February, 20, 2023
During the year under review, DFCC Bank remained committed to providing high-quality, customer-centric banking services across the country, despite facing unprecedented challenges and a volatile economic environment. As a result of this dedication, the Bank's performance remained strong and resilient, though relatively modest compared to previous years.
This can be attributed to three contributory factors that had a combined cascading effect across the economy. Firstly, the foreign exchange crisis caused by the lingering effects of the pandemic, as tourism had come to a standstill, export earnings dwindled, and inward remittances reduced to a trickle. The second was the devaluation of the Sri Lanka Rupee (SLR) which led to runaway inflation and widespread economic hardship. The third and most important factor was the high interest regime, which impacted the entire economy while the banking sector was particularly hard hit.
In line with the Bank's corporate strategy and its stated goal of becoming one of Sri Lanka's most customer-centric, digitally enabled banks by 2025, a new T24 Temenos Core Banking System was implemented on 21 October 2022, along with a feature-rich online banking platform. This transition has resulted in an improved, digitally enabled banking service that is highly flexible, agile, and highly beneficial to customers.
The year saw an adverse impact on profitability due to increased impairment costs and provisioning. However, this situation should improve as impairment mitigation measures take further effect over the upcoming quarters. The fiscal policies of the Central Bank of Sri Lanka (CBSL) will support the impacts of already implemented tight monetary policy measures, preventing the buildup of aggregate demand pressures and anchoring inflation expectations, which will help to bring down headline inflation and support the economy in achieving its potential. The domestic banking system's foreign exchange liquidity has also shown some improvement due to increased inflows of export proceeds and workers' remittances. Collectively, these measures and impacts could help to build momentum for economic recovery in 2023.
The following commentary relates to the audited Financial Statements for the year ended 31 December 2022, presented in accordance with Sri Lanka Accounting Standard 34 (LKAS 34) on “Interim Financial Statements”.
Profitability
DFCC Bank PLC, the largest entity within the Group, reported a Profit Before Tax (PBT) of LKR 2,439 Mn and a Profit After Tax (PAT) of LKR 2,513 Mn for the year ended 31 December 2022. This compares with a PBT of LKR 4,326 Mn and a PAT of LKR 3,222 Mn in the previous year.
The Group recorded a PBT of LKR 3,112 Mn and PAT of LKR 3,042 Mn for the year ended 31 December 2022 as compared to LKR 4,859 Mn and LKR 3,665 Mn respectively in 2021. All the member entities of the Group made positive contributions to this performance.
DFCC declared a final dividend of LKR 2.00 per share in the form of a scrip dividend for the year 2022.The Bank’s Return on Equity (ROE) reduced to 5.04% during the year ended 31 December 2022 from 6.55% recorded for the year ended 31 December 2021. The Bank’s Return on Assets (ROA) before tax for the year ended 31 December 2022 is 0.46% compared to 0.91% for the year ended 31 December 2021.
The tight liquidity conditions in the domestic money market have resulted in continuously rising market interest rates. As a result, the Bank's deposit and lending products experienced a significant increase in interest rates during the period under review. While the higher interest rates may have depressed the lending portfolio, it led to an overall improvement in Net Interest income (NII). In fact, the NIIs of the entire banking sector have grown dramatically due to the high lending rates.
The Bank's Net Interest Income (NII), which is its core business, increased by 106% to reach LKR
26.0 Bn by the end of 2022. The interest margin increased from 2.66% in December 2021 to 4.96% by December 2022, due to a 1,985 bps increase in the AWPLR over the past 12 months and the time lag in repricing existing deposits.
The untiring efforts of the Bank's staff led to an increase in non-funded business during the year, resulting in a rise in net fee and commission income to LKR 2,877 Mn for the year ended 31 December 2022, compared to LKR 2,596 Mn in the previous year.
Although trade operations were severely impacted in the early part of the year, they improved to a certain extent as more foreign funding became available. Additionally, inward remittances
significant improvement, enabling the Bank to accommodate more trade operations. Fee based business have shown a slight improvement in profitability due to the higher tariffs levied, though the actual volume of operations is lower than before.
