Sri Lanka for ELVIS

The government of Sri Lanka will join the US Electronic Visa Information System (ELVIS) on a fast track agreement. It is hoped that ELVIS will eliminate use of forged Textile Visas. Electronic transmission sent by a government agency direct to the U.S. Customs is most difficult to counterfeit compared to the hard copy of the visa stamp, issued to an exporter, a Industrial Development Ministry release said.

The system is expected to go on line by the end of the year, the American Embassy's Counsellor for Economic and Commercial Affairs Michael Owen told the Sunday Times Business.

The textile trade, which was recently plagued with corruption, is fully backing the proposal by agreeing to bear the cost of operating the system. Exports to the U.S. accounted for over US$ 2,460 in 1998, approximately 52 per cent of total exports that year.

The incidence of counterfeiting paper visa has been on the increase in many exporting countries including Sri Lanka, the release said. The U.S, Sri Lanka's largest garments importer feels that filling of visa information electronically with the U.S Customs will reduce or even eliminate the problem completely.

Under ELVIS, visa information is transmitted daily via a satellite receiving data to U.S. Customs for processing and storage. The U.S. customers sends a response message to the exporting country indicating the receipt of data and whether the message is acceptable or unacceptable. With such an independent link, it is virtually impossible to effect fraudulent exports, the release said.

DFCC consolidated income up

DFCC's consolidated income for the three months ending June 30 1999 has increased by 27 per cent to Rs. 785 mn from Rs. 620 mn for the same period last year. Loan growth was 21 per cent YoY while borrowings declined 43 per cent YoY.

Profits attributable to the group from associate companies was Rs 45 mn, up from Rs 37 mn for the same period last year. This was largely attributed to profits from Commercial Bank of Ceylon Ltd. Earnings per share was Rs. 3.05 for the period ending June 30 1999 in comparison to Rs. 3.14 last year.

The provision for the diminution in value of quoted shares declined to Rs. 4 mn from Rs. 36 mn the previous year.

Cold Stores takes a plunge

Ceylon Cold Stores Ltd's profit before tax for the three months ending June 30,1999 plunged by 54 per cent to Rs. 52 mn. Profits before tax was Rs.113 mn for the same period last year. "Persistent rains in April, May and June affected sales of soft drinks," Managing Director, Ceylon Cold Stores, Sumithra Gunesekera said, explaining the decline in profits. Turnover declined 14 per cent YOY to reach Rs. 479 mn.

Tea update

168 delegates at convention

Last week's overall average tea auction price continued this week, although individual categories changed price.

Except for a few selected western BOP/BOPFs, it was disappointing to note the drop in prices for the second week running, for the others and the below best Westerns. The only consolidation traders had was that even the world auction prices continued to weaken. Traders everywhere are baffled over the low prices despite the 100 million kilogram world crop shortfall, which normally would have brought about improved marketing conditions particularly in the third quarter when heavy cropping periods of the major producers are over. Predictions are that Sri Lanka, which was the only producing country to record an increase in production for the first six months of '99 will record a crop short fall for this year.

However, tea producers, traders, sellers and probably a few consumers gathered at the International Tea Convention held in Colombo last week.

Organised with the objective of promoting tea in the next millennium, some 168 delegates from 18 countries attended the two-day convention.

Speakers from the U.K, U.S.A, Russia, Italy, Japan and Sri Lanka spoke on the marketing, technology, innovation and health aspects of the tea industry.

An official visiting the coinciding exhibition said that he hoped the convention will help the industry in the short term as it would in the long term.

Market update

Poor corporate results depress market

Activity levels in the Colombo Stock Exchange remained subdued during the week. The All Share Price Index declined 3 per cent to close at 564.7 while the Milanka Price index fell 5 per cent to 922.6. Foreign investor participation in the market was limited, contributing 26 per cent to average daily turnover.

