Sri Lankan rupee, stocks slide as political crisis spurs outflows

Reuters: ** The Sri Lankan rupee ended weaker on Tuesday, as foreign investors continued to exit from bonds and stocks as a lingering political crisis weighed on market sentiment ahead of a key ruling by the island nation’s Supreme Court.

** The ruling, expected this week, will determine if the current parliament can continue in the next year or an election should be held. The decision could help end the political crisis.

** Foreigners sold a net 165.7 million rupees ($928,812) worth of stocks on Tuesday, and they have been net sellers of 10 billion rupees since the political crisis began on Oct. 26. The bond market saw outflows of about 51.2 billion rupees between Oct. 25 and Dec. 5, central bank data showed. 

** Foreign investors sold a net 17 billion rupees ($95.3 million) worth of government securities in the week ended Dec. 5, the highest weekly net outflow since the third week of February 2017. The stock market had net foreign outflows to the tune of 929.1 million rupees last week.

** The rupee ended at 179.20/40 per dollar on Tuesday, compared with 179.00/20 in the previous session. 

** Credit rating agencies Fitch and S&P downgraded Sri Lanka’s sovereign rating last week, citing refinancing risks and an uncertain policy outlook, after President Maithripala Sirisena’s sacking of his prime minister in October triggered the political crisis.

** On Wednesday, Fitch downgraded Sri Lanka’s financial institutions and Sri Lanka Telecom, citing the sovereign downgrade.

** This year, there have been 19 billion rupees of outflows from stocks and 143.4 billion rupees from government securities, the latest data from the bourse and central bank data showed.

** The rupee hit a record low of 180.85 per dollar on Nov. 28, surpassing its previous low of 180.50 hit the previous day. It has weakened about 3.3 percent since the political crisis began. The currency fell 1.8 percent in November and has slid 16.5 percent so far this year. 

** Moody’s downgraded Sri Lanka on Nov. 20 for the first time since it started rating the country in 2010, blaming the political turmoil for aggravating its already problematic finances. 

** The political paralysis remains the main concern for investors. While Mahinda Rajapaksa and President Sirisena have failed to win support in parliament for their new government, the deposed prime minister Ranil Wickremesinghe’s coalition, which claims it does have majority support in parliament, has not been allowed to try to form a government.

** A lower court has stayed Rajapaksa and his cabinet functioning in their positions after they refused to step down despite ousted via two confidence votes.

** The central bank on Nov. 14 unexpectedly raised its main interest rates to defend the rupee, which has faltered as foreign capital outflows pick up due to the domestic crisis as well as rising U.S. interest rates.


** Five-year government bond yields have risen 40 basis points since the political crisis unfolded on Oct. 26, while yields on Sri Lanka’s dollar bonds due in 2022 have risen by more than a percentage point to 8.31 percent since then.

** The Colombo stock index fell 0.29 percent to 6,026.26 on Tuesday. It rose 0.83 percent last week after a 1.5 percent rise in the previous week. It has declined 5.4 percent so far this year. 

** Stock market turnover was 689.3 million rupees ($3.86 million), less than this year’s daily average of 827.3 million rupees.

($1 = 178.4000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Sai Sachin Ravikumar)

Sri Lanka bourse asked to mandate electronic dividend payments

ECONOMYNEXT - Sri Lanka's central bank has called upon the Colombo Stock Exchange to ask listed companies to pay dividends through electronic means and stop issuing paper cheques, an official said.

"We encourage and request the CSE to consider the possibility of mandating use of electronic payment methods currently available," Central Bank Governor Indrajit Coomaraswamy told an Asia-Pacific forum of central depositories in Colombo.

Coomaraswamy said a committee set up to find ways to reduce physical cheque payments found that dividend payments by listed firms made up a large volume of cheques still issued in the country.

Some were for very small amounts, he said.

Coomaraswamy said the central bank was setting up a central counterparty and fully electronic trading platform for government securities.

There is a central depository for government securities, but trading was also done manually.

Sri Lanka's Colombo Stock Exchange set up a central depository and automated trading platform in 1991, in a first for the region at the time.

Fitch downgrades Sri Lanka Insurance Corp to IFS 'B'

ECONOMYNEXT – Fitch Ratings said it has downgraded the Insurer Financial Strength (IFS) rating of Sri Lanka Insurance Corporation (SLIC) to 'B' from 'B+' with a stable outlook.

A statement said the rating action follows the downgrade of Sri Lanka's Long-Term Local-Currency Issuer Default Rating (IDR) to 'B' from 'B+'. SLIC's IFS rating is constrained by Sri Lanka's Long-Term Local-Currency IDR.

The full statement follows:

Fitch Ratings-Hong Kong-05 December 2018: Fitch Ratings has downgraded the Insurer Financial Strength (IFS) rating of Sri Lanka Insurance Corporation (SLIC) to 'B' from 'B+'. The Outlook is Stable.

