that reduced costs.

Lion's sales volumes and profitability were also helped by the change in the excise tax regime in November 2017.However, margins may be somewhat constrained in the near term because of the depreciating Sri Lanka rupee, which raises the cost of the one-third of Lion's key production inputs that are likely to be imported.

Market Leadership Position: Lion is the largest beer manufacturer in Sri Lanka, with significant market share in the domestic strong beer market. During FY18, Lion consolidated its market leadership by regaining the shelf space it lost in FY17 due to the temporary halt in production following floods in May 2016. Lion's strong market share is supported by its entrenched brand and widespread retail coverage, with access to 2,800 retail outlets around Sri Lanka. The company's market position is protected to some extent by regulations in the form of stringent restrictions on advertising and limited issuance of new retail licenses.

High Regulatory Risk: Domestic alcoholic beverage producers face frequent revisions to excise duties, which cause significant operating cash flow volatility. In 2015, the government increased the excise duties on alcohol twice, which led to tax on strong beer overtaking the tax on hard liquor on an equivalent-alcohol basis. This situation was reversed after 24 months, which resulted in hard liquor taxed at 38% more than both strong and mild beer on an equivalent-alcohol basis. We believe any further tax increases will be gradual considering the importance of the industry to government coffers. Excise duties from alcoholic beverage makers made up 7% of government tax revenue in 2017.

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 previously 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 the manufacturing of personal care and homecare products. 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 Distilleries Company of Sri Lanka PLC (DIST, AAA(lka)/Stable) - the country's largest spirit manufacturer - reflecting DIST's considerably larger operating scale and dominant market position in spirits, which are more widely consumed domestically than beer. DIST has substantially stronger EBITDA margins than Lion as well as lower leverage.

Richard Pieris & Company PLC (A(lka)/Stable) is rated one notch below Lion, reflecting its weaker business risk profile due to significant exposure to the volatile agriculture segment.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer - Revenue to recover with a 23.4% increase in FY19; growth to moderate to a mid-single-digit rate on average over the next three years. - EBITDAR margin to modestly improve to 28.3% in FY19 and to stabilise at around 29.0% in the next three years. - Excise duty on strong and mild beer to remain unchanged during the next two years and increase by around 5% on average during in FY21 and FY22. - Capex at 4.3% and 8.0% of net revenue in FY18 and FY19, respectively then falling to 2.1% on average over the next two years, mainly for maintenance. - Dividend of LKR300 million per annum to shareholders in line with historical levels.

RATING SENSITIVITIES

Developments that May, Individually or Collectively, Lead to Positive Rating Action - A sustained reduction in Lion's lease-adjusted debt net of cash/EBITDAR to below 1.5x

Developments that May, Individually or Collectively, Lead to Negative Rating Action - An increase in Lion's lease-adjusted debt net of cash/EBITDAR over 3.0x for a sustained period

LIQUIDITY

Comfortable Liquidity Position: Lion had a comfortable liquidity position at end-March 2018, with unrestricted cash and cash equivalents of LKR8.1 billion and unutilised credit lines of LKR7.8 billion to meet LKR8.9 billion of debt maturing in the next 12 months. Lion's relatively defensive cash flows and consistent access to bank funding as one of Sri Lanka's largest listed corporates further supports liquidity.

Sri Lanka's Teejay Lanka June quarter net profits up 27-pct on GSP Plus

ECONOMYNEXT - Profits at Sri Lanka's listed fabric maker Teejay Lanka grew 27 percent from a year earlier to 279.3 million rupees in the June 2018 quarter on improving demand for clothing exports to Europe and the US, and capacity expansion at its mill in India, interim accounts showed.

The company which operates fabric mills in Sri Lanka and India reported earnings of 40 cents a share in the June quarter, accounts filed with the Colombo Stock Exchange showed.

"The increased turnover is the result of capacity expansion in India and an increased order book generated from both US and EU, yielding the benefits of GSP through a carefully managed European customer portfolio, further driven by new product launches to US customers," said Chairman Bill Lam.

Teejay Lanka closed 50 cents lower at 32.10 rupees on Wednesday.

Revenue grew 26 percent in the quarter to 6.8 billion rupees and cost of sales increased 27 percent to 6.1 billion rupees, leading to gross profits growing 15 percent to 697.1 million rupees.

Despite revenue growth, margins were impacted by rising cotton prices.

"To yield better margins the group is also continuously re-calibrating its product portfolio and has taken steps to increase prices which will come into effect in the 2nd half of the financial year," Lam said.

Business dynamics are changing rapidly with short life-cycle orders and more demand for discounted programmes, Lam said.

Teejay Lanka is looking to enter new markets in Asia and Africa.

Other income grew 97 percent from a year earlier to 61.3 million rupees in the June quarter

Distribution expenses grew 11 percent to 37.7 million rupees and administration costs increased 23 percent to 367 million rupees.

Net finance cost fell 52 percent to 5.4 million rupees.

Sri Lankan shares hit over 2-week low

Reuters: Sri Lankan shares extended losses to a fifth straight session on Monday as investors sold blue-chip stocks such as John Keells Holdings Plc after weak first-quarter numbers from the conglomerate dampened sentiment.

Conglomerate John Keels Holdings Plc after market hours on Thursday reported a 26 percent year-on-year fall in quarterly net profit.

The stocks, bond and foreign exchange markets were closed on Friday for a public holiday.

The Colombo stock index ended 0.41 percent weaker at 6,128.95, its lowest close since July 12, extending its year-to-date loss to 3.8 percent.

The index dropped 0.47 percent last week, its first weekly fall in three.

Turnover stood at 169.4 million rupees ($1.06 million), well below of this year’s daily average of 859.4 million rupees.

“The market came down manly on JKH as the earnings came down,” said Atchuthan Srirangan, assistant manager - research, First Capital Holdings Plc.

Shares of Keells fell 1.4 percent on Monday.

“Because the blue-chips are showing negative results, most of the investors are on the sidelines.”

Foreign investors bought equities net worth 1.4 million rupees on Monday. But they have been net sellers of 2.5 billion rupees worth of equities so far this year.

A downward revision in economic growth estimate earlier this month by the central bank has hurt sentiment, analysts have said.