Poor interim corporate results depressed market sentiments. Ceylon Cold Stores recorded a net profit decline of 60 per cent YOY due to a decline in demand for soft drinks due to adverse weather patterns. Maskeliya Plantations' turnover declined 35 per cent YOY to 238 mn while profits declined from 90 mn to a loss of 15 mn. Kegalle Plantations' turnover declined 34 per cent to Rs 114 mn and profits of 39 mn reversed to a loss of Rs 31 mn.

Vanik Incorporated gained 12.5 per cent after the announcement that it would sell its stake in Forbes and Walker Ltd to Mercantile Merchant Bank Ltd. Lanka Aluminium gained 10 per cent and PD Keells 8.11 per cent.

People's Merchant Bank lost 16.67 per cent on the back of poor corporate results while Aitken Spence lost 13.39 per cent and Serendib Lands declined 13.33 per cent.

"The market will stabilise next week," Head of Research, C T Smith's stock Brokers, Rajiv Casie Chitty predicted. "The corporate results which have been coming out are poor and are an indication of results which will be coming out. People will factor in the poor results. However the quarter ending September 30 holds more promise," he said.

"Trading patterns next week will be similar to this week," Director Research, John Keells Stock Brokers, Nandakumar Nair predicted. "There will be interest in stocks of companies which report good corporate results and vice versa. It is a restricted week of trading with a poya holiday and there will not be much activity," he said.

"Poor corporate results and profit taking will continue to hamper the market till most results are absorbed by the market," Head of Research, Asia Securities, Dushyanth Wijayasingha said.

"The market will remain flat at these levels but will not drop much further," Head of Research CDIC Sassoon Cumberbatch Stock Brokers, Diluk Desinghe said. "However foreigners have not been selling out and institutional investors have confidence in the market," he added.

The iron lady begins mopping up operations

By the Business Editor

BE: Mrs. Nanayakkara many general managers (GMs) who have come up the ranks to head the Bank of Ceylon (BoC) have disappeared after retirement. But you have gone onto seemingly more challenging and high profile jobs in the private sector. Why and how?

Mrs N: Well I agree that as a career banker you move up as far as you can get and then you retire. Some of them do go onto other less high profile, more straightforward assignments to keep themselves occupied.

In my case as soon as I moved out of the bank, I was very fortunate that the government decided to give me an assignment to set up the Private Sector Infrastructure Development Company (PSIDC) a Word Bank project and that was again setting up a new institution. There was absolutely nothing and I had to set it up from scratch. The groundwork had to be done. I had a report from the World Bank and based on that I had to set up the company. I was the only employee and I was hired as the GM.

I sat in the Finance Ministry conference room for about a month and I borrowed a secretary from the BOC. Then I was asked to find an office for myself. Mr. Lal Jayawardena offered me a room in his office in Horton Place and I first used all their facilities to set up office.

Then of course I moved to our permanent office at the world trade centre. I was fortunate because I used the services of all the suppliers that the BoC used!

Just before I left I got the first deal, the South Asian Gateway Terminal of the P & O project. The offer letter was signed by me but by that time I was feeling that this was not my line. I left last October and around that time Mr. Kotelawala met me and he was having problems here.

Although I was a public sector (state) banker I had a private sector style of management and I felt I was a private sector type of banker and this was the ideal opportunity.

My colleagues and friends expressed some doubts on my decision to take over a "troubled" bank although they wished me well. They thought it would ruin my reputation as a banker.

BE: It is widely understood that you have been hired by Lalith Kotalawala to mop up the mess at Seylan Bank. Is this your most difficult job so far?

Mrs. N: I would not say that really. I think running Sri Lanka's largest bank, with the largest cadre and taking over at a time when the whole country was at a standstill under JVP threat was more difficult. I had to take really tough, dangerous decisions like opening up the bank vault to pay the armed forces under heavy security and handing over the cash for salaries to the armed forces right inside my office in BOC, when the whole country was at home on a JVP declared hartal. But this is a different kind of challenge.

BE: Banking sector analysts have pointed out some unhealthy signs in your financial statement for FY98 and the first half of 1999. For example, earnings are down in the first half of 1999 compared to 1998?

