Sri Lanka shares close lower on rate hike, global woes

Reuters: Sri Lankan shares closed lower on Tuesday, led by large caps, as investors shunned risky assets in line with weaker global markets and after the country's central bank raised interest rates last week.

The central bank on Friday raised its key policy interest rates by 50 basis points from a record low, to prevent demand-driven inflationary pressure, signalling a rise in the local interest rates.

The recent recovery in riskier assets fizzled out on Tuesday, with a fall in stocks, oil and the value of China's yuan currency boosting investor demand for safer assets such as the Japanese yen, government bonds and gold.

The stock markets were closed on Monday for a Buddhist religious holiday.

The benchmark share index closed 0.35 percent weaker at 6,228.99, hovering near its lowest close since April 2014 which it hit on Thursday. It has fallen around 10 percent this year through Tuesday, amid a rise in market interest rates.

"Though there was an initial uptrend, invariably it came down," said Dimantha Mathew, head of research at First Capital Equities (Pvt) Ltd. "It may not be a shock fall as the rate hike was expected. It'll be a gradual fall."

Yields on 91-day t-bills rose 13 basis points at a weekly auction last Wednesday to a more-than-two-year high, signalling a further rise in market interest rates.

Turnover was 605.2 million rupees ($4.20 million), less than this year's daily average of 728.1 million rupees.

Foreign investors sold a net 94.9 million rupees worth of shares on Tuesday, extending the net foreign outflow to 1.47 billion rupees worth equities so far this year.

Shares in Ceylon Tobacco Company Plc fell 2.35 percent, while Sri Lanka Telecom Plc fell 2.12 percent. 

($1 = 144.1000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Biju Dwarakanath)

NDB places Seylan stake under AFS

Theagarajah said NDB’s investment in Seylan Bank PLC was under the bank’s trading portfolio categorized under the available-for-sale (AFS) investments at this point of time but would continuously be evaluated how such investments could play a meaningful role in the bank’s strategic journey. 

“The bank also had around 9.8 percent (stake) in Seylan Bank some time in the first quarter of last year and it is parked in the bank’s trading portfolio and it is still recorded under available-for-sale (category) of investments and it will continue to be recorded under AFS at this point in time. 

We believe in this model (because) at this point in time Sri Lanka needs financial inclusion; we see the universal banking model making sense to us,” NDB Director and Chief Executive Officer Rajendra Theagarajah said. 

The group posted a net profit of Rs.1.25 billion (EPS of Rs.7.62), up 46 percent year-on-year (YoY) during the December quarter, but the full-year net profit narrowed by 14 percent to Rs.3.54 billion (EPS of Rs.21.51) due to margin contraction and the hefty marked-to-market losses on its trading portfolio. 

The net interest margin (NIM) of the bank fell to 2.63 percent from 3.31 percent a year ago. Having operated as a development bank, NDB received the commercial banking licence 10 years ago. 

However, the bank has increased its retail and small and medium enterprise (SME) book by as much as 54 percent and the segment now accounts for 39 percent of the group’s assets, Theagarajah told an investor forum held last week. 

“This segment is critical for the future of the bank,” he emphasized, adding that the retail and SME sector would play a leading role in the country’s next phase of economic growth. 

The bank revamped its strategic direction end of last year as the bank thinks it could leverage its historical advantage in project and development financing to empower each individual and SME financially and linking up the latter with the value chains to provide them the market access. 

The veteran banker and the former CEO of Hatton National Bank PLC, who took the reins at NDB in 2013, said he would pull three key levers to ensure the bank constantly delivers shareholder value expected of him while closely watching the NIM. One such key performance indicator (KPI) he constantly monitors is the bank’s ‘fees-to-net income’, which rose from little above 20 percent at the beginning of 2015 to 28 percent by the end of the year. 

The bank makes conscious efforts to bring in fee-based incomes to cushion the pressure on margins. 

“The bank recognizes the pressure on margins and the pressure on volumes,” he explained. 

Further, the ‘cost-to-income’ ratio – a key efficiency ratio in the banking sector – was brought down to 49.5 percent and he expressed confidence in bringing it further down. 

However, the bank is on an aggressive channel expansion drive as it opened five branches year-to-date after opening 10 in 2015. 

