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Nisansala kuruppumudali, Research Analyst at First Capital commenting on the bond and stock market performance – 30.12.2019

Nisansala kuruppumudali, Research Analyst at First Capital commenting on the bond and stock market performance.

“The secondary market yield curve witnessed a slight downward shift mainly in the mid tenor maturities. Bourse closed the day on a mixed note mainly on the price gains made by LOLC and CLC… ”

First Capital is an investment bank offering services as Stock Brokers in Sri Lanka. The Company acts as a conduit between retail and institutional clients and the secondary market of the Colombo Stock Exchange. First Capital’s best-in-class research team provide a series of actionable trade recommendations, daily and periodic market commentaries and publications for Stock Brokers in Sri Lanka.

First Capital Holdings PLC is an investment bank and is the pioneer non-bank affiliated Primary Dealer in Treasury Bills and Bonds in Sri Lanka. With a track record of over 25 years, the Company was the first licensed primary dealer appointed by the Central Bank, and is also the only listed and rated primary dealer in Treasury Bills and Bonds in Sri Lanka.
First Capital delivers the only source for fixed income research in the local financial services industry. The Company’s best-in-class research team provide dynamic reports including economic reviews and proprietary research, encompassing fundamental, quantitative and technical analysis.

Hefty tax cuts, moratorium trim rate cut probability to 50%, says First Capital


The research arm of an investment banking unit has lowered the probability of a policy rate cut to 50 percent, from the previously projected 100 percent, amid the sweeping tax cuts and loan moratorium announced for small and medium-sized enterprise (SME) loans.

First Capital Research on November 26 said the door was wide open for a further policy easing in December 2019.

“We are maintaining the same stance; however lowering the easing probability to 50 percent in December, considering the recent hefty tax benefits, moratorium to SMEs and relaxation of capital adequacy requirements declared by the government and CBSL,” First Capital Research said in its pre-policy analysis.

“We believe that the benefits given may partly compensate an expectation of a rate cut to address the prevailing sluggish economic growth.

However, we are of the view that a 50 percent probability exists for a “No Change” in the Monetary Policy as well due to the major benefits,” it added.

First Capital Research believes the Statutory Reserve Ratio (SRR) will be maintained at the current levels.

The Central Bank is scheduled to announce its final monetary policy review for this year, tomorrow. 

The government on November 27 announced sweeping tax reforms, including a considerable reduction in the Value-Added Tax (VAT) and abolishing of taxes such as Nation Building Tax (NBT). Also, the thresholds applicable for several taxes such as Pay-As-You-Earn (PAYE) were increased.

The tax cuts have raised concerns on the government revenue side, signalling higher fiscal deficits than earlier projected.  Moody’s has estimated the revenue loss due to tax cuts to be around 1.5 percent of GDP while Fitch, which lowered Sri Lanka’s sovereign rating outlook over the tax cuts last week, estimates the impact from VAT change and scrapping of NBT alone to be 2 percent of GDP.

However, the government has strongly defended its position saying that the tax cuts would augment the aggregate demand in the economy and thereby boost economic growth, offsetting most of the revenue-side impacts.

On top of that, the government last week directed all banks to suspend the recovery of SME loans up to Rs.300 million for a 12-month period, starting from January next year, to support the lagging SMEs. Sri Lanka’s economic growth and private sector credit have shown signs for recovery, albeit below par the potential, leaving space for aggressive monetary policy easing.  Sri Lanka grew 2.7 percent in the third quarter and private credit recorded an increase of Rs.26 billion in October, recording a positive credit growth for the third consecutive month. The credit growth during January-October was 2.6 percent. 

Meanwhile, First Capital Research said although the government delaying the US  $ 500 million Samurai bond issuance, given the country’s higher foreign loan payments and modest foreign reserves, it added that foreign outflows is not considered a major concern, given the lower level of foreign holding in the government securities market. The government bond market witnessed an outflow of Rs.16.9 billion since November 27, resulting in foreign holding in government securities declining below 2.0 percent. 

“Though policy easing in the current scenario enhances foreign outflows, the historical low level of foreign holding significantly reduces the risk of further outflows,” First Capital Research said.

