Fitch affirms Hemas Holdings at ‘AA-(lka)’; Outlook Stable

Fitch Ratings has affirmed Sri Lanka-based consumer and healthcare company Hemas Holdings PLC’s National Long-Term Rating at ‘AA-(lka)’ with a Stable Outlook.

The affirmation reflects the limited vulnerability of the company’s largely defensive operating cash flows to disruptions from the coronavirus pandemic and the resultant economic downturn. Pharmaceutical trading and manufacturing as well as fast-moving consumer goods (FMCG) in home and personal care, and stationery account for over 80% of the group’s EBIT.

The rating also benefits from the company’s exceptionally strong balance sheet and high rating headroom before the economic downturn, and we estimate steady leverage of around 0.4x-0.5x in the year ended March 2020 (FY20) and FY21 compared with the 3.0x leverage threshold for the current rating.

Hemas also disposed of two of its smaller non- core businesses in FY20, which will improve the group’s profitability starting FY21, even as its exposure to the hotel sector weighs on its financial profile.
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Union Bank reports subdued growth in 1Q20

Despite its strong-footed entry into the first quarter of 2020, Union Bank’s core banking growth compressed since mid-March up until the end of the first quarter, owing to unprecedented economic impacts of the ongoing global pandemic.

Net Interest Income (NII) of the Bank was affected by low credit growth and the pressure on lending rate caps introduced by the Central Bank of Sri Lanka (CBSL). As a result, the Bank’s NII increased only by 2% YoY to Rs.1,031 Mn. The effective fund management strategies coupled with timely re-pricing of assets and liabilities contributed towards sustaining NII amidst challenges.

The Bank’s fee and commission income declined by 8% YoY to Rs. 201 Mn due to the drop in demand for fee based activities across credit related product lines and mainly due to the reduction in the import and export business.

The Bank’s Treasury recorded a notable performance with a significant YoY increase of Rs.119 Mn in capital gains mainly due to the favourable movements of interest rates. Other Operating Income of the Bank increased significantly on the back of exchange rate deflation by 5% YTD. Operating Income of the Bank for the period was Rs. 1,498 Mn.

As a result of focused efforts on enhancing operational efficiency, the Operating Expenses of the Bank increased only by 5% YoY to Rs. 1,001 Mn during the period under review. Pre-impairment profits of the Bank were Rs. 498 Mn for the period and indicated a growth of 20% YoY. Weighed down by the challenges of the operating environment, Union Bank recorded a subdued profit before all taxes of Rs. 405 Mn. Profit after Tax (PAT) of the Bank was Rs. 180 Mn.

Total assets of the Bank stood at Rs. 131,195 Mn as at 31st March 2020. The Bank’s loans and receivables stood at Rs. 78,266 Mn and the deposits base was Rs. 83,924 Mn by quarter-end.

The Group comprising the Bank and its two subsidiaries, National Asset Management Limited and UB Finance Company Limited, reported a Profit after Tax of Rs. 195 Mn for the period. Total assets of the Group were Rs. 139,206 Mn of which 94% was represented by the Bank.

Director/CEO Indrajit Wickramasinghe said, “We are currently operating in unprecedented conditions and are making every effort to provide our customers optimum solutions and financial support during these difficult times. The Bank has withstood a challenging first quarter, and the results have been impacted by the economic trials of the health crisis which began its effects from mid-March and is expected to bear a ripple effect on the banking sector as well as the business community in the coming months.”
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Pan Asia Bank records best ever Q1 results

Profit before tax up by 53% to Rs. 652 Mn

Pan Asia Banking Corporation PLC concluded 2020 Q1 with the best ever financial results in a first quarter of an year in its 25 year history to report a Profit before tax of Rs.652 Mn and Profit after tax of Rs.416 million, recording an impressive growth of 53% in both, demonstrating resilience amidst challenging conditions.

The Bank’s operating profit before taxes on financial services for the quarter increased by 22% reflecting solid overall core banking performance, effective assets and liabilities management and excellence in NPL management, although prudential impairment provisioning undermined the bank’s operating profits to an extent. The Bank consciously increased impairment provision buffers during Q1 to deal with probable general deterioration in asset quality due to the impact of COVID 19 pandemic.

