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Monday February 6th, 2023

Sri Lanka’s LB Finance ‘A-(lka)’ rating confirmed

ECONOMYNEXT – Fitch Ratings has confirmed a ‘A-(lka) rating of LB Finance was Sri Lanka’s third largest finance leasing company saying had satisfactory capital levels but it was exposed to a weak economic environment, and customer segments that were more vulnerable.

The outlook was stable.

The company’s five-month gross non-performing loan ratio worsened to 6.1percent in the first quarter of the financial year from 3.9 percent last year driven mostly by vehicle financing and gold loans where collections were hampered by lockdowns.

LB’s stage 3 (impaired) loans ratio, including facilities over 90 days due, had increased to 11.4 percent by end-FY21 from 10.7 percent at end-FY20.

“Asset quality risk remains a key concern for overall credit profiles of FLCs such as LB due to their high exposure to customer segments that are more susceptible to deteriorating economic conditions,” Fitch said.

“Fitch expects asset quality pressures to persist in the near to medium term, due to credit migration amid a challenging operating environment.”

Fitch Affirms LB Finance at ‘A-(lka)’; Outlook Stable

Fitch Ratings – Colombo – 01 Sep 2021: Fitch Ratings has affirmed LB Finance PLC’s National Long-Term Rating at ‘A-(lka)’. The Outlook is Stable.

At the same time, Fitch has affirmed the company’s Sri Lankan rupee-denominated senior unsecured debt at ‘A-(lka)’ and rupee-denominated subordinated debt at ‘BBB(lka)’.

KEY RATING DRIVERS

NATIONAL RATINGS AND SENIOR DEBT RATINGS

LB’s National Long-Term Rating is driven by its intrinsic financial strength and reflects its established domestic franchise as Sri Lanka’s third-largest finance and leasing company (FLC), accounting for 10% of total FLC sector assets as of the financial year ended March 2021 (FY21).

It also reflects high profitability from high-yielding products and satisfactory capital levels. This is counterbalanced by a high-risk appetite due to a large and increasing exposure to gold-backed lending.

The operating environment in Sri Lanka remains challenging. Sri Lanka’s real GDP contracted by 3.6% in 2020 on disruption stemming from the coronavirus pandemic. Fitch forecasts an economic rebound in 2021 and 2022, but this depends on how the pandemic evolves. Our assessment of the operating environment for Sri Lankan FLCs also incorporates the negative implications for FLCs through the effects on their largely sub-prime clientele and the prolonged restriction on motor vehicle importation.

Fitch is of the view that LB’s risk appetite remains high with rising exposure to gold-back lending. We expect this exposure to further increase in the near to medium term, compensating for the slowdown in its vehicle financing business.

LB has so far managed its gold loan exposure through regular monitoring and risk control measures, such as ensuring that adequate safety margins are maintained. However, we believe that potential volatility in global and local gold prices together with local exchange rates could pose a threat to LB’s asset quality.

Asset quality risk remains a key concern for overall credit profiles of FLCs such as LB due to their high exposure to customer segments that are more susceptible to deteriorating economic conditions.

Fitch expects asset quality pressures to persist in the near to medium term, due to credit migration amid a challenging operating environment.

The company’s five-month gross non-performing loan ratio deteriorated to 6.1% in 1QFY22 (FY21: 5.4%, FY20: 3.9%), driven mostly by its vehicle financing portfolio and gold loans where collections were hampered due to the country-wide lockdowns during that period.

LB’s stage 3 (impaired) loans ratio, including facilities over 90 days due, increased to 11.4% by end-FY21 from 10.7% at end-FY20.

Fitch expects a recovery in LB’s profitability in the medium term, although slower loan book growth, thinner net interest margin and high credit costs could continue to affect near-term profitability. LB’s core profitability metric – pretax profit/average assets – declined to 6.4% in 1QFY22 (FY21: 7.6%, FY20: 7.0%) due to a drop in yields amid
protracted low loan growth as a result of the lockdown that prevailed during the period, which outweighed the benefit of continued downward deposit repricing.

Fitch expects LB’s debt/tangible equity to remain broadly stable through FY22-FY23, supported by the still healthy internal capital generation that is likely to outpace the funding growth stemming from a potential pick up in loan growth. LB’s leverage ratio improved to 3.7x by end-FY21 (FY20: 5.0x) and remained at these levels in 1QFY22 as its funding base contracted on muted lending alongside consistent internal capital generation. However, LB’s leverage ratio remains one of the highest among large and mid-sized Fitch-rated FLCs in Sri Lanka.

Fitch expects LB’s funding and liquidity profile to remain adequate, supported by an established domestic franchise. We expect LB to rely on mostly deposit funding (1QFY22: 80% of funding) alongside secured, wholesale, term borrowings from banks and other funding agencies (17% of total funding).

LB’s senior debentures are rated in line with the company’s National Long-Term Rating, as they rank equally with claims of the company’s other senior unsecured creditors.

SUBORDINATED DEBT

The subordinated debentures are rated two notches below LB’s National Long-Term Rating to reflect the subordination to senior unsecured obligations, in line with our Bank Rating Criteria. Fitch’s baseline notching of two notches for loss severity reflects our expectation of poor recovery. We have not applied additional notching to the notes for non-performance risk, as they have no going-concern loss-absorption features, in line with Fitch’s criteria.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Upside to LB’s National Long-Term Rating in the near term is limited due to the pressure on the operating environment. In the medium to longer term, an upgrade is contingent on LB achieving lower leverage relative to peers, lower-risk asset exposure and a sustained improvement in its liquidity position when loan growth picks up meaningfully.