Bond Market look forward to policy meeting

Weekly Yield Movement & Volume

During the first three days of the week (19-12-2019 to 23-12-2019), the secondary market yield curve remained broadly unchanged while overall market witnessed limited activities amidst thin volumes.  On Tuesday, the yield curve experienced a downward shift mainly in the short to mid tenor maturities with renewed buying interest from local counterparties mainly centred on 2024 maturities. Furthermore, CBSL’s final  monetary   policy  announcement  for 2019 will be held on 27th December, Friday.


At the weekly Treasury bill auction, weighted average yields for both 3M and 1Yr bill remained at same levels while the yield for 6M bill dipped by 5bps to 8.02%.
Meanwhile in the forex market, the rupee appreciated to close the week at LKR 181.23 from LKR 181.31 held at the beginning of the week.

Liquidity & CBSL Holdings

Volatility  in  liquidity  was  witnessed  although  it remained positive during the week. The highest excess liquidity for the week was recorded on 19th December amounting to LKR 37.99B, although witnessed a slight decline towards the end of the week to LKR 26.07B. Meanwhile, CBSL holdings slightly decreased to close at LKR 74.74B.


Foreign Interest

Foreign holding in Government Securities decreased by LKR 4.5B to record at LKR 103.9B while foreign holding percentage also declined below 2.0%.


Maturities for next week

The Government  Security  market  has  to  settle a Treasury bill maturity amounting to LKR 23.5B and a  coupon  payment  amounting  to  LKR  39.0.8B during the week ending 3rd Jan 2020.

Dimantha Mathew, Head of Research at First Capital commenting on the bond and stock market forecast – 29.12.2019

Dimantha Mathew, Head of Research at First Capital commenting on the bond and stock market forecast.

“With the on-going festive season we expect a dull sentiment in the both debt and equity capital markets. Bonds are likely to be broadly stagnant with yields likely to stay similar to last week. Equity market activity has been on a declining trend already and is likely to continue in the upcoming week as well…… ”

First Capital is an investment bank offering services as Stock Brokers in Sri Lanka. The Company acts as a conduit between retail and institutional clients and the secondary market of the Colombo Stock Exchange. First Capital’s best-in-class research team provide a series of actionable trade recommendations, daily and periodic market commentaries and publications for Stock Brokers in Sri Lanka.

First Capital Holdings PLC is an investment bank and is the pioneer non-bank affiliated Primary Dealer in Treasury Bills and Bonds in Sri Lanka. With a track record of over 25 years, the Company was the first licensed primary dealer appointed by the Central Bank, and is also the only listed and rated primary dealer in Treasury Bills and Bonds in Sri Lanka.
First Capital delivers the only source for fixed income research in the local financial services industry. The Company’s best-in-class research team provide dynamic reports including economic reviews and proprietary research, encompassing fundamental, quantitative and technical analysis.

First Capital wins Silver – Investment Banking Category at 55th Annual Report Awards

Director/CEO, CFO and the Finance Team of First Capital with the Certificate and Award received at the 55th Annual Report Awards Competition

First Capital Holdings PLC, the only listed investment bank in Sri Lanka, won the Silver Award under the newly introduced industry category ‘Investment Banking’ at the 55th Annual Report Awards competition organised by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka).  

The Award and Certificate were presented to First Capital by Annual Report Awards Committee Chairman Heshana Kuruppu and CA Sri Lanka Past President Lasantha Wickremasinghe at a gala ceremony organised at the Shangri-La Hotel Colombo.

“As a listed entity, we strive to provide a comprehensive viewpoint for the benefit of our shareholders, clients as well as in a broader context for our market participants, through exemplary compliance, corporate governance, financial transparency, disclosure and effective communication in executing our business transactions,” commented First Capital Holdings PLC Chief Financial Officer Mangala Jayashantha.   

First Capital relies on the amalgam of distinct assets and capabilities of its subsidiaries to provide full-service investment banking, offering independent advice and transaction execution relating a diverse range of advisory services and financial products including Capital Markets Advisory, Wealth Management, Fixed Income and Equities. The company’s industry leading transactions are reflective of the ingenuity in enabling the most opportune investment solutions for its clients. 

First Capital Holdings is the holding company deriving its income from dividend from the group entities and income from its investments, which includes interest income and profit from investments. 

The company is listed on the Colombo Stock Exchange and is rated A- by ICRA Lanka Limited.

Financial disintermediation, need of the hour

Sri Lanka is too dependent on banks and financial institutions and it is of much importance to acknowledge the importance of the capital market. Banks and financial institutions are limiting both corporate and investors. What we need is a financial disintermediation, which would permit investors to access the capital market directly for cheaper funding.