The rating action follows the downgrade of Sri Lanka's Long-Term Local-Currency Issuer Default Rating (IDR) to 'B' from 'B+' (see "Fitch Downgrades Sri Lanka to 'B'; Outlook Stable," dated 3 December 2018 on www.fitchratings.com). SLIC's IFS rating is constrained by Sri Lanka's Long-Term Local-Currency IDR.

The 'AA+(lka)' National IFS rating on SLIC was not covered in this review.

KEY RATING DRIVERS

SLIC's IFS rating is constrained by the Long-Term Local-Currency IDR on the sovereign as a result of the insurer's concentration of operations in Sri Lanka as well as its fairly sizeable government debt holdings. Fitch believes the higher sovereign risk will also undermine the operating environment for domestic insurers.

SLIC's rating reflects the company's favourable domestic business profile as well as good financial performance and capital position. These strengths are partially offset by significant investments in sovereign-related securities, non-core subsidiaries and high exposure to equities in its investment portfolio.

RATING SENSITIVITIES

Further downgrade of Sri Lanka's ratings will lead to a downgrade of SLIC's Insurer Financial Strength rating.

The IFS rating may also be downgraded if there is:

- significant weakening in SLIC's market position

- deterioration in the non-life combined ratio to well above 100% for a sustained period (2017: 95%)

- weakening in SLIC's importance to the government, increased state pressure for higher dividend pay-outs that weakens capitalisation or a significant increase in non-core investments.

Sri Lanka's NSB, PLC downgraded to 'B' on political crisis, falling rupee

ECONOMYNEXT - Sri Lanka's state-run National Savings Bank and People's Leasing has been downgraded to 'B' from 'B+' by Standard and Poor's, a rating agency due to an ongoing political crisis triggered after Mahinda Rajapaksa was appointed Prime Minister which had pushed up yield on bonds and a weak rupee.

"We lowered the long-term issuer credit rating on NSB and PLC to reflect S&P Global Ratings' view that the Sri Lankan banking sector is facing escalated stress following political turmoil, slowdown in pace of reforms, and slower economic growth than we expected," Standard and Poor's said

"The downgrade also factors in weakening of the sovereign's external position given that weak rupee and rising bond yields have reduced the government's ability to access international capital markets.

"We also believe that the Sri Lankan government no longer has the financial ability to provide extraordinary support to its banking system in a stress scenario."

The bank downgrade comes in the wake of a cut in Sri Lanka's sovereign rating to 'B' from 'B+' on the ongoing political crisis.

S&P kept at 'B' rating on privately owned DFCC Bank unchanged.

The full statement is reproduced below:

National Savings Bank, People's Leasing Downgraded To Reflect Heightened Economic Risk

- We have lowered our long-term sovereign credit rating on Sri Lanka by one= notch to 'B', reflecting reduced prospects of reform under the fractious political environment, which we expect to be protracted.

The country's external financing conditions has also deteriorated as a weak rupee and high yields constrain the government's access to international capital markets.

- In our view, a slow economy, fractious political environment, and the sovereign's weakened external position have led to heightened economic risk for Sri Lankan financial institutions.

- We are lowering the long-term issuer credit rating on NSB and PLC to 'B' from 'B+'.

-At the same time, we are affirming the long-term issuer credit rating on DFCC Bank at 'B'. We are also affirming the 'B' short-term ratings on the three Sri Lankan financial institutions.

- The outlook on the long-term rating for all these entities are stable, reflecting the stable outlook on the sovereign.

SINGAPORE (S&P Global Ratings) Dec. 4, 2018--S&P Global Ratings said today that it had lowered its long-term issuer credit rating on National Savings Bank (NSB) and People's Leasing & Finance PLC (PLC) to 'B' from 'B+'. At the same time, we affirmed the long-term issuer credit rating on DFCC Bank at 'B'. The outlooks on the long-term ratings are stable. In addition, we affirmed our 'B' short-term issuer credit rating on all the three entities.

We also lowered the issue rating on NSB to 'B' from 'B+'; PLC has no outstanding debt securities.

We lowered the long-term issuer credit rating on NSB and PLC to reflect S&P Global Ratings' view that the Sri Lankan banking sector is facing escalated stress following political turmoil, slowdown in pace of reforms, and slower economic growth than we expected. We affirmed the ratings on DFCC despite the higher risk from the operating environment because the bank's capital assessment already captures these risks at the current rating level.

We lowered the sovereign rating on Sri Lanka based on our assessment that the current political standoff has weakened the sovereign's external financing conditions and reduced the likelihood that further reforms will improve Sri Lanka's macroeconomic fundamentals and institutionalize sustainable policy frameworks over the next 12-18 months.

The downgrade also factors in weakening of the sovereign's external position given that weak rupee and rising bond yields have reduced the government's ability to access international capital markets. We also believe that the Sri Lankan government no longer has the financial ability to provide extraordinary support to its banking system in a stress scenario.