The Bank’s growth in both profit before income tax and profit for the quarter was also supported by the low financial services taxes regime prevailed throughout the current quarter.

The Bank’s net interest margins improved from 4.36% to 4.78% during past 3 months which is a commendable feat given the industry wide deterioration in credit quality and steps taken by the government to bring down market interest rates despite the increased credit risk of borrowers. Meanwhile, the Bank’s pre tax Return on Assets improved from 1.52% to 1.63%.

The Bank’s total asset base stood at Rs.168 Bn at the end of the quarter after posting a growth of 10%. Meanwhile, the Bank’s gross loans and advances book recorded a strong growth of 6% during the quarter to reach Rs. 124 Bn which surpassed the previous full year’s growth.

The Customer deposits recorded a commendable growth of 6% or Rs. 7 Bn during the quarter to touch Rs.130 Bn mark.

The Bank’s Retail and Corporate segments collectively contributed towards improving the deposit base including CASA base, whilst an outflow of a large foreign currency time deposit was experienced on the latter part of the quarter.

The Bank’s gross non-performing loan ratio improved from 6.31% to 6.03% whilst net non-performing loan ratio improved from 2.82% to 2.27% within a short period of 3 months due to prudential provisioning policies. Bank’s Director/CEO, Nimal Tillekeratne said, “This is the best ever post tax profits in a first quarter the Bank had in its history of 25 years. We have achieved this feat while building additional provision buffers to deal with possible general deterioration in credit quality due to impact of COVID-19 pandemic,” Tillekeratne added. 

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Fitch affirms Richard Pieris at ‘A(lka)’/Stable

Fitch Ratings has affirmed Richard Pieris & Company PLC’s (RICH) National Long-Term Rating at ‘A(lka)’. The outlook is stable. At the same time, Fitch has withdrawn RICH’s rating because the rating has been taken private.

The affirmation reflects RICH’s ability to maintain net leverage commensurate with its ‘A(lka)’ rating in the next 12-18 months despite the vulnerability of some of its businesses to the coronavirus pandemic and the resultant economic downturn. We expect operating cash flows from RICH’s supermarket retail business, which accounts for around 45% of group EBIT, and its protected domestic palm-oil plantations to remain resilient in the current environment, offsetting challenges in the export and plastic segment, which are exposed to more volatile end-markets.

RICH had modest rating headroom before the economic downturn, and we expect this, together with its flexibility to cut capex and shareholder returns, to help the company maintain leverage at around 3.0x in the year ending March 2021 (FY21) - the threshold for the current rating - before improving in FY22. However, a deeper or more prolonged impact from the pandemic may pose risks to our expectations.

Fitch is withdrawing the rating of RICH because the rating has been taken private. “We expect supermarket revenue to decline by 15%-20% in FY21, mainly due to weaknesses in 1HFY21.
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Sampath Bank posts Rs 3 bn quarterly PBT

Sampath Bank recorded a Profit before tax (PBT) of Rs 3 billion for the quarter ending March 31, 2020.

Operating profit before all taxes, which is the real return generated by utilizing the assets and liabilities of the Bank, declined by 10.8%. This decline was due to the reasons mentioned above.

The challenges brought by COVID – 19 pandemic and the recession brought on by the terrorist attack in April 2019 has lead the period under review to be pressurized by some unique challenges that were not seen in Q1 2019.

The Bank reported Profit after tax (PAT) of Rs 2.5 billion for the three months ended 31st March 2020, reflecting a growth of 15.7% over the corresponding period in 2019. PAT growth was attributed to two factors; (1) the higher exchange income due to depreciation of the Sri Lankan rupee against the US dollar by Rs 7.90 during the quarter and (2) tax concessions received owing to the abolition of Debt Repayment Levy and NBT on financial services.