Mrs. N: The two main reasons are that our reserves are not so high and we recently made a market related salary structure adjustment. Of the four listed commercial banks that are generally grouped together, i.e. HNB, Commercial bank, Sampath Bank and us, HNB and Commercial have huge reserves in the 30 40 years of existence. Our reserves are comparatively small. The other reason is that we decided to effect a board decision to make a market related salary structure increase. Our salary structure is lower than other commercial banks. A conscious decision was made to improve the salary structure to motivate the staff and keep the staff happy.

BE: Were they agitating for an increase?

Mrs. N: Yes, we have our in-house union, we are not a member of the bankers union and the board of directors was strongly of the view that we must have a contented staff. And particularly at that time, the other banks too (in the collective agreement union) were having problems with demands and go slows etc.

So to avoid that type of unrest and to reward our staff, we decided to go for a salary increase. So that did affect our half-year bottom line.

BE: What was the revision like?

Mrs. N: About 35% across the boards.

BE: Since your operating costs have been high, especially with a 35% increase in salaries your return to shareholders, (earnings per share - EPS) is low?

Mrs. N: Unlike other banks we have our own building at a cost of approximately Rs. 700 million. It does not earn us anything now, for either Seylan Bank or Ceylinco Seylan Towers investors. It a very long-term investment but in years to come it will give rewards to shareholders. The other unfortunate investment is of course, the Seylan Merchant Bank. It is unfortunate because of the crash of the stock market. Not only our merchant bank but all the other merchant banks too had trouble. So those two big investments don't earn anything. But we are confident that at least the Seylan Towers will give a fair return soon .We have already leased out the other tower to offices and we hope to make a good return on that investment in the future. We have also had a rapid bank expansion program with about 10 branches each year, which is a very aggressive expansion. It involved a large intake of staff and also other operational costs like hiring, renting premises which were also high because of the rapid expansion compared to the other banks.

BE: Your capital adequacy ratio is just above the Central Bank's requirement of 8% at 8.68% in 1998 why do you maintain such a low ratio? In view of Central Bank's plans to increase capital adequacy to 10% by 2000 is your bank planning to revalue assets or expand asset base? If so how?

Mrs. N: Our capital adequacy ratio is low because we grew very fast (90 branches over ten years) and we managed our capital accordingly. The most prudent and effective manner of meeting the Central Bank requirements of 8% capital as well as 20% liquidity, is to manage capital and liquid assets without excesses. To meet the higher capital of 10%, we are planning to increase and accumulate our profits and also strengthen our tier II capital by re-valuing our assets, issuing debentures, etc. The last debenture issue was very successful in the retail market across the country and we broke away from the traditional pattern of sourcing funds from the institutional investors in Colombo.

BE: About loan loss provisioning:1. It is noted that Seylan Bank's non-performing loans are 17% of its total portfolio, which is above the industry average of 13%. Why? 2.What are you doing to pull the stops on bad loans? 3.The bank has also come in for criticism about poor credit control? 4.Central Bank is planning to make provisioning more stringent by advancing provisioning from six to three months from the date of disbursement. Are you getting ready for this eventuality? (The bank has written off about Rs. 500 million in the past two years and Rs. 86 million in the first half of FY99.)

Mrs. N: 17% of non performing loans are basically due to : 1) the nature of our market which was mostly retail and high risk. 2) rapid expansion, which was a conscious policy to expand the banking habit and assist the small and medium businesses to grow with the bank's assistance. It was an aggressive policy followed by the bank at that time. 3) Poor performance of some sectors of the economy which affects debt service. My experience has shown that banks do well when the economy does well and badly when the economy slows down. 4) We are now consolidating our position and managing our risks by diversifying our portfolio to include facilities for corporate, trade finance and off-shore banking clients. 5) I agree that this area was weak as a new and expanding bank with limited trained and experienced staff. Now we are taking steps to improve credit administration, supervision and monitoring systems with changes to the Bank's organisation and appropriate systems and procedures. 6) We are also emphasising on relationship banking, both for corporate and retail customers, since it is now known and accepted that in a competitive and complex environment, the bank's staff has to be well trained and knowledgeable on the various sectors in the economy and should also interact closely with the customers to monitor the business progress and step in when they need assistance. 7) Once these systems and procedures are in place, and properly enforced by Senior Management, we will have no difficulty in complying with these requirements.

