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Thursday December 8th, 2022

Sri Lanka’s NTB ‘A(lka)’ rating confirmed by Fitch amid slowing credit

ECONOMYNEXT – Fitch Ratings Lanka has confirmed Nations Trust Bank PLC’s (NTB) National Long-Term Rating at ‘A(lka)’ with a stable outlook, saying it had higher interest margins, though a difficult operating environment had was pushing up bad loans.

It had a higher concentration on leasing and credit cards and weak asset quality than peers.

“We expect profitability to continue to be dampened by credit costs, although it is likely to remain better than that of similarly rated peers due to a higher net interest margin,” the rating agency said.

“NTB’s modest franchise and profitability are balanced against its higher-than-peer product concentration in leasing and credit cards and weak asset quality relative to similarly rated peers,” Fitch Ratings said.

“NTB’s impaired-loan ratio, based on stage 3 loans, continued to rise to 11.2 percent by end-2020 from 10.9 percent at end-2019, reflecting the continued deceleration in lending amid challenging operating conditions.”

The 6.7 had contraction in loans exceeded the 3.5 percent decrease in stage 3 loans.

NTB’s loan loss allowances have been rising and increased to 3.8% of gross loans by end-1H21, but coverage of impaired loans remains low at 35.6% relative to similarly rated peers.

The operating environment for Sri Lankan banks reflects the risk of doing banking business due to the sovereign’s credit profile (CCC) and the impact of the coronavirus pandemic.

NTB’s loans/deposits ratio has grown to 98 per cent by end-1H21 due to the resumption of lending and is likely to remain high due to its reliance on medium-term, non-deposit funding to reduce asset and liability maturity mismatches, Fitch said.

Sri Lanka sovereign’s credit profile is rated at (CCC) and remains negative due to the potential deterioration in the sovereign credit profile and pressure on domestic operating conditions

Fitch expects pressure on NTB’s asset quality to persist in the near to medium term, stemming from the assessment of the operating environment.

“The bank also has a moderate share of foreign-currency denominated funding and is exposed to challenges in access to – and pricing of – foreign-currency funding due to the sovereign’s credit profile,” Fitch said.

NTB’s impaired-loan ratio on stage 3 loans, has risen to 11.2 per cent by end-2020 from 10.9 per cent at end-2019.

Its loan facility has contracted 6.7 per cent exceeded the 3.5 per cent decrease in stage 3 loans (bad loans).

Fitch says this reflects the continued deceleration in lending amid challenging operating conditions.

NTB’s loan loss allowances have been rising and increased to 3.8 per cent of gross loans by end-1H21, “but coverage of impaired loans remains low at 35.6 per cent relative to similarly rated peers,” Fitch said.

“We expect profitability to continue to be dampened by credit costs, although it is likely to remain better than that of similarly rated peers due to a higher net interest margin.”

The banks operating profit/risk-weighted assets has decreased to 3.4 per cent in 2020 from 3.9 per cent in 2019 alongside muted income generation and higher impairment charges before rebounding to 4.3 per cent in 1H21.

NTB’s common equity Tier 1 ratio of 13.46 per cent at end-1H21 remained well above the 10.7 per cent median for similarly rated banks.

“Unprovided impaired loans remain high relative to CET1 at 53.8%, putting pressure on its capital buffers,” Fitch ratings said.

The full statement is reproduced below:

Fitch Affirms Nations Trust Bank at ‘A(lka)’; Outlook
Stable

Fitch Ratings – Colombo – 29 Sep 2021: Fitch Ratings Lanka has affirmed the National Long-Term Rating on Nations Trust Bank PLC (NTB) at ‘A(lka)’ ‘. The Outlook is Stable. At the same time Fitch has affirmed the bank’s outstanding subordinated debt at
‘BBB+(lka)’.

KEY RATING DRIVERS

NATIONAL LONG-TERM RATING

NTB’s National Long-Term Rating is driven by its intrinsic credit profile, which in turn is highly influenced by our assessment of the challenging operating environment and the impact on banks’ asset quality.

NTB’s modest franchise and profitability are balanced against its higher-than-peer product concentration in leasing and credit cards and weak asset quality relative to similarly rated peers.

The operating environment for Sri Lankan banks has a high influence on banks’ ratings, as it is likely to constrain their intrinsic credit profiles through its effect on financial and non-financial key rating factors, including their company profiles.

The operating environment for Sri Lankan banks reflects the risk of doing banking business due to the sovereign’s credit profile (CCC) and the impact of the coronavirus pandemic.

The operating environment outlook remains negative due to the potential for deterioration in the sovereign credit profile and pressure on domestic operating conditions beyond our expectation independent of changes in the sovereign rating.

Fitch expects pressure on NTB’s asset quality to persist in the near to medium term, stemming from our assessment of the operating environment.

NTB’s impaired-loan ratio, based on stage 3 loans, continued to rise to 11.2% by end-2020 from 10.9% at end-2019, reflecting the continued deceleration in lending amid challenging operating conditions.