Meanwhile, the Sampath Group achieved a PBT of Rs 3.3 billion and a PAT of Rs 2.7 billion for the period under review compared to Rs 2.8 billion and Rs 2.1 billion reported in the corresponding period of 2019.

Owing to the prevailing challenges, average weighted prime lending rate in the Country dropped by approximately 3%. A similar drop was observed in Treasury Bill interest rates.

Consequently, Sampath Bank’s Net Interest Income (NII) decreased by Rs 0.2 billion to Rs 9.98 billion as at March 31, 2020, a decline of 2.4% compared to the figure reported in Q1 2019. It should however be noted that despite the challenging conditions, effective fund management strategies helped to restrict the decline in NII to 2.4%.

Overall, interest income for the period under review decreased by Rs 1.1 billion and stood at Rs 24.5 billion compared to Rs 25.6 billion recorded in the corresponding period in 2019, a decline of 4.3%. Interest expenses for the period under review decreased by 5.5%. For the three months ended March 31, 2020, Sampath Bank registered interest expenses of Rs 14.5 billion compared to Rs 15.4 billion recorded in 2019.

Net fee and commission income, which largely comprises credit, trade, card, and electronic channel related fees, was Rs 2.2 billion for the quarter under review, a marginal decline of 1.4% over the figure reported in Q1 2019.

Net other operating income recorded a YoY increase of 321.6% in Q1 2020, led mainly by an increase in realized exchange income due to a 4.4% depreciation of the Sri Lankan Rupee against the US Dollar.

Consequently, net other operating income increased to Rs 2.3 billion, from the loss of Rs 1 billion reported during the corresponding period in 2019.

On the other hand, the Bank incurred a net trading loss of Rs 664 Mn as a result of mark to the market losses on forward exchange contracts owing to the aforementioned currency depreciation.

The Bank’s total operating expenses, which amounted to Rs 5.14 Bn in 1Q 2019, increased marginally by 0.2% during the period under review to Rs 5.15 Bn in 1Q 2020. The increase in operating expenses was kept to a minimum, thanks to comprehensive cost containment strategies implemented throughout the period under review.

The total impairment charge for the first three months ended 31st March 2020 was Rs 4.9 Bn compared to Rs 3.5 Bn recorded in 1Q 2019 denoting an increase of 39.7%. The gross non-performing loans increased to 6.72% at end of 31st March 2020 from 6.37% reported at the end of 2019.

Sampath Bank’s total asset base grew by 2.2% (annualized 8.7%) during the period under review to reach Rs 983 Bn as at 31st March 2020. In comparison, the total asset position as at 31st December 2019 stood at Rs 962 Bn. Gross loans & advances grew by 3.4% (annualized 13.9%) to reach Rs 744 Bn as at 31st March 2020, recording a growth of Rs 24.8 Bn for the period under review. The total deposit base increased by Rs 31.1 Bn for the same period, to reach Rs 749 Bn as at the reporting date, a growth of 4.3% (annualized 17.4%).

The Bank’s Common Equity Tier (CET) I Capital, Tier I Capital and Total Capital Adequacy ratios as at 31st March 2020 stood at 13.65%, 13.65% and 17.16% respectively, all well above the corresponding minimum regulatory requirement.

Sampath Bank continued to demonstrate its commitment to offer the best possible service to its customers across the Country by maintaining all essential banking services without interruption amidst curfew restrictions imposed during the COVID-19 lockdown.
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Dialog posts Rs 29.2 bn revenue for Q1 2020

Direct and Indirect taxes, fees, levies to Govt, Rs 4.5 bn

Dialog Axiata PLC all key business segments, Mobile, International, Tele-infrastructure, Digital Pay Television and Fixed Line contributed to record a consolidated revenue of Rs 29.2 billion for Q1 ended 31st March 2020, demonstrating a marginal decline of 1% Quarter-on-Quarter (“QoQ”), resulting from challenges to core revenue growth, albeit growing 1% Year-on-Year (“YoY”).

derpinned by strong cost optimization initiatives, Group Earnings Before Interest, Tax, Depreciation and Amortisation (“EBITDA”) grew 4% and 1% YoY to record at Rs12.2Bn for Q1 2020. The EBITDA margin was accordingly recorded at 41.6%, a 2.3pp QoQ improvement for Q1 2020.