We consider it unlikely that Sri Lankan financial institutions would be immune to rising credit pressure on the sovereign and the broader operating environment. In our view, this weakened external position of the sovereign has heightened imbalances in the operating environment for the banks.

We expect the external financing pressure faced by the sovereign to hurt the broad economy, including the banking system. This accentuates the economic risk for banks in Sri Lanka. Continued high loan growth at about 16% (annualized) for first half of 2018, despite the economy slowing down sharply to 3.3% (in 2017), adds to the imbalance.

We have witnessed increasing credit stress for banks in Sri Lanka, partly due to lower-than-expected GDP growth. The asset quality for these banks has deteriorated more than we expected. The banks' nonperforming loans (NPLs) rose to 3.6% by end-August 2018, from 2.5% at end-2017 (compared with our expectation of 3%-3.2% by end-2018). Slower GDP growth, a depreciating rupee, and rising interest rates have partly contributed to this increase. Given the heightening economic risk, we expect NPLs to rise further to 4.5%-5% over the next 12-18 months, but remain within our tolerance level for a BICRA 9 system.

The increased economic risk would also require banks to maintain higher risk-adjusted capital to take care of the additional risk in the system.

Sri Lankan banks are already seeing higher pricing for their external funding, which could negatively affect their profitability. We believe the large state-owned banks may be required to tap the external markets at higher costs to finance the sovereign's bond repayments. In a low-probability and high-impact downside scenario, if the political turmoil escalates or prolongs, uncertainty could spread to the banking sector and cause funding stress or liquidity outflows.

PEOPLE'S LEASING & FINANCE PLC

The rating on PLC reflects the credit profile of the People's Bank group, of which PLC is a core entity. The rating on PLC is equalized with the group's credit profile.

We have revised PLC's stand-alone credit profile (SACP) to 'b' due to the worsening operating environment. PLC's dependence on wholesale funding and its concentration in commercial vehicle financing also constrain the rating. The company's moderate capital and earnings temper these weaknesses.

The stable outlook on PLC reflects our expectation that PLC will remain a core entity of the People's Bank group at least for the next 12 months because commercial vehicle leasing will remain a large and profitable business for the group.

We don't see any upside potential for the rating over the next 12 months.

We may downgrade PLC if the People's Bank group's capitalization reduces substantially.

NATIONAL SAVINGS BANK

The rating on NSB reflects our view that the Sri Lankan government will almost certainly provide extraordinary support to the bank in a stress situation.

We have revised NSB's SACP to 'b' from 'b+', due to the worsening operating environment. Our assessment of the SACP benefits from the bank's superior funding and liquidity metrics. A statutory guarantee on 100% of deposits and a requirement to invest 60% of deposits in government securities support the bank's liquidity and funding. NSB's low risk-adjusted capital ratio tempers the strength.

The stable outlook on NSB reflects the outlook on its parent, the government of Sri Lanka. We expect the bank's critical role and link to the government to remain unchanged over the next 12 months.
The most likely change (up or down) to our rating and outlook on NSB will be from a change in the creditworthiness of the government of Sri Lanka.

DFCC BANK

The rating on DFCC reflects the Sri Lanka-based bank's limited deposit base and weak capitalization. DFCC's satisfactory business position, earnings, and asset quality temper these weaknesses. We assess the bank's SACP as 'b'.

Our stable outlook on DFCC Bank reflects our view that the bank will maintain its credit profile despite tough operating conditions in Sri Lanka over the next 12 months.

We may lower the rating on DFCC if the bank's risk-adjusted capital ratio declines below 3%. This could happen if DFCC's profitability is lower or if its loan growth exceeds our expectations.

We are unlikely to upgrade DFCC over the next 12 months.

BICRA SCORE SNAPSHOT
Sri Lanka

                              To                From
Anchor                        b+                bb-
BICRA Group                   9                 8
Economic risk                 9                 8
 Economic resilience          Very high risk    Very high risk
 Economic imbalances          Very high risk    High risk
 Credit risk in the economy   Very high risk    Very high risk
Industry risk                 8                 8
Institutional framework       Very high risk    Very high risk
 Competitive dynamics         High risk         High risk
 System-wide funding          Very high risk    Very high risk
Trends
 Economic risk trend          Stable            Stable
 Industry risk trend          Stable            Stable
Government Support            Uncertain         Supportive


RATINGS SCORE SNAPSHOT

National Savings Bank
                             To                From
Anchor                       b+                bb-
Business position            Adequate (0)      Adequate (0)
Capital and earnings         Very weak (-2)    Very weak (-2)
Risk position                Adequate (0)      Adequate (0)
Funding                      Above avg (+1)    Above avg (+1)
Liquidity                    Strong            Strong
SACP                         b                 b+
Support                      0                 0
Group                        0                 0
GRE support                  Critical/         Critical/
                             Integral (0)      Integral (0)
Additional factors           0                 0

