Sampath Bank Maintains its Sustainable Growth Trajectory

Harsha Amarasekera, Chairman, Sampath Bank PLC (left) and Nanda Fernando, Managing Director, Sampath Bank

Sampath Bank produced strong results for the nine months ended 30th September 2021, despite the challenges caused by prolonged impact of the COVID -19 pandemic. Due to the strategic initiatives and target orienting business plans, the Bank was able to steer through volatile economic conditions created by the pandemic to record a sizable 76.4% improvement in profit after taxes, compared with the last year. 

Sri Lanka’s third wave of the COVID-19 pandemic which emerged in mid-2021 has been by far the most challenging for the country, since its commencement in March 2020. As in the past, Sampath Bank supported its customers and employees in dealing with the disruption from these difficulties. The Bank’s digitalization strategy continued to prove its worth by ensuring an easier and safer banking experience for customers and enabling employees to seamlessly switch to the work from home environment during the period of lockdown. Further expediting its digitalization strategy in response to the pandemic, the Bank introduced touchless Cash withdrawals at ATMs for the first time in Sri Lanka and possibly the first time in the region. The revolutionary technology of the touchless ATM eliminates the need to physically touch the surface of the ATM, which minimizes the risk of virus transmission to the user through contaminated surfaces, thus proving to be the ideal solution for withdrawing cash from ATMs during the current global COVID-19 pandemic.

To further reiterate its commitment to support customers and help ease their financial burdens during the prolonged economic crisis, the Bank actively engaged in identifying customers who were eligible for the latest cycle (phase IV) of the moratorium announced by the government. Meanwhile, the Bank continues to deliver its commitments to the agriculture sector in continuing its programme by restoring a further three water tanks under the “Wewata Jeewayak” program.

With the pandemic resurfacing from time to time, it is quite likely to remain an ongoing global challenge for the foreseeable future. In the Sri Lankan context, the pandemic related containment measures that have been in place for the past 18 months also appear to be delaying the anticipated economic recovery in 2021 in turn aggravating the pressure on the economy. However, despite these ongoing challenges, it is hoped that the expeditious vaccine rollout program and other containment measures would pave the way for a revival of the Sri Lankan economy in the coming months.  

Financial results declared by Sampath Group for the Nine months ended 30th September 2021:  

  • The Bank reported a profit after tax (PAT) of Rs 8.98 Bn and profit before tax (PBT) of Rs 12.32 Bn for the period under review, denoting significant growth of 76.4% each over the corresponding period in 2020.  
  • Sampath Bank’s NIM for the reporting period was 3.46%, an improvement of 16 bps compared to the figure reported at the end of 2020.  
  • The Bank recorded a sizable 30.9% increase in fee and commission income during the period, primarily driven by cards, electronic channels and trade-related operations.  
  • Despite the improvement reported in NPL and Stage 3 loans, additional impairment provisions were charged as management overlay to reflect potential credit losses due to the COVID -19 related uncertainty.  
  • The Sampath Group too posted significant growth in the first nine months of the current financial year, with Group PBT and PAT growing by 84.6% and 87.9% respectively. In the period under review, the Group recorded a PBT of Rs 13.48 Bn and PAT of Rs 9.79 Bn compared to the PBT of

Rs 7.30 Bn and PAT of Rs 5.21 Bn recorded in the corresponding period.  

Income   

Lower interest rate regime prevailed during the period caused the interest income to decrease compared to the corresponding period in the previous year. Although the pressure on interest income was partly absorbed by increased interest income generated from other investment securities, total interest income for the period decreased by 7% to Rs 63.2 Bn compared to Rs 68 Bn recorded for the corresponding period in the previous year. Further, subdued credit demand during the period too negatively affected the growth of interest income.

Customer deposits on current and savings (CASA) accounts grew by Rs 81.5 Bn. This coupled with lower interest rates that prevailed in the first nine months of 2021, saw the Bank’s interest expenses declined by 20.2% for the period under review.  

The drop in interest income was offset by the drop in interest expenses. Therefore, on an overall basis, Net interest income for the first nine months of the year grew to reach Rs 29.69 Bn as at 30th September 2021, up by 14.2% compared to Rs 25.99 Bn reported for the same period in 2020. Consequently, Net interest margin (NIM) improved marginally compared to 31st December 2020. However, interest rates started increasing since the latter part of the third quarter with the increase of policy rates by the Central Bank of Sri Lanka.

Net fee and commission income (NFCI) grew by 30.9% from the figure reported in the corresponding period of the previous year. This segment comprises income from various sources such as credit cards, trade, and electronic channels. Growth in online transaction volumes and slightly higher seasonal economic activity in April 2021 were the main reasons for the growth of fee and commission income. In addition, the trade related commission income also contributed to the growth mentioned above.

