Fitch Ratings to maintain a negative banking sector outlook for 2018

LBO – Fitch Ratings said they are maintaining a negative banking sector outlook for this year as operating conditions are likely to remain challenging.

Releasing their results dashboard for Sri Lankan Banks, Fitch Ratings said that moderate asset quality and earnings pressure to remain in 2018.

“Sri Lankan banks’ 2017 results were muted amid a difficult operating environment as economic growth slowed to 3% in 2017, the lowest in 16 years,” Fitch Ratings said.

“The lacklustre economic conditions resulted in banks facing moderate asset quality pressure through 2017 and into 1Q18 but we do not expect the sector’s nonperforming loan ratio to reach historical highs.”

Fitch Ratings said capital requirements for the banks have also increased with the implementation of Basel III in July 2017.

Sri Lanka Banks Results Dashboard – Fitch Ratings

Slower Loan Growth: We expect loan growth to moderate further in 2018 due to a reduction in consumption demand. Loan growth slowed in 2017 to 16%, in line with our expectations, from 18% in 2016 (2015: 21%) as tighter monetary policy curbed credit demand.

Weaker Asset Quality: We expect NPLs to rise through 2018 on the back of difficult operating conditions. Sector NPLs rose 13% in 2017, reversing from back-to-back contractions in the last three years and continued to rise in 1Q18 as reflected in the banks’ reported results. Some recoveries and/or write-offs in 4Q17 helped the year-end sector NPL ratio improve marginally to 2.5% before ticking up to 3% at end-1Q18.

Profitability Pressure: We expect pressure on the banks’ profitability to continue in 2018 from increased credit costs with the implementation of SLFRS 9 and weaker asset quality. A new levy proposed in the government’s 2018 budget could also reduce the sector’s profits. Net profit growth was subdued at 10% in 2017 (2016: 25%) due to higher credit costs and the full year impact of the higher financial VAT introduced in November 2016 – both of which resulted in stagnant sector return on assets.

Improved Capital: Fitch believes that the one-time impact of SLFRS 9 on banks’ regulatory capital ratios could be spread out across several years. In 2017, Sri Lankan banks raised LKR50 billion in equity and issued LKR11 billion of Basel III-compliant subordinated debt ahead of the full implementation of Basel III on 1 January 2019. This included LKR10 billion of equity among the large state-licensed commercial banks. Capital raising is likely to continue in 2018, mostly among the large banks, although much of the shortfall was bridged in 2017.

Stable Funding: Loan/deposit ratios are likely to improve in 2018 due to our expectations of a moderation in lending and healthy deposit growth with banks’ balance sheets being fairly liquid. The share of low-cost current and savings accounts (CASA) in the deposit mix continued to decline to 34% (2016: 36%) as term deposits increased due to higher interest rates. Deposits were the main source of funding for banks at 80% at end-2017.

Sri Lanka Hemas pharma unit maintains margins despite price controls, depreciation

ECONOMYNEXT – Morison PLC, the pharmaceutical manufacturing unit of Sri Lanka’s Hemas Holdings group, said it managed to maintain net profit margin at 15% last year despite price controls, higher costs and a weaker rupee.

The company’s sales fell 5% to Rs3.8 billion in the year to 31 March 2018 largely because of poor sales of its over-the-counter (OTC) brands, together with slower sales in its range of distributed cosmetics, Morison chairman Husein Esufally said.

The loss of the distribution rights for Alcon, one of its longstanding principals due to a global acquisition, also contributed to lower sales, he told shareholders in the company’s annual report.

However, Morison’s net profit for the year rose 9% to Rs 564 million from the previous year.

Morison, previously known as J L Morison Son & Jones (Ceylon), which counts MSJ Industries (Ceylon) Ltd., s a wholly owned subsidiary, not only manufactures pharmaceutical and OTC products but also imports and distributes international healthcare and consumer products.

Managing Director Murtaza Esufally said net profit margin was maintained at 15%, the same as last year.