LB’s senior and subordinated debt will be upgraded if the company’s National Long-Term Rating is upgraded

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of LB’s National Long-Term Rating would most likely arise from a weakening in its overall credit profile relative to the national-rating universe of Sri Lankan rated entities. This could result from a deterioration in asset quality beyond our base-case expectations leading to weaker profitability and higher capital impairment risks.

LB’s senior and subordinated debt will be downgraded if the company’s National Long-Term Rating is downgraded.

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Sri Lanka to address SME tax problems at first opportunity: State Minister

ECONOMYNEXT – Problems faced by Sri Lanka’s small and medium enterprises from recent tax changes will be addressed at the first opportunity, State Minister for Finance Ranjith Siyambalapitiya said.

Business chambers had raised questions about hikes in Value Added Tax, Corporate Income Tax and the Social Security Contribution Levy (SSCL) that’s been imposed.

It should be explored on how to amend the Inland Revenue Act, Siyamabalapitiya said, adding that the future months should be considered as a period where the country is being stabilized.

Both the VAT and SSCL are effectively paid by customers, but the SSCL is a cascading tax that makes running businesses difficult.

In Sri Lanka SMEs make up a large part of the economy, accounting for 80 per cent of all businesses according to according to the island’s National Human Resources and Employment Policy.

(Colombo/ Feb 05/2023)

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Sri Lanka revenues Rs158.7bn in Jan 2023 up 51-pct

ECONOMYNEXT – Sri Lanka’s government revenues were 158.7 billion rupees in January 2023 but expenditure and debt service remained high, Cabinet spokesman Minister Bandula Gunawardana said.

In January 2022 total revenues were Rs104.5 billion according to central bank data.

Sri Lanka’s tax revenues have risen sharply amid an inflationary blow off which had boosted nominal GDP while President Ranil Wickremesinghe has also raised taxes.

Departing from a previous strategy advocated by the IMF expanding the state and not cutting expenses, called revenue based fiscal consolidation, he is attempting to do classical fiscal consolidation with spending restraint.

President Ranil Wickremesinghe has presented a note to cabinet requesting state expenditure to be controlled, Gunawardana told reporters.

State Salaries cost 87.4 billion rupees.

Pensions and income supplements (Samurdhi program) were29.5 billion rupees.

Other expenses were 10.8 billion rupees.

Capital spending was   21 billion rupees.

Debt service was 377.6 billion rupees for January which has to be done with borrowings from Treasury bills, bonds and a central bank provisional advance of 100 billion rupees, Gunawardana said.

Interest costs were not separately given. (Colombo/Feb05/2023)

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Sri Lanka’s Ceylon Tea prices down for second week

ECONOMYNEXT – Sri Lanka’s Ceylon Tea prices fell for the second week at an auction on January 31, with teas from all elevations seeing a decline, data showed.

“In retrospect, the decline in prices would be a price correction owing to the overall product quality and less interest from some key importers due to the arrival of cargo at destinations ahead of schedule,” Forbes and Walker tea brokers said.

The weekly sale average fell from 1475.79 rupees to 1465.40 rupees from a week ago, according to data from Ceylon Tea Brokers.

The tea prices are down for two weeks in a row.

High Growns

The High Grown sale average was down by 20.90 rupees to 1380.23 rupees, Ceylon Tea Brokers said.

High grown BOP and BOPF was down about 100 rupees.

“Ex-Estate offerings which totalled 0.75 M/Kg saw a slight decline in quality over the previous week” Forbes and Walker said.

OP/OPA’s in general were steady to marginally down.

Low Growns

In Low Grown Teas, FBOP 1 was down by 100 rupees and FBOP was down by 50 rupees while PEK was up by 150 rupees.

The Low Growns sale average was down by 8.55 rupees to 1547.93 rupees.

A few select Best BOP1s along with Below Best varieties maintained.

OP1                     Select Best OP1’s were steady, whilst improved/clean Below Best varieties maintained.   Others and poorer sorts were easier.

PEKOE                 Well- made PEK/PEK1s in general were steady, whilst others and poorer sorts were down.

Leafy and Semi Leafy catalogues met with fair demand,” Forbes and Walker brokers said.

“However, the Small Leaf and Premium catalogues continued to decline.

“Shippers to Iran were very selective, whilst shippers to Türkiye and Russia were fairly active.”

This week  2.2 million Kilograms of Low Growns were sold.

Medium Growns

Medium Grown BOP and BOPF fell by around 100 rupees

The Medium Growns sale average was down by 33.40 rupees to 1199.4 rupees.

“Medium CTC teas in the higher price bracket witnessed a similar trend, whilst teas at the lower end were somewhat maintained subject to quality,” Forbes and Walker brokers said.

“Improved activity from the local trade and perhaps South Africa helped to stabilize prices to some extent.”

OP/OPA grades were steady while PEKOE/PEKOE1 were firm, while some gained 50-100 rupees at times.

Well-made FBOP/FBOPF1’s were down by 50-100 rupees per kg and more at times.

(Colombo/Feb 5/2023)

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