The Bank had to face many headwinds during the period under review due to never experienced turmoil in the economy. However, the Bank was able to report Rs. 21.8 billion of Profit Before Tax (PBT) during the first six months of the year among these unprecedented challenges.
Fund Based Income
The net interest income of Rs. 80.8 billion was reported with 57% growth contributing 72% to total operating income of the Bank. Interest income grew by 62% materializing the loans and investment growth reported in the previous year. Out of the total interest income of Rs. 197.5 billion, 67% was represented by the interest income from loans and advances and considerable contribution was delivered by income from Overdraft, Term loans and Retail loans.
The investment instruments which mainly comprises of Government Treasury Bonds and Bills brought the major portion of interest income earned from the investment portfolio which stood at Rs. 63.8 billion. In the meantime, interest expenses increased by 65% to Rs. 116.7 billion in line with the increase in deposit base and repricing the deposits at higher rates. However, the Bank managed to maintain better trade-off between the funding cost and interest yield during the period.
Non- Fund Based Income
Total net non-fund-based income of the Bank amounted to Rs. 31.5 billion. During the first six- month period ended 30 June 2022, LKR depreciated by 80% against USD and this resulted a significant amount of exchange gains which is included under non- fund-based income. Net exchange gain of Rs. 25.4 billion has been reported after netting off the exchange impact derived on impairment on loans and advances and Government Securities denominated in foreign currency and the corresponding exchange gain reported under other operating income.
Net fee and commission income of Rs. 7.8 billion was derived through the retail transactional level banking services and trade finance including card transactions and remittances. Mark to market loss of Rs. 2.4 billion was resulted from the investment in unit trusts and equity shares due to adverse market price fluctuations.
Impairment Charges for Loans and Advances and Other Financial Instruments
In preparing these Financial Statements the Bank has adopted the requirements specified under the new CBSL Directions No.13 and 14 of 2021 on Classification, Recognition and Measurement of Credit Facilities and Financial Assets which have been effective from 01.01.2022 when classifying and calculating the impairment provision for loans and advances and investments.
The unhealthy economic context prevailed during the period adversely impacted for the business operations and non-performing loans and advances increased due to cash flow pressures and low repayment ability. In order to capture expected losses from this downturn, the Bank stressed the Economic Factor Adjustment (EFA) used in determining the impairment provision for loans and advances. Individually Significant Loan (ISL) customers were carefully evaluated for significant increase in credit risk indicators and management overlays were used for the stressed industries by ensuring the credit risk of those customers are identified in the Financial Statements adequately. Accordingly, Rs. 49.5 billion of impairment provision for loans and advances was charged to statement of income during the period.
Impairment for investment instruments which are alarming for impairment are also provided for in line with the CBSL guidelines and SLFRS 09. In view of that, default risk of the investments in foreign currency denominated sovereign instruments were considered in line with the recent downgrade announced for sovereign rating as “ Restricted Default” and considerable level of ECL factor was assigned providing Rs. 14.2 billion impairment charge for those investments (purely for the increase in ECL factor). The increase in impairment charge for the same due to exchange rate amounted to Rs. 21.9 billion and has been net off against the revaluation gains of such instruments recorded under other operating income.
The net Stage 3 impairment loans to net loans stood at 5.50% as of end June 2022 against 5.08% reported at the end December 2021, the slight increase is due to capturing the potential risk customers on prudent basis and recording under stage 3 ensuring the proactive measures are taken throughout the period by way of providing for possible losses, continuous monitoring and revival actions.
The operating expenses of Rs. 21.5 billion consists of personnel costs, assets maintenance, deposit insurance and other overhead expenses. YoY increase of 14% has been reported in operating expenses due to increase in personnel expenses as the Bank ensures the safety and well-being of the employees in this trying times. However, the Bank always observant on effective cost management strategies and was able to maintain the cost to income ratio below 40% over the recent years.