BE: Your return on equity has been dropping over the years, from 21% in 1994 to 11% in 1998. There is criticism that your bullish expansion was at severe cost to the shareholder who got a poor return?

Mrs N: Our bullish expansion would have reduced the returns to the shareholders in the short-term. Furthermore, our strategic investment in the property development company which includes the bank's head office premises and apartment complexes with very modern facilities similar to developments in Singapore and other developed cities would also bring in additional returns within the next few years.

BE: What is your exposure to group companies especially Blue Diamonds? What is your policy on lending to group companies? Do you have a say in it?

Mrs. N: Our policy of lending to the Ceylinco Group of Companies is to comply with the Central Bank requirements of Single Borrower Limits. Our exposure to Blue Diamonds is adequately covered by acceptable security. However there have been some excesses in short-term working capital facilities, which are of a self-liquidating nature and profitable to the bank. Since I assumed duties, I have explained the Central Bank requirements to the Group Companies and they are taking steps to comply with these requirements over a period of time.

BE: Investors and bankers say that there has been a lack of transparency in the bank so far. Can you do anything about it?

Mrs. N: If you look at our Annual Report, you will realise how transparent we are. In fact at the last AGM, we were commended for this.

BE: Why is your share price so low compared to other listed commercial banks ? Some stockbrokers recommend a hold on your bank to investors while others recommend a sell. What does this mean to you as the Bank's GM? (Seylan Bank closed at Rs. 17 on Friday August 20)

Mrs. N: We observed that our share is not heavily traded in the market, but have maintained a steady price without wide fluctuations.

BE: Is your cost of funds too high and are you spending too much on advertising and promotion? How do you compare with competition?

Mrs. N: Our cost of funds are on par with our competitors, but our overheads are on the high side due to rapid expansion and staff cost as a young bank. We believe that our advertising and promotional budget is not too high in the present competitive market.

BE: There are complaints that your ATM machines are always out of order? What are you doing about this? Are you planning to expand your network?

Mrs. N: I agree that our technology has not been at a very high level and the bank has had only a few ATMs located in a few branches. It is not fair of course to say that 'it is always out of order', since we do not receive such complaints. In our strategic plan, we have decided to expand our ATMs commencing Year 2000, so that we will have at least a network of on-site and off-site ATMs of around 30 to 40 by the year end. The new ATMs will not only provide enchashment facilities but will have additional features for cheque deposits, utility payments and funds transfer.

BE: What is your strategy for growth and increasing profitability? What are your plans especially for deposit mobilization and lending?

Mrs. N: i) Maintain growth rates compatible with the industry ii) Increase productivity through IT, iii) Emphasise on local and international training for staff to improve their skills levels and to handle a complex banking environment with appropriate responses to customer demands. iv) More fee income through trade finance and other fee based activities. v) Canvass selectively for good corporate clients and offer complete banking packages to suit their requirements.

Ceylinco high first half profits

Ceylinco Insurance's Life Division has reported the highest total premium income among private sector life insurers in the first half of 1999, retaining its position as the leader of this sector.

The total premium income during this period exceeded Rs 579 million. This figure, which represents a growth of 25 per cent, is significantly higher than the life insurance industry average for the period and resulted in Ceylinco Insurance accounting for 40.77 per cent of the premium income earned by private sector insurers during the period under review, a release says.

The company's total life premium income during this period was Rs 59 million higher than that of its nearest competitor in the private sector, and is Rs 330 million more than the premium income of the third placed private life insurance company.

Ceylinco Insurance's Director Mr Stuart Chapman said he was confident that Ceylinco would continue to dominate the private sector insurance market in the years ahead. " A key factor for this success is that we have some of the most meaningful policies in the market and a highly trained sales team to sell them."

He said the Life Division sold 22,958 individual life policies during the first half of 1999 and this represents a growth of 13 per cent compared to the same period in 1998.

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