“The year saw many challenges that had an adverse effect on the performance of your company,” he told shareholders.

“The slow growth of the economy, high food inflation and high taxes led to less consumer demand both for pharmaceuticals and consumer products.

The private pharmaceutical industry grew by only 1% last year as compared to the 11% growth in the previous year. Government purchases of medicine were also flat last year, Murtaza Esufally said.

“The challenges in maintaining product margins continued in the year under review, as we operate in a price-controlled pharmaceutical market. The increase in raw material costs and rupee depreciation significantly impacted margins,” he said.

“However, productivity gains and efficiency improvements in the production facility helped the company to maintain margin levels on par with the previous year.”

Sri Lanka MTD Walkers lose Rs200mn in March

ECONOMYNEXT - MTD Walkers, a Sri Lanka based construction and engineering group ost 200 million rupees in the March 2018 quarter, in a reversal from a 128 million profits a year earlier, with full year losses reaching 2.2 billion rupees, interim accounts showed.

The loss per share was Rs1.20 in the March quarter and Rs13.34 for the full year. The company’s share was last trading at Rs15.10, down 70 cents or 4.4% Monday.

In the March quarter it reported a gross profit of 266 million rupees, down 73 percent from a year earlier, on revenues of 4.8 billion rupees, which rose 21 percent, but cost of sales rose at a faster 51 percent to 4.6 billion rupees.

Finance cost rose 48 percent to 902 million rupees.

In the year to March the firm reported finance costs of 2.6 billion rupees.

Sri Lanka's Asiri hospital group earnings hit by higher tax rate

ECONOMYNEXT - Profits at Sri Lanka's Asiri Hospital Holdings fell 19.4 percent from a year earlier to 177 million rupees in the March 2018 quarter, after the state more than doubled the income tax rate on healthcare services, interim accounts showed.

The hospital group reported earnings of 16 cents a share in the quarter, interim financial results filed with the Colombo Stock Exchange showed.

The stock was trading 30 cents higher at 25.90 rupees on Monday.

Asiri Hospital Holdings reported earnings of 1.53 rupees a share for the year to end-March 2018 with revenue growing 15.7 percent from a year earlier to 12 billion rupees.

Gross profits in the March 2018 quarter rose 9.6 percent from a year earlier to 1.4 billion rupees with revenue increasing 8.5 percent to 3 billion rupees and cost of sales growing at a slower 7.5 percent to 1.6 billion rupees.

The group's income tax expenses increased 174 percent from a year earlier to 286.7 million rupees in the March quarter. This was due to income taxes on healthcare services increasing to 28 percent from 12 percent.

The hospital group's profit before tax had increased 33.8 percent from a year earlier to 480.3 million rupees.

Administrative expenses rose 3.6 percent to 703 million rupees while selling and distribution costs rose 38 percent to 105.5 million rupees.

Net finance cost fell 13.8 percent to 175.7 million rupees.

Sri Lanka's LOLC March earnings down 74-pt

ECONOMYNEXT - Profits at Lanka Orix Leasing (LOLC) contracted 74 percent from a year earlier to 2.46 billion rupees in the March 2018 quarter on higher loan-loss provisioning and lower capital gains, interim financial results filed with the stock exchange showed.

LOLC reported group earnings of 5.18 rupees a share in the quarter. The stock closed at 115.50 rupees last Friday.

Earnings per share fell 43 percent from a year earlier to 9.72 rupees in the 12-months to end-March 2018.

Interest income grew 86 percent in the March quarter to 29.1 billion rupees, and interest expenses grew at a slower 60 percent to 15 billion rupees, with net interest income expanding 126 percent from a year earlier to 14.1 billion rupees.

Operating profit increased 142 percent to 6.9 billion rupees in the quarter, despite direct expenses growing 94 percent to 2.4 billion rupees, personnel costs growing 26 percent to 4.8 billion rupees, and loan loss provisioning increasing 78 percent to 4 billion rupees.

