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Monday February 6th, 2023

Sri Lanka’s Senkadagala Finance ‘BBB+(lka)’ rating confirmed, outlook stable

ECONOMYNEXT – Fitch Ratings has confirmed a domestic ‘BBB+(lka)’ rating of Sri Lanka’s Senkadagala Finance despite pressure on the operating environment, with the firm having lower bad loans than the industry.

Senkadagala Finance has reported gross non-performing loan ratio based on six-month arrears of 7.7 percent by June 2021 which could deteriorate further amid lockdowns.

The firm had set aside set aside loan-loss provisions of about 7.0 percent of gross loans in the fiscal year to March 2021 (FY21), with further provisions of around 1.6 percent of gross loans taken in the first quarter of the current financial year.

Senka’s regulatory six-month NPL ratio also remained lower at FYE21 (6.5 percent) compared with the industry average of 11.3 percetn.

The full statement is reproduced below:

Fitch Ratings – Singapore/Colombo – 01 Sep 2021: Fitch Ratings has affirmed Senkadagala Finance PLC’s (Senka) National Long-Term Rating at ‘BBB+(lka)’. The Outlook is Stable.

KEY RATING DRIVERS

NATIONAL LONG-TERM RATING

Senka’s National Long-Term Rating is underpinned by its standalone credit profile. It reflects the company’s moderate deposit franchise and higher-risk exposure to cyclically sensitive SME borrowers as a mid-sized finance company in Sri Lanka.

These features contribute to the company’s modest profitability and higher reliance on secured wholesale funding relative to peers. Nonetheless, Senka has generally retained a more consistent business strategy and risk appetite relative to lower-rated peers, and its adequately matched asset-liability maturity profile provides some protection against the risk of a liquidity squeeze.

The Covid-19 pandemic continues to exert significant pressure on the operating environment for Sri Lankan finance and leasing companies. Fitch projects a gradual economic recovery in 2021 and 2022 after a 3.6% contraction in 2020 GDP, but this forecast remains subject to considerable uncertainty as it depends on the trajectory of the pandemic.

We expect continued pressure on loan demand, asset quality and profitability in the near term in light of the challenging operating environment.

Senka’s regulatory reported gross non-performing loan (NPL) ratio (based on six-month arrears) remained elevated at 7.7% at end-June 2021, and we see a risk of continued deterioration in the near term if the current lockdown is extended.

Against this, the company set aside loan-loss provisions of about 7.0% of gross loans in the fiscal year to March 2021 (FY21), with further provisions of around 1.6% of gross loans taken in 1QFY22.

Senka’s regulatory six-month NPL ratio also remained lower at FYE21 (6.5%) compared with the industry average of 11.3%.

We expect credit-provisioning pressure to continue to weigh on profitability in the near term. Senka recorded a quarterly net loss in 1QFY22 as higher credit costs outstripped pre-provision profits. Nonetheless, Senka has remained profitable in the past year with pretax profit of around 2.8% of average assets in FY21 (FY17-FY20: 2.2%-5.0%), and profitability is likely to recover if current movement restrictions are eased.

Meanwhile, Senka’s leverage, as captured by debt/tangible equity, remains at the higher end of rated large and mid-sized finance companies, but improved to 4.7x by end-1QFY22 from 5.2x at FYE21 due to an infusion of equity capital by the major shareholders earlier in the year. The company has announced a subsequent rights issue of around LKR475 million, which should help to shore up the capital buffer further. Senka’s core capital adequacy ratio of 17.9% at end-1QFY22 provided a moderate buffer against capital impairment risk relative to the regulatory minimum requirement of 6.5%.

We view Senka’s funding profile as more confidence-sensitive than that of peers, due to its smaller deposit-funding franchise and greater reliance on secured wholesale funding. Deposits comprised a moderate 38% of total funding at FYE21 (large and mid-sized peers:
78%-94%). Its deposit base is also fairly concentrated, raising the risk of lumpy funding outflows. Against this, its longstanding market presence helps to anchor the stability of its large deposit relationships, and the company’s positive short-term liquidity gaps and considerable undrawn liquidity facilities help to offset the risk of a liquidity shock.

SUBORDINATED DEBT

Senka’s Sri Lankan rupee-denominated subordinated debt is rated two notches below its National Long-Term Rating. This reflects Fitch’s expectation of high loss severity and poor recoveries in the event of default, per our Bank Rating Criteria.

RATING SENSITIVITIES

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

NATIONAL LONG-TERM RATING

Positive rating action is unlikely in the near term in light of the difficult operating environment. An upgrade is only possible in the medium to longer term if the company is able to diversify its funding profile and strengthen its deposit franchise and profitability materially, closer to that of larger peers, while maintaining leverage towards the lower end of its peer group.

SUBORDINATED DEBT

Any positive action on Senka’s National Long-Term Rating will lead to similar action on its subordinated debt.

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

NATIONAL LONG-TERM RATING

Fitch may take negative rating action in the event of further persistent asset quality deterioration that results in in material capital impairment, funding pressure or an increase in asset encumbrance.

SUBORDINATED DEBT

The ratings on Senka’s subordinated debt would be downgraded in the event of a downgrade of its National Long-Term Rating.

ISSUER PROFILE

Senka, founded in 1968, is a mid-sized finance company in Sri Lanka. It held a market share of roughly 2.7% of industry assets and 1.5% of industry deposits at end-March 2021.

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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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