Issuer credit rating         B/Stable/B        B+/Stable/B


People's Leasing & Finance PLC
                             To               From
Anchor                       b-               b
Business position            Strong (+1)      Strong (+1)
Capital and earnings         Moderate (0)     Adequate (0)
Risk position                Adequate (0)     Adequate (0)
Funding                      Adequate (0)     Adequate(0)
Liquidity                    Adequate         Adequate 
Comparable Rating Analysis   0                0
SACP                         b                b+
External Influence           0                0
Group Influence              0                0
Government Influence         0                0
Guarantees or   Other External Influences   0                0
Issuer credit rating         B/Stable/B       B+/Stable/B


DFCC Bank

                            To                 From
Anchor                      b+                 bb-
Business position           Adequate (0)       Adequate (0)
Capital and earnings        Weak (0)           Weak (-1)
Risk position               Adequate (0)       Adequate (0)
Funding                     Below avg (-1)     Below avg (-1)
Liquidity                   Adequate           Adequate 
SACP                        b                  b
Support                     0                  0
Group                       0                  0
GRE support                 0                  0
Additional factors          0                  0
Issuer credit rating        B/Stable/B         B/Stable/B

Fitch downgrades Sri Lanka Telecom to 'B' on sovereign downgrade

ECONOMYNEXT – Fitch Ratings said it has downgraded Sri Lanka Telecom PLC's (SLT) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to 'B' from 'B+' with the outlook remaining stable.

The rating agency in a statement also confirmed SLT's National Long-Term Rating at 'AAA(lka)' with a Stable Outlook, and also confirmed the national rating at 'AAA(lka)' on its seven billion rupee debt programme.

The rating action follows Fitch's downgrade of Sri Lanka's Long-Term Foreign- and Local-Currency IDRs to 'B' from 'B+'.

The full Fitch statement follows:

Fitch Ratings - Singapore,Colombo - 05 December 2018: Fitch Ratings has downgraded Sri Lanka Telecom PLC's (SLT) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to 'B' from 'B+'. The Outlook is Stable.

The agency has affirmed SLT's National Long-Term Rating at 'AAA(lka)' with a Stable Outlook.
We have also affirmed the national rating at 'AAA(lka)' on the LKR7 billion debt programme.

The rating action follows Fitch's downgrade of Sri Lanka's Long-Term Foreign- and Local-Currency IDRs to 'B' from 'B+' (see "Fitch Downgrades Sri Lanka to 'B'; Outlook Stable," dated 4 December 2018 on www.fitchratings.com).

SLT's IDRs are constrained by Sri Lanka's IDRs as per Fitch's Government-Related Entities Rating Criteria, as the state holds a majority stake in SLT directly and indirectly, and exercises significant influence on its operating and financial profile. SLT's second-biggest shareholder, Malaysia's Usaha Tegas Sdn Bhd at 44.9%, has no special provisions in its shareholder agreement to dilute the government's significant influence over SLT.

SLT's standalone credit profile, assessed by Fitch at 'BB', is stronger than that of its owner, reflecting the company's market-leading position in fixed-line services and second-largest position in mobile, along with its ownership of an extensive optical-fibre network. The standalone profile is also underpinned by its mid-single-digit percentage growth prospects, moderate estimated 2018 FFO adjusted net leverage of 1.7x and stable operating EBITDAR margin.

KEY RATING DRIVERS

Strong State Linkages: Fitch sees SLT's status, ownership and control by the Sri Lankan sovereign as 'Strong'. The state's ownership gives it significant influence over operating and financial policies. We view the support record and expectations for the likelihood of state support for SLT as 'Strong', given its strategic importance in expanding the country's fibre infrastructure. Historically, SLT has not required tangible financial support due to its healthy financial profile.

State's Incentive to Support: Fitch sees the socio-political implications of a default by SLT as 'Moderate' due to the presence of three other privately owned telcos. However, it could affect the fixed-line market because SLT acts as a policy company to invest in fibre networks across the island to support the government's vision of fibre-based internet for all households.
Fitch also sees the financial implications of a default as 'Strong', as a financial default by SLT may have an impact on the availability and cost of financing options for other government-related entities.

High Capex, Negative FCF: We expect SLT to have negative free cash flow (FCF) during 2019-2020 (estimated 2018 negative FCF of LK2 billion-3 billion) as cash flow from operations may be insufficent to fund large capex plans to expand the fibre infrastructure and 4G mobile networks. SLT's 2019 capex is likely to remain high, at around 28%-30% of revenue, as it aims to complete its 4G population coverage to around 95% by end-2019.

We expect SLT to continue to invest in expanding fibre coverage as it aims to connect about 1 million homes by 2020-2021, from an existing 70,000 homes currently enable. Typically, SLT would need to lay fibre for at least 2 million homes to half of the households to be connected.

We expect SLT's fibre investments to have low returns due to the country's low broadband tariffs. Dividends are likely to remain around LKR1.6 billion-1.8 billion in the next two to three years.