The third and most importantly, the bank will drive its efforts to increase its low-cost deposit base – current and savings accounts (CASA) – in a bid to maintain its average cost of funds to a minimum and increase margins. 

The bank had a CASA ratio of 25.6 percent at the end of 2015 but remains well below the industry average that hovers around 40 percent. 

“Our peers are ahead of 40 (percent) and we recognize that. It’s a journey,” said Theagarajah adding that the bank records this CASA ratio in just 10 years since it started raising deposits. 

Notably, the new branches opened during 2014, 2015 and 2016 maintain a CASA ratio between 40 and 70 percent. Matured branches too show a growth in CASA as a result of the bank’s efforts to capture the SMEs. 

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Royal Ceramics 3Q net up 32% over higher top line

Porcelain and ceramic manufacturer, the Royal Ceramics Lanka PLC group (RCL), increased its net profits by 32 percent to Rs.903.4 million for the quarter ended December 31, 2015 (3Q16) as a result of higher top line, the interim results showed. 

The earnings per share (EPS) for the quarter rose to Rs.8.15 from Rs.6.18 a year ago. The group turnover rose by 10.7 percent year-on-year (YoY) to Rs.7.68 billion. During the quarter, the distribution expenses rose by over 35 percent YoY to Rs.858.3 million. RCL, with its associate and subsidiary companies, is said to be controlling over 80 percent of Sri Lanka’s porcelain and ceramic tile industry. 

The Budget 2016 proposed to remove the import tariff protections on the domestic ceramic tile manufacturers. However, the impacts of this proposal are yet to be seen in the market place. Meanwhile, for the nine months ended December 31, 2015, the RCL group posted a net profit of Rs.2.14 billion (EPS of Rs.19.27), up 67 percent YoY. The top line grew a moderate 12 percent YoY to Rs.19.65 billion and the gross profit rose a strong 32 percent YoY to Rs.6.8 billion. 

During the nine months, the distribution expenses rose 30 percent YoY to Rs.2.24 billion. The segmental results showed the group’s tile and associated products business grew its net profit by 75 percent YoY to Rs.1.93 billion. 

The segment’s top line improved 15.9 percent YoY to Rs.12.4 billion. The sanitaryware business increased the net profits by 33 percent YoY to Rs.309.3 million. 

The top line grew by 16 percent YoY to Rs.1.08 billion. The paint and allied products segment narrowed net losses to Rs.44 million from Rs.75.2 million a year ago. 

The group’s plantation segment turned a net loss of Rs.119.6 million from a net profit of Rs.26.3 million. 

The packaging segment increased the net profits by 36.8 percent YoY to Rs.142.5 million. 

The aluminum business increased its bottom line by 51 percent YoY to Rs.172.4 million. 

The impact of the one-off Super Gains Tax on the group was Rs.262 million. As of December 31, 2015,high-net-worth investor Dhammika Perera’s holding company Vallibel One PLC had a 51 percent stake in the group while the state-controlled private sector pension fund, the Employees’ Provident Fund, had a 13.99 percent stake, up from 13.65 percent in September 2015. 

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Brandix CFO gets candid on what ails stock market

By Shehana Dain

Bringing a balanced view to the mixed fortunes of the Colombo Stock Exchange, an expert recently stressed the current situation is not as grim as commonly perceived, recalling the country has weathered worse situations in the recent past.

Brandix CFO Hasitha Premaratne in a recent seminar bringing positivism to the gathering stressed that Sri Lanka’s economic woes in the global front were far lower compared to other countries going through severe financial turmoil.

“We are very good at getting into a mindset and saying ‘this is bad’ and keep on talking about it. When the mood is good we say companies with zero assets are good but when the mood is bad companies with fundamentally sound stocks are also bad,” Premaratne said at a presentation titled ‘Macro Shocks Vs Colombo Bourse’ organised by the SEC’s Capital Market Education and Training Division.

The year 2015 was known as the year of volatility in the market as ups and downs were frequent but the overall trend ended up on a negative note. Therefore the ASPI index which started at a peak of 7,600 points ultimately closed the year at 6,800 points,an 8% drop. Meanwhile, 2016 bought forward the negative impact and is yet to bounce back.

