In the backdrop of challenging external environment, Seylan Bank recorded a profit after tax of Rs.3.68 Bn for the year ended 31st December 2019.
Successful and oversubscribed Rights Issue made during the last quarter for LKR 4.30 Bn which followed a similarly successful debenture issue earlier in the year endorsed and demonstrated the confidence placed in the Bank by the investors and shareholders.
Net Interest Income (NII)
Net Interest Income (NII), the main source of income representing more than 75% of the total operating income of the Bank, recorded an increase of LKR 0.886 Bn. (4.99%) during the period under review. Accordingly, the Bank recorded a NII of LKR 18.633 Bn. in 2019, compared to LKR 17.747 Bn. in 2018. NII growth, despite the narrowing net interest margins, was supported by growth in loans and advances and volatile interest rates.Net Interest Margin (NIM) reduced to 4.20% from 4.53% in 2018.
Fee and commission income
Net fee and commission income was LKR 4.233 Bn., reflecting an increase of 4.41% compared to the previous year. Income on guarantees, cards, trade and remittances were the main contributors for the increase. The Bank strengthened its banking activities in trade finance special guarantees and other financial services causing the fee and commission income to increase compared to last year. The Bank promotes the cross selling of its products across the spectrum by the branches, to increase the fee base income.
Total operating income
The operating Income of LKR 24.354 Bn. was 5.01% higher than the previous year and reflects a growth in NII (LKR 0.886 Bn), Net Fee and Commission Income (LKR 0.178 Bn.) and other income (LKR 0.098 Bn). Other income comprises a net loss from trading amounted to LKR 1.459 Bn. over the previous year (reflects a net loss from Derivative Financial Instruments of LKR 1.864 Bn. due to fluctuations in rates and volume), net gains/(losses) from de-recognition of financial assets with a growth of LKR 0.268 Bn. and Other Operating Income with a growth of LKR 1.289 Bn. which is mainly from foreign exchange income derived from both revaluation gain/(loss) on the Bank’s net open position and realised exchange gain/(loss) on foreign currency transactions.
The impairment charge for the year 2019 was LKR 3.883 Bn. which is an 11.73% increase over the last year. The impairment charge of loans and advances for the year amounted to LKR 3.848 Bn. compared to, LKR 3.516 Bn. in 2018. Stage 3 assets has increased by LKR 3 Bn. over the previous year and the same impacted on the impairment charges for Stage 3 (increased by LKR 0.9 Bn. approximately) in 2019. Expected credit loss allowance as at 31 December 2019 stood at LKR 10.73 Bn. which is an increase of LKR 0.84 Bn. from LKR 9.89 Bn. recorded in 2018.
Total operating expenses recorded LKR 12.606 Bn. during the year under review, whilst total operating expenses including VAT, NBT and DRL arose to LKR 15.37 Bn. Personnel costs increased by 12.28% as head count, remuneration and staff development activities increased during the year.
The Bank’s cost to income ratio, including additional gratuity expense, VAT, NBT and DRL stood at 63.12%, which reflects a drop from 2018 (64.90%). The cost to income ratio excluding additional gratuity expense stood at 62.79% as at end 2019 which shows an increase from the previous year (60.00%), mainly due to increase in DRL charge in 2019 compared to 2018 by LKR 0.738 Bn. (DRL was effective from 1 October 2018 and accounted only three months in 2018).
The cost to income ratio excluding DRL (including VAT and NBT) stood at 58.88% in 2019 and almost same as the ratio in 2018 of 59.08% and noted that an increase of DRL by LKR 0.738 Bn. has impacted on the cost to income ratio by 4%. However, the cost to income ratio excluding additional gratuity expense, VAT, NBT & DRL was reported as 51.43%.
Sri Lanka Government announced several tax amendments during latter part of 2019. Value Added Tax standard rate reduced from 15% to 8% for other than financial services with effect from 1 December 2019.
The Debt Repayment Levy has been removed with effect from 2020 and this will have a favourable impact on the profitability of the Bank in the future.
Bank’s tax expense (income tax, VAT, NBT and DRL on financial services) for 2019 was LKR 4.185 Bn. which is higher than the tax expense recorded in 2018 (LKR 3.590 Bn.) by LKR 0.595 Bn. with 17% increase. This is mainly from DRL, which reflected an increase of LKR 0.738 Bn. over the previous year (DRL was effective from 1 October 2018 and accounted only for three months in 2018).
