Impairment provisions affect Sri Lanka’s DFCC Bank bottom line

July 30, 2018 (LBO) – Sri Lanka’s DFCC Bank, the banking arm of the DFCC Group reported a drop in profit for the second quarter amidst a challenging business environment.

The drop in profit was due to higher impairment provisions, as well as a one-off gain from the disposal of shares of Commercial Bank during the previous period, the bank said in a statement.

DFCC Bank’s CEO, Lakshman Silva said that despite profits being adversely impacted due to impairment, he is encouraged by the growth seen during the period in other sectors.

According to him these include expansion of island-wide footprint and continued focus on launching technologically advanced products and services such as the recently launched DFCCiConnect, which is a fully integrated Payments and Cash Management (PCM) System for businesses.

DFCC Group recorded a profit before tax of 2,596 million rupees and profit after tax of 1,861 million rupees for the period ended June 2018 as compared to 3,616 million and 2,944 million respectively, in the comparative period in 2017.

DFCC Group covers commercial banking, investment banking, wealth management, information technology, industrial park management and consultancy sectors.

The bank posted a profit before tax of 2,402 million and a profit after tax of 1,710 million which reflects a decline of 30 percent and 39 percent respectively compared to the same period in 2017.

“When adjusted for the exceptional gain from the sale of Commercial Bank shares reported in the previous period, the declines in profit before tax and profit after tax were 5 percent and 10 percent respectively,” the bank said.

The impairment provision during the current period was 1,407 million compared to 487 million in the comparable period.

“Recovery processes, however, are being rigorously pursued to minimize any actual losses that may arise from such exposures. The decline of 11 percent in net operating income was due to the higher charge for impairment.”

The bank recorded a healthy growth of 24 percent in net interest income to 6,556 million from 5303 million mainly as a result of the portfolio growth of 38,229 million in loans and receivables year-on-year.

In addition, total operating income increased to 7,662 million compared to 7,533 million in the comparative period.

“Various initiatives adopted in order to grow non-interest income paid dividends as a growth of 30 percent was recorded in fees and commission income to 906 million from 699 million in June 2017,” the bank said.

Trading gains increased by 14 percent to 172 million in June 2018.

“The reason for the overall moderate growth was due to the adverse impact from the revaluation of funding swap contracts and the previous year’s one-off gain reported from the sale of Commercial Bank equity shares.”

The Bank has added nine fully-fledged branches to its branch network during the period July 2017 to June 2018.

This largely contributed to the increase in operating expenses to 3,178 million from 2,784 million (14%) in the comparable period.

Other Comprehensive Income

In terms of other comprehensive income, the available for sale equity securities recorded a fair value loss of 1,907 million and the fixed income securities recorded a fair value loss of 413 million.

The bank said regulatory change in the implementation of tax with effect from 1st April 2018 for Treasury Bills and Bonds adversely affected the market prices of Treasury Bills and Bonds.

Financial Position

Fortifying its position as a strong business entity, DFCC Bank’s total assets grew by 56,346 million year-on-year to 361,272 million which reflects an 18.5 percent growth compared to June 2017.

Bank’s loans portfolio grew by 38,229 million to 236,666 million compared to 198,437 million as at 30 June 2017, reflecting a growth of 19.3 percent year-on-year.

The Bank’s deposit base reported an increase to 207,862 up 23.5 from 168,357 million in June 2017, further displaying customer confidence.

The growth in customer deposits during the first half year 2018 was 14,555 million (8%). The Bank’s CASA ratio, which represents low-cost deposits over the total deposits of the Bank improved to 20.2 percent from 19.8 percent in March 2018.

DFCC bank continues to enjoy medium to long-term low-cost borrowing lines that helped to reduce the funding cost. When these term borrowings are added to deposits, the ratio improved to 28.4 percent as at 30th June 2018.

The Bank’s NPL ratio slightly moved up to 3.14 percent as at June 2018 from 3.12 percent recorded in March 2018 as a result of adverse environmental conditions that prevailed during this time.

The bank, however, said this is in line with the industry average of 3.3 percent as at June 2018.

Equity & Capital Requirements

As at 30 June 2018, the Group’s Tier 1 capital adequacy ratio stood at 11.05 percent while the total capital adequacy ratio stood at 16.56 percent.

DFCC Bank recorded a Tier 1 and total capital adequacy ratios of 10.66 percent and 16.20 percent respectively as at 30th June 2018.

The bank said the ratios are well above the minimum regulatory requirements of 7.875 percent and 11.875 percent.

Future Outlook

DFCC Bank’s CEO, Lakshman Silva said keeping up with the Fintech revolution, they will focus on developing cutting-edge inclusive financial solutions that are more relevant to consumers, taking the Bank and the industry to a new level of convenience in this digital age.