Capital Alliance and First Capital face a painful reversal as bond-market volatility exposes the risks behind extraordinary profits
COLOMBO — For years, Sri Lanka’s bond-market boom created some of the most spectacular earnings in the country’s capital-markets industry. As interest rates fell sharply, government securities rose in value, creating lucrative trading opportunities for primary dealers and fixed-income investors. Among the prominent names in this market were Capital Alliance and First Capital, associated with executives Ajith Fernando and Dilshan Wirasekara, respectively.
During the boom, these firms became closely associated with the extraordinary profitability of Sri Lanka’s falling-interest-rate cycle. But the latest reported results raise an uncomfortable question for investors: what happens when the market that generated exceptional profits turns against the same business model? The answer is beginning to emerge in the financial statements.
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From bond-market kings to billion-rupee losses
Capital Alliance PLC (CALT) has reported a sharp deterioration in profitability, with the figures provided for this analysis indicating a loss of Rs. 701.57 million for the latest reported quarter and a cumulative loss of Rs. 3.51 billion over six months. A separate market-data feed reports a quarterly loss of approximately Rs. 2.81 billion. The discrepancy must be reconciled against the company’s official Colombo Stock Exchange filing before the figures are treated as a definitive breakdown.
First Capital Holdings PLC has also suffered a significant reversal. For the quarter ended 30 June 2026, the group reported a loss after tax of Rs. 726 million, compared with a profit of Rs. 2.15 billion in the corresponding quarter of the previous year. Its primary-dealer division recorded a loss after tax of Rs. 741 million, including a Rs. 1.80 billion trading loss on government securities. .
These are not minor fluctuations in earnings. They represent a dramatic reversal from the profits generated when falling yields and favourable market valuations boosted fixed-income trading.
The falling-rate bonanza
The underlying mechanism is straightforward. Bond prices generally move in the opposite direction to market yields. When interest rates and yields decline, existing fixed-rate bonds become more valuable because their contractual returns become attractive relative to newly issued securities.
Dealers holding substantial government-security portfolios can therefore benefit from rising bond prices, realised trading gains and favourable fair-value adjustments. Sri Lanka’s monetary easing and the improvement in market conditions following domestic debt optimisation created an especially favourable environment for these activities.
First Capital’s own 2024/25 annual report described the previous year’s extraordinary trading gains as the result of a substantial decline in interest rates, alongside domestic debt optimisation and lower policy rates. The group reported profit after tax of Rs. 5 billion for FY2024/25, compared with Rs. 10.2 billion in the preceding year. . That historical performance demonstrates both the earning power of a favourable bond cycle and the danger of treating cyclical gains as permanent earning capacity. The critical question is whether investors adequately distinguish between recurring income generated by a sustainable business and profits arising from a particularly favourable interest-rate environment.
When the cycle reverses, the same mechanism works against you. The bond market does not guarantee a one-way journey
When yields rise, the market value of existing fixed-rate securities generally falls. A dealer holding a large portfolio can consequently face mark-to-market losses, reduced trading opportunities and higher funding costs.
This is precisely the pressure visible in the latest reported results of both firms.
First Capital’s June 2026 quarterly disclosure attributed its deterioration to global economic uncertainty, geopolitical tensions, movements in interest rates and adverse mark-to-market movements across trading portfolios. The Central Bank of Sri Lanka increased its policy rate by 100 basis points during the quarter amid rising inflationary pressures. .
Capital Alliance’s reported FVTPL losses point to a similar vulnerability. Financial assets measured at fair value through profit or loss can create substantial earnings volatility because changes in market prices and valuations are recognised in the income statement.
The danger is not simply that profits decline. Repeated losses can erode shareholders’ equity, weaken financial flexibility and reduce the capital available to withstand further adverse market movements
A business that appears exceptionally profitable during falling yields may therefore look very different when yields move in the opposite direction.
Could interest rates rise further?
The possibility of further losses depends heavily on the direction of domestic interest rates, government-security yields, inflation and funding costs. Sri Lanka faces exposure to external shocks, including higher energy prices, geopolitical instability and exchange-rate pressures. If these factors intensify inflationary pressures or prompt tighter monetary policy, market yields could rise further.
