The group's non-interest income for the quarter shot up 177 percent to 388 million rupees from a year ago, according to unaudited accounts filed with the stock exchange.

DFCC Bank chief executive Nihal Fonseka said in a statement that at bank level, after-tax profit for the nine months ended 31 December 2008 rose 7.6 percent to 1,167 million rupees compared with the same April to December period in 2007.

"The rate of increase has slowed down from the half year primarily due to the cumulative impact of the reduction of the advances and asset portfolio and reduced capital gains in the third quarter," he said.

"The slower growth in profit is the outcome of a strategy to control credit portfolio growth and utilize improved liquidity to reduce borrowings and maintain a healthy liquidity cushion in the context of the uncertainties in the global and local economic environment."

Fonseka said the bank reduced the total borrowing from 48 billion rupees to 42 billion during the nine-month period.

Group profit attributable to equity holders after minority interest in the nine-month period grew only 1.8 percent to 1,627 million an rupees from a year ago mainly due to a reduction in contribution from subsidiaries.

The combined gross advances of the bank and its subsidiary DFCC Vardhana Bank (DVB) as at 31 December 2008 (consolidated with a three-months lag due to different financial years) amounted to 57,878 million rupees.

This marginal reduction in the nine-months ended 31 December 2008 compared with the year before was primarily due to the contraction of portfolio in DFCC Bank by 3,910 million rupees, the statement said.

In contrast, the portfolio of the commercial banking subsidiary, DVB, increased by 25 percent to 14,580 million rupees on 31 December 2008.

The statement said DFCC Bank's core business is the funding of capital assets relating to projects that tends to slow down in times of economic uncertainty and stress.

By contrast, it said, the expansion of the portfolio of a commercial bank is correlated to the working capital requirements, that tend to increase in tandem with price increases in the raw material and stocks and slow turn around of trade debtors.

"DVB was a beneficiary of this phenomenon," the statement said.

"During the third quarter, DFCC Bank selectively assisted borrowers in the SME (small and medium enterprise) sector such as those engaged in the low country tea industry and tourism to tide over cash flow difficulties that arose from adverse market conditions."

Despite a contraction in the advances portfolio, the bank said it was able to improve the margins by "judicious optimization" of the interest differentials between the lending rates, government securities yield and the cost of borrowing.

The gross non-performing loans, advances and leases (NPA) ratio of the bank was 8.0 percent, a slight increase over 7.8 percent in the June and September 2008 quarters.

The NPA is also higher than the 6.2 percent recorded on 31 March 2008.

The bank said it continues to make prudent general and specific provisions, at times over and above the minimum mandated by the Central Bank of Sri Lanka.

The consolidated non-performing loans and advances ratio of both the bank and its commercial banking subsidiary DVB was 8.4 percent on 31 December 2008, up from 6.3 percent on 31 March 2008.

The total provisions covered 55 percent of the consolidated gross NPA while the unprovided NPA was 18 percent of the consolidated equity of the DFCC Bank and DFCC Vardhana Bank.

"The bank’s business model does not expose it to significant market risks and this risk was managed through appropriate pricing strategies," the statement said.

The share of profit after tax of Commercial Bank of Ceylon included in the consolidated financial statements was 777 million rupees in the period under review, compared with 756 million in the same period a year ago.

The profit contribution from all the associate companies, subsidiaries and joint venture investment banking company, Acuity Partners (Pvt) Limited, was affected by the bank’s share of the post tax loss of 46 million rupees of the venture capital subsidiary Lanka Ventures, and the nine million rupee loss at technology solutions subsidiary Synapsys.

The loss incurred in Lanka Ventures is primarily due to a provision of 130 million in respect of prior year taxes relating to which there is ongoing litigation, the bank said.

The Synapsys loss arose from investment in capacity building to position it for enhanced future revenue generation.