These sentiments were expressed by First Capital Holdings PLC, Senior Manager – Corporate Finance, Mahesh Amarasinghe.

Bringing down interest rates should be a priority, since Sri Lanka has probably one of the highest real interest rates in the world.

“For a business operating in Sri Lanka, the cost of capital is significantly higher than any where else in the world. We as an organization, have been advocating for better access to capital and we suggest that that banks and finance companies be incentivized to lend for investment, rather than consumption, because when interest rates are brought down, people use credit for consumption purposes and not contribute to the growth of the economy.

On the other hand, financial disintermediation means that Issuers or Borrowers – the companies that are seeking funds to grow should look beyond traditional sources of funds such as banking and financial institutions and find opportunities to directly access investors to directly get involved and lend to projects.

“This is what a vibrant capital market could do to grow business.”

“This is where Corporate Finance has a significant role to play as a full service investment bank operating in both debt and equity markets. We understand the changing economic and industry trends and provide both Issuers and Investors with new opportunities for businesses at attractive rates.

He commenting that the problem is that most lending entities too have traditional mind-sets on how they approach lending.

“For example, despite the prevalence and growth of IT, digital, and data-related companies, many banks are still reluctant to lend to them, as they have less understanding about the business, how it runs and how it could make profits.”

“In addition, we as Sri Lankans, have very little financial literacy so it makes life harder for entities looking for funding to pitch their proposals in an attractive manner.”

“Our teams are able to study and understand the financial position of corporates and structure customized solutions that are on their terms such as what rates they would wish to borrow at, if they are fixed or floating, matching cash flow and growth requirements of companies.”

On the other hand, investors are finding it difficult to place their funds due to caps on interest rates. “Traditionally, Sri Lankans are used to a financial landscape where people make deposits to banks and banks keep a margin and lend to businesses they perceive to be risk-free, but not really contributing to the economy.”

He said that the teams at First Capital would advise a client how the investor looks at the company and we advise on how to improve.

“When we see liquidity decreasing, our advise is to get the funding now, as we see trends of lack of liquidity in the market, while and these are part of the services we offer.”

Corporate Finance creates a more robust capital market structure that actually provide investors the opportunity of going directly into businesses and earn higher interest rates in addition to the security that is behind this type of instrument. “If you put a Fixed Deposit it’s just between you and the bank of the institution, whereas this would have a trustee, regulator if listed, a security to back the funds.”

We are a sponsor for SMEs to list them in the Empower Board. Specific license.

He also opined that listing or unlisted debt, there is a cost benefit to the issuer. So we advise them accordingly. Although unlisted costs less, sometimes it is better for a company’s brand or name if they are a listed with a publicized IPO.”

“IPOs are an ideal way for an investor who had not invested in this type of product earlier, because it is highly regulated with the CSE and SEC monitoring, a rating agency and a trustee and many other participants securing the process.”

Also for someone subscribing to a debt IPO, there is a set exit mechanism, because they could trade it on the secondary market.

“However, with the previously offered tax benefits no longer applicable, there is a significant benefit for corporates to do an unlisted issue, but to do so, there must be qualified investors who are experienced and understand the risks of the product.”

He said that they would look into it and would judge as to how these projects must be structured for the company to make the best of it. “Or we also would offer finding investment opportunities for investors who are looking for opportunities in the Securities Market for private placements or public offerings.”

Amarasinghe and his team recently closed a Rs. 5 billion Debenture for LOLC in a market where the company is over exposed.

Amarasinghe counts over 18 years of significant experience in Treasury and Securities Management through business operations and expertise gained as a Primary Dealer in and a Secondary Dealer of a range of fixed income securities.

He has extensive exposure in front and back-office operations and in customer relations in financial services.

Nisansala kuruppumudali, Research Analyst at First Capital commenting on the bond and stock market performance – 23.12.2019

Nisansala kuruppumudali, Research Analyst at First Capital commenting on the bond and stock market performance.

“The secondary market yield curve remained broadly unchanged while overall market witnessed ultra-thin volumes amidst limited activity. Bourse concluded the day in red persisting the negative sentiment for the fourth consecutive trading session, mainly attributable to the price losses in DIST and BUKI…. ”

First Capital is an investment bank offering services as Stock Brokers in Sri Lanka. The Company acts as a conduit between retail and institutional clients and the secondary market of the Colombo Stock Exchange. First Capital’s best-in-class research team provide a series of actionable trade recommendations, daily and periodic market commentaries and publications for Stock Brokers in Sri Lanka.