That would create another difficult scenario for dealers holding securities whose prices are sensitive to interest-rate movements.
However, higher interest rates are not inevitable. The Central Bank may maintain or adjust policy according to inflation, economic growth, external-sector conditions and financial stability. Bond yields can also move ahead of policy decisions as markets price in expectations. Furthermore, a rise in rates does not automatically translate into a particular amount of accounting loss. The outcome depends on portfolio duration, the size and composition of holdings, hedging, leverage, realised transactions and the accounting classification of financial assets. The appropriate conclusion is that further losses are a material risk, not a certainty. The balance-sheet question investors cannot ignore
The next concern is the capacity of these businesses to absorb further losses. For Capital Alliance, the reported deterioration makes it essential to examine shareholders’ equity, liquidity, portfolio valuations and funding arrangements in the complete interim financial statements.
For First Capital, the financial summary for the quarter ended 30 June 2026 indicates that total equity declined to approximately Rs. 7.95 billion from Rs. 8.68 billion at the end of March 2026. The reported debt-to-equity ratio increased to approximately 9.19 times, while interest cover fell to around 0.37 times. These figures require interpretation in the context of the group’s financial-services business model and the detailed accounts. .
Leverage can magnify returns when trading conditions are favourable. It can also amplify the consequences of adverse valuations and funding pressures when markets turn. Investors should therefore look beyond headline profits and losses. The crucial indicators include the duration and composition of bond portfolios, sensitivity to yield changes, unrealised versus realised losses, financing costs, liquidity buffers, regulatory capital and the contribution from recurring fee-based businesses.
The ability to withstand a difficult market cycle matters just as much as the ability to generate exceptional profits during a favourable one.
Were the extraordinary profits sustainable?
The recent reversal raises a broader question about how investors value capital-markets businesses. When earnings surge during a falling-rate cycle, those profits can be mistakenly extrapolated into the future. Valuations may come to reflect peak earnings rather than earnings generated across a complete economic cycle. But primary dealing is inherently exposed to market conditions. A year of exceptional bond gains does not guarantee another year of similar performance.
For investors, the more useful measure is through-cycle profitability: the earnings a business can generate across rising and falling yields, after operating expenses, funding costs, taxes and the cost of maintaining adequate capital.
Diversification into corporate finance, stockbroking, wealth management and other fee-based services can reduce dependence on trading gains. First Capital has reported contributions from several such businesses, although their latest performance must be assessed against the scale of the losses in its primary-dealer operation. The challenge is whether these relatively diversified earnings can consistently offset the volatility of a capital-intensive fixed-income business.
What shareholders should watch next
The next set of interim statements from Capital Alliance and First Capital will be critical in determining whether the reported losses represent temporary market dislocations or a more persistent deterioration. Investors should pay particular attention to:
Bond yields: Whether domestic government-security yields continue rising or begin to stabilise.
FVTPL performance: Whether fair-value losses continue, narrow or reverse.
Shareholders’ equity: Whether accumulated losses materially weaken the capital base.
Leverage and liquidity: Whether funding costs and short-term financing requirements increase.
Recurring earnings: Whether advisory, broking and wealth-management income can offset weaker trading results.
Dividends: Whether distributions remain adequately supported by earnings, cash generation and capital requirements.
Dividend yields based on historical distributions should be treated cautiously when current earnings have turned negative. A high trailing yield is not proof that the same dividend can be maintained.
Conclusion: The bond market rewards both skill and the cycle
The losses reported by Capital Alliance and First Capital offer a reminder that financial-market success is shaped by both management decisions and the economic environment. Executives who navigate a falling-rate market successfully may generate substantial value for shareholders. But a reversal in yields can expose the risks inherent in the same portfolios and strategies that produced exceptional profits. The issue is not whether the executives were successful during the boom. It is whether their businesses can protect capital, manage liquidity and generate sustainable earnings when market conditions become unfavourable.
If inflationary pressures persist and yields rise further, the environment could become more challenging. If yields stabilise or fall, some valuation losses may narrow or reverse. Neither outcome should be assumed without evidence. For shareholders, the lesson is clear: do not value a bond dealer solely on the profits it made when interest rates were falling. Evaluate how much capital it can preserve—and how much recurring income it can generate—when the cycle turns against it.