Economic growth in 2018 is likely to be between 4 percent and 4.5 percent, falling short of an earlier estimate of 5 percent, Central Bank Governor Indrajit Coomaraswamy said earlier this month.

Shares in Hatton National Bank Plc ended 1.3 percent lower while Caltex Lubricant Lanka Plc closed 5.3 percent down and Sampath Bank Plc fell 1 percent. 

($1 = 159.5500 Sri Lankan rupees) 

(Reporting by Ranga Sirilal; Editing by Vyas Mohan)

Sri Lankan shares fall for fourth straight session

Reuters: Sri Lankan shares extended their losses to a fourth straight session on Thursday as foreign investors sold blue-chip stocks such as John Keells Holdings Plc and Hemas Holdings Plc.

The Colombo stock index ended 0.14 percent weaker at 6,153.99, its lowest close since July 16.

The index dropped 0.47 percent this week, its first weekly fall in three, bringing its year-to-date losses to 3.4 percent.

Turnover stood at 430.8 million rupees ($2.7 million), half of this year’s daily average of 864.5 million rupees.

“The market is slowly coming down on blue-chip selling and is back to its support level of 6,100 again,” said Atchuthan Srirangan, assistant manager - research, First Capital Holdings Plc.

Foreign investors sold equities net worth 169.6 million rupees on Thursday, extending the year-to-date net foreign outflows to 2.5 billion rupees.

A downward revision in economic growth estimate earlier this month by the central bank has hurt sentiment, analysts have said.

Economic growth in 2018 is likely to be between 4 percent and 4.5 percent, falling short of an earlier estimate of 5 percent, Central Bank Governor Indrajit Coomaraswamy said earlier this month.

Shares of conglomerate John Keels Holdings Plc fell 1.9 percent, while Hemas Holding Plc ended 3.1 percent lower. Biggest listed lender Commercial Bank of Ceylon closed 1.5 percent down and Sri Lanka Telecom Plc lost 2.9 percent.

The stocks, bond and foreign exchange markets are closed on Friday for a public holiday and will resume trading on Monday. 

($1 = 159.5000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal; Editing by Amrutha Gayathri)

Sri Lanka's Union Bank June net up 7-pct, weighed down by new tax rules

ECONOMYNEXT - Sri Lanka's listed Union Bank of Colombo said profits grew 7 percent from a year earlier to 134.3 million rupees in the June 2018 quarter on improving interest margins despite a sharp rise in tax costs.

"Profits were adversely impacted due to the changes in the tax regulations subsequent to the New Inland Revenue Act enforcement," the bank said in a statement filed with the stock exchange.

The bank reported earnings of 12 cents a share. Earnings were 25 cents a share for the six months to end June 2018 with net interest income growing 17 percent from a year earlier to 2.2 billion rupees in the six month period, interim results filed with the Colombo Stock Exchange showed.

Union Bank closed 10 cents lower to 12.30 rupees on Tuesday.

Income tax expenses grew 131 percent to 103.6 million rupees.

"The effective tax rate for the June quarter increased significantly in comparison to the previous quarter. This is mainly due to the withdrawal of tax exemptions on profits made out of Sri Lanka Development Bonds and corporate debt instruments invested prior to the tax changes and withdrawal in the notional tax credits," the bank said in a statement accompanying the interim results.

The bank saw interest income grow 17 percent from a year earlier to 3.4 billion rupees in the June quarter with interest expenses growing a slower 14 percent to 2.3 billion rupees, leading to a 22 percent growth in net interest income to 1.1 billion rupees.

"Both net interest margins and spreads depicted an improvement. This was despite the withdrawal of the notional tax credit which bears a direct impact on the interest income earned on the government securities portfolio carried prior to the change in the tax regulations," the bank said.

The bank's interest margin improved to 3.06 percent at end June 2018, up from 2.87 percent at end December.

Net fee and commission income grew 16 percent from a year earlier to 217.9 million rupees in the June 2018 quarter.

Provisioning for bad loans increased 84.5 percent to 109.4 million rupees.

Personnel expenses grew 11 percent to 522.6 million rupees and depreciation charges fell 1 percent to 103.8 million rupees.

Other expenses grew 17 percent to 459.6 million rupees.

The bank reported a loss of 80.9 million rupees from revaluating financial assets, compared to a 350.4 million gain a year earlier.

The bank's loan book expanded 3 percent from a year earlier to 81.2 billion rupees as at end June 2018.

Public deposits fell a marginal 0.18 percent to 76.6 billion rupees.

The bank reported a Basel III Tier 1 Capital Ratio of 18.93 percent at end June 2018, higher than the 7.875 percent minimum regulatory requirement.

Total capital adequacy was 18.93 percent, above the 11.875 percent Basel III minimum requirement.

Gross non-performing loans increased to 3.18 percent of total loans at end June 2018, compared to 2.69 percent at end December 2017.

Sri Lanka's Ceylon Cold Stores June quarter net falls 65-pct

ECONOMYNEXT - Profits of Sri Lanka's listed Ceylon Cold Stores fell 65 percent to 238.9 million rupees in the June 2018 quarter from a year earlier, with a sugar-tax hurting manufacturing sales and falling margins and soaring finance costs hitting profits at its Keells supermarket chain, interim results showed.

The company, which makes fizzy drinks, juices and ice creams under the popular Elephant House and other brands, and operates the Keells supermarket chain of about 80 outlets, reported earnings of 2.51 rupees a share in the quarter, a Colombo Stock Exchange filing showed.

The stock was trading 1 rupee lower at 925 rupees on Wednesday. Ceylon Cold Stores is a unit of listed John Keells Holdings.

In the June quarter, revenue grew 13 percent from a year earlier to 13.9 billion rupees, with cost of sales growing at faster 19 percent to 12.7 billion rupees, resulting in a 25 percent contraction of gross profits to 1.2 billion rupees.

Selling and distribution costs rose 16 percent to 549 million rupees, and administration expenses increased 17 percent to 426 million rupees.

Other operating expenses rose 30 percent to 227.9 million rupees.

Net finance costs rose 236 percent to 40.2 million rupees, as finance income fell 26 percent to 23.4 million rupees and finance costs soared to 63.6 million rupees in the June 2018 quarter, up from 2 million rupees a year earlier.

Outstanding bank overdrafts amounted to 4.97 billion rupees at end June 2018, up 61 percent from the previous March quarter.

