Sri Lanka National Savings Bank 'B+/B' ratings confirmed

ECONOMYNEXT - S&P Global Ratings said it had confirmed its 'B+' long-term issuer credit rating on Sri Lanka’s National Savings Bank (NSB) with a negative outlook, and confirmed its 'B' short-term issuer credit rating.

At the same time, the rating agency confirmed the 'B+' long-term issuer rating on NSB's senior unsecured debt.

“We affirmed the rating on NSB because we equalise them with the sovereign credit rating on Sri Lanka (B+/Negative/B),” a statement said.

The full rating report follows:

SINGAPORE (S&P Global Ratings) June 10, 2016-- S&P Global Ratings said today that it had affirmed its 'B+' long-term issuer credit rating on National Savings Bank (NSB). The outlook is negative. We also affirmed our 'B' short-term issuer credit rating on the Sri Lanka-based bank. At the same time, we affirmed our 'B+' long-term issue ratings on NSB's senior unsecured debt.

We affirmed the ratings on NSB because we equalize them with the sovereign credit rating on Sri Lanka (B+/Negative/B).

The government fully owns NSB. We consider the bank to be a key public policy institution, benefiting from ongoing and potential extraordinary support from the government. This approach is based on our methodology of rating government-related entities. However, our rating on NSB incorporates no uplift because of this factor, given that the bank's 'b+' stand-alone credit profile (SACP) is already equal to the sovereign rating.

"We believe the Sri Lankan government is almost certain to provide extraordinary support to NSB, if needed," said S&P Global Ratings credit analyst Amit Pandey.

Our view is based on our assessment of the critical importance of NSB's policy role and its integral link with the government. This support is legalized through an act of parliament (the National Savings Bank Act), through which the bank was established in 1972.

NSB is integrally linked to the sovereign through the government's sole ownership. The government maintains full control over the bank's management by appointing its chairman and board of directors. It also exercises a high degree of control over the bank's strategic and budgetary decisions. The government guarantees all NSB's deposits and savings certificates.

In our opinion, the bank's critical role stems from its function as a pseudo-funding vehicle for the government. The National Savings Bank Act requires the bank to invest at least 60% of its deposits in government securities. Four entities of national significance in the savings movement were combined to form NSB. The bank's key objective is to mobilize retail savings to obtain a higher investment rate and sustain Sri Lanka's GDP growth.

NSB's SACP reflects the bank's challenging operating environment, very weak capitalization, and volatile earnings. NSB's satisfactory business position and robust funding and liquidity temper these weaknesses.

"The negative outlook on NSB reflects the outlook on the sovereign credit rating on Sri Lanka and our expectation that the bank's role for, and link to, the government will remain unchanged over the next few years," said Mr. Pandey.

We do not rate financial institutions in Sri Lanka above the sovereign because of the direct and indirect influence that the sovereign in distress would have on their operations, including their ability to service foreign-currency obligations.

In our view, the sovereign credit factors are relevant for NSB because: (1) the bank is subject to government policy and regulation; (2) it invests a sizable portion of its assets in government securities or credit; (3) a high proportion of its revenue comes from domestic operations that are susceptible to deterioration in macroeconomic environment typically associated with sovereign stress; and (4) it relies on the government to derive foreign currency to repay or hedge its foreign currency liabilities.

We could downgrade NSB if we lower the sovereign credit rating. We could lower our ratings on Sri Lanka in the next 12 months if we see no tangible signs of a substantial and sustained reversal of the weakening of external and fiscal credit metrics we currently project.

S&P confirms Sri Lankan DFCC Bank's 'B/B' ratings

ECONOMYNEXT - S&P Global Ratings said it had affirmed its 'B' long-term issuer credit rating on Sri Lanka’s DFCC Bank with a negative outlook, and confirmed its 'B' short-term issuer credit rating.

The rating agency said it also confirmed its 'B' long-term issue rating on DFCC's senior unsecured debt.

"We affirmed the rating because we expect DFCC to maintain its satisfactory business position and earnings over the next 12 months," said S&P Global Ratings credit analyst Amit Pandey in a statement.

