Perpetual Treasuries profit shocks markets
Bond trader Perpetual Treasuries hit the headlines this week, for the third time in 19 months, with a phenomenal post-tax profit of over Rs. 5 billion in the year ending March 2016, far above market trends. The company – owned by the son-in-law of former Central Bank Governor Arjuna Mahendran – made a killing compared to a low post-tax profit of Rs.57 million versus (Rs. 532.2 million in end March 2015) by Capital Alliance, the highest profit-maker from the powerful trader’s closest competitors. “How could Perpetual Treasuries make huge profits when every other company made a small profit or huge loss in a market that was destined to show only marginal profit or huge losses,” asked one dealer, explaining the frustrations in the market over the absence of action that should have been taken by the authorities.
Post-tax profits at Perpetual Treasuries, a new kid on the block having got its license in 2013, were also much higher than most commercial banks. Its Rs. 5.2 billion profit, up from just Rs 959 million in end March 2015 was higher than DFCC (financial year 2015 post-tax of Rs.4.3 billion), Seylan (Rs. 3.8 billion), NDB (Rs.3.5 billion), NTB (Rs.2.6 billion), PABC (Rs.1 billion) and Union Bank (Rs.192.6 million). A Business Times study showed that only the Bank of Ceylon (2015 post-tax Rs. 17.35 billion), People’s Bank (Rs.12.59 billion), Commercial Bank (Rs. 11.85 billion), HNB (Rs. 10.45 billion) and Sampath Bank (Rs. 6.13 billion) were higher than the powerful trader.
In a more-closer-to-the-market comparison, the Business Times found that other primary dealers, all more experienced, suffered because this trader benefitted. According to data, NSB Fund reported a post-tax profit of Rs. 28.9 million in end March 2016 (versus a profit of Rs. 109.6 million in end March 2015), Acuity Rs.2.7 million profit (2015 – loss of Rs. 15.7 million), Natwealth Securities loss of Rs. 515 million (2015 – loss of Rs. 200 million), First Capital Treasuries Rs. 11 million profit (2015 – profit of Rs.729 million) and Entrust Securities loss of Rs. 40.8 million (2015 – profit of Rs. 220 million). The last named company is part of an investigation where its directors have been charged with fraud and misuse of funds.
In a high interest-rate regime in the Treasury bills’ and bond markets, the tendency is for traders to lose unless there are exceptional circumstances, which is what Perpetual Treasuries benefitted from, the dealer noted. “For instance, when market rates were sharply rising, traders tend to lose unless you buy bills and bonds with an advantage of having a buyer to offload these when rates fall. And this is how this trader benefitted as it offered high rates with advance information of a buyer (EPF) waiting to purchase these bills,” the dealer said. Market rates have been rising in the period January 2015 to March 2016 because the government desperately needed to borrow cash to settle debt. The 12-month T-bill rose to 10.3 per cent in March 2016 from 7.1 per cent in December 2015 and 6 per cent in January 2015.
In the same comparative months, the 5-year T-bond rose nearly double to 12.45 per cent in March 2016 from 9.5 per cent and 7.5 per cent while the 10-year T-bond rose to 13 per cent from 10.3 per cent and 8.3 per cent, respectively. Former Governor Mahendran has been accused of helping his son-in-law (Arjun Aloysius)’s company benefit from bond and T-bill auctions, an accusation vigorously denied by Mr. Mahendran. The Committee on Public Enterprises (COPE) which is probing the controversial bond deal in February 2015 in which Perpetual Treasuries secured half the Rs.10 billion that the Central Bank borrowed in the market, is yet to release its report amidst reports of a division between UNP MPs and opposition MPs on the committee.
A June 2015 interim report by COPE, then under the chairmanship of MP D.E.W. Gunasekera, said that “… participation details of the Perpetual Treasuries Ltd in CBSL Treasury Bonds as a primary dealer, shows extraordinary performances after 27th February 2015. The maximum amount of the bid offered by them before that is Rs. 250 million. And only Rs. 27 million from the bid offered to the value of Rs.150 million had been accepted during the period of 26.02.2014 to 30.12.2014. Further from 10th March 2015 onwards, they have offered bids ranging from Rs. 300 million to Rs.3000 million and received bids in range of Rs. 50 million to Rs. 3000 million.”
In March 2016 dealers said two primary market traders – one possibly Perpetual Treasuries – had purchased large stocks of bonds and sold it at a premium a few weeks later to the Employees Provident Fund (EPF). More questions emerged over the influence of Perpetual Treasuries Ltd when it was named as one of the lead sponsors of a government-sponsored Sri Lanka Investment Summit being held in Singapore on March 15. “That was another instance where the dealer was favoured. For example if the Colombo Stock Exchange has a roadshow it will invite all the brokers.
But in this case Perpetual was the only dealer in a conference in which Mr. Mahendran played a key role. To add insult to injury, Perpetual was also introduced to PIMCO Singapore, a top fund manager, during the conference and chances are that they will trade in Sri Lankan securities through Perpetual purely because of government patronage and not equal competition. What are the authorities doing about unfair competition?” asked a banker. Dr. Indrajith Coomaraswamy took over as Central Bank Governor in July as pressure mounted on the Government not to extend Mr. Mahendran’s term.