Data Drives Growth: We expect revenue to grow by a mid-single-digit percentage during 2019-2020 (barring any tax shocks), driven by data and fixed-broadband growth. We expect 4G smartphone penetration to improve from the current 25% with the proliferation of cheaper Chinese phones. Revenue rose strongly by 6.5% in the first nine months of 2018, driven by fixedbroadband and mobile usage after a temporary usage slump in 2017 due to higher taxes on oice and data. We expect the government's recent announcement on the removal of floor rates for voice call charges to have only a limited impact on growth.

Industry Consolidation, M&A Risk: We believe the recently announced merger between Hutchison Telecommunications Lanka (Private) Ltd and Etisalat Lanka (Private) Ltd is likely to relieve some competitive pressures that have undermined telecom companies' revenue and EBITDA growth in recent years. The merger is pending regulatory approval. Industry consolidation is likely to provide some relief from pricing pressure, especially in the data segment where telcos have not been able to fully capture the strong growth in data traffic.
SLT's National Long-Term Rating could come under pressure if it were to carry out a debt-funded acquisition of the smallest telco - Bharti Airtel Limited's (BBB-/Stable) Sri Lankan subsidiary, Airtel Lanka. However, any rating action will be based on the acquisition price, funding structure, and the financial and operating profile of the combined entity.

Stable Sector Outlook: Fitch's outlook for the Sri Lankan telco sector is stable as we expect the mean net leverage for SLT and mobile market leader, Dialog Axiata PLC (AAA(lka)/Stable), to remain stable at around 1.4x in 2019. We expect the sector's cash generation to improve, driven by higher mobile and broadband data usage, which will be insufficient, however, to fund the large capex requirement, leading to negative FCF. We also expect average operating EBITDAR margins to remain stable at around 34% (2018 estimate: 34%), driven by improving economies of scale in the data and home broadband segment, offsetting the negative impact of the changing revenue mix.

DERIVATION SUMMARY

SLT's standalone rating reflects its moderate financial profile and strong market position in the fixed-line industry segment, and second-largest position in the mobile market. SLT has lower exposure to the crowded mobile market and more diverse service platforms than Dialog.

However, Dialog has a larger revenue base and better operating EBITDAR margin than SLT, while SLT's forecast FFO adjusted net leverage and FCF profile are worse than that of Dialog.

SLT has a larger operating scale and a wider EBITDAR margin than Hemas Holdings PLC (AA-(lka)/Stable), which is a diversified conglomerate with exposure to pharmaceuticals, fastmoving consumer goods, leisure and transport. Hemas is the largest private retail pharmaceutical distributor in the country and the second-largest home care and personal care manufacturer. Hemas's FFO adjusted net leverage is likely to be better than SLT's over the medium term.

KEY ASSUMPTIONS

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

- Revenue to grow by the mid-single-digit percentage, driven by fixed-broadband and mobile data services in 2018-2019.

- Capex/revenue to remain high at around 28%-30% as SLT expands its fibre and 3G/4G networks.

- Operating EBITDAR margin to remain stable at around 29%-30%.

- Effective tax rate of 28%.

- Dividend payout of LKR1.6 billion-1.8 billion.

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating Action

- An upgrade in Sri Lanka's IDRs would result in corresponding action on SLT's IDRs;

- A weakening of links between SLT and the sovereign could result in SLT's Local-Currency IDR being upgraded above Sri Lanka's Local-Currency IDR. However, SLT's Foreign-Currency IDR will remain constrained by Sri Lanka's Country Ceiling of 'B'

There is no scope for an upgrade as SLT is at the highest rating on the Sri Lankan national ratings scale.

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

- A downgrade of Sri Lanka's IDRs would result in corresponding action on SLT's IDRs;

- A debt-funded acquisition of a smaller operator could threaten SLT's National Long-Term Rating, depending on the acquisition price and the financial profile of the combined entity.
For the sovereign rating of Sri Lanka, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 4 December 2018:

The main factors that, individually or collectively, might lead to positive rating action are: - Improvement in external finances supported by higher non-debt inflows, or a reduction in external sovereign refinancing risks from an improved liability profile

- Improved policy coherence and credibility

- Stronger public finances, underpinned by a credible medium-term fiscal strategy

The main factors that could lead to negative rating action, individually or collectively, are:

- Further increases in external funding stresses that threaten the ability to repay external debt

- Continued political uncertainty that contributes to a loss of investor confidence, possibly affecting the macroeconomic outlook

- A deterioration in policy coherence and credibility that leads to an increase in general government debt and deficit levels.

LIQUIDITY AND DEBT STRUCTURE

Strong Access to Local Banks: At end-September 2018, SLT's liquidity - cash of LKR12 billion and committed undrawn bank lines of LKR13.5 billion - was sufficient to fund its short-term debt of LKR13.5 billion. We expect SLT to refinance its short-term debt in light of its access to local banks. It has demonstrated a solid track record of accessing capital from local banks and capital markets. Total debt was about LKR53 billion, out of which about 25% was denominated in US dollars.