The full statement follows:

SINGAPORE (S&P Global Ratings) June 10, 2016-- S&P Global Ratings said today that it had affirmed its 'B' long-term issuer credit rating on DFCC Bank. The outlook is negative. We also affirmed our 'B' short-term issuer credit rating on the Sri Lanka-based bank. We also affirmed our 'B' long-term issue ratings on DFCC's senior unsecured debt.

"We affirmed the ratings because we expect DFCC to maintain its satisfactory business position and earnings over the next 12 months," said S&P Global Ratings credit analyst Amit Pandey.

We consider it unlikely that DFCC would be immune to increasing sovereign credit pressures on Sri Lanka (B+/Negative/B) and the broader operating environment. We reflect these risks in our view that the economic risk trend and industry risk trend for Sri Lanka's banking sector have become negative.

DFCC's business position reflects the bank's satisfactory business stability, diversification, management, and strategy, compared with that of peers in emerging markets.

We expect DFCC's pre-diversification risk-adjusted capital (RAC) ratio to be 5%-5.5% for next 12-18 months. We estimate the bank's loan growth to be 13%-15% and dividend payout ratio to be about 35% over the next couple of years. We anticipate that the bank's net interest margin will improve marginally because the interest rate cycle in Sri Lanka has turned, with higher policy and market rates. At the same time, we forecast higher credit costs due to economic headwinds in Sri Lanka.

DFCC's risk position reflects the bank's higher exposure to the small and midsize and project finance sectors, which are susceptible to economic downturns and execution risks. The bank also has some single name concentration risk. However, we note that the bank has limited exposure to riskier segments, such as pawning, and has taken steps to improve risk management processes.

"Our negative outlook on DFCC reflects our view that the bank faces increasing risks stemming from Sri Lanka's weakening external and fiscal performance," said Mr. Pandey.

We could lower our ratings on DFCC if we downgrade Sri Lanka. We could lower our ratings on Sri Lanka in the next 12 months if we see no tangible signs of a substantial and sustained reversal of the weakening of external and fiscal credit metrics we currently project. In this scenario, we believe that the systemic risks facing Sri Lankan banks would also have increased. And consequently, we would expect to revise the assessment of the banking sector's anchor stand-alone credit profile to 'b+' from 'bb-', resulting in DFCC's downgrade.

We could also lower the ratings on DFCC if the bank's capitalization weakens, such that the pre-diversification RAC ratio falls below 5%, even if the systemic risks facing Sri Lanka's banking sector remain unchanged, in our view. DFCC's capitalization may deteriorate if the bank is not able to replenish its capital to support growth and dividend payouts or its profitability is weaker than our expectations.

We could revise the outlook on DFCC to stable if the risks to the sovereign credit ratings subside while DFCC maintains its pre-diversification RAC ratio above 5%.

Sri Lanka sells USD250mn one-year development bonds

(LBO) – The issue of Sri Lanka development bonds amounting to 200 million US dollars has been oversubscribed with over 516 million US dollars of bids received from investors.

The central bank has accepted 250.04 million US dollars in one year bond at a floating rate of six month LIBOR (94 bp) plus 438.01 basis points.

The Central Bank has received 67 million US dollars of bids for the two year floating rate bond among other small bids received for the auction.

The issue was open for subscription from 7 to 13 June and the Central Bank planned to issue 200 million US dollars development bonds with a tenor of 1 year, 2 years, 3 years and 5 years to local and foreign investors.

Development bonds are issued by the Public Debt Department of Central Bank and exempted from income tax paid in Sri Lanka.

Senkadagala Finance’s Senior Debt rated ‘BBB+(lka)(EXP)’

Fitch Ratings has assigned Senkadagala Finance’s proposed issue of senior unsecured redeemable debentures of up to Rs 2 bn an expected National Long Term rating of ‘BBB+(lka)(EXP)’.

The debentures will have tenors of two to four years and carry fixed and floating coupons. The debentures are to be listed on the Colombo Stock Exchange and the company plans to use the proceeds to fund loan growth, diversify its funding mix and reduce structural maturity mismatches.

The final rating is subject to the receipt of final documentation conforming to information already received.

The proposed debentures are rated at the same level as SFC’s National LongTerm Rating as they will constitute direct, unconditional, unsecured and unsubordinated obligations of SFC.