The Group NPAT declined 39% QoQ and 69% YoY to reach Rs1.5Bn for Q1 2020, mainly resulting from the non-cash translational forex losses. The Rupee (“LKR”) depreciated against the Dollar (“USD”) by 4.6% in Q1 2020 versus an appreciation of 3.6% and 0.1% in Q1 2019 and Q4 2019 respectively. Normalised for the non-cash translational forex losses/gains NPAT was recorded at Rs3.1Bn, up 31% QoQ albeit declining 13% YoY due to increase in depreciation and transactional forex impact.

Dialog Group continued to be a significant contributor to state revenues, remitting a total of Rs 4.5 Bn to the Government (“GoSL”) during Q1 2020. Total remittances included Direct Taxes and Levies amounting to Rs1.4Bn as well as Rs3.1Bn in Consumption Taxes collected on behalf of the GoSL.

The Group capital expenditure was prioritised in Q1 2020, amid Covid-19 outbreak and associated challenges, which recorded at Rs2.0Bn representing a capex to revenue ratio of 7%.

The Group continued to exhibit a low geared balance sheet with the Net Debt to EBITDA ratio being maintained at 0.81x as at end of March 2020.

At an entity level, Dialog Axiata continued to contribute a major share of Group Revenue (70%) and Group EBITDA (75%). The Company further consolidated its market leadership position in the Sri Lanka to reach 15.0 Mn subscribers during the quarter.

Company Revenue was impacted by slowdown in core revenues and reached Rs20.5Bn for Q1 2020.

Company NPAT was recorded at Rs1.6Bn for Q1 2020 declining 45% QoQ and 65% YoY due to the impact from non-cash translational forex losses. Dialog Television (“DTV”), continued to consolidate its leadership position in the Digital Pay Television space with a subscriber growth of 25% YoY to reach 1.5Mn as at end of March 2020. DTV Revenue remained stable QoQ and was up 8% YoY, amid growing subscription revenue, to reach Rs 2.2Bn.

Dialog Broadband Networks (“DBN”) featuring the Group’s Fixed Telecommunications and Broadband Business recorded revenue of Rs7.4Bn for Q1 2020, down 2% QoQ and up 10% YoY. 

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Teejay ends 2019-20 with net profit up 28%

Sri Lanka’s only multinational textile producer Teejay Lanka PLC has ended 2019-20 on an encouragingly strong note,

reported profit before tax of Rs 2.9 billion at Group level for the 12 months ending 31st March 2020, reflecting impressive growth of 29% over the preceding year, a remarkable achievement considering that pre-tax profit for the final quarter was down 24% over the corresponding three months of 2019-20, to Rs 542.1 million.

The Group posted net profit of Rs 2.4 billion for the full year, an improvement of 28%, after paying income tax of Rs 528.7 million, which was up 33% over that of the previous year. Net profit for the quarter ending 31st March 2020, at Rs 421.7 million, reflected a decline of 30%.

Group revenue increased by a consistent 5% to Rs 33.3 billion for the 12 months reviewed, but was down by 21% to Rs 6.9 billion for the fourth quarter of 2019-20.

Teejay Lanka Chairman Bill Lam commented that the unexpected decline in numbers in the fourth quarter was unfortunate as the Teejay Group was well in line to achieve its 10th consecutive quarter of growth in revenue and net profit had it not faced the unforeseen circumstance of the pandemic. “However, the Group had a very successful financial year achieving remarkable milestones, which included its highest revenue, highest gross profit and highest net profit for a financial year,” he said.

In a note to shareholders, Lam also said the Group had donated fabric with its existing capabilities for the production of 2 million face masks to protect medical staff and armed forces in Sri Lanka that are engaged in the battle against the spread of COVID-19.