Sri Lanka 12-month Treasury yield steady at 11.20-pct

ECONOMYNEXT - Sri Lanka's 12-month Treasury bill yield remained unchanged at 11.20 percent at an auction Wednesday compared with the week before, data from the state debt office showed.

The 03-month bill was not offered while the 06-month bill yield rose to 10.01 percent from 9.99 percent on 7 November when they were last offered.

The debt office offered 13 billion rupees of 12-month bills and six billion rupees of 06-month bills and accepted the same amounts.
(COLOMBO, December 5, 2018)

Fitch downgrades Sri Lanka financial institutions on sovereign rating cut

ECONOMYNEXT – Fitch Ratings said it has downgraded the ratings of Sri Lanka’s National Savings Bank, Bank of Ceylon, DFCC Bank and People's Leasing & Finance PLC's, all with stables outlooks, after the sovereign rating was downgraded.

A statement said the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) downgrades were, National Savings Bank (NSB) to 'B' from 'B +', Bank of Ceylon (BOC) to 'B' from 'B +'; DFCC Bank PLC ( DFCC) to 'B' from 'B +'; and People's Leasing & Finance PLC's (PLC) to 'B-' from 'B'.

“The Stable Outlook on NSB, BOC and PLC reflects the Stable Outlook on the sovereign.”

Fitch has also downgraded the Viability Ratings (VR) of BOC and DFCC to 'b' from 'b+' to reflect the more challenging operating environment in Sri Lanka.

The full Fitch statement follows:

Fitch Ratings-Singapore/Colombo-05 December 2018: Fitch Ratings has downgraded the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of the following Sri Lanka-based financial institutions following the downgrade of Sri Lanka's sovereign rating:

- National Savings Bank (NSB) to 'B' from 'B +'; Outlook Stable

- Bank of Ceylon (BOC) to 'B' from 'B +'; Outlook Stable

- DFCC Bank PLC ( DFCC) to 'B' from 'B +'; Outlook Stable

- People's Leasing & Finance PLC's (PLC) to 'B-' from 'B'; Outlook Stable

The Stable Outlook on NSB, BOC and PLC reflects the Stable Outlook on the sovereign.

Fitch has also downgraded the Viability Ratings (VR) of BOC and DFCC to 'b' from 'b+' to reflect the more challenging operating environment in Sri Lanka.

Fitch has revised our assessment of the operating environment in Sri Lanka to 'b/stable' from 'b+/negative' to reflect the likely adverse impact on the banks' credit profiles following the deterioration in the Sri Lankan sovereign's credit profile amid difficult domestic and external conditions. The National Ratings of BOC, NSB, DFCC and PLC were not covered in this review.

Fitch downgraded the Sri Lankan sovereign to 'B' from 'B+' on 3 December 2018 (see "Fitch Downgrades Sri Lanka to 'B'; Outlook Stable" at www.fitchratings.com).

KEY RATING DRIVERS

IDRS, VIABILITY RATINGS AND SENIOR DEBT RATINGS

The IDRs of NSB and BOC reflect Fitch's expectation of extraordinary support from the sovereign. The downgrades of their IDRs reflect Fitch's view that the state's ability to provide support to these banks has reduced, although the state's propensity to do so has not changed.
NSB

Fitch believes state support for NSB stems from its policy mandate of mobilising retail savings and investing them in government securities. The NSB Act contains an explicit deposit guarantee and Fitch is of the view that the authorities would support, if needed, the bank's depositors and its senior unsecured creditors to maintain confidence and stability in the system. Fitch has not assigned a Viability Rating to NSB as it is a policy bank.

The US dollar senior unsecured notes issued by NSB has also been downgraded by one notch to reflect the downgrade of its IDRs. The notes are rated at the same level as the bank's Long-Term Foreign-Currency IDR as they rank equally with other senior unsecured obligations. The notes have a Recovery Rating of 'RR4'.

BOC
Fitch expects state support for BOC to stem from its high systemic importance, quasi-sovereign status as well as its role as a key lender to the government and its full ownership by the state. BOC's Viability Rating (VR) reflects its thin capitalisation and asset quality pressures amid a difficult operating environment, but these are partly balanced by a stronger domestic funding franchise than the majority of sector peers.

DFCC
DFCC's IDRs are driven by its intrinsic strength as indicated by its VR. DFCC's VR captures its developing commercial banking franchise, and relatively weak asset quality and earnings, which are balanced against our expectation that DFCC would maintain higher capital buffers than similarly rated peers.

PLC
PLC's IDRs reflect Fitch's view that its parent, the state-owned and systemically important People's Bank (Sri Lanka), has a high propensity but limited ability to provide extraordinary support to PLC, if required. People's Bank's propensity to support PLC stems from PLC's role within the group 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. Fitch believes People's Bank's ability to provide support to PLC is limited as indicated by the downgrade of the sovereign rating.

