Margin Play

May 14, 2008 (LBO) – Sri Lanka's state-run Bank of Ceylon has seen margins squeezed in 2007 amidst directed lending and rising funding costs, but has pushed up fee income and cut bad loans in the period. In 2007 group revenue rose 40 percent to 52.3 billion rupees while interest income rose 56 percent to 44.0 billion rupees. But interest expense also rocketed 85.5 percent to 30.3 billion rupees, trimming net interest income growth to just 15 percent.

"At the outset we had a business plan that focused on expanding our market share. So in pursuing the strategy we had to take some cut in our margins, we expected that," says Bank of Ceylon's chief financial officer Saliya Rajakaruna.

He says business grew across sectors and regions while the share of lending to government fell in 2007.

Group net profits also rose at a slower 10 percent to 3.2 billion rupees.

Development Lending

In addition to rising cost of funds the bank also lent at concessionary terms for what it calls 'development lending,' which hit the bottom line.

Rajakaruna says the amount of lending the bank does for 'development' purposes is not usually recognized. These include loans to state workers, lendin