Looking ahead, he said the pandemic will challenge the business in the coming months as most of the brands Teejay produces fabric for have had to shut their retail stores in the US and EU. Adapting to the changing environments, Teejay has ventured into a new endeavour of producing Personal Protection Equipment (PPE) to cater to international markets to supply the unprecedented current demand for these products.

“As the manufacture of fabric is a mechanised process and the Teejay facilities extend to nearly 1.1 million square feet, the Group’s three production facilities are capable of manufacturing with their full work force amidst a COVID-19 environment”, Lam said.

Teejay Lanka CEO Pubudu de Silva added: “With the team’s ability to innovate and create products, the Group’s new venture into the PPE market exploiting the years of experience in creating sophisticated fabric and its strength in the South Asian region together with its strong balance
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David Peiris buys 30 mn ComBank shares for Rs. 1.5 billion

A total of Rs. 60 Million Commercial Bank shares were sold yesterday where David Peiris bought half of that stock, market sources told the Daily News Finance.

David Peiris had bought Rs. 30 Million shares of Com Bank at Rs. 50 each for Rs. 1.5 Billion while the rest of the shares were bought by other institutional investors, they said.

They also said that David Peiris was a cash rich company which had Rs. 26 Billion available for portfolio investments as they were rich on trishaw sales.

Meanwhile, yesterday’s trading was also positive as Wednesday where there was a turnover of Rs. 3684294.10 while 85,087,859 were traded. The All Share Price Index was 4393.54 , an increase of 26.29% over Wednesday. However, the S&P SL20 Index was down 22.13% to 1707.02.
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ComBank posts income of Rs 39.4 bn, a growth of 12.87%

Makes steady start to 2020 with pre-COVID-19 gains

The bank has reported a gross income of Rs 39.444 billion for the three months ending 31st March 31, 2020, recording a growth of 12.87%. Interest income growth remained predictably flat, up just 0.83% to Rs 31.892 billion, but the Bank’s interest expenses, at Rs 19.466 billion, reflected an achievement of a 1.43% reduction during the quarter reviewed, attributable to timely re-pricing of liabilities as well as an improvement in its CASA ratio. This enabled the Bank to generate net interest income of Rs 12.426 billion, an improvement of 4.59%.

A 4.34% depreciation of the Sri Lanka Rupee against the US Dollar in the three months reviewed as against an appreciation of 4.27% recorded in the first quarter of 2019, coupled with a revaluation of the Bank’s foreign currency assets and liabilities, resulted in the Bank posting an exchange profit of Rs 6.514 billion, which helped convert a net loss of Rs 389.309 million in other operating income in Q1 2019 to net income of Rs 6.587 billion in the three months under review.

At the same time, a loss of Rs 2.348 billion was recorded from trading in the quarter reviewed due to unrealised losses on forward foreign exchange contracts entered into by the Bank.

As a result of the higher impairment charges, the Bank’s net operating income declined by a marginal 0.38% to Rs 12.775 billion, despite the fact that total operating income had grown by a robust 31.64% to Rs 19.320 billion.

Operating profit before taxes at Rs 6.239 billion reflected a decline of 4.63%, but with taxes on financial services reducing by 42.83% to Rs 1.010 billion for the quarter under review due to the abolition of Nation Building Tax (NBT) from December 2019 and Debt Repayment Levy (DRL) from January 2020, the Bank posted a profit before income tax of Rs 5.229 billion for the three months, an increase of 9.51%. Profit after tax grew by 22.62% to Rs 3.707 billion, with the increase in the tax-exempt component of income being higher in the reviewed quarter in comparison with Q1 of 2019.

Commercial Bank Chairman Dharma Dheerasinghe said: “Although the impact of the shutdown of businesses necessitated by the COVID-19 pandemic is not yet reflected in the top line performance of the Bank because we had relatively normal volumes up to the middle of March, we did witness a continuing worsening in the prospects for certain business sectors.”

Managing Director S. Renganathan disclosed that the Bank had increased its CASA ratio to 39.81% from 37.10% at the end of last year, even as it recorded extremely healthy deposit mobilisation in the reviewed three months.

