Amidst a turbulent economic environment and significant disruption to the economy as a result of Sri Lanka’s multiple crises of economy, energy, and foreign exchange, DFCC Bank has recorded a moderate performance for the first half of the year, ending 30 June 2022.
After accounting for the higher charge for impairment loss, the bank reported a profit before tax (PBT) of Rs. 331 million and a profit after tax (PAT) of Rs. 513 million for the period ending 30 June 2022. This compares with a PBT of Rs. 2,753 million and a PAT of Rs. 2,031 million in the comparable period.
The group recorded a PBT of Rs. 690 million and a PAT of Rs. 824 million for the period ending 30 June 2022, compared with Rs. 2,994 million and Rs. 2,237 million, respectively, in June 2021.
Due to the prevailing financial crisis, as a monetary policy tightening measure, the Government of Sri Lanka (GoSL) decided to increase interest rates to arrest the development of demand-driven inflationary pressures in the economy and preempt the escalation of adverse inflationary expectations, to provide the required impetus to stabilise the exchange rate and also to correct anomalies observed in the market interest rate structure.
Accordingly, the interest rates on deposit and lending products of the banks have adjusted upwards considerably. The net interest income (NII), which is the core business of the bank, recorded an increase of 97% and reached Rs. 11.1 billion by the end of Q2 2022. The increase in the Average Weighted Prime Lending Rate (AWPLR) by 1,480 bps over the past 12 months and the time lag in repricing the existing deposits contributed to an increase in the interest margin from 2.66 % in December 2021 to 4.45% in June 2022.
DFCC Bank posted a total operating income of Rs. 12 billion for the period ending 30 June 2022 compared to Rs. 9 billion in the comparative period, which is a 35% increase. Due to exchange rate depreciation, import restrictions, and other unfavourable economic conditions, the momentum of the business was noticeably negatively affected. However, the concerted effort made has helped the bank to record a non-fund income (NFI) of Rs. 1,183 million for the period ending 30 June 2022, which is only a 9% decrease compared to the comparable period.
The impaired loan (Stage 3) ratio increased from 3.03% in December 2021 to 3.53% at the end of June 2022. In order to address the current and potential future impacts of prevailing economic conditions on the lending portfolio, the bank stated it 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 including additional provisions made for the bank’s exposure to foreign currency denominated financial instruments issued by the GoSL.
With these additional provisions made to cover the additional risk in the economic environment, the impairment charge has recorded an increase of 313% compared to the comparative period and was Rs. 6,808 million for the period ending 30 June 2022 compared to Rs. 1,649 million in the comparable period of last year.
During the period ending 30 June 2022, the bank’s operating expenses increased from Rs. 4,095 million to Rs. 4,831 million, compared to the corresponding period in 2021, primarily due to the increase in inflation. With the implementation of the core banking system during the last year, the bank created multiple channels for service delivery to customers through a strong digital drive, providing access to enhanced banking services.
This resulted in an increase in IT-related expenses in order to support the infrastructure upgrades. However, the numerous process automation and workflow management systems introduced helped to facilitate effective cost controls, which resulted in operating expenses being curtailed and managed at these 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. Total other comprehensive expense that was reclassified during the period to the income statement mainly includes the negative movement of Rs. 13,594 million from hedging reserve which was due to the currency depreciation which impacted the hedged foreign currency borrowing (hedge item) and the swap arrangement (hedge instrument).
As per the option given under the Statement of Alternative Treatment (SoAT) on Reclassification of Debt Portfolio issued by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka), the bank has reclassified the investment in long-term debt instruments from fair value through other comprehensive income to amortized cost. A fair value loss of Rs. 4,729 million was recorded on account of equity securities outstanding as of 30 June 2022.
As a result of rising interest rates, high inflation, and currency depreciation, the bank did not pursue an aggressive lending growth strategy. The gross loan portfolio of the bank of Rs. 416,619 million as of 30 June 2022 recorded an increase of Rs. 31,660 million compared to 31 December 2021.
The net increase reflected is mainly due to the effect of the devaluation of the rupee on the foreign currency lending portfolio in spite of steps being taken by the bank to reduce the foreign currency lending portfolio by over Rs. 9 billion during the period ending 30 June 2022.
Similarly, the deposit portfolio of the bank also experienced an increase of Rs. 23,663 million to record Rs. 343,524 million as of 30 June 2022 compared to Rs. 319,861 million as of 31 December 2021. This resulted in a loan-to-deposit ratio of 114% as of 30 June 2022. The current and savings account (CASA) ratio decreased to 29.20% as of 30 June 2022.
DFCC Bank stated it 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 of 30 June 2022, the bank has recorded Tier 1 and Total Capital Adequacy ratios of 10.84% and 14.14%, respectively. The bank’s Net Stable Funding Ratio (NSFR) was 124.58% and Liquidity Coverage Ratio (LCR) – all currency was 133.37% as of 30 June 2022. All these regulatory ratios were maintained above the minimum regulatory requirement.
During the quarter, with the objective of increasing Tier 1 capital in order to assist future asset growth, the bank raised Rs. 3.6 billion by way of a rights issue of shares at an issue price of Rs. 55 per share.
DFCC Bank records moderate performance amidst volatile economic, political environment
10 Aug 2022
DFCC Bank records moderate performance amidst volatile economic, political environment
10 Aug 2022