Opinion: Are Sri Lanka’s banks aggressively raising capital without adequate disclosure?

March 17, 2019 (LBO) – Banking institutions over the last few months seem to be making an aggressive push to raise capital through rights and debenture issues. Almost all banks in Sri Lanka are in the midst of some capital raising exercise.

LBO has reported extensively on the subject of rights issues in the following articles:

http://www.lankabusinessonline.com/rock-bottom-rs12bn-rights-issue-pricing-crashes-sampath-bank-samp-shares/

http://www.lankabusinessonline.com/another-cash-call-dfcc-to-tap-the-markets-for-rs7-6bn-in-strikingly-low-priced-rights-issue/

http://www.lankabusinessonline.com/ndb-rights-issue-60-subscribed-rs3-8bn-raised/

The recent flood of capital raises have come amidst economic weakness and an uptick in non-performing loan ratios of Sri Lanka’s largest financial institutions.

Bank stocks have also seen significant recent weakness as a result of all the new supply of stock that will have to be absorbed by a chronically weak stock market.

In Colombo Stock Exchange disclosures, the unifying chorus of the need to raise capital has been to bolster Basel III capital levels and fund growth/expansion of the loan book.

Amidst a constant flow of earnings results in Sri Lanka showing highly leveraged companies struggling to cope with their debt load, the feeling amidst corporate Sri Lanka is that non-performing loans will be on the rise.

When banks are asking for billions of rupees from investors through rights and debenture issues, their managements have a duty to disclose any major changes that have occurred in the conditions of their businesses since the last quarterly results published December 31, 2018.

If bank managements have seen a significant increase in non-performing loan ratios and are internally forecasting further deterioration since the last published financials, they have a moral if not legal duty to disclose this to investors who would be purchasers of their securities.

If banks do sell these large amounts of securities, and then only shortly after announce significant deterioration of their business conditions in the March quarter, their regulators should be blamed for not doing their job. Sri Lanka’s banks and stock market are all highly regulated entities.

If investors in the securities offered by the banks in Sri Lanka suffer losses due to lack of adequate disclosure, the Securities and Exchange Commission (SEC) and the Central Bank of Sri Lanka (CBSL) will share some of the responsibility with the institutions that they have a responsibility to regulate.