The Bank recorded a net trading loss of Rs 98 Mn in the period. Net gain on de-recognition of financial assets for the first nine months of 2021 stood at Rs 116 Mn. Meanwhile, Net other operating income for the period stood at Rs 4.29 Bn, an increase of 38.3% compared to the corresponding period in the previous year. This growth was mainly attributed to the higher realized exchange income stemming from the 8.2% depreciation of the Sri Lankan Rupee against the US Dollar.

Operating Expenses   

Total operating expenses for the reporting period under review was Rs 16.57 Bn, an increase of 11.4% compared with the corresponding period in the last year. The Bank recorded a 13.9% increase in personnel expenses for the period under review, mainly on account of salary increments and increases in other personnel expenses.   

Other expenses also increased by 6% in the period under review. This was mainly due to the increase in deposit insurance premium in line with the growth in the deposit portfolio and changes in regulatory provisions. Further, the general price hikes created by the import-related restrictions also contributed to the increase mentioned above. The Bank’s Cost-to-Income ratio (excluding taxes on financial services) decreased marginally to 39.6% in 2021, from 42.3% reported for the corresponding period in 2020. This decline is due to the combined effect of higher total operating income and the Bank’s extensive cost-saving programs.  

Impairment  

The impairment charge for the period under review dropped marginally by 11.4% compared to the corresponding period of 2020 to reach Rs 9.8 Bn as at 30th September 2021.

The Bank made a substantial impairment provision during the current period as the macroeconomic environment remains challenging locally and globally and the Bank is conscious of the potential longer-term impact, especially once relief measures are eased. Further, the Bank continues to remain vigilant to the continued impact of COVID-19, including progress in vaccination process and the likelihood of uneven economic recoveries across the various affected industries.

During the period under review, the Bank re-assessed the credit risk of the loan portfolio. Based on this assessment, steps were taken to reclassify customers to Stage 2, if their business models were deemed to have been affected by the pandemic induced risk metrics. Even though past due movements have been restricted to the moratorium customers, the Bank captured the potential impact via various significant adjustments to the impairment provision as an allowance for overlay. As a result, cumulative impairment provision against Stage 1 loans and Stage 2 loans increased by Rs 1.6 Bn and Rs 7 Bn respectively in the period under review, from the figures reported at the end of 2020.

However, taken on an overall basis, significantly higher provisioning was made in the previous financial year considering COVID-19 related uncertainties in 2020. As such the Bank did not require to increase the impairment provision during the current period at a higher scale as it did in 2020, resulting in 11% drop compared to the previous year.

The Bank also increased the impairment provision against the foreign currency denominated government instruments sizably by fine-tuning the macro factor model to better reflect macro-economic conditions.

Capital ratios and requirements  

The Bank maintained all capital ratios well above the regulatory minimum requirements at the end of Q3 2021. At the end of September 2021, the Bank’s CET 1, Tier 1 and Total Capital ratios were at 12.32%, 12.32% and 15.56%, compared to 13.44%, 13.44% and 16.41% at the end of 2020 respectively. The movement in the total capital ratio during the reporting period was driven mainly by an increase in the total risk-weighted assets and dividends paid for 2020. The Bank did not consider the PAT generated for the period when computing the Capital ratios mentioned above. Had the Bank considered the PAT for the period, the ratios would have improved.

The Bank raised Rs 6 Bn worth of Tier 2 capital during 2021 via a Basel III compliant, listed, rated, unsecured, subordinated, redeemable 7-year debentures with a non-viability conversion.  The successful debenture issued in April 2021 partly countered the decrease in capital ratios caused by the factors mentioned above.  

Key ratios

As a result of the growth recorded in PAT, the Return on Average Shareholders’ Equity (ROE) increased by 318 bps to 10.76% as at 30th September 2021 compared to 7.58% reported at the end of the year 2020. Return on Average Assets (ROA) also increased to 1.42% as at 30th September 2021 against the 1.09% reported for 2020.  

Deposits and Advances   

Net loans and advances increased by 7.3% (annualized) in the period under review, compared to the figure reported at the end of 2020. At the end of 30th September 2021, the Bank’s Gross Advance portfolio stood at Rs 807 Bn compared to Rs 759 Bn as at 31st December 2020. Consequently, Sampath Bank’s total Asset base increased to Rs 1.18 Tn at the end of 30th September 2021 from Rs 1.11 Tn recorded at the end of last year.  

Meanwhile, the Bank’s deposit base recorded a growth of 10.86% (annualized) from the level reported at the end of 2020. The total Deposit base at the end of 30th September 2021 stood at Rs 959 Bn compared to Rs 887 Bn reported at the end of 2020.