Revenue from manufacturing fizzy drinks and ice creams fell 7.8 percent from a year earlier to 3.1 billion rupees. Net finance costs rose 104 percent from a year earlier 742 thousand rupees.

Profits of the manufacturing segment declined 38 percent to 434.3 million rupees.

The Keells supermarket chain saw revenue grow 21 percent from a year earlier to 10.9 billion rupees in the June 2018 quarter. Net Finance costs increased 412 percent from a year earlier to 39.5 million rupees.

Profits of the retail business declined 60 percent to 95.6 million rupees.

The company has been reducing the sugar content of most of its drinks and cold-confectionery goods to meet regulatory standards over the last two years.

However, falling sales due to a sugar tax has resulted in the company deferring investments on a new bottling plant, with the current facility operating under capacity, the company said.

The sugar tax resulted in an average 33 percent increase in prices of its portfolio in 2017/18.

Ceylon Cold Stores is going ahead with 4.2 billion ice cream manufacturing plant, hoping to achieve better margins from impulse buying by consumers.

The company is also rebranding its supermarkets to Keells and refurbishing all outlets. It's investing in a 225,000 square foot centralized distribution centre.

Sri Lankan shares fall for third straight session in dull trade

Reuters: Sri Lankan shares extended fall for a third straight session on Wednesday as investors sold blue-chip shares, but foreign buying helped limit losses.

The Colombo stock index ended 0.34 percent weaker at 6,162.49. The index, which is down nearly 3 percent in the year so far, had on Friday recorded its highest close since June 29.

Turnover stood at 161.4 million Sri Lankan rupees ($1.01 million), less than a third of this year’s daily average of 873.1 million rupees.

“Today the market came down on blue-chip selling in dull trade,” said Atchuthan Srirangan, assistant manager - research, First Capital Holdings Plc.

“Investors are waiting to see the direction and the good sign is we are seeing net foreign buying for the fifth straight day.”

Foreign investors bought equities worth net 4.3 million rupees ($26,959.25) on Wednesday, but they have been net sellers of stocks worth 2.4 billion rupees so far in the year.

A downward revision in economic growth estimate earlier this month by the central bank has hurt sentiment, analysts have said.

Economic growth in 2018 is likely to be between 4 percent and 4.5 percent, falling short of an earlier estimate of 5 percent, Central Bank Governor Indrajit Coomaraswamy said earlier this month.

Shares in Ceylon Tobacco Company Plc fell 9.5 percent, while conglomerate John Keels Holdings Plc ended 0.9 percent down, biggest listed lender Commercial Bank of Ceylon closed 1.0 percent down, Dialog Axiata Plc lost 0.1 percent and Hemas Holding Plc ended 1.3 percent lower. 

($1 = 159.5000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal; Editing by Vyas Mohan)

Multi Finance to top up capital with Rs200mn private placement

LBO - Central Bank of Sri Lanka (CBSL) registered finance company Multi Finance is to increase its capital base by way of private placement.

The Colombo Stock Exchange listed company is to raise Rs200mn at Rs13/share which is approximately the net asset value of the company. The shares will be placed with controlling shareholder Fairway Holdings. Fairway is one of the largest property developers in Sri Lanka controlled by lawyer cum property developer Hemaka De Alwis.

In a stock exchange announcement released today, the purpose of the capital raise is to: ” meet the core capital requirement of Rs1bn in terms of section 3.2 of Finance Companies Direction No.1 of 2013 to comply with the Finance Companies minimum core capital direction No.2 of 2017.”

The issue is subject to approval by the CSE, SEC and shareholders at a general meeting.

Multi Finance finished last year close to breakeven and is supporting a small balance sheet of just 2 times equity. Deposits are a relatively small Rs650mn, however this is up 75% from 12 months prior.

Nation Lanka Finance squeaks out a profit in the June quarter, deposits at Rs7.7bn

LBO - Colombo Stock Exchange listed company Nation Lanka Finance PLC (CSF) has turned a profit in the quarter ended June 30, 2018. The Central Bank of Sri Lanka (CBSL) registered finance company is the first listed finance company to report earnings for the quarter ended 20 days ago.

The company reported a profit of Rs19mn for the June 2018 quarter vs. a loss of Rs53mn in the same quarter in 2017.

The group maintains a significant balance sheet of Rs9.7bn in assets on a relatively small Rs619mn in equity. Total deposits from customers are relatively large at Rs7.7bn, up Rs300mn from the prior year quarter.

The company has reported all regulatory capital and regulatory liquidity levels above the required minimums, however non performing loans are high at 14%.

The share price of the company last traded close to its net asset value of Rs80 cents per share, a much higher valuation that high quality companies in the sector.

Registered finance companies in Sri Lanka have had a troubled history with many institutions going bust and deposit holders holding the bag. As the quarterly listed finance company results are reported, LBO will aim to highlight for the public how these companies are performing, and any red flags that may appear.

Singer Sri Lanka to sell 3-year fixed rate debt rated A-(lka): Fitch

ECONOMYNEXT - Singer Sri Lanka Plc, a consumer durables firm, will sell 1.5 billion rupees 3-year listed debt, which has been given an expected rating of 'A-(lka)' Fitch Ratings said.

The fixed rate debt will be used to re-finance existing debt.

"We expect demand for consumer durables to pick up in the medium term as consumers adjust to higher costs, supported by an earnings recovery in the agricultural sector, continued low personal taxes and stable interest rates," Fitch Ratings said in a statement Friday.

Singer's revenue growth slowed to 1 percent in 2017 on weak demand, after two years of double-digit growth, due to higher indirect taxes and a prolonged drought.

"We believe Singer was able to better respond to the weak demand compared with peers due to its defensive product portfolio and strong brand presence."

The full statement is reproduced below:

Fitch Ratings has assigned Singer (Sri Lanka) PLC's (A-(lka)/Stable) proposed senior unsecured redeemable debenture issue of up to LKR1.5 billion an expected National Long-Term Rating of 'A-(lka)(EXP)'.

The debenture is to be issued at a fixed rate with a tenor of three years. Proceeds will be used to refinance debt.

The proposed debenture is rated at the same level as Singer's National Long-Term Rating, as it ranks equally with its other senior unsecured obligations. The final rating is subject to the receipt of final documents conforming to information already received.

