Hatton National Bank CEO Jonathan Alles opined that in the current environment the larger players in the banking sector could borrow below 10% over the long term on unsecured or subordinated instruments like corporate debentures. In the immediate context Alles noted that a larger bank could issue an instrument closer to 11%.
Alles said, “You just have to wait a bit and rates will come down.”
Alles was speaking exclusively to Daily News on May 19 in Thimbirigasyaya. On the broader interest rate movements Alles opined that there would be a gradual decline in the period ahead.
Alles speculated that the Monetary Board would not be cutting interest rates sizably in the coming May 28, Monetary Policy Board Meeting. Alles expected interest rates to be more volatile closer to the election period.
Commenting on recent corporate debentures being priced at around 13.05%, Alles noted that was potentially due to the smaller scale of the institution.
He however noted that it was still an impressive figure in relation to other market rates and could be attributed to the backing of a much stronger balance sheet of the ultimate ownership.
Alles was of the view that large locking in of rates was unwise during periods where interest rates exceeded long-run averages. Other analysts have noted that bank unsecured long-term issuances have mostly been fixed rate instruments which might be unwise in a scenario wherein long-term rates are above long-run averages.
He noted that over the crisis period last year he was under pressure to issue instrumentation closer to 26% but stood firm against such a decision. This was despite his major competitors opting to use such instrumentation without any major issuances with a variable rate component.
Alles said, “I was under a lot of pressure to do it, but I thought it would be better to wait.” Alles predicted a slow but certain decline in interest rates in the period ahead.
Following sharp declines in treasury bond rates in the recent May 13 issuance the next major bond issuance is on 13 June which is after the Monetary Policy decision due on May 28 . In the previous bond issuance, between April 29 and May 13 the Weighted Average Yield Rate for the 2028 series decreased by 0.71% from 11.72% to 11.01%, for the 2030 series decreased by 0.53% from 12.38% to 11.85%, for the 2032 series decreased by 0.30% from 12.47% to 12.17%.
Other analysts have noted that an illiquidity premium has been assigned to corporate debentures due to lack of an active market. The Securities and Exchange Commission of Sri Lanka and other actors have prevented the Atrad system from allowing clients access to the corporate debenture board. Primary dealers and banks have their own proprietary system for transacting with government securities and have left out the Colombo Stock Exchange’s system which includes functionality for repurchase transactions. (TP)