October, 29, 2021
Financial Results for the period ended 30 September 2021
Despite the challenging operating environment in the banking industry, DFCC Bank has continued to record good key performance indicators which reflects growth and stability of the entity.
The Bank is proud to spearhead unique digital innovations that help revolutionize digital banking and provide convenience to customers. DFCC remains focused on the overall value proposition it delivers to customers – with relevance and personalization. The Bank is committed to enhancing functionalities, creating utility value to increase adoption and ensuring that the products and services are customer centric.
DFCC has had a long-term vision in becoming the most customer centric digitally enabled bank in the country. To this effort, DFCC Bank also continued to reach new heights in solidifying its status as a pioneer in the financial services industry with the Global Banking & Finance Awards 2021 recognizing the DFCC Virtual Wallet as the Best Digital Wallet in the country and DFCC iConnect as the “Most Innovative Corporate Banking App” in Sri Lanka.
The following commentary relates to the unaudited Financial Statements for the period ended 30 September 2021, presented in accordance with Sri Lanka Accounting Standard 34 (LKAS 34) on “Interim Financial Statements”.
Financial Performance Profitability
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).
DFCC Bank PLC, the largest entity within the Group, reported a profit before tax (PBT) of LKR 4,105 Mn and a profit after tax (PAT) of LKR 3,070 Mn for the period ended 30 September 2021. This compares with a PBT of LKR 2,636 Mn and a PAT of LKR 1,751 Mn in the comparative period.
The Group recorded a PBT of LKR 4,508 Mn and a PAT of LKR 3,413 Mn for the period ended 30 September 2021 as compared to LKR 3,062 Mn and LKR 2,110 Mn respectively in the comparative period of year 2020. All the member entities of the Group made positive contributions to this performance.
The basic earnings per ordinary share (EPS) of the Bank improved to LKR 9.74 for the period ended 30 September 2021 from LKR 5.74 for the comparative period in year 2020 recording an increase of 70%.
The Bank’s Return on Equity (ROE) improved to 7.14% during the period ended 30 September 2021 from 4.93% recorded for the year ended 31 December 2020. The Bank’s Return on Assets (ROA) before tax for the period ended 30 September 2021 is 1% compared to 0.78% for the year ended 31 December 2020.
Net Interest Income
The Bank recorded LKR 8,700 Mn in net interest income (NII) which is a 2% increase year on year. However, the drop in AWPLR by 116 bps over the past 12 months and the time lag to reprice the existing deposits to match market trends, contributed to the drop in interest margin from 2.53% in December 2020 to 2.41% in September 2021. Since a large component of the portfolio which are to be repriced based on variable rates and with the expected upward revision to Average Weighted Prime Lending Rates the bank would record a positive impact to Net Interest Margins in the coming months.
Other Operating Income
Due to travel restrictions imposed to curb the spread of the pandemic, the business momentum was impacted during the third quarter of 2021.
The staff at the Head office and the branch network working continuously over the period has assisted the bank to increase non-funded business and helped the priority sectors of the country to continue with their business activities uninterruptedly. This effort was fruitful as it resulted in an increase in net fee and commission income to LKR 1,929 Mn for the period ended 30 September 2021 from LKR 1,436 Mn in the comparative period. Other operating income has increased mainly due to increase in dividend income and gain on the sale of fixed income securities during the period ended 30 September 2021.
Impairment Charge on Loans and Other Losses
Impairment provision for the period ended 30 September 2021 was LKR 2,532 Mn compared to LKR 2,661 Mn in the comparable period. The drop is primarily due to the investments matured during the period. In order to address the potential future impacts of COVID - 19 on the lending portfolio, the Bank has made an adequate impairment provision as at 31 December 2020 by introducing changes to internal models to cover unseen risk factors in the highly uncertain and volatile environment including additional provisions made for the exposures to risk elevated sectors. While following the same method and basis, impairment provisions were increased in response to the third wave of the pandemic and related matters. However, with the best practices that were adopted in granting new credit and by providing proactive solutions to the impacted clients, the bank was able to report a NPL ratio of 5.18% in September 2021 compared to 5.56% in December 2020. As the interruptions due to COVID-19 pandemic might continue to be felt for some time, the Bank continues to monitor its loan portfolio and provisioning levels on a more regular basis.