KEY RATING DRIVERS

Recovery in Sales Volume: We expect demand for consumer durables to pick up in the medium term as consumers adjust to higher costs, supported by an earnings recovery in the agricultural sector, continued low personal taxes and stable interest rates.

Singer's consumer electronics and home appliance revenue growth slowed to 1% in 2017 on weak demand, after two years of double-digit growth, due to higher indirect taxes and a prolonged drought that affected the livelihood of a significant proportion of Sri Lanka's population. We believe Singer was able to better respond to the weak demand compared with peers due to its defensive product portfolio and strong brand presence.

Growth in IT, Digital Media: Fitch expects Singer's IT and mobile segments to be key growth drivers in the medium term, aided by Sri Lanka's increasing smartphone penetration and short replacement cycles compared with most other consumer durables. Singer is the country's largest smartphone retailer and exclusive agent for Huawei, Sri Lanka's second-largest smartphone brand. Singer's IT and digital media revenue has increased at a CAGR of 57% over the past five years. We expect it to maintain its market leadership for the next three years, with the renewal of its contract with Huawei.

EBITDAR Margins to Stabilise: Fitch expects Singer's EBITDAR margin to improve by around 50bp-60bp from the current level of 9.1%, to stabilise at around 9.5% from 2019, on better sales volume and cost pass-through to customers. Singer's EBITDAR margin contracted by almost 150bp in 2017 due to lower sales as well as higher indirect taxes and sales costs. The margin contraction was seen across most product segments, as weak demand compelled the company to absorb a majority of the tax increases and cost escalations to sustain top-line growth.

Leverage to Improve: We expect Singer's leverage to improve meaningfully from 2019 amid the recovery in the operating environment and better margin, but headroom under the current rating will remain low due to high capex, dividend payments and working capital investments, which may limit debt pay down. Higher inventory build-up amid sluggish demand, coupled with lower profitability in 2017, saw leverage worsen to 5.5x, compared with 4.3x at end-2016.

No Extraordinary Support from Parent: Fitch will continue to rate Singer on its financial strength due to weak-to-moderate linkages between Singer and its new 81% parent, Hayleys PLC, under Fitch's Parent and Subsidiary Rating Linkage Criteria, as well as the size of Singer's balance sheet and significant debt at end-2017. Hayleys acquired a controlling stake in Singer in 2017.

We do not expect additional pressure for higher dividend payments from Hayleys, as Singer's average dividend payout, at around 60% of after-tax profit, is already high on average compared to most corporates.

Low Dependence of Singer Finance: We do not believe Singer will be called upon for an additional capital infusion to Singer Finance (Lanka) PLC (BBB(lka)/Stable) due to the 80%-owned finance subsidiary's strong capitalisation, which is well above the regulatory minimum, better-than-peer asset quality and strong funding profile. Singer's last equity infusion of LKR550 million was in 2017 to support the subsidiary's new credit card business.

DERIVATION SUMMARY

Singer is Sri Lanka's co-market leader in consumer-durable retail, backed by a strong portfolio of well-known brands and an extensive distribution network.

Singer is rated one notch above its closest peer, Abans PLC (BBB+(lka)/Stable), to reflect its stronger financial risk profile. Abans' business profile has also weakened relative to Singer due to its investment in a large real-estate project.

The one-notch differential between DSI Samson Group (Private) Limited (BBB+(lka)/Stable) and Singer stems from Singer's better business risk profile, as it enjoys a robust market position in the sale of consumer durables domestically, while DSI's sales remain under pressure from rising local-market competition.

Sunshine Holdings PLC (A-(lka)/Stable) is rated at the same level as Singer due to Singer's stronger business risk profile and significantly larger operating scale being offset by higher leverage and more volatile operating cash flow stemming from the higher discretionary demand for its products. Richard Pieris & Company PLC (A(lka)/Stable) is rated one notch above Singer due to its stronger business risk profile, reflected in its cash flow diversity, more defensive end-markets and lower leverage.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

- Revenue growth to average in the low double digits from 2019-2021, helped by a volume recovery in consumer electronics and home appliances as well as strong growth in IT and mobile-product sales.

- EBITDAR margin to improve and stabilise at around 9.5% from 2019, amid better cost pass-through and volume recovery.

- Capex to average around LKR800million per annum over the next couple of years, to be spent on store refurbishment.

- Dividend payout to average around LKR820million per year for the next two years.

- No equity infusions into Singer Finance.

RATING SENSITIVITIES

Developments that may, individually or collectively, lead to positive rating action:

- Singer's leverage - as measured by adjusted net debt/EBITDAR, excluding Singer Finance - falling below 4.5x on a sustained basis (end-2017: 5.5x)

- Fixed-charge coverage, as measured by operating EBITDAR/interest paid + rent, sustained above 1.5x (end-2017:1.4x)

Developments that may, individually or collectively, lead to negative rating action:

- A sustained increase in Singer's leverage to over 5.5x

- Fixed-charge coverage falling below 1.2x for a sustained period

- Any significant equity support to subsidiary, Singer Finance

LIQUIDITY

Tight but Manageable Liquidity: Singer had LKR1.8 billion of cash and LKR11.2 billion in unutilised credit facilities to meet LKR14.4 billion of long-term debt maturing in 2018 as at end2017, leaving the company in a tight liquidity position. We do not expect the company to generate positive free cash flow in the next 12 months due to high capex and shareholder returns. However, we believe Singer will be able to roll over its short-term working-capitalrelated debt, amounting to LKR9.2 billion, in the normal course of business, leaving the company's liquidity position more manageable.

Sri Lanka's John Keells Plc June quarter net down 25-pct

ECONOMYNEXT - Sri Lanka's John Keells Plc, a commodity broker, said net profits fell 25 percent from a year ago to 45 million rupees in the June 2018 quarter on falling revenues from trading in tea and rubber and stock broking unit.

John Keells Plc reported earnings of 74 cents a share in the quarter, interim results filed with the Colombo Stock Exchange showed. The share last traded at 55 rupees.

June quarter revenue fell 4 percent from a year earlier to 206.8 million rupees, but cost of sales growing at a faster 15 percent to 69.5 million rupees saw gross profits contract 11 percent to 137.3 million rupees.

Administrative expenses grew 1 percent from a year earlier to 61.9 million rupees and distribution costs grew 15 percent to 3.4 million rupees.