Elaborating on the role the capital market community should undertake to bounce back, he said: “The world is in hot water and we seem to be in a better place.

We all know the market will correct itself; today people have forgotten that they earned big sums during the peak period of the stock market and now they only talk about the negatives.”

He also said that even during height of the civil war the market performed well, not going below 3% compared to the current dip of 8%.“The market is performing worse than it was during a time when bombs were blowing up every now and then. It’s because we have got used to a better time and we have forgotten how to handle bad times.”

Addressing possible action plans, Premaratne pointed out: “You must talk to the investors who have never known worse times than thisin this language. Have a diversified portfolio without limiting your exposure to onestock from a small investor point of view. In the meantime be aware of the macro developments and shift the portfolio. This could be questionable in a short-term aspect but in a long-term scenario it’s going to bring more money to the investors.”

According to him, the Chinese economy which has been driving global growth for the past 15 years has shown signs of slowdown, which has impacted global growth. China’s decision to devalue its currencyhad a global impact,especially in this part of the world, particularly on Indian, Malaysian and Taiwanese currencies.

“When we talk of our exchange rate, what we forget is that the Indian Rupee exchange rate which was INR 58 last year is INR 68 today. That’s depreciation of 19%. We speak about our 10% being very bad and our Government not doing its job well but don’t forget our neighbour which has billions of foreign reserves has lost almost 19% of its current value,” he highlighted.

Moreover, the Russian Ruble has depreciated by about 50% due to its political unrest and sanctions imposed subsequently.

Additionally he highlighted that Sri Lanka was a silent beneficiary during the economic calamity the world was currentlyexperiencing.

“The oil price and commodity price crash has majorly impacted the world. Indian steel companies are closing down on a daily basis as their losses per day mount up to $ 8 billion. Even though we say we should produce commodities, at this juncture we are blessed that we are not inthe commodity game. Low oil prices are good for us while it’s not disastrous for the Middle East; it’s a huge comfort factor to bridge our budget deficit. Thus we are the place to be and the place to invest, yet we complain about our situation.”Govt. instability causing red tape for investors

Addressing macro factors and their impact on the Bourse, Brandix CFO Hasitha Premaratne stated that the hung Parliament and unstable Government had been the most impactful red tape which had slowed down CSE growth.

“The Unity Government looks stable on paper but with these diverse views, can we really finalise the decisions that we want to make? One can always argue that it’s democracy, but growth will require a balance between democracy and dictatorship. So we need to find middle ground, otherwise this delay in decision-making is going to affect the stock market from an investor perspective.”

Commenting on Budget 2016, Brandix’s CFO said that it was “disastrous,” adding that continuous change in budget proposals tended to dampen investor sentiment.

“We had one of the most disastrous budgets in the history of this country last November. They were trying to do too much in one budget. Change management isn’t easy because it involves people and changing people isn’t an easy job. These guys thought that reading something in the Parliament would change the game. It looked a very reformist budget which was good in a longer-term economic kind of view but too many policy shifts were proposed and ultimately ended up with the reversing of more than half of them. It gave a serious setback to consistency and stability because even after the Budget was passed there have been many shifts, which has created a lot of uncertainty in investor mindsets,” he opined.

Nonetheless on a confident note he said that the Government would definitely strengthen the tax net via the new Budget, adding that it was the correct thing to do.

“The Inland Revenue Department is going through a revamp. The industry and service sector will get prominence while State institutions are said to go through capital market activity. These policies look realistic, but can they be consistent?” he queried.

He also said that the current UNP Government during its earlier short term as the ruling party had similar good policies but lacked implementation, however he noted that now things could shift to a more positive footing.
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Sri Lanka's tobacco firm Dec net down; sales plunge q-o-q

SMOKE SIGNAL: Ceylon Tobacco's sales which rose steadily for four quarters have fallen sharply.

ECONOMYNEXT - Profits at Sri Lanka's Ceylon Tobacco Company Plc, fell 8 percent to 1.84 billion rupees in the December 2015 quarter from a year earlier, while revenues and taxes to the government were back to levels seen last year.

Ceylon Tobacco reported earnings of 9.79 rupees per share for the quarter. In the year to December earnings were 56.7 rupees per share on total profits of 10.6 billion rupees which were up from 8.6 billion rupees.

