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Thursday February 22nd, 2024

Bulk carrier MV Eurosun runs aground off Sri Lanka coast

RUN AGROUND: Bulk carier MV Erosun run aground off Sri Lanka’s southern coast on January 23, 2021.

ECONOMYNEXT – MV Eurosun, a Liberian registered 33,000 dead weight tonne bulk carrier has run aground off Sri Lanka’s southern coast while carrying a cargo of cement clinker, Navy spokesman Captain Indika De Silva said.

The vessel was en route to Trincomallee from Abu Dhabi carrying a 33,000 tonnes of clinker when it appeared to have run aground on a reef, he said. Clinker is used to manufacture cement.

“Our biggest concern is whether there is an oil leak,” he said.

The crew has indicated that they could not see a fuel leak.

Sri Lanka Navy had dispatched a ship and a Dvora fast attack craft with two diving teams to examine the hull, he said.

The ship had run aground about 13 miles of Sri Lanka’s Yala coast near the Little Basses Light house, in a areas referred to as Middle Basses, he said.

The reason it ran aground or why it was sailing so close to the shore is not clear, he Captain de Silva said, but its 18 crew was safe.

According to Marinetraffic.com the ship has a draft of 10 metres. (Colombo/Jan23/2021)

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Merchant Bank of Sri Lanka and Finance given ‘BBB+(lka)’ rating by Fitch

ECONOMYNEXT – Fitch Ratings said it assigned Merchant Bank of Sri Lanka and Finance Plc (MBSL) a first-time national long-term rating of ‘BBB+(lka)’.

“MBSL’s rating is driven by our view that the parent, BOC, would provide extraordinary support to MBSL, if required,” the rating agency said.

“We assess MBSL’s standalone credit profile as being weaker than its support-driven rating because of its small franchise with 1.8% market share of sector loans, evolving business model, and weak financial profile, which is reflected in its poor asset-quality metrics, weak profitability and high leverage.”

The full statement is reproduced below:

Fitch Ratings – Mumbai – 22 Feb 2024: Fitch Ratings has assigned Merchant Bank of Sri Lanka & Finance PLC (MBSL) a first-time National Long-Term Rating of ‘BBB+(lka)’.
The Outlook is Stable.

MBSL is 84.5% owned by Bank of Ceylon (BOC, A(lka)/Stable) and other BOC group entities. BOC is the largest banking group in the country.

Key Rating Drivers

Shareholder Support Drives Ratings: MBSL’s rating is driven by our view that the parent, BOC, would provide extraordinary support to MBSL, if required. BOC’s ability to support MBSL is reflected in its credit profile, which is underpinned by its standalone strength. We believe that any required support for MBSL would be manageable relative to BOC’s financial capacity.

Our support assessment also takes into consideration BOC’s majority shareholding in MBSL, increasing product offerings by MBSL that are complementary to those provided by BOC, the parent’s oversight of MBSL’s policies and strategy through board representation, and the usage of the BOC brand by MBSL in its business operations, which raises reputational risk for BOC should MBSL default.

Limited Importance to Parent: MBSL is rated two notches below BOC due to its limited importance to the group. MBSL mainly serves high-yielding, under-banked segments that have limited overlap with BOC’s core customer base, but this is partly offset by BOC’s focus on increasing merchant banking via MBSL to strengthen group feebased revenue. MBSL made up 0.8% of BOC’s consolidated assets at end-September 2023, and makes negligible contribution to group profitability. MBSL also has considerable management independence and there is limited operational integration between the entities.

Weak Standalone Profile: We assess MBSL’s standalone credit profile as being weaker than its support-driven rating because of its small franchise with 1.8% market share of sector loans, evolving business model, and weak financial profile, which is reflected in its poor asset-quality metrics, weak profitability and high leverage. MBSL focuses on vehicle leasing, and gold- and property-backed loans. It has a high risk profile stemming from its significant exposure to borrower segments that are highly susceptible to economic and interest rate cycles.

Stabilising Economic Outlook: We expect the operating environment for Sri Lankan finance and leasing companies (FLCs) to continue to stabilise following the inflation and interest-rate shocks over the past two years. Easing inflation and interest-rate pressures should provide steadier conditions for FLC sector performance. Some headwinds linger, as higher taxes will continue to weigh on household finances in 2024. Investor confidence will also take time to recover. Nonetheless, we expect economic activity in Sri Lanka to improve in the financial year ending March 2025 as GDP growth recovers.

Asset Quality Pressure: The company’s loans that are more than three months past due were high at 25.3% of total loans at end-September 2023 (end-2022: 24.3%) due to its high risk profile. Nonetheless, MBSL’s focus on bad debt recovery has resulted in a decline in the non-performing loan ratio from a much higher level in previous years. We expect a pick-up in borrowers’ business activity and declining interest rates to aid loan collections in the medium term.