“The Bank was able to adapt very quickly to provide customers safe and convenient access to services during the crisis through multiple channels,” he said.



Total assets of the Bank increased by Rs 63.919 billion or 4.61% at a monthly average of Rs 21.3 billion to Rs 1.451 Trillion.

Gross loans and advances grew by Rs 28.744 billion or 3.12% since end 2019 to Rs 949.201 billion at the end of the three months under review.

Total deposits recorded a growth of 4.87% or Rs 51.326 billion over the three months to reach Rs 1.105 Trillion as at 31st March 2020, reflecting average monthly growth of over Rs 17 billion.

In other key indicators, the Bank’s gross NPL ratio increased to 5.27% from 4.95% at end 2019 and 4.14% at end of first quarter 2019, while its net NPL ratio increased similarly to 3.24% from 3.0% at the start of the quarter.

The Bank’s Total Tier 1 capital ratio stood at 11.495%, comfortably above the revised minimum requirement of 9% imposed by the regulator.

As a group, Commercial Bank, its subsidiaries and associates reported profit before tax of Rs 5.438 billion, an improvement of 8.35% and profit after tax of Rs 3.814 billion, reflecting growth of 19.54%.

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Trends Shaping Sri Lanka's Bond Market

LOW BORROWING RATES AND TAX CUTS HAVE POTENTIALLY TRANSFORMED THE ECONOMY. WHAT DOES IT MEAN FOR THE GOVERNMENT SECURITIES MARKET AND FOR INVESTMENT STRATEGY?

Sweeping tax cuts and a moratorium on small business loans capital repayments will potentially drag Sri Lanka’s economy out of the doldrums. Apart from the government’s fiscal stimulus, the economy will potentially transform with the Central Bank reducing monetary policy rates; lower lending rates will lift credit growth and consumption. General elections slated for April 2020 will likely enhance political stability which is also growth positive.

“The heavy tax cuts and the lower interest rate regime are expected to boost consumption and investments, improving GDP growth. However, the acceleration is likely to take place towards the second half of 2020. Thereby, we expect growth to reach 4.1% during the year,” First Capital Research said in its flagship ‘Strategy Report 2020: Fiscal loosening weakens 2H2020 outlook’ released in February at a well-attended business forum in Colombo.

The First Capital Research Team, from left: Hiruni Perera, Senior Research Analyst, Nisansala Kuruppumudali, Research Analyst, Atchuthan Srirangan, Assistant Manager Research, and Dimantha Mathew, Head of Research.

First Capital is a listed investment bank in Sri Lanka. The economy will continue to pick up steam heading into 2021 but will slow down during the second half.

However, economic growth for 2021 will be an improved 4.3%, a five-year high, the investment house said. What does all this mean for an investment strategy? With the economy improving and interest rates trending downwards, equities are looking more attractive than in recent years. The heavy tax cuts and the policy rate cut are likely to be an added boost for company earnings. With attractive multiples, First Capital has upgraded its equities outlook and is bullish that the Colombo stock exchange’s All Share Index will reach 6,500 points by June 2020 and increase to 7,500 points by end December 2020, significantly higher than its earlier forecast of 7,000 points.

Equities, however, are risky and cannot match the security offered by government treasury bills and bonds.

First Capital recommends an investment strategy of holding government securities with shorter tenures because yields will likely pick up towards the second half of 2020. Pressure on bond yields to rise will mainly come from the government’s increased domestic borrowing requirement, pushing the yield curve higher by 50-100 basis points. Market borrowing rates will also trend slightly upward. Bank prime lending rates usually lag the five-year bond yields by six months. The Central Bank recently imposed lending caps on banks to force interest rates down. The average weighted prime lending rate (AWPR) for the banking sector has bottomed out at around 9.5% and will slightly increase in the second half of the year. The fiscal stimulus will make it difficult for the government to manage the budget deficit as tax revenues decline.

