An Echelon Media Company
Friday June 2nd, 2023

Sri Lanka bank – finance company mergers could deny credit to some borrowers: Fitch

ECONOMYNEXT – A proposal in Sri Lanka’s budget for 2021 to merger finance and leasing companies with their parents will result in customers with a higher risk profile being denied credit, Fitch Ratings said.

“FLCs typically cater to sub-prime customers, which banks have very little appetite for,” the rating agency said.

“However, if the proposed mergers are enforced, we expect the risk appetite of the amalgamated bank to be lower than the simple aggregated risk appetite of the parent and the FLC subsidiary, as the FLC business is unlikely to be a core business line for the parent.”

In a re-organization of finance companies, banks bought some of the best capitalized finance companies.

As a separate entity, finance company subsidiaries could also pay slightly higher rate of interest.

Fitch said ratings of banks which merge with their subsidiaries are unlikely to be affected in the short term as the risks of the subsidiary were already factored in.

“However, the extent of the impact of absorbed FLCs on banks’ business models and their consolidated risk and financial metrics, particularly asset quality and profitability, will be important for the banks’ ratings in the medium term,” Fitch said.

“We believe banks will be reluctant to absorb their FLCs due to the significant difference between their risk profiles and underwriting practices, leading to elevated challenges in achieving effective management.”

Sri Lanka however has a large number of deposit taking finance companies, which are small and are less able to absorb shocks, though two of the biggest in the sector have also failed, partly due to regulatory forbearance and the lack of a mandatory resolution framework based on capital thresholds, analysts say.

Sri Lanka has seen higher levels of monetary instability and output shocks under a so-called ‘flexible inflation targeting’ regime, where consumption falls after each currency collapse, led to spikes in bad loans.

Two currency crises came quickly on top of each other (2015 and 2018) after Sri Lanka’s soft-pegged central bank dropped its policy rate band in favour of targeting a call money rate, as it also targeted a perceived output gap, critics have said.

“The sector continues to struggle with lack of access to capital, muted income generation and very weak asset quality despite the regulatory moratoriums for stressed loans,” Fitch said.

Fitch said the fragmentation at the lower end – where 33 FLCs, out of the total 44, accounted for only around 31 pecnt of sector assets – have posed challenges to Sri Lankan financial-sector stability, despite the sector’s moderate 8 percent share of financial-sector assets at end-2019.

The full statement is reproduced below

Sri Lankan Banks’ Ratings Unaffected by Proposed FLC Mergers

Mon 23 Nov, 2020 – 3:09 AM ET

Fitch Ratings-Colombo-23 November 2020: The mergers of Sri Lankan finance and leasing company (FLC) subsidiaries with their parent banks will not have an immediate impact on the banks’ ratings, says Fitch Ratings.

The agency’s assessment of our rated banks is based on their consolidated credit profiles and already factors in the risks of having subsidiary FLCs.

However, the extent of the impact of absorbed FLCs on banks’ business models and their consolidated risk and financial metrics, particularly asset quality and profitability, will be important for the banks’ ratings in the medium term. The proposal was announced in the government’s budget speech for 2021.

We believe banks will be reluctant to absorb their FLCs due to the significant difference between their risk profiles and underwriting practices, leading to elevated challenges in achieving effective management.

FLCs typically cater to sub-prime customers, which banks have very little appetite for. However, if the proposed mergers are enforced, we expect the risk appetite of the amalgamated bank to be lower than the simple aggregated risk appetite of the parent and the FLC subsidiary, as the FLC business is unlikely to be a core business line for the parent.

The proposal affects five Fitch-rated banks with FLC subsidiaries – Hatton National Bank PLC (AA+(lka)/Negative), which owns HNB Finance Limited (AA-(lka)/Negative), Commercial Bank of Ceylon PLC (AA+(lka)/Negative), which owns Serendib Finance Limited (AA-(lka)/Negative), Sampath Bank PLC (AA-(lka)/Stable), which owns Siyapatha Finance PLC (A(lka)/Stable), Bank of Ceylon (AA+(lka)/Negative), which owns Merchant Bank of Sri Lanka & Finance PLC, and People’s Bank (Sri Lanka) (AA+(lka)/Negative), which owns People’s Leasing & Finance PLC (A+(lka)/Stable).

These subsidiaries’ assets account for 0.5%-7.7% of their group assets (median: 3%) and 0.5%-26% of profit before tax (median: 5%).

The government’s budget speech, presented on 17 November 2020, reiterated the importance of consolidation in the FLC sector, which has been on the cards since 2014 when the Central Bank of Sri Lanka (CBSL) announced its ‘Master Plan for the Consolidation of the Financial Sector’.

It led to several banks acquiring FLC subsidiaries in 2014 and 2015, including the acquisition of HNB Finance (then Prime Grameen Micro Finance Limited) by Hatton National Bank and Serendib Finance (then Indra Finance Limited) by Commercial Bank of Ceylon.

Fitch thinks consolidation in the Sri Lankan FLC sector is positive for its long-term stability, but will not necessarily ease its near-term challenges.

The sector continues to struggle with lack of access to capital, muted income generation and very weak asset quality despite the regulatory moratoriums for stressed loans. For details, see Sri Lanka Finance and Leasing Dashboard: FY20, published 19 October 2020.