The 6.7% contraction in loans exceeded the 3.5% decrease in stage 3 loans. NTB’s loanloss allowances have been rising and increased to 3.8% of gross loans by end-1H21, but coverage of impaired loans remains low at 35.6% relative to similarly rated peers.

We expect profitability to continue to be dampened by credit costs, although it is likely to remain better than that of similarly rated peers due to a higher net interest margin.

Operating profit/risk-weighted assets decreased to 3.4% in 2020 from 3.9% in 2019
alongside muted income generation and higher impairment charges before rebounding to 4.3% in 1H21.

NTB’s common equity Tier 1 ratio of 13.46% at end-1H21 remained well above the
10.7% median for similarly rated peers. Unprovided impaired loans remain high relative to CET1 at 53.8%, putting pressure on its capital buffers.

NTB’s loans/deposits ratio rose to 98% by end-1H21 due to the resumption of lending and is likely to remain high due to its reliance on medium-term, non-deposit funding to reduce asset and liability maturity mismatches.

The bank has a moderate share of foreign currency-denominated funding and is exposed to challenges in access to and pricing of foreign-currency funding due to the sovereign’s credit profile.

We expect NTB’s loan book to become more evenly distributed among its customer segments in the medium term, although SME and retail would likely dominate, even though the bank has tilted its business mix towards corporates since 2018 due to challenging operating conditions.

Nonetheless, product concentrations in credit cards and leasing are likely to remain a feature of NTB’s loan book, despite muted near-term growth potential due to pandemic-related restrictions and the ban on vehicle imports.

SUBORDINATED DEBT

NTB’s Sri Lankan rupee-denominated subordinated debt is rated two notches below the National Long-Term Rating.

This reflects Fitch’s baseline notching for loss severity for this type of debt and our expectations of poor recoveries. There is no additional notching for non-performance risks, as the notes do not incorporate going-concern loss-absorption features.

RATING SENSITIVITIES

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

A downgrade of NTB’s National Long-Term Rating would likely arise from a weakening in its overall credit profile relative to the universe of Sri Lankan entities rated on the National Rating scale.

This could result from increased capital-impairment risk through asset-quality deterioration or sustained rapid loan expansion.

NTB’s subordinated debt would be downgraded if the bank’s National Long-Term Rating is downgraded.

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

Positive rating action appears unlikely in the near term due to the ongoing
macroeconomic pressure.

An upgrade in the longer term is contingent upon a sustained improvement in the bank’s credit profile relative to the universe of Sri Lankan entities rated on the National Rating scale.

This could be through reduced product concentration and higher capital buffers against its risk appetite, alongside a stronger franchise could support an upgrade.

NTB’s subordinated debt would be upgraded if the bank’s National Long-Term Rating is upgraded.

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Sri Lanka in deep talent drain in latest currency crisis

ECONOMYNEXT – Sri Lanka businesses are facing a drain of talent, top business executives said as the country suffers the worst flexible exchange rate crisis in the history of its intermediate regime central bank and people lose hope.

“We are seeing a trend towards migrating,” Krishan Balendra, Chairman of Sri Lanka’s John Keells Holdings told an economic policy forum organized by the Ceylon Chamber of Commerce.

“We have seen an impact mainly on the tourist hotels side, quite an exodus of staff (migrating) to countries we have not seen in the past. 

“We have seen people go to Scotland, Ireland. It has usually been the Middle East and Maldives. Australia seems like a red hot labor market at the moment.”

Sri Lanka’s rupee collapsed from 200 to 360 to the US dollar after macro-economists printed money to suppress rates.

Sri Lanka operates a ‘flexible exchange rate’ where errors in targeting interest rates are compensated by currency depreciation especially after the 1980s.

Classical economists and analysts have called for the power to mis-target rates and operate dual anchor conflicting monetary regimes should be taken away to prevent future crisis.

Currency crises are problems associated with flexible exchange rate central banks which are absent in hard pegs and clean floats.

“Something new we are seeing is that older people, even those in their 50s, which was a surprise, are looking at migrating,” Balendra said.

Businesses are trying to retain talent as real wages collapse.

Balendra said as businesses they see some stability returning and based on past experience growth is likely to resume, and they were communicating with the workers.

“We have a degree of conviction that the economy should get better, its the stability phase now and it will get better going forward so without the way our businesses are placed we should see good growth,” Balendra said.

“We can’t chase compensation that’s just not practical and we are not trying to do that especially if people are looking to immigrate but what we can do is show the career opportunities in the backdrop of the situation that people would rather stay here because its home.” 

Sri Lanka unit of Heineken says it is also trying to convince workers not to leave, with more success.

“We are all facing the effects of brain drain and it’s not just the lower levels… What we are doing is a balance of daring and caring,” Maud Meijboom-van Wel – Managing Director / CEO, Heineken Lanka Ltd told the forum.

“Why I say daring is, you have to be clear in what you can promise people, when you make promises you have to walk the talk. So with the key talents and everyone you need to have the career and talent conversations.