Other operating income fell 99 percent to 30 thousand rupees in the quarter, down from 3.73 million rupees a year earlier.

Finance costs in the June quarter was 24.4 million rupees, up marginally from a year earlier while finance income grew 3 percent to 16.4 million rupees, contracting net finance expenses by 4 percent to 8 million rupees.

The company reported a 12.6 million gain on financial assets available for sale in the June 2018 quarter, compared to loss of 11.8 million rupees the previous year.

In segment results reported by John Keells Plc, revenue from tea and rubber broking fell 1.36 percent from a year earlier to 140.2 million rupees in the June 2018 quarter and revenue from stock broking (John Keells Stockbrokers) fell 19.5 percent to 42.4 million rupees.

Revenue from tea warehousing operations grew 20.4 percent to 25.7 million rupees.

John Keells Plc is a unit of listed group of companies John Keells Holdings which reported revenues of 121.2 billion rupees for the year to end March 2018, up 14 percent from a year earlier.

A John Keells Holdings share closed Friday at 148.10 rupees.

Sri Lankan Treasuries yields ease across tenors

ECONOMYNEXT – Sri Lankan Treasury Bill yields edged lower across all maturities at an auction Tuesday with the 01-year bill yield falling 04 basis points to 9.27 percent from last week, data from the the Public Debt Department of the central bank showed.

It raised 21 billion rupees from 01-year bills, having offered 12 billion rupees worth of bills and getting bids worth almost 54 billion rupees.

The 03-month bill yield edged down one basis point to 8.24 percent while the 06-month bill yield was also down one basis point to 8.74 percent.

The debt office raised 24 billion rupees from all tenors, the same amount offered, having got bids worth 76 billion rupees.

Sri Lanka’s Asian Hotels and Properties June net down 77-percent

ECONOMYNEXT – Net profit at Sri Lanka’s Asian Hotels and Properties plunged 77% to Rs81 million in the June 2018 quarter from a year ago as competition increased with the opening of new city hotels in Colombo.

June quarter sales of the firm, which operates the five-star Cinnamon Grand Colombo and Cinnamon Lakeside Colombo hotels, fell 14 percent to Rs1.7 billion over the period, according to interim accounts filed with the stock exchange.

June quarter earnings per share of the firm, part of the John Keells Holdings group, fell to 15 cents from 63 cents the previous year.

Asian Hotels and Properties share was trading at Rs45 Tuesday morning.

In the March 2018 quarter also net profit had fallen, down 17% to Rs689 million from a year ago.

Earnings in the March 2018 quarter included significant non-cash gains on changes in fair value of investment property in the firm's property business, Crescat Boulevard shopping mall.

Bad loans keep Sri Lanka's HDFC Bank on 'Ratings Watch Negative'

ECONOMYNEXT – Fitch Ratings Lanka says it will keep Sri Lanka's state-controlled Housing Development Finance Corporation Bank (HDFC) on Rating Watch Negative with a rating of BBB-(lka) on account of weak capital position and high non-performing loans.

The Rating Watch Negative was placed in August 2017 pending a capital infusion from government to help HDFC meet the 5 billion rupee minimum regulatory capital requirement, Fitch Ratings said.

"We expect the state, the bank's major shareholder, to extend its support but the timinof the capital infusion depends on regulatory clearance," the ratings agency said in a statement Tuesday.

The bank is exposed to above-industry exposure to low- and middle-income borrowers, mainly through housing loans, who are more susceptible to economic cycles, Fitch said.

The bank reported a high non-performing loan ratio of nearly 20 percent at end March 2018.

This was mainly due to defaults from housing finance backed by the Employees' Provident Fund (EPF).

Sri Lanka's Central Bank which managers the EPF annually reimburses HDFC Bank for EPF-backed loans in arrears for more than three months, Fitch noted.

"The bank's NPL ratio remained high even without the EPF-backed housing loans at 8.9 percent at end-March 2018."

Fitch Ratings statement in full:

Fitch Ratings has maintained Housing Development Finance Corporation Bank of Sri Lanka's (HDFC Bank) National Long-Term Rating of 'BBB-(lka)' on Rating Watch Negative (RWN). The agency has also maintained the RWN on the 'BBB-(lka)' rating of HDFC Bank's senior secured and senior unsecured debentures.

--Key rating drivers--

The RWN, first placed in August 2017, has been maintained pending a capital infusion from the Sri Lankan state (B+/Stable) to help HDFC Bank meet the LKR5 billion minimum regulatory capital requirement. We expect the state, the bank's major shareholder, to extend its support but the timing of the capital infusion depends on regulatory clearance. The minimum capital requirement has been in force since 2016. Fitch downgraded HDFC Bank on 29 January 2018 after the state failed to provide the capital to the bank in a timely manner.

HDFC Bank's rating reflects Fitch's expectation that the bank will receive extraordinary support from the sovereign, if required. Our assessment captures the state's 51% effective holding, which includes the National Housing Development Authority's direct ownership of 49%; the bank's quasi-policy role in supporting housing-development initiatives; as well as HDFC Bank's low systemic importance.

The bank's weak standalone profile is characterised by its above-industry exposure to low- and middle-income customers, mainly through housing loans, who tend to be more susceptible to economic cycles. The share of housing loans has declined over the years but it has remained high, at 82% at end-March 2018.

The bank continued to have a high reported non-performing loan (NPL) ratio, which stood at 19.7% at end-March 2018. This was mainly due to defaults from housing finance backed by the Employees' Provident Fund (EPF), which contributed slightly more than half of the bank's total housing NPLs at end-March 2018. Nevertheless, the Central Bank of Sri Lanka annually reimburses HDFC Bank for EPF-backed loans in arrears for more than three months. The bank's NPL ratio remained high even without the EPF-backed housing loans at 8.9% at end-March 2018 (9.0% at end-2017), which reflects the concentration of its credit risk in the low- and middleincome housing-finance market.

We see HDFC Bank's capitalisation as weak despite the bank's Fitch Core Capital (FCC) ratio of 16.8% at end-March 2018 because of the bank's substantial unreserved NPLs.

Fitch expects HDFC Bank's asset and liability mismatches to persist due to its longer-tenor loan book and short-tenor deposit base, exerting pressure on the bank's liquidity. The bank's dependence on high-cost term deposits also weighs on its net interest margins and profitability.