SUPPORT RATING AND SUPPORT RATING FLOOR

The Support Ratings for the banks remain unchanged but the Support Rating Floors (SRFs) of NSB and BOC have been downgraded following the sovereign rating downgrade, which indicates the state's reduced ability to provide support and consequently, more limited probability that the banks would receive timely support, if needed. This is despite the state's strong propensity to provide support to these banks given their high importance to the state and high systemic importance.

The SRF on DFCC was revised to 'No Floor' as its systemic importance is much lower relative to larger banks such as NSB and BOC, and with the downgrade of Sri Lanka's rating, we believe sovereign support for DFCC cannot be relied upon given the sovereign's weakened financial ability.

RATING SENSITIVITIES

IDRS, VIABILITY RATINGS AND SENIOR DEBT RATINGS

Further changes to Sri Lanka's sovereign rating and/or changes in our perception of state support to NSB and BOC, could result in a change in their IDRs.

NSB
A reduced expectation of state support through, for instance, the removal of preferential support extended to NSB, or a substantial change in its policy role or deviation from mandated core activities, indicating its reduced importance to the government, could result in a downgrade of NSB's ratings. However, this is not our base case scenario.
NSB's senior debt rating is sensitive to changes in the bank's Long-Term IDRs. The Recovery Rating on the bank's notes is sensitive to Fitch's assessment of potential recoveries for creditors in case of default or non-performance.

BOC
A downgrade of BOC's IDRs would most likely result from further negative rating action on the sovereign, which would reflect a further weakening in the state's ability to support the bank. BOC's Viability Rating may come under pressure if there is a continued decline in capitalisation through a surge in lending or high dividends. Further deterioration in the operating environment, leading to deterioration of BOC's key credit metrics, could also exert negative pressures on its rating.

DFCC
An inability to replenish its capital buffers to a level that is commensurate with its risk profile could put pressure on the bank's IDRs. Fitch sees limited upside for the bank's ratings due to its weak franchise. Further deterioration in the operating environment, leading to deterioration of DFCC's key credit metrics (especially to its capital buffers which is a rating strength for the bank), could also exert negative pressure on its rating.

PLC
A downgrade of PLC's IDR would occur if People's Bank's ability to support PLC was to weaken, if People's Bank was to reduce 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 People's Bank's propensity to support PLC to weaken in the foreseeable future. PLC's IDR is also sensitive to changes in the sovereign rating, as this would affect People's Bank's ability to provide support to PLC.

SUPPORT RATING AND SUPPORT RATING FLOOR

Lower propensity of the state to support systemically important banks could result in further downward pressures to the banks' Support Ratings and Support Rating Floors, but Fitch believes this to be unlikely in the medium term. Further changes in the sovereign rating could also impact the banks' Support Ratings and Support Rating Floors.

The rating actions are as follows:
National Savings Bank:
Long-Term Foreign-Currency IDR downgraded to 'B' from 'B+'; Outlook Stable
Long-Term Local Currency IDR downgraded to 'B' from 'B+'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'B'
Support Rating affirmed at '4'
Support Rating Floor revised to 'B' from 'B+'
US dollar senior unsecured notes downgraded to 'B' from 'B+'; Recovery Rating at 'RR4'
Bank of Ceylon:
Long-Term Foreign-Currency IDR downgraded to 'B' from 'B+'; Outlook Stable
Long-Term Local Currency IDR downgraded to 'B' from 'B+'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'B'
Viability Rating downgraded to 'b' from 'b+'
Support Rating affirmed at '4'
Support Rating Floor revised to 'B' from 'B+'
DFCC Bank PLC:
Long-Term Foreign-Currency IDR downgraded to 'B' from 'B+'; Outlook Stable
Long-Term Local Currency IDR downgraded to 'B' from 'B+'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'B'
Viability Rating downgraded to 'b' from 'b+'
Support Rating affirmed at '5'
Support Rating Floor revised to 'No Floor" from 'B-'
People's Leasing & Finance PLC:
Long-Term Foreign-Currency IDR downgraded to 'B-' from 'B'; Outlook Stable
Long-Term Local-Currency IDR downgraded to 'B-' from 'B'; Outlook Stable

Sri Lanka economic slowdown trims company profits, bank earnings grow

ECONOMYNEXT – Sri Lankan listed company profits fell 10 percent in the September 2018 quarter from a year ago on lower consumer spending as the economy lost steam but banks and insurers maintained growth momentum, a brokerage said.

Despite the drop in overall earnings there was continued growth in banks and insurance sectors, First Capital Holdings said in an equities research report on the performance of 267 listed firms.

September 2018 quarter earnings dipped by 10 percent to 54.3 billion rupees from a year ago.

The dip was “primarily owing to sluggish performance in Food, Beverage and Tobacco, Telecommunication and Materials sectors which outweighed the positive momentum experienced by Banks and Insurance (+217%YoY) sectors,” the report said.

Food, Beverage and Tobacco sector profits fell 31 percent in the September 2018 qurater from the previous year, Telecommunication sector profits fell 36 percent and that of the Materials sector slumped 68 percent.