“I am a bit lucky because I am running a multinational company so my career path goes beyond Sri Lanka so I can say if you acquire certain skills here, then you can move out of here and then come back too, that is a bit easier for me but it starts with having a real open conversation with walking the talk – dare and care.” (Colombo/Dec7/2022)

 

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Despite losses, Sri Lanka to resume “park & ride” transport after complaints  

ECONOMYNEXT –  Sri Lanka’s state-run Transport Board will resume its loss-making City Bus service from January 15, 2022 Cabinet Spokesman Bandula Gunawardena said, after the service abruptly discontinued with the state-run firm’s director board citing losses.

The City Bus service was introduced in 2021, under the government of former President Gotabaya Rajapaksa, from Makubura to Pettah and Bambalapitiya.

The service was started to reduce the number of automobiles travelling to and from Colombo and suburbs by providing a comfortable, convenient and safe public bus transportation for passengers and riders who use cars and motorcycles as their means of transportation.

During the time period in which the service was initiated, there were 800 hundred vehicles that would be parked and would use the system, Gunawardena, who is also the Transport Minister, said.

The service was later collapsed due to inconsistencies in scheduling and it was completely stopped after

“Without informing the Secretary or the Minister of the relevant Ministry, the Board of Directors have come to a conclusion that this is loss making route and must be halted,” Gunawardena said.

“The users of the City Bus service brought to our notice and therefore I gave the Secretary to the Ministry of Transport the approval to start the City Bus service from January 15.”

“If we stop all loss making transport services then massive inconveniences will occur to the people in far parts of the island.”

The chairman of the state run Ceylon Transport Board has been asked to handover the resignation letter by the Minister Gunawardana citing that the head has failed to implement a policy decision approved by the government. (Colombo/ Dec 06/2022)

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Sri Lanka may see rates falling next year: President

ECONOMYNEXT – Sri Lanka’s interest rates are high and hurting small businesses in particular but interest rates are required to maintain stability, President Ranil Wickremesinghe said.

“One is, all of you want to know what’s going to happen to the interest rates?,” President Wickremesinghe told an economic policy forum organized by the Ceylon Chamber of Commerce.

“I wish I know. The governor has told me that the inflation has peaked. It’s coming down. You all understandably want some relief with the interest rates to carry business on.”

“I understand that and appreciate the viewpoint. It’s not easy to carry business on with such high interest rates. On the other hand, the Central Bank also has to handle the economy. So maybe sometimes early next year we will have a meeting of minds of both these propositions.”

Sri Lanka’s interest rates are currently at around 30 percent but not because the central bank is keeping it up. The central bank’s overnight policy rate is only 15.5 percent but the requirement to finance the budget deficit and roll over debt is keeping rates up.

Rates are also high due to a flaw in the International Monetary Fund’s debt workout framework where there is no early clarity on a whether or not domestic debt will be re-structured.

After previous currency crises, rates come down after an IMF deal is approved and foreign loans resume and confidence in the currency is re-stabilished following a float.

This time however there has been no clear float, though the external sector is largely stable and foreign funding is delayed until a debt re-structure deal is made.

Sri Lanka’s external troubles usually come because the bureaucrats do not believe market rates are correct when credit demand picks up and mis-uses monetary tools given in 1950 by the parliament to suppress rates, blowing the balance of payments apart.

The result of suppressed rates by the central bank are steep spikes in rates to stop the resulting currency crisis.

A reserve collecting central bank has little or no leeway to control interest rates (monetary policy independence) without creating external troubles, which is generally expressed as the ‘impossible trinity of monetary policy objectives’.

However, it has not prevented officials from trying repeatedly to suppress rates, perhaps expecting different results.

After suppressed rates – supposedly to help businesses – trigger currency crises, the normalization combined with a currency collapse leads to impoverishment of the population.

The impoverishment through depreciation leads to a consumption shock, which also leads to revenue losses in businesses.

The suppressed rates then lead to bad loans.

In the 2020/2022 currency crisis the sovereign default has also led to more problems at banks. Several state enterprises also cannot pay back loans.

“…[T]he bad debt that is being carried by the banks is mainly from the private sector or the government sector,” President Wickremesinghe said.

“Keep the government sector aside. We’re dealing with it. How do you handle it? Look, one of our major areas of are the small and medium industries. You can’t allow them to collapse, but they’re in a bad way.”

Classical economists and analysts have called for new laws to block the ability to central bank to suppress rates in the first place so that currency crises and depreciation does not take place in the first place.

Then politicians like Wickremesinghe do not have to take drastic and unpopular measures to fix crises and there will be stability like in East Asia.

Sri Lanka had stability until 1950 when the central bank was created by abolishing an East Asia style currency board. The currency board kept the country relatively stable through two World Wars and a Great Depression.

In 1948 after the war (WWII) was over “we stood second to Japan” Wickremesinghe said.

“But we started destroying it from the sixties and the seventies,” he said. :We started rebuilding an economy, which was affected by a (civil) war, and thereafter the way we went, is best not described here.”

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