--Senior debt ratings--

The bank's senior debentures are rated in line with its National Long-Term Rating and rank equally with the claims of other senior unsecured creditors. Fitch has not provided any rating uplift for the collateralisation on the senior secured notes as we consider recovery prospects to be average and comparable with that of unsecured notes in a developing legal system.

--Rating sensitivities national ratings and senior debt--

Fitch may downgrade the bank's rating if there is a change in our expectation of state support for the bank. This may occur due to a weakening of the bank's linkages with the state, evident from a dilution of the state's majority-ownership of the bank, or a revision in Fitch's view of the bank's policy role.

HDFC Bank's rating could be downgraded by several notches if the sovereign's ability to support is significantly impaired or if Fitch concludes that the bank can no longer rely on sovereign support.

HDFC Bank's rating could be affirmed and removed from RWN if the state were to provide the additional capital required in the next six months.

The ratings of the senior secured and senior unsecured debentures will move in tandem with HDFC Bank's National Long-Term Rating.

Sri Lankan shares fall for second straight session

Reuters: Sri Lankan shares extended fall for a second straight session on Tuesday, easing further from a three-week closing high recorded late last week, but foreign buying helped limit losses.

The Colombo stock index ended 0.02 percent weaker at 6,183.64. The index, which is down nearly 3 percent in the year so far, had on Friday recorded its highest close since June 29.

Turnover stood at 273.8 million Sri Lankan rupees ($1.72 million), less than a third of this year’s daily average of 873.1 million rupees.

“Though there is selling pressure in the market, the decline is not huge,” said Dimantha Mathew, head of research, First Capital Holdings.

“Foreigners are net buyers and that creates some positive sentiment.”

Foreign investors bought equities worth net 90.3 million rupees on Tuesday, but they have been net sellers of stocks worth 2.4 billion rupees so far in the year.

A downward revision in economic growth estimate earlier this month by the central bank has hurt sentiment, analysts have said.

Economic growth in 2018 is likely to be between 4 percent and 4.5 percent, falling short of an earlier estimate of 5 percent, Central Bank Governor Indrajit Coomaraswamy said earlier this month.

Shares in conglomerate John Keels Holdings Plc ended 0.7 percent down and Hemas Holding Plc ended 1.1 percent lower while Sri Lanka Telecom Plc shed 1.6 percent. 

($1 = 159.4000 Sri Lankan rupees)

(Reporting by Ranga Sirilal; Editing by Vyas Mohan)

Sri Lankan shares edge lower from 3-wk high in dull trade

Reuters: Sri Lankan shares ended weaker on Monday, slipping from the last session’s three-week closing high, but foreign buying prevented steeper losses.

The Colombo stock index ended 0.1 percent weaker at 6,184.68, edging lower from its highest close since June 29 hit on Friday. The bourse rose 0.86 percent last week, but has fallen 2.9 percent year to date.

Turnover was 238.4 million rupees ($1.5 million) in the session, less than a quarter of this year’s daily average of 877.6 million rupees.

“The selling pressure was absorbed by foreign buying which is a good sign,” said Dimantha Mathew, head of research, First Capital Holdings.

Foreign investors bought equities net worth 98.1 million rupees on Monday, but they have been net sellers of stocks worth 2.5 billion rupees so far this year.

A downward revision in economic growth estimate by the central bank has hurt sentiment, analysts have said.

Economic growth in 2018 is likely to be between 4 percent and 4.5 percent, falling short of an earlier estimate of 5 percent, Central Bank Governor Indrajit Coomaraswamy said earlier this month.

Shares in Ceylon Tobacco Company Plc fell 1.6 percent, while Distillers Company of Sri Lanka Plc ended 1.9 percent weaker and conglomerate John Keels Holdings Plc ended 0.7 percent down. 

($1 = 159.4000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal; Editing by Amrutha Gayathri)

Sri Lankan shares hit 3-wk high, mark second weekly gain in nine

Reuters: Sri Lankan shares rose on Friday to their highest close in three weeks and marked their second weekly gain in nine.

The Colombo stock index ended 0.13 percent firmer at 6,191.17, its highest close since June 29. It rose 0.86 percent on the week, but has fallen 2.8 percent year to date.

Turnover was 207.1 million rupees ($1.30 million) in the session, its lowest since July 10 and less than a quarter of this year’s daily average of 882.5 million rupees.

Foreign investors bought equities net worth 26.2 million rupees on Friday, but they have been net sellers of stocks worth 2.6 billion rupees so far this year.

A downward revision in economic growth estimate by the central bank has hurt sentiment, analysts have said.

Economic growth in 2018 is likely to be between 4 percent and 4.5 percent, falling short of an earlier estimate of 5 percent, Central Bank Governor Indrajit Coomaraswamy said earlier this month.

Shares in Ceylinco Insurance Plc rose 3.4 percent, while Lanka ORIX Leasing Plc gained 2 percent and biggest listed lender Commercial Bank of Ceylon Plc ended 0.3 percent firmer. 

($1 = 159.8500 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Amrutha Gayathri)

Trading suspended in Sri Lanka's Swarnamahal Financial shares

ECONOMYNEXT - Sri Lanka's Swarnamahal Financial Services PLC said trading of its shares had been suspended from 1 July 2018 because of non-compliance with stock exchange listing rules.

A statement said its appeal to the Securities and Exchange Commission to defer the suspension had been rejected.

The company, which is being restructured under central bank supervision, said it was negotiating with a potential investor to inject fresh capital and change ownership.

Sri Lanka finance company bad loans rising; 9 ratings confirmed: Fitch

ECONOMYNEXT - Fitch Ratings has confirmed ratings of nine Sri Lanka finance companies saying the credit profile of the sector will remain under pressure for the medium term with bad loans starting to go up and slower vehicle leasing.

"Competition in leasing from banks and a deceleration in vehicle financing has pushed finance companies to look beyond their core businesses and venture into term financing, microfinance and lending against gold," Fitch said.

"Fitch believes the shift in business mix has raised the companies' risk profiles in the absence or poor quality of collateral, challenges to the recoverability of collateral and a lack of experience in the new segments. "

By end March 2018, total non-performing loans (six months arrears) has increased to 5.8 percent of assets, from 4.9 percent in 2017.