VAT on financial services which is charged based on the value addition made by the financial services has a direct relationship to the PBT and emoluments showed a marginal dip of 3%. Income tax expense for the period was accounted as Rs. 5.9 billion at an effective tax rate of 27%.
The Surcharge tax of Rs. 6.7 billion was deducted from the equity as per the Surcharge Tax Act No.14 of 2022 certified on 08th April 2022. The Bank has already effected the payment of Rs. 3.4 billion for the 1st installment which was due on 20th April 2022 and the liability to pay the balance amount has been recognized under current tax liability as of end June 2022.
During the period the Bank’s total assets grew by 17% and reached Rs. 4.5 trillion, preserving its industry leadership. The other key contributive factor is growth in loans and the investment book which denotes about 92% of the assets of the Bank. However, the increase in foreign currency assets in rupee terms due to foreign currency depreciation is also needed to factor.
Loans and Advances
The gross loans and advances showed a marginal growth of 7% during 1H-2022 and stood at Rs. 2.7 trillion due to low credit appetite in line with the sluggish movement in the economy. The lending to private sector grew by 12% during the period and the Bank continued to extend its support towards business revival. Focusing more on maintaining the portfolio quality and with a view to addressing transforming of non-performing facilities in to hardcore level, the Bank setup a Business Revival unit during the last year and continued to support the revival of the The Bank maintains adequate coverage for the expected losses and the provision reserve built so far covers the 9% of the total loan book for expected losses.
The Banks financial investments portfolio denotes 35% of its total assets and comprises mainly with Government Treasury Bills and Bonds. The Bank holds investments in Sri Lanka Development Bonds and International Sovereign Bonds which are denominated in foreign currency and as mentioned afore impairment provision has been provided against those investments by capturing the foreign currency risk.
During the period under review, CA Sri Lanka issued a “Statement of Alternative Treatment (SoAT) on Reclassification of Debt Portfolio” and as per the guidelines given the Bank reclassified Rs.12.7 billion worth of Treasury Bonds to Amortized Cost from FVTOCI.
The Bank’s deposit base during the year has increased to Rs. 3.2 trillion with a 13% growth over end December 2021 and 68% of the Deposit base comprises of local currency deposits. The Balance 32% which denotes foreign currency deposits stood at Rs. 1,026.1 billion as of end June 2022 and the foreign currency deposit base in rupee terms showed and increase due to rupee depreciation. Current and Saving deposit (CASA) base which generates funds at low cost represents 32%.
Key Performance Indicators
Return on Assets (ROA) ratio of the Bank stood at 1.1% while reporting a 14.7% Return on Equity (ROE) ratio. Both these ratios showed a decline comparing to previous year due to deterioration in the bottom line. The key regulatory ratio of the Banking industry; Capital Adequacy Ratio (CAR) was maintained above the regulatory norms and the Bank always strives to maintain adequate buffers on all its regulatory norms to absorb unforeseen risk factors. The Tier I Capital and Total Capital ratio stood at 11.6% and 14.3% respectively as of end June 2022, both of which were above the regulatory norms. Despite cash flow deferments in loan installments, the Bank was able to maintain a better trade -off between the liquid assets and its liabilities. All liquidity ratios were maintained on safe zone.
During the year 2022 Fitch Ratings (SL) reaffirmed the Bank’s National credit rating of AA- (lka) and downgraded the Long and Short-Term Foreign Currency (FC) Issuer Default Ratings (IDRs) to ‘RD’ from ‘CC’ and ‘C’ respectively.
The Bank’s approach on service delivery has now reached more towards digital and virtual delivery channels. A greater surge was experienced in the customer adoption to those channels during the pandemic and the Bank was ready with the required infrastructure to cater this growing demand, resulting an increase in the Bank’s digital and virtual transactions. During the last year Bank added 104 new CRM machines to its service channels and the Bank has more than 1,400 digital customer touch points and more than 670 physical customer touch point island wide.
In this year also the Bank was ranked among the Top 1000 Banks of the world by “The Banker” magazine and the country ranking is No.01.