SFC’s rating reflects the satisfactory credit profile that it has maintained through economic cycles, itsrelatively strong franchise amongst finance companies in Sri Lanka and access to longer-term institutional funding. These are counterbalanced by its deposit franchise and capitalisation, which are weaker compared with higher rated peers.

The rating on the proposed debentures will move in tandem with SFC’s National LongTerm Rating.
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Sri Lankan shares close at more than 1-wk high

Reuters: Sri Lankan shares closed at a more than one-week high on Monday as investor sentiment remained upbeat following approval of a key loan by the International Monetary Fund, but concerns over rising interest rates and foreign fund outflows capped gains.

The IMF's executive board approved a three-year, $1.5 billion loan to support Sri Lanka's economic reform agenda, the global lender said on June 4.

Treasury bill yields have risen between 16 and 36 basis points to near three-year highs in the last three weekly auctions through Wednesday despite the central bank leaving key policy rates steady for a third straight month on May 20.

Stockbrokers said a rise in interest rates could be detrimental to risky assets if they jumped beyond 12 percent. The average prime lending rate edged up 8 basis points to 10.23 percent in the week ended June 3.

The benchmark Colombo stock index ended 0.12 percent higher at 6,538.25, its highest close since June 1. The bourse gained 0.17 percent last week, snapping a three-week losing streak.

"Slow upward trend is continuing with the positive sentiment created after the IMF deal, but high interest rates are impacting the investor confidence," said Dimantha Mathew, head of research at First Capital Equities (Pvt) Ltd.

"Today, the turnover was pushed up by some block deals."

Turnover stood at 608.3 million rupees ($4.21 million), the highest since June 3, but still less than this year's daily average of around 771.6 million rupees.

Overseas funds offloaded a net 111.1 million rupees worth of shares on Monday, extending the year to date net foreign investor outflow to 5.84 billion rupees worth of equities.

Prime Minister Ranil Wickremesinghe told parliament last week that the government would take measures to abolish the Exchange Control Act and introduce a capital gains tax soon, without giving any time frame.

Shares in Carson Cumberbatch Plc jumped 5.34 percent, while Ceylon Cold Stores Plc rose 2.50 percent and Asiri Hospital Holdings Plc climbed 1.97 percent.

Conglomerate John Keells Holdings Plc was up 0.82 percent. 

($1 = 144.6500 Sri Lankan rupees) 

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

LafargeHolcim's Sri Lankan operations eyed by Indian firms

ECONOMYNEXT – Indian cement manufacturers like Dalmia Bharat, Shree Cements and Ramco based in the south are reportedly interested in buying multinational LafargeHolcim's Sri Lankan operations.

The Economic Times of India reported that these firms have been shortlisted after an initial round of screening and are competing with local Sri Lankan, Chinese and Thai cement makers, and private equity players like Baring Asia.

The island’s largest and sole integrated cement operation was put up for sale as part of the global cement major’s divestment of some units in a global portfolio realignment.

The Indian newspaper quoted multiple sources aware of the developments as saying the Sri Lankan operation of LafargeHolcim assets may get valued at up to $300 million.

Higher margins for Sri Lanka’s Royal Ceramics larger tiles

ECONOMYNEXT – Sri Lanka’s Royal Ceramics group aims to expand production of larger format tiles, which has helped it make higher profit margins as demand grows with a construction boom amid high import tariff protection.

Managing Director Nimal Perera said the group had made investments in the modifications, enhancements, and ongoing development of squaring and glazing lines and polishing lines and expansion project.

The upgrades had been done in Royal Ceramics, and its subsidiaries Royal Porcelain and Rocell Bathware plants.

“Our decision to introduce large format tiles to the local market . . . have already proved to deliver higher margins, thereby growing both topline and bottomline, making for an impressive balance sheet,” he told shareholders in the company’s annual report.

The ceramic tile and sanitary ware industries have been positively impacted by global oil prices falling sharply since the last quarter of 2014, helping the company and the industry to bring down production costs.

Perera said Royal Porcelain aims to commence manufacturing of the largest floor tile of the size 600mm x 1200mm once its new press is operational.

High tariffs on imported ceramic tiles and sanitary ware help provide protection to the local industry, analysts said.