Despite the sluggish economy that prevailed during 2019, Seylan recorded a net profit before income tax of LKR 5.099 Bn. and net profit after tax of 3.680 Bn. which is 15.40% higher than last year. Branch banking, treasury operations and corporate banking are the main contributors to profitability.
2019 was a year of accomplishment as the Bank’s asset base crossed the LKR 500 Bn. The total assets of the Bank rose to LKR 516 Bn. and represents a growth of 10.57% over last year. Despite a number of factors such as the Easter attack, political instability, increasing interest rates, tightening liquidity and subdued global growth outlook that affected industry credit growth, Seylan Bank’s loan portfolio gathered momentum in 2019 with substantial growth of 16.02%. Corporate Banking was the main contributor to the loan growth.
Further, with the SLFRS 16 effective from 1 January 2019, the Bank’s balance sheet has grown by LKR 4 Bn. approximately in both the assets and liabilities. I.e. Rights of use assets was newly recorded in the assets side (LKR 4.457 Bn.) and lease liabilities were newly recorded in the liabilities side (LKR 4.351 Bn.).
Loan growth and asset quality
Loans and advances grew by LKR 52.377 Bn. which is a 16.02% growth over 2018 to LKR 379 Bn. as at end 2019. Targeted marketing to lucrative segments within the economy helped us grow our loan portfolio in areas such as term loans, refinance, housing and RIL.
Preserving asset quality in the current economic climate was a key challenge for most lending institutions in the industry. However, Seylan Bank tightened the process of loan approvals and disbursements and continuous monitoring of the portfolio led to controlling NPLs. Consequently, the gross NPL ratio declined to 6.49% in 2019 from 6.55% in 2018. The net NPL ratio also declined to 5.76% in 2019 from 5.98% in 2018. Bank’s provision cover was 42.03% in the year under review.
The total deposit base of the Bank grew by LKR 43.171 Bn. to LKR 400.731 Bn., a 12.07% increase compared to the previous year. Despite the aggressive rates, deposit growth was able to achieve through our widespread branch network across the country. This showed a confidence placed by our valuable customers. Despite a shift into higher yielding deposits witnessed across the industry, the Bank grew its CASA base to LKR 113.76 Bn. which was a notable 10.33% rise from last year. The Bank’s CASA ratio stood at 28.39% at the end of 2019. The
Capital and funding
Managing capital, funding and liquidity are crucial to the on-going viability of any banking organisation in meeting foreseeable demands and to optimise the returns to stakeholders. Market liquidity remained tight throughout most parts of the year, as loan growth was showing an upward trend. To supplement business growth and to enhance the lending book, the Bank raised a total of LKR 9.389 Bn. in a debenture issue (LKR 5 Bn.) and a rights issue (LKR 4.389 Bn.) in April 2019 and November 2019 (allotted on 10 December 2019) respectively, in the process of strengthening Basel III capital and the balance sheet. Both these issues were oversubscribed, signifying strong confidence in the Bank.
Capital adequacy ratios
The Bank maintains a sound capital adequacy ratio despite the growth of the lending book which resulted in increasing risk weighted assets. The capital adequacy ratio has increased from 13.30% to 14.84% during the year, mainly due to rights issue of LKR 4.3 Bn., Debenture issue of LKR 5 Bn., favourable impact from fair value through other comprehensive income reserve (LKR 1.2 Bn.), despite the increase in the risk weighted amount for credit risk (LKR 52 Bn.) mainly due to growth in the advances portfolio.
Return on equity
The return on equity (ROE) at the Bank level was 9.29%, up from 9.27% in 2018. Excluding the right issue the ratio in 2019 was 9.83% which is higher than the current ratio with rights of 9.29%.
Earnings per share (EPS)
Earnings per share of LKR 8.99 in 2019 were higher than the LKR 7.97 recorded in the previous year. Earnings per share excluding additional gratuity expenses show LKR 9.13 comparative to last year LKR 10.01.
EPS has been diluted with the rights issue, where the number of shares increased by 125,905,946 making the total number of shares to 503,623,786 (weighted average number of ordinary shares as at 31 December was 409,441,483). The EPS for 2019 was 9.74 if excludes right issue (2018 – EPS 8.44).
Bank has made a significant progress in implementing the initiatives derived on the strategic plan 2017-2020 resulting many developments in SME operations, digital drive, low cost deposit mobilization, sales and marketing etc.
During the quarter we opened our 200th library under “Seylan Pehesara” library project recognising the social responsibility towards the education. Further, the Bank’s Environmental and Social Management Policy implemented specifies a pledge to undertake responsible financing.