Fees generated from loans and advances, credit cards, and fees collected from trade accounted for the majority of the fee and commission income.
The impaired loan (stage 3) ratio increased from 3.03% in December 2021 to 4.36% as at 31 December 2022. In order to address the current and potential future impacts of prevailing economic conditions on the lending portfolio, the Bank has made adequate impairment provisions during the year, by introducing changes to internal models to cover unseen risk factors in the present highly uncertain and volatile environment.
The main uncertainties regarding the recoverability of the Bank’s total sovereign debt exposure relate to the debt service capacity of the Government of Sri Lanka. This is, in turn, affected by the development of the prevailing macroeconomic environment as well as the levels of liquidity of the Government. The ongoing debt restructuring negotiations with the International Monetary Fund (IMF) and the resultant comprehensive debt restructuring programme could have other adverse outcomes. Based on the currently available data, the Bank has used its discretion and informed judgment to estimate the recoverable value. Accordingly, it has been decided to maintain a minimum impairment provision cover of 35% of our overall sovereign debt investment.
With these provisions made to cover the additional risk in the economic environment, the impairment charge recorded an increase of 280% against the comparative period and stood at LKR 17.04Bn for the year ended 31 December 2022 compared to LKR 4.5Bn in the comparable year.
With the implementation of the core banking system during the last quarter of 2021, the Bank upgraded to its IT infrastructure to provide multiple channels for service delivery to customers through a robust digital drive. Due to the increase in IT related expenses as a result of infrastructure upgrades carried out, and increases in cost due to inflation and SLR devaluation, the operating expenses for the year ended 31 December 2022 increased to LKR 10,116 Mn compared with LKR 8,381 Mn during the corresponding period in 2021. However, the numerous process automation
and workflow management systems introduced during the period helped curtail and manage operating expenses at reduced levels.
Changes in the fair value of investments in equity securities and fixed income securities (treasury bills and bonds) and movement in hedging reserve are recorded through other comprehensive income.
Due to the application of hedge accounting, the impact on equity due to the exchange fluctuation was minimised. A fair value loss of LKR 4,506 Mn was recorded on account of equity securities outstanding as at 31 December 2022.
Despite the challenges faced by the economy and the banking sector, DFCC Bank’s total assets increased by LKR 80,421 Mn, recording a growth of 17% from December 2021.This constitutes a loan portfolio growth of LKR 3,172 Mn to LKR 369,072 Mn compared to LKR 365,901 Mn as at 31 December 2021, an increase of 1%. The Bank did not pursue an aggressive lending growth strategy due to high inflation, currency depreciation and a rising interest rate environment. The
Bank curtailed its foreign currency lending portfolio significantly during the year ended 31 December 2022.
The Bank has implemented several relief schemes in line with the Central Bank of Sri Lanka's directives to support those affected customers. The Bank’s net asset value per share was recorded at LKR 125.96 as at 31 December 2022 compared with LKR 152.83 recorded as at 31 December 2021.
The liabilities increased by 18% over the previous year to LKR 515,205 Mn as at the year end. The Bank’s deposit base also experienced a growth of 16%, recording an increase of LKR 50,453 Mn to LKR 370,314 Mn from LKR 319,861 Mn as at 31 December 2021. This resulted in recording a loan to deposit ratio of 108%. Further CASA ratio is 18.5% as at 31 December 2022. Funding costs of the Bank were also contained by using medium to long-term concessionary credit lines. When these concessionary term borrowings are considered, the CASA ratio further improved to 22.21% as at 31 December 2022.
DFCC Bank continued its approach to tap local and foreign currency related, long-to-medium- term borrowing opportunities.
DFCC Bank’s total equity increased to LKR 50 Bn as at 31 December 2022 with the recorded profit after tax of LKR 2.5 Bn.
As at 31 December 2022 the Bank recorded Tier 1 and Total Capital ratios of 10.085% and 13.148% respectively. The Bank’s Net Stable Funding Ratio (NSFR) was 126.55% and Liquidity Coverage Ratio (LCR) – all currency was 202.34% as at 31 December 2022. All these ratios were maintained above the minimum regulatory requirement.
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