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Portfolio YoY Growth +19%; PAT up 70%; First single digit Coupon Debenture Issue

       Mr Royle Jansz,Chairman, DFCC Bank                                   Mr Arjun Fernando, Chief Executive, DFCC Bank

The DFCC Group recorded a robust first half performance with consolidated profit after tax of LKR 2,071m for the 6 months ended 30th September, 2014 compared with LKR 1,222m during the previous period. This growth of 70% was underpinned by the strong performance of the Group’s Banking Business (a composite of DFCC Bank, a specialised bank, and its 99% owned subsidiary, DFCC Vardhana Bank, a commercial bank).

The stand alone operating profit before taxes of the Group’s Banking Business was LKR 2,996m and profit after tax was LKR 2,002m, against LKR 1,962m and LKR 1,180m respectively in the previous period. This represents impressive growth of 53% and 70% respectively. The other members of the DFCC Group, which includes the joint venture investment bank, Acuity Partners (Pvt) Ltd., collectively contributed LKR 126m to PAT compared with LKR 104 in the previous period – a growth of 21%.

The Group’s Banking Business recorded a portfolio growth of 19% year on year. This was a notable achievement given the weak demand for credit that persisted throughout most of the period. In fact, this growth rate far exceeded that achieved by the banking industry. The period was also marked by drop in benchmark interest rates leading to a steep decline in lending rates. While borrowing costs also declined, the lag effect had an impact on net Interest income, which decreased by 18% from LKR 4,092m to LKR 3,364m. However, fee and commission income in the period increased by 21% to LKR 453m compared to LKR 373m in the previous period. A notable feature is that this income not only included fees generated by the commercial banking subsidiary from trade finance and commercial banking services, but also consultancy fees earned from overseas assignments undertaken by DFCC Bank. Cost control remains a critical focus area and during the period, stringent cost management enabled the Group’s Banking Business to contain operating cost increases to 8% over that of the comparable period. Of these increases, 3% was on account of a charge for Nation Building Tax, while the balance included the expenses incurred for the addition of ten new branches in the year to date.

DFCC Bank’s performance also benefited from the performance of the Colombo stock market. The impact of the stock market on the value of the listed shares in DFCC Bank’s equity portfolio is recognised by the fair value changes representing unrealized gains or losses in other comprehensive income. During the period ended 30 September 2014, due to the share market appreciation there was a fair value gain of LKR 4,679m compared to the fair value gain of LKR 569m in the previous comparable period. At the same time, capitalizing on the upward momentum in the Colombo stock market, DFCC Bank divested some of its mature equity holdings and realised a capital gain of LKR 300m.

The period was also noteworthy for DFCC Bank’s funding activities. In August, the Bank trail blazed the way when it undertook its second issue of listed Debentures at a single digit coupon rate – the first such issue to hit the market. The initial offer was for LKR 3,000m with an option to raise a further LKR 2,000m. Due to the overwhelming response, where the issue was oversubscribed 3 times over during the first day itself, DFCC exercised its option to increase the issue to the total value of LKR 5,000m.

Commenting on DFCC Group’s performance, CEO Arjun Fernando said: ‘The strong performance of the Group’s Banking Business should be viewed in the context of weak credit demand and excess liquidity. While the combined business represents a mix of development banking and commercial banking, the bulk of the portfolio comprises project loans. These are amortising facilities in that they are continuously repaid over a period of time. This means that achieving absolute growth is that much more difficult. In fact, our project loan book grew by almost 16% from January to September this year and if you factor in the repayments the growth is close to 37%, which is a remarkable achievement’. He further commented that the reduction in interest rates have benefitted DFCC’s Banking Business clientele as these low rates have been passed on to them. ‘Given the circumstances, maintaining interest margins is going to be a challenge and the Bank recognizes that relying only on lending activities is no longer tenable. We have taken steps to grow other income to ensure shareholders continue to realize good returns on their investment.

I am happy that an Organisational Efficiency Improvement Programme, which was introduced last year, is bearing fruit in eliminating unnecessary costs and achieving efficiency gains. In fact the Business Banking Group’s cost to income ratio is one of the lowest in the industry and that of DFCC itself is the lowest’. Commenting on the future he said; ‘It is business as usual for the DFCC Business Banking Group. As you know the DFCC Bank (Repeal and Consequential Provisions) Act No 39 of 2014, which provides for the registration of DFCC Bank as a public limited company incorporated under the Companies Act with the name DFCC Bank PLC was certified by the Hon. Speaker on 1st November. The proposed law will enable the Bank to come into being as DFCC Bank PLC from a date specified by the Minister and continue to carry on its business as a licensed specialised bank without any interruption. As regards the proposed merger with NDB, discussions between the institutions are well underway with facilitation from the Boston Consulting Group’. He concluded; ‘We are in for very challenging but exciting times and all of us at DFCC Group are looking forward to a new era’.