Operating Expenses
During the period ended 30 September 2021, the Bank’s operating expenses increased from LKR 5,476 million to LKR 6,165 million compared to the corresponding period in the previous year mainly due to providing facilities to staff due to restrictions in public transport and all other expenses incurred in keeping safe and healthy environment within Bank premises to support client engagements. During the year the Bank also created multiple channels to enhance the service delivery to customers through a strong digital drive providing access to uninterrupted banking services during these trying times. This resulted the increase in IT related expenses with the infrastructure upgrades. The process automation and workflow management systems introduced during this period facilitated effective cost control measures which resulted in managing the operating expenses at these levels.
Other Comprehensive Income
Investments in equity securities and treasury bills and bonds (fixed income securities) are classified as financial assets and the change in fair value is recorded through other comprehensive income. Accordingly, a fair value gain of LKR 505Mn and a net fair value loss of LKR 3,828 Mn were recorded on account of equity and fixed income securities, respectively. The increase in the share price of Commercial Bank of Ceylon PLC during the period mainly contributed to the reported fair value gain in equity securities. The unfavorable movement in the treasury bills and bonds yields resulted in the fair value loss of LKR 1,766 Mn during the period. A gain of LKR 2,062 Mn was recycled through the Income statement by disposing of selected treasury bills and bonds holding originally categorized under fair value through other comprehensive income (FVOCI) with the objective of cash flow management to support the loans and advance growth in line with its projections. The action also goes in tandem with the bank’s expectations on the domestic interest rate trend, going forward.
Business Growth
Despite the challenging business environment, the Bank continued its growth strategy by increasing both deposit and loan portfolio as at 30 September 2021. The loan portfolio grew by LKR 54,072 Mn to record LKR 355,981 Mn compared to LKR 301,909 Mn as at 31 December 2020 recording an increase of 18%. The Bank’s deposit base also experienced a growth of 10% recording an increase of LKR 30,779 Mn to LKR 340,806 Mn from LKR 310,027 Mn as at 31 December 2020. With the 10% increase in deposits and 18% increase in loans, DFCC Bank reported loan to deposit ratio of 104%. The Bank’s CASA ratio, recorded an impressive improvement to 35.66% which is one of the best in the industry. 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 improved to 40.35% as at 30 September 2021.
DFCC Bank continued its approach 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 quality portfolio.
Equity and Compliance with Capital Requirements
In order to support future growth as a full-service retail bank, the Bank has consistently maintained a capital ratio above the Basel III minimum capital requirements. As at 30 September 2021, the Bank has recorded Tier 1 and total capital adequacy ratios of 9.11% and 13.26%, respectively which is well above the minimum regulatory requirements of 8% and 12% including capital conservation buffer of 2%. The Bank’s Net Stable Funding Ratio was 111.71%, which is well above the regulatory minimum of 100%. These strong capital adequacy and liquidity levels are a clear affirmation of the Bank’s stability.
CEO Comment
“Ensuring that we run our business responsibly delivering profit with purpose DFCC Bank will always place our customers in the forefront of everything we do. As a customer centric, digitally enabled bank we will continue to be our customers source of stability and deliver value through an unmatchable top- of-the-line customer experience.
In line with the said vision, the bank embarked on implementing a state of the art, new core banking system in June 2020. Due to the pandemic that prevailed globally and travel restrictions, the go live date of the system got delayed until October 2021. We are happy to note that the new core banking went live by 21st October 2021. Considering the magnitude of the implementation, we have to face many unforeseen challenges. We are thankful to all our clients who were patient with us during this period and can ensure a more futuristic digitally enabled system for client convenience.
Despite the unprecedented challenges faced due to the ongoing pandemic, staff of DFCC Bank will continue to work with commitment to combat the negative socio-economic effects that have impacted our customers and assist them to ascent through sound financial solutions. We will continue to introduce banking services that put safety and security at the forefront and ensure that our internal processes are aligned to these same principles to serve our customers better.
We have a strong asset base to be deployed, but none is more important than the loyalty we earn from customers, not just by keeping their money and their data safe, but by offering products and services that meet their financial needs. This loyalty generates both more predictable returns and insight, enabling us to continue to improve our service”
Lakshman Silva
Director/Chief Executive Officer
October 29, 2021
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