Share of profits of equity accounted investees fell 75 percent to 197 million rupees and capital gains fell 99 percent to 62 million rupees from 10.4 billion rupees a year earlier.

LOLC group's deposit base grew 45 percent from a year earlier to 307.5 billion rupees as at end March 2018. Borrowings grew 16 percent to 332.1 billion rupees.

The group's loan book expanded 34.5 percent to 493.2 billion rupees.

In segment results reported by LOLC, the financial services businesses of the group reported a four-fold growth in profits from a year earlier to 11.4 billion rupees in the March 2018 quarter.

The group's manufacturing and trading segment grew 2,200 percent to 16.8 billion rupees and insurance grew 525 percent to 0.4 billion rupees.

Profit from plantations and hydropower was 4.6 billion rupee, compared to a 500 million rupee loss the previous year. The hotels segment saw losses expand 56% to 220 million rupees in the March 2018 quarter from a year earlier.

Sri Lanka's HNB syndicates R9bn loan for waste-to-energy plant

ECONOMYNEXT - Sri Lanka's Hatton National Bank said it had syndicated 9.0 billion rupee loan for Western Power Company, a waste-to-energy firm, which is a unit of publicly trade Aitken Spence Plc.

Bank of Ceylon, DFCC and People’s Bank were co-lenders.

"The recovery of energy from waste has become crucially important with Waste to Energy (WtE) power generation, one of the world’s most effective and green modes of managing disposal of garbage," DGM Corporate Banking of HNB, Ruwan Manatunga said.

""Our business too is evolving in response to this global trend."

Western Energy Company will have a capacity to burn 700 metric tonnes of waste from the Colombo municipal area, powering a 10 MegaWatt power plant in 2020.

The plant will be in Kerawalapitiya, Muthurajawela in the Western province of Sri Lanka.

Sri Lankan shares hit 5-month closing low, foreign investors cap falls

Reuters: Sri Lankan shares ended weaker on Monday to hit their lowest close in more than five months as investors sold telecom and banking shares, while foreign buying curbed further decline.

Foreign investors bought net 318.2 million rupees ($2.01 million) worth of equities on Monday, but the market has witnessed a year-to-date net foreign outflow to 824 million rupees worth of shares.

The Colombo stock index ended 0.1 percent weaker at 6,394.93, its fifth drop in six sessions. It fell 1 percent last week.

“The market is completely dead and some block deals pushed the turnover levels,” said Dimantha Mathew, head of research, First Capital Holdings.

“Investors are adopting the wait-and-see approach for some positive news, especially on the economic front.”

Turnover was 771.8 million rupees, less than this year’s daily average of 994.2 million rupees.

A weaker rupee, political uncertainty and the recent fuel price hike also weighed on sentiment, as local investors mostly remained on the sidelines as they gauged the impact of the floods that killed 24 people in the island nation over the past two weeks, brokers said.

Shares in Dialog Axiata Plc ended 2.1 percent lower, while Ceylinco Insurance Plc closed down 4.3 percent and Hemas Holdings Plc ended 2.4 percent weaker.

Foreign investors, who mostly sold shares of John Keells last week, bought the market heavyweight after the lower prices made it more attractive, stockbrokers said. Shares of John Keells ended steady on Monday.

Reports that MSCI Frontier Markets 100 Index, which captures large- and mid-cap representation across 29 frontier markets, will remove Keells from its index triggered foreign selling.

The rupee hit a fresh low of 158.80 per dollar on Friday owing to dollar demand from foreign banks and importers, but ended steady on late inflows from remittances.

Analysts said market sentiment was dented by concerns over political instability following President Maithripala Sirisena’s decision to suspend parliament last month after 16 legislators from his ruling coalition defected.

Last month, Sirisena urged his own coalition government and the opposition to end a power struggle to achieve ambitious goals including anti-corruption measures.

($1 = 158.4000 Sri Lankan rupees) 

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