The sector also faces more stringent capital requirements and potential earning headwinds stemming from higher credit costs.

Extracts from the statement is reproduced below:

KEY RATING DRIVERS IDRS, NATIONAL RATINGS
The rating actions follow Fitch's periodic review of Sri Lanka's large and mid-sized finance companies.

Fitch expects the credit profiles of the country's licensed finance company sector to remain under pressure in the medium term.

Competition in leasing from banks and a deceleration in vehicle financing has pushed finance companies to look beyond their core businesses and venture into term financing, microfinance and lending against gold.

Fitch believes the shift in business mix has raised the companies' risk profiles in the absence or poor quality of collateral, challenges to the recoverability of collateral and a lack of experience in the new segments.

This has already resulted in the industry's reported non-performing loan (NPL) ratio (based on six month arrears) increasing to 5.8% at end-March 2018 (FYE18), from 4.9% at FYE17. The sector also faces more stringent capital requirements and potential earning headwinds stemming from higher credit costs.

The ratings of the finance companies in the peer group are driven by their business models and franchises. Risk appetite, another rating driver, reflects the companies' predominant exposures to more vulnerable customers and non-core business segments.

Finance Companies with Intrinsic Strength-Driven Ratings

- Central Finance Company PLC (CF)

CF's rating reflects its modest franchise and strong capitalisation, which is supported by above-industry profitability and earnings retention. These factors counterbalance its weaker asset quality compared with similarly rated peers, owing to its higher exposure to the risky three-wheeler segment. CF remains the highest capitalised among peers, with regulatory Tier 1 and total capital ratios of 32.9% and 32.1%, respectively, at FYE18. It has demonstrated an ability to maintain better-than-industry net interest margins through the interest-rate cycle and its profitability ratio, as measured by pre-tax net income/average assets, improved to 10.5%, from 7.9% in FYE15, on wider net interest margins, better cost efficiency and lower credit costs.

- LB Finance PLC (LB)

LB's rating reflects its established franchise and satisfactory capital level, which is supported by sound profitability from high-yielding products. This is counterbalanced by the company's higher risk appetite due to high exposure to gold-backed lending and elevated liquidity risk, with gross loans accounting for 87% of total assets at FYE18 (FYE17: 89%). LB has the highest leverage ratio among peers, with debt/tangible equity of 6.6x (FYE17: 6.9x). However, its Tier 1 ratio was a satisfactory 17.3% at FYE18 (FYE17: 16.1%). Fitch believes risk from gold-backed lending (FYE18: 19% of gross loans, FYE17: 18%) has been managed through active monitoring and risk-control measures, but a sharp decline in gold prices could pressure asset quality.

- Senkadagala Finance PLC (Senka)

Senka's rating reflects its strong franchise and well-matched maturity gaps. This is counterbalanced by a low proportion of deposit funding compared with higher-rated peers. We expect Senka's Tier-1 ratio of 17.0% at FYE18 to come down in the absence of capital infusion, as internal capital generation has not kept pace with above-industry loan growth. The company's reported NPL ratio increased to 2.3%, from 1.6% at FYE17, but remained below higher-rated peers amid challenging operating conditions.

- Singer Finance (Lanka) PLC (SFL)

SFL's rating reflects its small franchise and overall stable financial indicators. Capitalisation has been supported through rights issues, the most recent being in FY18. The company's reported NPL ratio increased, like that of peers, to a still-modest level of 2.1% at FYE18 and asset-quality pressure is likely to persist. SFL's profitability is better than that of peers', supported by higher-yielding assets. The rating is underpinned by Fitch's view that the rating of SFL's parent, retailing company Singer (Sri Lanka) PLC (A-(lka)/Stable), provides a floor for SFL's rating that is two notches lower. This reflects Singer's majority ownership in SFL and the common Singer brand.

- Mercantile Investments and Finance PLC (MIF)

MIF's rating reflects its long operating history and satisfactory capitalisation. It also captures MIF's high risk appetite, stemming from relatively weak underwriting standards, evolving risk controls that have affected asset quality and high reliance on concentrated short-term funding that has led to considerable negative maturity mismatches. We expect MIF's relatively weaker profitability to improve marginally in the medium term, aided by its high-yielding, non-lease products, and for the reported NPL ratio (FYE18: 7.6%) to remain elevated until the resolution of its single-largest NPL account (backed by collateral), which forms half of total NPLs. We attribute MIF's below-peer NPL provision coverage to the low allowances set aside for its largest NPL account. Finance Companies with Institutional Support-Driven Ratings

- People's Leasing & Finance PLC (PLC)

PLC's Issuer Default Rating (IDR) and National Long-Term Rating reflect Fitch's view that its parent, the state-owned and systemically important People's Bank (Sri Lanka) (AA+(lka)/Stable), would provide PLC with extraordinary support, if required. People's Bank's propensity to support PLC stems from PLC's group role as a strategically important subsidiary and the high reputational risk to People's Bank should PLC default, as the bank owns 75% of PLC and shares a common brand. People's Bank's ability to provide support to PLC is limited and stems from Sri Lanka's rating of 'B+'/Stable.

PLC plays an important role in the group, accounting for 10.3% of People's Bank's assets and 11.6% of loans at FYE18. PLC also has 101 window offices within People's Bank branches and board representation from People's Bank. PLC's reported NPL ratio increased to 2.7% at FYE18, from 1.3% at FYE17, due to unsecured term loans - a segment PLC has aggressively grown over FY15-FY17. Nevertheless, its NPL ratio remained better than that peer average.

- HNB Grameen Finance Limited (HGL)

HGL's rating reflects Fitch's expectation of support from its parent, Hatton National Bank PLC (HNB; AA-(lka)/Stable), Sri Lanka's fourth-largest domestic commercial bank. This view is based on HNB's majority 51% shareholding, its involvement in HGL's strategic direction through board representation and the common HNB brand. The two-notch differential reflects HGL's limited role in the group. HGL is mainly engaged in microfinance, which is not a significant product for HNB. Furthermore, there is limited operational integration between the entities.

