Hutch and Etisalat Merger – 04 December 2018
Hutch Lanka to survive whilst Etisalat Lanka ceases to exist post-merger
Emirates Telecommunications Group to own 15% of Hutch Lanka
CK Hutchison’s Holdings Ltd Group to own 85% stake of Hutch Lanka
The CBSL reduces the SRR to neutralize the key policy rate hike impact – 14 November 2018
The CBSL adjusted its policy rates in its Nov Monetary policy review as follows:
SLFR +50bps to 9%, SDFR +75bps to 8% w.e.f. 14 Nov 2018
SRR -150bps to 6% w.e.f. 16 Nov 2018
Read full report for Impact Analysis
Programme for Economic Revival – 02 November 2018
- The Government of Sri Lanka (GoSL) on 01 November 2018, gave directions to implement a set of initiatives in an attempt to revive the local economy
- Whilst the initiatives are expected to impact the fiscal account of the government, the government is confident that the primary surplus of 1.8% of GDP and the budget deficit of around 4.9% of GDP for 2018E could be achieved, with reduced capex and expenditure on Cabinet Ministers
- The anticipated impact of these initiatives on key Colombo Stock Exchange (CSE) counters are summarised in the report.
Impact from LKR Depreciation – 20 September 2018
- The Sri Lankan Rupee has depreciated –8.9% in 2018YTD to LKR166.47/US$, in line with currency weakening witnessed in regional countries, amid the strengthening of the US$
- Foreign T bill and bond holdings in the domestic market were continuously impacted from the March 15 rate decision of the US FED – may continue in the near term due to anticipated rate increases by the US FED
- The Central Bank of Sri Lanka (CBSL) reduced forex intervention during mid 2016 – but did intervene recently owing to the excessive depreciation
- The CBSL has introduced restrictions on imports to ease the situation and may increase interest rates as a further control
- The report also includes the potential impact on companies under coverage from LKR depreciation
Sri Lanka Banking Sector
Banking on Fundamentals: August 2018
- Sri Lankan banks remained relatively strong with better asset quality and higher ROEs during the past decade. The regulatory environment also has been more accommodative given the leeway provided on adjustment of new IFRSs and Basel III regulations.
- Whilst GoSL banks may need capital to remain relevant in the economy, top three Private LCBs (T3PL) were increasingly used as GoSL’s project financiers during past five years, whilst also reducing dependency on GoSL’s owned banks. Meanwhile DFI root LCBs in the Mid-Size Private LCB segment struggled in increasing their leverage, whilst pure LCBs in this segment remained competitive with T3PL at the ROE level, driven by their improved strategies to mobilize deposits, usage of analytics in lending and acquisition of high yielding credit cards. A majority of Relatively Smaller Domestic Private LCBs remained under capitalized compared to Jan 2020 absolute minimum capital requirements.
- Internet banking transactions grew 3X during FY2010-16, lowering the need of the domestic cheque-clearing system by a fifth. Whilst SL accounts for a smart phone penetration above 50% as at mid-2018, a notable increase in mobile transactions have been utilized only for utility allied regular settlements, which may likely follow a growth phase in the medium term. Implementation of a bio metric ID system by the GoSL (if introduced) could however fast track the current banking facilities as proved by some of the regional counterparts.
- SL banks have seen their valuations fall during the past few years amidst high earnings, creating a strong entry point for investors. Listed BFI sector accounts for ~50% of the overall CSE earnings whilst accounting for a good third of the CSE market cap. The fundamentally strong sector offers decent dividend yields that could now be reserved as the currency hedge by overseas investors. While SL bank forward EPS growth slows on recent and anticipated CET 1 injections, it’s hard to see a scenario where they have to cut their dividends. SL banks now offer “relative” valuation appeal and we recommend moving back to market over-weight on this sector.
Strategy Report – May 2018
- The Sri Lankan economy is forecast to report 4.7% real GDP growth for 2018E (vs. 3.1% in 2017) and 5.4% in 2019E
- The GoSL is expected to continue its fiscal consolidation into 2018E, in line with the IMF’s extended fund facility agreement thresholds, with a focus on strengthening macroeconomic fundamentals and implementing structural reforms
- The GoSL forecasts budget deficit to GDP at -4.8% in 2018E and -3.5% by 2020E, in accordance with its medium term macro fiscal framework
- General price levels likely to remain between 4-6% levels (vs. 6.6% in 2017), though potential weather related supply side shocks remain as a key risk
- The LKR is expected to be under pressure in the near term, with the Central Bank expected to intervene less in defending the currency at the expense of external reserves
- The Sri Lankan stock market witnessed an increase in 2018YTD, with the ASPI rising +3%, whilst the more liquid S&P SL20 remained broadly unchanged (vs. +2% and +5% respectively in 2017)
- Forward market valuation of 10.1X for 2018E is at a discount to regional peers, on the back of an expected earnings growth of +12% YoY
- Select key stocks, particularly in banking, finance & insurance, export related and consumer sectors offer relatively attractive valuations, backed by strong earnings growth prospects
Outlook 2018 – January 2018
- The GoSL is expected to continue its fiscal consolidation, in line with the IMF’s extended fund facility agreement thresholds, with a focus on strengthening of macroeconomic fundamentals and implementing structural reforms
- Forward market valuation of 9.6x for 2018E is at a discount to regional peers. The local equity market has been a laggard amongst regional peers, primarily due to relatively high interest rate pressures and lack of clear policy direction over the past two years, though both aspects seem to be shifting now. Consequently, the market is expected to witness gains in 2018E
- After a considerable delay, Local Government elections are being held island wide on 10 Feb 2018. Though a relatively minor election with low voter turnout, the outcome of same will indicate the strength and standing of the current coalition Government
- GoSL has also set its sight on attracting US$50bn worth of investment in the next five to ten years and is focused on accessing bigger markets through free trade agreements with India, China and Singapore
- The Megapolis development project, Colombo Financial City and development of Hambantota port to open up greater investment opportunities for both domestic and foreign investors. Further, the GoSL called for a request for proposal (RFP) to find investors for two state-owned hotels, Grand Hyatt Colombo and Hilton Colombo, with potential partial listings of other SOEs also in the pipeline