First Capital Holdings PLC is an investment bank and is the pioneer non-bank affiliated Primary Dealer in Treasury Bills and Bonds in Sri Lanka. With a track record of over 25 years, the Company was the first licensed primary dealer appointed by the Central Bank, and is also the only listed and rated primary dealer in Treasury Bills and Bonds in Sri Lanka.
First Capital delivers the only source for fixed income research in the local financial services industry. The Company’s best-in-class research team provide dynamic reports including economic reviews and proprietary research, encompassing fundamental, quantitative and technical analysis.

Listed firms’ earnings down 9.6% in Sept. quarter

Earnings of the 264 companies listed on the Colombo Stock Exchange declined by 9.6 percent year-on-year (YoY) to Rs.45.8 billion during the September quarter, though slightly better than the previous quarter, and considerably better than March 2019 and December 2018 quarters.

According to First Capital Research, the decline in earnings was primarily due to the sluggish performance of Insurance (-48 percent YoY), Consumer Services (-495 percent YoY), Capital Goods (-39 percent YoY) and Food, Beverage and Tobacco
(-12 percent YoY) sectors. 

However, an earnings upside was witnessed in Material (108 percent YoY), Consumer, Durable & Apparel (+13600 percent YoY) and Energy (646 percent YoY) sectors negating the negative performance in the above-mentioned sectors. 

Insurance, Consumer Services, Capital goods and Beverage and Tobacco sectors weaken the quarterly earnings growth. Lackluster performance in Insurance, Consumer Services and Food, Beverage and Tobacco was mainly owing to the lower consumer spending stemmed from subdued economic activities. 

Insurance sector earnings recorded a substantial drop mainly due to earnings decline in Softlogic Life Insurance PLC (-85 percent YoY) from a deferred tax adjustment and Union Assurance PLC (-91 percent YoY) due to the increased transfer of insurance contract liabilities to the life fund. 

Consumer Services sector earnings declined and posted a loss of Rs.1.67 billion relatively to a profit of Rs. 0.4 billion in Sep 2018 as a result of the drop in tourist arrivals subsequent to the Easter Sunday attacks. Food, Beverage and Tobacco sector earnings dipped by 12 percent YoY to Rs.7.8 billion led by Browns Investments PLC, Melstacorp PLC and tea plantation companies. 

Browns Investments posted a loss of Rs.1.19 billion compared to a loss of Rs 0.6 billion due to higher finance and admin cost. Melstacorp earnings dropped by 58 percent due to hefty taxes while the cost of sales also surged against the same period last year. 

Profit dip witnessed across the tea plantation counters due to weaker tea prices further dragged down the Food Beverage and Tobacco sector earnings. 

Material Consumer, Durable & Apparel and Energy sectors posted a healthy performance. Material sector saw a profit growth of 108 percent YoY to Rs.1.8 billion driven by Tokyo Cement PLC (573 percent YoY). Tokyo Cement profits were boosted due to operational efficiencies and increase in maximum retail price. 

Consumer, Durable & Apparel sector saw an impressive earnings growth of 13600 percent YoY with Teejay Lanka PLC, Hayleys Fabric PLC and Ambeon Holdings PLC posting earnings growth of 84 percent, 83 percent and 184 percent respectively. 

Teejay Lanka and Hayleys Fabric earnings growth was supported by efficiency improvements, strong order book and stable cotton prices. 

Energy sector posted a strong earnings growth of 646 percent YoY in profits as a result of turnaround in Laugfs Gas PLC, which posted earnings of Rs.17 million compared to Rs.305 million loss posted in September 2018 and improved performance in Lanka IOC PLC due to higher focus on bunkering, lubricant operations and export market.

First Capital is an investment bank offering services as Stock Brokers in Sri Lanka. The Company acts as a conduit between retail and institutional clients and the secondary market of the Colombo Stock Exchange. First Capital’s best-in-class research team provide a series of actionable trade recommendations, daily and periodic market commentaries and publications for Stock Brokers in Sri Lanka.

