November, 16, 2022
Despite unprecedented challenges and a volatile economic environment, DFCC Bank continued its commitment to serving customers across the country, delivering high-quality customer centric banking services. Accordingly, the Bank has recorded a resilient performance for the 3rd Quarter of 2022, ended 30th September 2022, remaining steady against a volatile business environment, further compounded by external challenges and domestic political uncertainty.
The fluid political situation and heightened fiscal, external and financial sector imbalances pose significant uncertainty for Sri Lanka’s economy, all of which have resulted in a relatively subdued performance for the Bank.
Along with this, rising impairment costs and provisioning for the same have resulted in a negative impact on profitability for the period. However, this should ease as impairment mitigation measures take further effect over the upcoming quarters. The contractionary fiscal policies of Central Bank of Sri Lanka (CBSL) would complement the effects of tight monetary policy measures already in place, helping to mitigate any build-up of aggregate demand pressures, thereby anchoring inflation expectations and bringing down headline inflation, while supporting the economy to reach its potential. Foreign exchange liquidity in the domestic banking system also recorded some improvement, supported by increased inflows in the form of export proceeds and workers' remittances. Together, these measures and impacts could work to help build momentum towards a recovery in 2023.
The following commentary relates to the unaudited Financial Statements for the period ended 30 September 2022, presented in accordance with Sri Lanka Accounting Standard 34 (LKAS 34) on “Interim Financial Statements”.
The DFCC Group comprises of DFCC Bank PLC (DFCC), and its subsidiaries – Lanka Industrial Estates Limited (LINDEL), DFCC Consulting (Pvt) Limited (DCPL) and Synapsys Limited (SL), the joint venture company – Acuity Partners (Pvt) Limited (APL) and associate company – National Asset Management Limited (NAMAL).
The Bank reported a profit before tax (PBT) of LKR 1,420 Mn and a profit after tax (PAT) of LKR 1,043 Mn for the period ended 30 September 2022 compared to a PBT of LKR 4,105 Mn
and a PAT of LKR 3,070 Mn in the comparable period. The subdued profit during the period is due to the higher charge made for impairment loss considering the potential future impacts of the prevailing economic conditions on the lending and investment portfolios.
The Group recorded a PBT of LKR 1,762 Mn and a PAT of LKR 1,320 Mn for the period ended 30 September 2022, compared to LKR 4,508 Mn and LKR 3,413 Mn, respectively, in September 2021.
Market interest rates are continuously adjusting upwards reflecting the tight liquidity conditions in the domestic money market. Accordingly, interest rates on the Bank’s deposit and lending products have considerably increased during the period under review. The net interest income (NII), which is the core business of the Bank, therefore recorded an increase of 114% and reached LKR 18.6 Bn by the end of Q3 2022.The increase in AWPLR by 1,941bps over the past 12 months and the time lag in repricing the existing deposits contributed to the increase in the interest margin from 2.66 % in December 2021 to 4.92% by September 2022.
DFCC Bank posted a total operating income of LKR 21.6 Bn for the period ended 30 September 2022 compared to LKR 13.9 Bn in the comparative period, which is a 56% increase. Due to depreciation of the rupee, import restrictions and other unfavorable economic conditions, the momentum of the business was negatively affected. However, the concerted effort made has helped the Bank to record a non-fund income (NFI) of LKR 2,031 Mn for the period ended 30 September 2022, which is a 5% increase against the comparable period.
The impaired loan (stage 3) ratio increased from 3.03% in December 2021 to 3.50% as at end September 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 quarter, by introducing changes to internal models to cover unseen risk factors in the present highly uncertain and volatile environment.
The Bank also recognized substantial impairment provisions on its foreign currency denominated government securities owing to the recent downgrading by rating agencies of Sri Lanka’s Sovereign rating and the announcement by the Government on restructuring of the country’s external debt via an economic adjustment programme supported by the IMF.
With these provisions made to cover the additional risk in the economic environment, the impairment charge recorded an increase of 372% against the comparative period and stood at LKR 11.96Bn for the period ended 30 September 2022 compared to LKR 2.5Bn in the comparable period of last year.
With the implementation of the core banking system during the last quarter of 2021, the Bank carried out upgrades to its IT infrastructure to provide multiple channels for service delivery to customers through a strong digital drive.
Primarily due to the increase in IT related expenses as a result of infrastructure upgrades carried out and increases in cost due to inflation and rupee devaluation, the operating expenses for the period ended 30th September 2022 increased to LKR 7,382 Mn compared with LKR 6,165 Mn during the corresponding period in 2021.
However, the numerous process automation and workflow management systems introduced during the period helped to curtail and manage operating expenses at these levels.
Changes in fair value of investments in equity securities and fixed income securities (treasury bills and bonds) and movement in hedging reserve are recorded through OCI. The amount reclassified during the period to the income statement includes the negative movement of LKR 8,735 Mn from hedging reserve which was due to the currency depreciation. A fair value loss of LKR 3,660 Mn was recorded on account of equity securities outstanding as at 30 September 2022.
The gross loan portfolio of the bank increased to LKR 411,883 Mn as at 30th September 2022 compared to LKR 384,959 Mn as at 31st December 2021. The Bank did not pursue an aggressive lending growth strategy due to high inflation, currency depreciation and rising interest rate environment. Bank curtailed its foreign currency lending portfolio by over Rs. 8.3 Bn during the period ended 30th September 2022.
The deposit portfolio of the Bank experienced an increase of LKR 22,785 Mn to record LKR 342,646 Mn as at 30 September 2022 compared to LKR 319,861Mn as at 31 December 2021. This resulted in a loan to deposit ratio of 111% as at 30 September 2022. The CASA ratio decreased to 24.97% as at 30 September 2022. DFCC Bank will continue to tap local and foreign currency related long to medium term borrowing opportunities to facilitate lending to deserving segments of the market whilst maintaining a high-quality portfolio.
As at 30 September 2022, the Bank recorded Tier 1 and Total Capital ratios of 10.22% and 13.68% respectively. The Bank’s Net Stable Funding Ratio (NSFR) was 121.57% and Liquidity Coverage Ratio (LCR) – all currency was 157% as at 30 September 2022. All these ratios were maintained above the minimum regulatory requirement.
“Despite having to deal with unprecedented economic, energy and sociopolitical crises during the 3rd Quarter of 2022, DFCC Bank has been able to successfully post a resilient, though subdued financial performance during the period under review. During this time, Sri Lanka experienced quite turbulent social unrest and political instability. Fortunately, the country’s strong democratic institutions prevailed and the political atmosphere, though uneasy, remains stable. This was driven, no doubt, by the uncontrolled inflation and poor fiscal and monetary policy adopted during the latter half of 2021 and the earlier part of 2022. However, subsequently, the Central Bank of Sri Lanka has adopted a prudent, tighter monetary stance and the government has introduced more responsible fiscal policies, including increased taxation to shore up government revenues and bridge the deficit. The first fruits of these responsible actions have begun to emerge with inflation easing for the first time this year in October 2022. We expect further easement in the next few months, along with a concrete debt restructuring plan, together with continued responsible policy, which will likely provide a fertile environment for an economic recovery in 2023, which we are presently well-positioned to take advantage of.
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