These headwinds and the fragmentation within the FLC sector at the lower end – where 33 FLCs, out of the total 44, accounted for only around 31% of sector assets – have posed challenges to Sri Lankan financial-sector stability, despite the sector’s moderate 8% share of financial-sector assets at end-2019.

The CBSL has taken regulatory action against several FLCs that failed to meet capital requirements, including cancellation of licences held by The Finance Company PLC and suspension of the business activities of ETI Finance Limited and Swarnamahal Financial Services PLC.

We expect significant increase in M&A activity within the FLC sector in next 12-24 months, even among standalone small FLCs, as there are at least 20 that are currently facing capital challenges, either on an absolute basis or to meet the regulatory capital ratios.

Several FLCs have already announced potential mergers, including Abans Finance PLC (BB+(lka)), which is on Rating Watch Evolving to reflect its potential amalgamation with Softlogic Finance PLC.

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

Sri Lanka to ramp up weekend fuel deliveries after petrol price cut

More deaths reported at Sri Lanka fuel queues

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Petroleum Corporation will be operating on the weekend to complete all fuel deliveries to end vehicle queues forming outside fuel stations after the price revision earlier in the week, Energy Minister Kanchana Wijesekera said.

“Instructions have been given to CPC and Ceylon Petroleum Storage Terminals to continue fuel deliveries on Saturday and Sunday this week to supply sufficient stocks to all fuel stations,” Minister Wijesekera said in a TWITTER.COM MESSAGE

“To reduce expenses on overtime, CPC and CPSTL have not been operating on Sundays and public holidays in the last 4 months,” Wijesekera said.

“Non-placement of orders by fuel stations from last Saturday, anticipating a price reduction, not maintaining minimum stocks, immediate increase in demand by consumers after the price revision, and quota increase have created shortages in the fuel stations.”

The Minister in April 2023 said all fuel stations would be required to maintain a minimum of 50 percent of stock tank capacity.

“I have asked CPC to review and suspend the license of fuel stations that had not maintained minimum stocks.” (Colombo/ June 02/ 2023)

Continue Reading

Sri Lanka bonds yield up at close, rupee at 291.75/292.50 against the US dollar

ECONOMYNEXT – Sri Lanka’s bonds closed steady on Friday, dealers said, following the central bank’s decision to cut its main policy rate by 250 basis points.

The Spot US dollar closed at 291.75/292.50 rupees, dealers said.

The rupee opened at 290.25/75 to the US dollar Thursday and closed at 292.50/295.50 to the US dollar.

A bond maturing on 15.09.2027 closed at 24.70/90 percent up from 24.50/90 percent a day earlier, dealers said.

A bond maturing on 15.05.2026 closed at 25.75/26.25 percent up from 25.00/26.00 percent a day earlier.

A bond maturing on 01.05.2025 closed at 27.00/30 percent, up from 26.30/27.00 per cent at last close.

A bond maturing on 01.07.2032 closed at 20.25/21.00 percent, up from 20.00/40 per cent at last close.
(Colombo/ June 02/2023)

Continue Reading

Sri Lanka’s shares edge up on positive macroeconomic sentiments

ECONOMYNEXT – Sri Lanka’s shares closed higher in trade on Friday, over positive macro-sentiments encouraging investors to redeem their interest towards buying, an analyst said.

The main All Share Price Index was up 0.72 percent or 62.19 points to 8,753.80,  while the most liquid index S&P SL20 was up 0.68 percent or 16.87 points to 2,487.29.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

Prior to the Monetary Policy investors were quite optimistic that inflation is to lower and interest rates will decrease and since exp, an analyst said.

Sri Lanka Central Bank is waiting for the government proposal on the domestic debt restructuring (DDR), the central bank governor Nandalal Weerasinghe said amid uncertainty over DDR and speculations over instability in the banking sector.

“On debt restructuring, the borrower is the ministry of finance’s treasury. Certainly we will announce what the strategy will be. We are waiting for a government proposal,” Weerasinghe said.

Sri Lanka’s investors are waiting on assurances to be made on debt restructuring and optimization, Central Bank Governor Nandalal Weerasinghe said, “It is up to the government to clear the uncertainty, because from our side we have done that part.”

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

The speculation of DDR has hit the market and the risk premium has kept the market lending rates well above the central bank’s policy rates. The government has yet to present its plans on DDR.

Weerasinghe said the central bank has done its best to reduce the risk premium through bringing down the market lending rates while keeping the policy rates unchanged.

Sri Lanka’s President Ranil Wickremesinghe has discussed progress of International Monetary Fund program and debt restructuring during a visit of Deputy Managing Director Kenji Okamura, statement said.

“The discussion primarily focused on the progress of the IMF program between Sri Lanka and the IMF,” a statement from President’s office said.

“Attention was also paid to the on-going debt restructuring negotiations.”

However Officials from IMF have said Sri Lanka has to focus on expanding taxes.

“We discussed the importance of fiscal measures, in particular revenue measures, for a return to macroeconomic stability,” Deputy Managing Director Kenji Okamura said in a statement.

The finance ministry this week issued rules requiring everyone above 18 year of age to register to pay income tax.

“I was encouraged by the authorities’ commitment to negotiate a debt strategy in a timely and transparent manner.

The market generated a revenue of 738 million rupees, while the daily average was 1 billion rupees.

Top gainers in trade were Vallibel One, LOLC Finance and Browns Investment. (Colombo/June02/2023)

Continue Reading