First Capital Holdings PLC is an investment bank and is the pioneer non-bank affiliated Primary Dealer in Treasury Bills and Bonds in Sri Lanka. With a track record of over 25 years, the Company was the first licensed primary dealer appointed by the Central Bank, and is also the only listed and rated primary dealer in Treasury Bills and Bonds in Sri Lanka.
First Capital delivers the only source for fixed income research in the local financial services industry. The Company’s best-in-class research team provide dynamic reports including economic reviews and proprietary research, encompassing fundamental, quantitative and technical analysis.

Atchuthan Srirangan, Assistant Manager – Research at First Capital commenting on the bond and stock market forecast – 22.12.2019

Atchuthan Srirangan,  Assistant Manager – Research at First Capital commenting on the bond and stock market forecast.

“We expect both capital market activity to remain dull in the coming week as well with the upcoming festive season. Stock market may remain volatile but stagnant with low turnover level and volume.. ”

First Capital is an investment bank offering services as Stock Brokers in Sri Lanka. The Company acts as a conduit between retail and institutional clients and the secondary market of the Colombo Stock Exchange. First Capital’s best-in-class research team provide a series of actionable trade recommendations, daily and periodic market commentaries and publications for Stock Brokers in Sri Lanka.

First Capital Holdings PLC is an investment bank and is the pioneer non-bank affiliated Primary Dealer in Treasury Bills and Bonds in Sri Lanka. With a track record of over 25 years, the Company was the first licensed primary dealer appointed by the Central Bank, and is also the only listed and rated primary dealer in Treasury Bills and Bonds in Sri Lanka.
First Capital delivers the only source for fixed income research in the local financial services industry. The Company’s best-in-class research team provide dynamic reports including economic reviews and proprietary research, encompassing fundamental, quantitative and technical analysis.

Weekly Govt Securities: Benchmark 1-year T-bill records 1-month high

Weekly Yield Movement & Volume

During the week, the secondary market yield curve remained broadly unchanged, while the overall market witnessed limited activities amidst thin volumes. At the weekly Treasury Bill auction, the benchmark one-year was accepted at a weighted average of 8.45 per cent, up by 22bps, recording a one-month high. The three-month bill was accepted at a weighted average of 7.51 per cent, up by 6bps, while the six-month was accepted at a weighted average of 7.97 per cent, up by 32bps, recording a 4½-month high.

Meanwhile in the forex market, the rupee depreciated to close the week at Rs 181.17, from Rs 181.14 at the beginning of the week.


Liquidity and CBSL Holdings

Volatility in liquidity was witnessed, although it remained positive during the week. The highest excess liquidity for the week was recorded on 17 December, amounting to Rs 27.75 billion, although it witnessed a slight decline towards the end of the week to
Rs 27.04 billion. Meanwhile, CBSL Holdings slightly increased to close at Rs 78.5 billion.


Foeign Interest

Foreign Holdings in Government Securities decreased by Rs 82.8 billion to record at Rs 108.4 billion, while the foreign holding percentage also declined to 2.0 per cent.


Maturities for next week

The Government Security market has to settle a Treasury Bill maturity amounting to Rs 12.8 billion during the week ending 27 December 2019.
Daily Summary

Friday (13.11.19): The secondary market yield curve remained unchanged, while the overall market witnessed limited activity amidst low volumes, as market participants remained on the sidelines during the short week.
Monday (16.12.19): Commencing the week, the secondary market was at a complete standstill.

Tuesday (17.12.19): The secondary market yield curve remained broadly unchanged, while the overall market witnessed limited activities with low volumes. During the day, mid-tenor [15.09.24] was seen trading at 9.85-9.88 per cent levels. However, overall market remained at a standstill mode as most market participants stayed on sidelines. Meanwhile, CBSL announced an issue of Rs 25.0 billion worth of Treasury Bills at the bill auction to be held on 18 Wednesday.

Wednesday (18.12.19): The secondary market yield curve remained broadly unchanged, while the overall market witnessed limited activities amidst thin volumes. At the primary bill auction, the three-month bill was accepted at a weighted average of 7.51 per cent, up by 6bps, while the six-month was accepted at a weighted average of 7.97 per cent, up by 32bps, recording a 4½-month high. The benchmark one-year was accepted at a weighted average of 8.45 per cent, up by 22bps and recorded a one-month high, while post-auction, selling interest was seen on mid tenor [15.09.24] at 9.95 per cent.