Weaker Profitability: MBSL’s pre-tax profit/average asset ratio was low at 0.9% in 9M23 and -0.9% in 2022, primarily due to the sharp reduction in its net interest margin and increase in operating costs on lower business volumes. We expect MBSL’s profitability to improve in the near to medium term, though it will likely remain weaker than that of peers, as its lending operations pick up, borrowing costs decline, and bad debt recovery improves.

History of Capital Shortfalls: MBSL’s capital adequacy ratio (CAR) rose to 16.9% (equity Tier 1 ratio at 13.4%) by end-September 2023 from 12.3% (11.7%) at end-2022, and against the regulatory minimum CAR of 12.5%. MBSL suffered significant capital shortfalls in 2020, with CAR at end-2020 of 5.6% below the minimum required 10.5% due to losses. BOC injected equity into MBSL in 2021 to improve its capitalisation. The breaches resulted in the regulator limiting MBSL’s deposit and lending balances, which affected its business franchise. The caps were removed after its capital ratios increased.

The recent improvement in CAR was due to significant reduction in total gross loans, an increase in gold loans, which carry lower risk weights, in the lending mix, and an increase in Tier 2 capital. We expect capitalisation pressure to ease in the medium term due to improved profitability prospects.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

MBSL’s rating is sensitive to changes in BOC’s credit profile, as reflected in BOC’s National Long-Term Rating, as well as Fitch’s opinion around BOC’s ability and propensity to extend timely extraordinary support. Developments that could lead to a downgrade include:

– meaningful reduction in the parent’s ownership, control or influence that could weaken its propensity to support the subsidiary

– notable decline in MBSL’s capital buffers, indicating reduced timeliness in financial support to back growth or meet regulatory norms

– insufficient or delayed liquidity support from the parent relative to MBSL’s needs, which hinders MBSL’s ability to meet its obligations in a timely manner

– sustained weak performance of MBSL that we believe will weaken the parent’s propensity to support the subsidiary

– a material increase in size relative to the parent that makes extraordinary support more onerous for the parent.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

An upgrade is less likely in the near term. However, a significantly greater strategic role for MBSL within the BOC group, along with closer integration with BOC across broader functional areas and greater sharing of the BOC brand name besides the operational usage of brand, could be positive for the rating in the long term.

Date of Relevant Committee
19 February 2024

References For Substantially Material Source Cited As Key Driver Of Rating
The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings With Credit Linkage To Other Ratings
The rating is linked to rating on the parent, BOC.

This report was prepared by Fitch in English only. The company may prepare or arrange for translated versions of this report. In the event of any inconsistency between the English version and any translated version, the former shall always prevail. Fitch is not responsible for any translated version of this report.

Additional information is available on www.fitchratings.com

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Sri Lanka to get update on GSP+ cycle at EU joint commission meeting

ECONOMYNEXT – Sri Lanka will get an update on the GSP+ trade concessions at a Joint Commission meeting with the European Union, the Foreign Ministry said.

Three working groups on Governance, Rule of Law and Human Rights, Trade and Economic Cooperation, Development Cooperation will report to the Joint Commission.

“The European Union will also brief on the current developments in the EU including an update on new GSP Regulation and the new cycle of the EU GSP+ concessions,” the statement said.

The full statement is reproduced below:

The 26th session of the Joint Commission between Sri Lanka and the European Union will be convened on 22 February 2024 in Brussels. The meeting will be co-chaired by Secretary of the Ministry of Foreign Affairs of Sri Lanka Aruni Wijewardane and EU European External Action Service Deputy Managing Director for Asia Pacific Paola Pampaloni.

Sri Lanka delegation to the Joint Commission will comprise senior officials of the Ministry of Foreign Affairs, Attorney General’s Department and Ministry of Finance.

The EU- Sri Lanka Joint Commission serves as a platform for dialogue and cooperation between Sri Lanka and the European Union, covering a broad range of bilateral and multilateral issues of mutual interest inter alia trade and investments, development assistance, fisheries, education, counterterrorism, governance and human rights, Indo-pacific & maritime security and environment.

The outcome of the three Working Groups which reports to the Joint Commission, Governance, Rule of Law and Human Rights, Trade and Economic Cooperation, Development Cooperation will be presented to the Joint Commission.

The European Union will also brief on the current developments in the EU including an update on new GSP Regulation and the new cycle of the EU GSP+ concessions.

The previous session of the Joint Commission meeting was held in May 2023 in Colombo.

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India’s BAL Investment interested in land around aragalaya site

ECONOMYNEXT – India’s BAL Investment has expressed interest in a land in Colombo which was used as a popular people’s protest site in 2022.

“An acre of land at Baladaksha Mawatha was requested for a joint development project by Bal Investments,” Prasanna Ranatunga, Minister of Urban Development and Housing said in parliament on Thursday.

“They have deposited a fee of 10,000 dollars and signed a memorandum of understanding on 16 February 2024. We are waiting for the government’s assessment report. The project has not been approved, we are still considering it in keeping with all rules and regulations,” Ranatunga said in reply to a statement by National People’s Power MP Vijitha Herath. (Colombo/Feb22/2024)

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