In the December quarter gross revenues fell marginally to 23.70 billion rupees from 23.738 billion rupees a year earlier, tax revenues to the government also fell to 17.44 billion rupees from 17.916 billion rupees a year earlier.

Sri Lanka's economy recovered from a 2012 balance of payments crisis in the last quarter of 2014 and in 2015 a budget expanded deficit with a state salary hike and banks started to lend accumulated up excess liquidity (foreign reserves bought by the Central Bank).

CTC revers rose steadily from 20.4 billion rupees in September 2014 to 26.9 billion rupees in June 2015 and 29.9 billion rupees in September 2015.

But in December revenues were back down to 23.7 billion rupees.

There were tax increases in October 2014 also in October 2015. In September Sri Lanka's rupee fell to in a failed float and has continued to depreciate. The rupee is down to 144 to the US dollar from 131 in the beginning of the year.

Tax revenues which were rose as much 22.6 billion rupees in the September quarter, plunged to 17.4 billion rupees in the December quarter.

Whether the declining spend on cigarettes is a temporary reaction to the tax hike or a more permanent decline in disposable income from the currency collapse is not yet clear.

Ceylon Dollar Bond Fund at ‘BB-/ V5′: Fitch

(LBO) – Fitch Ratings has affirmed Ceylon Dollar Bond Fund’s Fund Credit Quality Rating of ‘BB-‘ and affirmed the Fund Volatility Rating at ‘V5′.

The fund is managed by Ceylon Asset Management (CAM).

The full statement follows:

Fitch Affirms Ceylon Dollar Bond Fund at ‘BB-/ V5‘

Fitch Ratings-London/Colombo-19 February 2016: Fitch Ratings has affirmed Ceylon Dollar Bond Fund’s Fund Credit Quality Rating of ‘BB-‘ and affirmed the Fund Volatility Rating at ‘V5′. The fund is managed by Ceylon Asset Management (CAM).

KEY RATING DRIVERS

The affirmation of the ‘BB-‘ Fund Credit Quality Rating is driven by the weighted average rating factor (WARF) and rating distribution based on the expected composition of the fund and the fund’s investment guidelines. The fund has a limited investment space as it will only invest in US dollar bonds issued by the government of Sri Lanka, licensed banks in Sri Lanka and Sri Lankan corporates that are rated by an international rating agency. This limits the potential investments to 13 issuances totalling just under USD9bn.

The affirmation of the Fund Volatility Rating is driven by the reduced exposure to interest-rate risk and spread risk, while recognising the fund’s ability to extend duration risk to a greater level than that expressed in the target portfolio. The rating is also affirmed because the target portfolio is not yet fully invested and its ultimate composition remains uncertain, and due to Fitch’s conservative assumptions relating to potential volatility in emerging market debt.

ASSET CREDIT QUALITY

The fund’s updated target portfolio comprises of four bonds – three rated ‘BB-‘ and one rated ‘B+’ – which have been issued by the entities detailed above. The target portfolio is mainly exposed either directly to government or government-guaranteed debt. The fund will invest up to 4% of its assets in US-dollar fixed deposits in a licensed commercial bank in Sri Lanka.

By 17 February 2016, the fund had invested in three of the four issuances in the target portfolio (representing 73.4% of the portfolio). The rest of the funds are placed in US dollar deposits with Deutsche Bank Sri Lanka, a branch of Deutsche Bank AG (A-/Stable/F1+). The fund has struggled to reach a substantial size since its launch in July 2014, partly due to volatility in overall market conditions.

CONCENTRATION

The target portfolio will be concentrated with material exposure to Sri Lankan sovereign risk. The concentration risk is a structural feature given the limited opportunities in the fund’s investment universe. Fitch has conducted stress tests on the target portfolio. Based on its analysis, Fitch believes the fund has a limited capacity to withstand negative rating migration in its investments before it would be downgraded to the ‘B’ category.