- AMW Capital Leasing And Finance PLC (AMWCL)

AMWCL's rating reflects Fitch's view that support would be forthcoming from Associated Motorways Private Limited (AMW), which owns 90% of AMWCL, given the finance company's strategic importance to its parent, a large importer of motor vehicles in Sri Lanka. This is based on AMWCL's role in the group, the common AMW brand and the existence of common creditors, which contribute to high reputational risk for AMW if AMWCL were to default. Fitch sees the synergies between the two companies as high, since almost half of AMWCL's advances comprise facilities that are provided to clients who purchase AMW products. AMWCL also benefits from business referrals from its parent.

- Siyapatha Finance PLC (Siyapatha)

Siyapatha's rating reflects Fitch's expectation that support would be forthcoming from its 100% parent, Sampath Bank PLC (A+(lka)/Stable), which is involved in the strategic direction of the subsidiary through board representation. Siyapatha is rated two notches below its parent because of its limited role to the group's core business and different branding. Sampath Bank's leasing book accounted for just 7% of group loans at FYE18, of which half came from Siyapatha. Siyapatha also only accounted for 5% of group pre-tax profit in 2017.

DEBT RATINGS

The ratings on the senior debentures of PLC, CF, LB, Senka, SFL, MIF and Siyapatha are in line with the companies' National Long-Term Ratings, as they constitute their direct, unconditional, unsecured and unsubordinated obligations.

Fitch has not provided any rating uplift for the collateralisation of CF's and SFL's secured notes, as we consider recovery prospects as average and comparable with that of unsecured notes in a developing legal system. Subordinated debentures of LB, Senka and Siyapatha are rated one notch below the companies' National Long-Term Ratings to reflect their subordination to senior unsecured creditors.

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS

Finance Companies with Intrinsic Strength-Driven Ratings

CF's ratings could be upgraded if its risk appetite moderates, which Fitch does not expect in the medium term. However, the rating could be downgraded if capital buffers are substantially eroded due to weakening asset quality and a prolonged rapid growth in the more vulnerable customer segments.

Downgrade triggers for LB include capital pressure from weaker profitability, increased liquidity risk or heightened risk appetite. This could be indicated through aggressive loan growth or deterioration in asset quality. An upgrade of LB's rating is contingent on the company achieving stronger capitalisation, lower risky asset exposure and a more comfortable liquidity position.

An upgrade of Senka's rating is contingent upon the company sustaining stronger capital levels and a more robust deposit franchise. Senka's rating could be downgraded if asset quality weakens, leading to a significant decline in capitalisation or excessive asset encumbrance.

We do not expect an upgrade of SFL's ratings from an improvement in its standalone strength, as its franchise is likely to remain significantly weaker than that of its more established, higher-rated peers. The more likely upgrade driver would be a stronger relationship with its parent, in particular, its strategic importance to Singer. A sustained deterioration in SFL's standalone credit profile in terms of capitalisation and asset quality relative to similarly rated peers would not result in a downgrade of SFL's rating, unless our assessment of parental support also changed.

MIF's ratings could be downgraded if its large maturity mismatches were to increase or if it experiences higher capital impairment risk due to sustained deterioration in profitability and asset quality. An upgrade of MIF's ratings is contingent upon a moderation of its risk appetite, as seen through better underwriting standards and risk controls alongside sustained improvement in asset quality and profitability.

Finance Companies with Institutional Support-Driven Ratings

A downgrade of PLC's IDR and National Ratings would occur if People's Bank's ability to support PLC was to weaken, if People's Bank's was to cede its majority ownership in PLC or if PLC's strategic importance to its parent was to diminish over time, reflecting a reduced propensity to support PLC. However, Fitch does not anticipate this in the foreseeable future. PLC's ratings are also sensitive to changes in the sovereign rating, as this would affect People's Bank's ability to provide support to PLC.

The ratings on HGL, AMWCL and Siyapatha are similarly sensitive to changes in Fitch's assessment of their respective parents' ability and propensity to provide support, none of which Fitch expects to change significantly in the short to medium term.

DEBT RATINGS

The ratings on the senior debt of CF, LB, Senka, SFL, MIF, PLC and Siyapatha will move in tandem with the companies' National Long-Term Ratings.

The assigned subordinated debt ratings will move in tandem with the National Long-Term Ratings.

FULL LIST OF RATING ACTIONS

Central Finance Company PLC: National Long-Term Rating affirmed at 'A+(lka)'; Outlook Stable Senior secured National Long-Term Rating affirmed at 'A+(lka)' Senior unsecured National Long-Term Rating affirmed at 'A+(lka)'

LB Finance PLC:

National Long-Term Rating affirmed at 'A-(lka)'; Outlook Stable Senior unsecured National Long-Term Rating affirmed at 'A-(lka)' Subordinated debt National Long-Term Rating affirmed at 'BBB+(lka)'

Senkadagala Finance PLC

National Long-Term Rating affirmed at 'BBB+(lka)'; Outlook Stable Senior unsecured National Long-Term Rating affirmed at 'BBB+(lka)' Subordinated debt National Long-Term Rating affirmed at 'BBB(lka)'

Singer Finance (Lanka) PLC

National Long-Term Rating affirmed at 'BBB(lka)'; Outlook Stable Senior secured National Long-Term Rating affirmed at 'BBB(lka)' Senior unsecured National Long-Term Rating affirmed at 'BBB(lka)'

Mercantile Investments and Finance PLC

National Long-Term Rating affirmed at 'BBB-(lka)'; Outlook Stable Senior unsecured National Long-Term Rating affirmed at 'BBB-(lka)'

People's Leasing & Finance PLC:

Long-Term Foreign-Currency Issuer Default Rating affirmed at 'B'; Outlook Stable Long-Term Local-Currency Issuer Default Rating affirmed at 'B'; Outlook Stable National Long-Term Rating affirmed at 'AA-(lka)'; Outlook Stable Senior unsecured National Long-Term Rating affirmed at 'AA-(lka)'

HNB Grameen Finance Limited:

National Long-Term Rating affirmed at 'A(lka)'; Outlook Stable AMW Capital Leasing And Finance PLC National Long-Term Rating affirmed at 'BBB+(lka)'; Outlook Stable

Siyapatha Finance PLC

National Long-Term Rating affirmed at 'A-(lka)'; Outlook Stable Senior unsecured National Long-Term Rating affirmed at 'A-(lka)' Subordinated debt National Long-Term Rating affirmed at 'BBB+(lka)'