Sampath Bank reports resilient financial performance in nine month ended Sept 2020

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Sampath Bank recorded a profit before tax (PBT) of Rs 6.99 Bn and a profit after tax (PAT) of Rs5.09 Bn for the nine months ended 30th September 2020.

This is a decline of 33.1% in PBT and 22% in PAT compared to the corresponding period in 2019. The Bank recorded PBT of Rs 1.66 Bn and a PAT of Rs1.12 Bnduring the 3rd quarter from 1st July 2020 to 30th September 2020, a drop of 64.2% and 53.8% respectively compared to Q3 of2019.

PBT and PAT of the Group for the first nine months of the year stood at Rs 7.31 Bn and Rs 5.21 Bn respectively. This is a reduction of32.6% in PBT and 23% in PATagainst the achievements of the corresponding period.

Fund Based Income (FBI)

The spread of the COVID -19 pandemic and related containment measures have resulted in a significant downturn in the global and local economies. The Central Bank of Sri Lanka continued to implement monetary easing measures including, several policy ratescut in a bid to stimulate an economic recovery. These measures, together with relief measures granted to customers under the moratorium schemes by charging lower interest rates below the market rates significantly affected the Bank’s Net Interest Income (NII) in the nine months ended 30th September 2020. Sampath Bank’s NII declined by 15.5% to Rs 25.99Bn for the first nine months of the year compared to the same period in 2019.

Overall, interest income for the period under review decreased by Rs 9.67 Bn in the first nine months of 2020 to Rs 68.02Bn, reflecting a decline of 12.4% compared to Rs 77.7 Bn recorded in the corresponding period in 2019.

Interest expenses for the nine months ended 30th September 2020 also decreased to Rs 42.02Bn compared to Rs 46.91Bn recorded in 2019, denoting a decline of 10.40%.

Consequently, the Net Interest Margin for the period under review decreased to 3.46% compared to 4.46% reported in 2019.

Non-Fund Based Income (NFBI)

Net fee and commission income, which mainly comprises credit, trade, card and electronic channel related fees, was Rs 5.99 Bn for the period under review, a decline of 18% over the figure reported for the corresponding period in 2019. Low credit demand due to the economic downturn significantly affected the credit related fee income. Further, the low usage of credit cards due to the pandemic situation affected the credit card related commission income. Meanwhile, fee and commission income from digital products reported a substantial growth compared to the corresponding period in 2019 driven by higher usage of the Bank’s digital products during the lockdown period and thereafter. Trade related commission income too reported a marginal growth due to increased acceptances and documentary credit volumes.

Net other operating income recorded a significant YoY increase of 197.5% during the nine months ended 30th September 2020 to Rs 3.10Bn, from Rs 1.04Bn reported for the corresponding period in 2019. This was due to a sizable increase in exchange income owing to the 2% depreciation of the Sri Lankan Rupee against the US Dollar.  Due to the currency depreciation, the Bank also incurred a net trading loss of Rs 523Mn asmark to market losses on forward exchange contracts. Therefore, the Bank’s net exchange income from foreign exchange transactions amounted to Rs 2.15Bn for the period under reviewcompared to Rs 2.24 Bnreported during the corresponding period in 2019.

Operating Expenses

Due to the dedication and the commitment the Sampath team has shown in this incredibly tough time, the Bank ensures that they are appropriately rewarded. Accordingly, personnel expenses increased marginally by 2.6%. In addition to the cost control strategies already implemented by the management, a few new enhanced cost control plans were also introducedduring this quarter. These cost-containment strategies helped to minimize the impact on the bottom line caused by a weaker revenue environment. As a result, overall operating expenses decreased by 3% against the comparative period. Meanwhile, the Bank’s Cost-to-Income ratio (excluding taxes on financial services) increased to 42.3% during the period under review, from 37.5% reported in the corresponding period in 2019. The main reason for this increase was the drop in the main sources of income.

Impairment Charges on Investments

The total investments in foreign currency denominated government securities as at 30th September 2020amounted to Rs 87 Bn (31.12.2019: Rs 67Bn). During the first nine months of 2020, the Bank made a total provision of Rs 950 Mn against FCY bonds, a 741% increase compared to the 2019 provision of Rs 113 Mn. Out of the above provision Rs 704Mn was recognized against sovereign rating downgrading and in 2019 none was reported.

The Bank typically uses the Fitch rating to determine the probability of default on foreign currency denominated government bonds. Fitch downgraded the sovereign rating in April 2020 and accordingly a provision of Rs 316 Mn was recognized in 2Q 2020.Further, Moody’s Investor Services downgraded the sovereign rating in September 2020 by two notches to Caa1, which is one notch below Fitch’s current rating. Consequently,the Bank decided to use a more conservative approach and chargedan additional impairment provision on the above instruments during the quarterin anticipation of a probable downgrading by Fitch.

Impairment Charges on Loans and Receivables

Even though it is difficult to reliably estimate the adverse impact on our customer base due to Covid 19, based on the available information the Bank took steps to make additional provisions against the customers showing distress signs.Further, customers operating in vulnerable/risk elevated industriessuch as tourism, apparel, vehicle import, overseas lending, transportation and condominium constructionswere pushed to the stage 2 category.This required the Bank to absorb an additional charge under collective impairment in the third quarter.We have also increased the collective impairment charge by adjusting the probability weightage applied for different economic scenarios since a proper economic forecast is not available.

Business Growth

Sampath Bank’s total asset base grew by 10.9% (annualized 14.6%) during the period under review and stood at Rs 1.1Tn as at 30th September 2020. In comparison, the total asset position as at 31st December 2019 stood at Rs 962 Bn. Gross loans & advances grew by 4.6% (annualized 6.2%) to reach Rs 753 Bn as at 30th September 2020, recording a growth of Rs 33 Bn for the period under review. The total deposit base increased by Rs 128 Bn for the same period, to reach Rs 846 Bn as at the reporting date, a growth of 17.8% (annualized 23.8%). Meanwhile, the CASA ratio which stood at 35.2% as at 31st December 2019 increased to 37.1% by 30th September 2020.

Performance Ratios

Return on Average Equity (ROE) (after tax) declined from 11.78% as at 31st December 2019 to 6.45% as at 30th September 2020 in direct correlation to the Bank’s performance for the first nine months of 2020. Return on Average Assets (ROA) (before tax) also declined to 0.93% as at 30th September 2020 from 1.66% as at the end of 2019.

The Statutory Liquid Asset Ratio (SLAR) for the Domestic Banking Unit and the Off-Shore Banking Unit was maintained well above the mandatory requirement of 20% throughout the period and ended up at 33.52% and 36.40% respectively as at 30th September 2020.

Capital Adequacy

Sampath’s Common Equity Tier I Capital, Tier I Capital and Total Capital Adequacy ratios as at 30th September 2020 stood at 13.07%, 13.07% and 16.03% respectively, all well above the minimum regulatory requirement of 6.5%, 8% and 12%, applicable as at the reporting date.