Although rupee debt repayments remain low in 2020, a potentially high budget deficit is likely to be created with the hefty tax cuts. The high budget deficit is likely to push the rupee debt borrowing requirement also higher. The trade deficit may also grow wider towards the second half of 2020 amidst the possible rise in consumer demand possibly leading to a high level of consumer imports, pressuring the foreign reserve and the rupee,” First Capital says. There are higher external debt repayments due including a $1 billion sovereign bond maturing in September 2020. First Capital expects the rupee to depreciate by 4.6% against the US dollar in 2020 despite a stable run in the first half of the year. Sri Lanka’s total debt repayment for 2020 is Rs2.4 trillion. Debt to GDP is expected to increase to 85% in 2019 but dip marginally to 84% in 2020 due to higher GDP growth, lower debt repayments and foreign direct investments mainly into the Colombo Port City. While overall bond repayments will dip in 2020, foreign debt repayments remain high in the second and third quarters.

“The Year 2020 illustrates a notable reduction in repayments especially in the first and fourth quarters, however, we expect foreign payments in the range of $300-350 million to exist monthly in the form of project loan repayments with relatively high repayments in the second and third quarters,” First Capital notes. The policy rate cut on top of the fiscal stimulus prompted foreign selling of government securities which impacted market liquidity. However, due to restrictive foreign holdings, the market impact was low. Private sector credit improving to 14% in 2020 will further tighten liquidity. Sovereign rating risk is another concern. The government’s fiscal stimulus has been criticized by sovereign rating agencies. Fitch downgraded the outlook on Sri Lanka to ‘Negative’ indicating a possible rating downgrade in the future.

This will likely make capital raising in international markets more expensive. The rating downgrade risk is offset by the South Asian region’s economic growth prospects. With the US Fed expected to hold rates, foreign investors could find the region’s bond markets attractive, particularly in Sri Lanka with improved political stability and growth. However, ensuring fiscal discipline will be critical to ensure the tax cuts and monetary easing have their desired effect on the economy.

Source:https://echelon.lk/trends-shaping-sri-lankas-bond-market/

Sri Lanka banks trading at 10-yr low valuations: First Capital

ECONOMYNEXT- Sri Lankan banks are trading at a ten year low valuation, with upward pressure on performance after a challenging 2019, a research firm said.

“Compared to frontier and emerging markets, Sri Lankan banks have the lowest price to earnings ratios,” First Capital Senior Research Analyst Hiruni Perera said.

“Banks are still undervalued in Sri Lanka. Banking stocks are at a ten year low,” she said, speaking at the First Capital Investment Strategy 2020 Second Research Conference held on Tuesday.

Sri Lankan banks had ended 2019 at a price to earnings multiple of 5.4 and a price to book value multiple of 0.7.

The price to earnings multiple of India-based Axis Bank Ltd was 17.3 at end-December, while Bank of the Philippine was 12.3 and Malayan Banking Berhad was 11.5.

The Colombo Stock Exchange had ended the year with a price to earnings multiple of 11.6.

FC Research Assistant Manager Atchuthan Srirangan said with the government removing the Nation Building Tax and the Debt Repayment Levy, net profits at banks will rise 9 percent.

The government has also announced bank income tax will fall to 24 percent from 28 percent.

With a bullish view on banking stock Srirangan said banks with high capital and a digitization edge will outperform the sector, as digital banking growth has outpaced traditional transactions at brick and mortar branches.

Profits at banks which fell 4 percent in 2019 with constrained capital and rising bad loans, will grow at a compounded 19 percent up to 2021, he said.

Return on equity is expected to rise to 12 percent in 2021, First Capital has estimated, from 10 percent in 2019.

Credit growth is expected to pick up in the latter half of 2020 and early 2021, while bad loans will moderate with higher economic growth and the breathing room borrowers receive from loan moratoriums, he said.

Meanwhile, the capital constraints on banks will ease, as many have raised equity during the year, while larger banks such as Sampath, HNB, Seylan and NDB will face lower capital requirements due to the D-SIB rule change, which will give them room to expand, Perera said.

Annual private credit growth, which had fallen to 4.5 percent in 2019, would rise to 14 percent in 2020 and 2021 amid a low interest environment, Srirangan said.