Profits of banks grew 14 percent and that of insurance firms shot up 217 percent during the period, First Capital Holdings said.

“Lackluster performance in Food, Beverage and Tobacco, Telecommunication and Materials sectors was mainly owing to lower consumer spending stemming from subdued economic growth,” the report said.

The profits dip in Carsons and Bukit Dahar was due to a loss of 943 million rupees as a result of a change in fair value of financial assets, deferred tax of 442 million rupees and a 821 million rupee foreign exchange loss.

The decline in volumes as a result of a new sugar tax saw earnings at Ceylon Cold Stores fall 31 percent.

“Amidst the heavy depreciation in the rupee, Dialog Axiata recorded a forex loss which led to a 54 percent year-on-year decline in earnings leading to a 36 percent YoY dip in Telecommunication sector earnings,” the report said.

The 68 percent dip YoY in the Material sector earnings was attributed to the 90 percent slump YoY in earnings of Tokyo Cement due to the slowdown in economic activities, First Capital said.

But they said the banking and insurance sector earnings continued to grow.

Banking sector earnings posted a 14 percent YoY growth to 17.7 billion rupees while continuing to be the largest contributor to overall earnings.

Commercial Bank, Hatton National Bank and Sampath Bank, being the largest banks in terms of the asset base, contributed 72 percent to total banking sector earnings.

“Improved earnings during the quarter was a result of higher interest rates that prevailed in the market, thereby improving margins and spreads which negated the effect of an increase in impairment provisioning under IFRS 9,” the report said.

The two-fold growth in insurance sector earnings was owing to phenomenal growth in earnings of Union Assurance Ltd. (1.6 billion rupees) and Softlogic Life Insurance (2.3 billion) resulting from the reversal in deferred tax assets in life insurance business.

Sri Lanka’s Bogawantalawa to replant tea, upgrade factories with debt issue

ECONOMYNEXT – Sri Lankan regional plantations company Bogawantalawa Tea Estates has told shareholders it would use funds raised from a debt issue to replant tea fields, upgrade factory machinery, settle loans and set up solar power plants.

A stock exchange filing said Bogawantalawa Tea Estates plans to raise 850 million rupees by issuing bonds of up to seven years with the option to convert to ordinary shares on maturity.

The circular to shareholders described how the funds would be used with 250 million rupees to be used for field development activities and 200 million rupees to buy specialised machinery and laboratory equipment.

Each year 150-200 million rupees is needed to rehabilitate soild on estates, soil building and tea re-planting and in-filling over 150 hectares, the company said.

New machinery is needed to make specialty teas for which markets are developing.

Another 200 million rupees would be used to settle high cost debt while 150 million rupees would be to develop identified solar power projects.

Sri Lanka tourist arrivals up 16.8-pct in Nov with Barmy Army, Indians

ECONOMYNEXT - Tourist arrivals to Sri Lanka in November 2018 grew 16.8 percent from a year earlier to 195,582 despite an ongoing political crisis, with strong growth from India and the UK, official data showed.

Arrivals from the United Kingdom grew 61.1 percent to 21,971 tourists, overtaking the Chinese market, which fell 1.8 percent to 18,888 tourists, data from the Sri Lanka tourism promotion office said.

Sri Lanka had a cricket series with England, with the so-called Barmy Army travelling with the team, which helps boost arrivals.

About 20 percent of the tourists came from India, with arrivals growing 21.4 percent from a year earlier to 39,137.

A falling Indian rupee tends to make travel to countries with better central banks more expensive, but Sri Lanka's rupee has fallen faster than the Indian rupee making Sri Lanka cheaper.

At independence from Britain, both India and Sri Lanka's rupee were at 4.76 to the US dollar. Sincen the Reserve Bank of India has taken to the rupee to about 70 to the US dollar and Sri Lanka's Central Bank has taken it to 180 to the US dollar, with policy worsening over the last three years.

Before independece India's rupee was pegged to specie (silver and gold) and Sri Lanka had a currency board keeping 1 to 1 parity with the Indian rupee.

German arrivals grew 89.6 percent to 18,754 tourists, with a sixth of them coming on cruise ships.

With better air connectivity, Australia jumped up to the top 5 markets for Sri Lanka tourism, overtaking Russia and the Maldives. Arrivals from Australia grew 51.9 percent to 10,299 tourists.

By region, 47 percent of the tourists came from Asia and Pacific, while 43 percent came from Europe in November.

The 11 months to November saw arrivals grow 11.2 percent to 2.08 million tourists.

India, China, United Kingdom, Germany and Australia made up the top five markets during the 11 months as well.

Industry stakeholders have said that so far, only the MICE (Meetings, Incentives, Conferences and Exhibitions) market has been affected by the ongoing constitutional crisis, with some cancellations and postponements.

However, they say that forward bookings growth overall has been slower up to April.

President Maithripala Sirisena is set to address tourism stakeholders at the Sri Lanka Tourism Awards tonight, after throwing the country into crisis in October.