PORTFOLIO SENSITIVITY TO MARKET RISK

The updated target portfolio has a shorter weighted average life (WAL) than the original model portfolio based on which we assigned the ratings in July 2014. As a result, the target portfolio has a significantly lower sensitivity to interest-rate risk and spread risk than the original model portfolio. Based on the fund’s market risk factor alone, it could achieve a ‘V4′ Fund Volatility Rating. However, in affirming the rating at ‘V5′, Fitch has taken into consideration the fact that the fund is not yet fully invested so its eventual composition may differ from that of the target portfolio, and that the fund manager does have discretion to extend duration above current levels if it sees fit.

Fitch has also taken wider market conditions- notably potential volatility in emerging market debt – into consideration in its rating decision. According to Fitch’s criteria, funds rated ‘V5′ are considered to have high sensitivity to market risk. On a relative basis, total returns and/or changes in net asset value are likely to experience substantial variability across a range of market scenarios due to substantial exposure to interest rates, credit spreads and other risk. The fund will invest in instruments with a relatively long maturity (WAL of 2.52 years in the target portfolio) except for an allocation of up to 4% to three-month deposits. Therefore the fund will be reliant on secondary market liquidity to meet large redemption requests. However, the fund has access to an overdraft facility of 10%, and requires 14 days’ notice on redemptions above 3% of the fund. On the asset side, it will hold only a limited proportion of outstanding debt issues, all of which will be listed on the Singapore Exchange.

FUND PROFILE

The fund is regulated by the Securities and Exchange Commission of Sri Lanka under the Unit Trust Code, 2011. The fund’s trustee is Deutsche Bank Sri Lanka.

THE ADVISOR

Fitch considers CAM suitably qualified, competent and capable of managing the fund. The investment committee has relevant experience, and the company has sufficient sources of information on which to base its decision-making process. Fitch considers the systems supporting the fund’s investment activities to be satisfactory.

CAM is 21%-owned by Sri Lanka Insurance Corporation Limited (SLIC, BB-/Stable), 69% by Ceylon Capital Trust (Pvt) Ltd and 10% by Commercial Credit and Finance PLC (CCF). Fitch believes CAM has support from the shareholders. However, a key challenge facing the business will be to demonstrate sustained growth in assets under management. The Ceylon Dollar Bond Fund is a key component of its growth strategy. CAM has been managing funds since 1999. The current management team has been in place since 2005, and SLIC and CCF invested in the business in 2010 and 2013, respectively.

RATING SENSITIVITIES

The ratings may be sensitive to material changes in the credit quality or market risk profile of the fund. A weakening in the liquidity inherent in the fund or changes to liquidity provisions – such as the manager’s ability to borrow against the net assets of the fund or its ability to delay redemptions – would be viewed as negative. A downgrade of the ratings on the Sri Lankan sovereign or the banks in which the fund has invested its assets, especially the banks whose issues are not government guaranteed, could also lead to a downgrade of the Fund Credit Quality Rating. Changes in exchange-control regulations that could increase transfer and convertibility risks for the fund would also be viewed as negative.

Fitch has capped the fund’s rating at that of the Sri Lankan sovereign (BB-/Stable), given its expected material exposure to the Sri Lankan sovereign. Therefore upside potential for the fund rating is limited. To maintain the bond fund ratings, CAM will provide Fitch with portfolio information, including details of the portfolio’s holdings and credit quality. Fitch closely monitors the credit composition of the portfolio, the credit market risk profile of the investments.

Sri Lanka sells 1 and 2 year bonds; risk premium up

ECONOMYNEXT - Sri Lanka has sold 294 million dollars of 13 and 26 month bonds floating rate bonds which will pay up to 424 basis points above the 6-month London Interbank Offered Rate, sharply up from last year.

The Sri Lanka Development Bonds (SLDB) styled bonds are offered mostly to resident investors who are allowed to hold dollar deposits.

Key buyers include banks who borrow abroad at lower rates and buy into the government bonds.

The debt office said it accepted 247.15 million dollars out of 290.5 million dollars of bids for 1 year 1 month bonds at a weighted average yield of 388.83 basis points above Libor. In May 2015, Sri Lanka sold 13 month bond at 316.69 basis points above Libor.

It also sold 47 million dollars of 2-year 2-month bond after getting bids of 52 million at 424.79 basis points above Libor. In April 21, 2-year bonds were sold at 360 basis points above Libor.