Results for the First Quarter Ended 30 June 2013
August 13, 2013
Mr Nihal Fonseka, Chief Executive/Director
Results for the First Quarter Ended 30 June 2013
This commentary relates to the interim non-audited financial statements for 3 months ended 30 June 2013.
This is the first Interim Financial Statements presented in accordance with Sri Lanka Financial Reporting Standards (SLFRS) aligned with International Financial Reporting Standards (IFRS). In this presentation, the comparative amounts previously reported, under the former accounting standards collectively referred to Generally Accepted Accounting Principles (GAAP) have been restated under SLFRS.
Group Performance
The DFCC Group recorded a consolidated profit after tax of LKR 615m for the 1st quarter ended 30 June 2013 compared with LKR 609m in the corresponding period of the previous year (comparable period).
Apart from the Banking Business which contributed LKR 577m to profit after tax and is analysed below, the investment banking joint venture, Acuity Partners (Pvt) Limited (APL) contributed LKR 14m in the current period and a loss of LKR 1m in the comparable period. The contribution from all other subsidiaries and associate company collectively was LKR 24m in the current period (LKR 29m in the comparable period).
Banking Business
The Banking Business of the DFCC Group is undertaken by DFCC Bank (DFCC), a licensed specialized bank and 99 % owned subsidiary DFCC Vardhana Bank (DVB), a licensed commercial bank. Both banks function as one economic entity and as such it is appropriate to analyse the consolidated performance of the two banks as DFCC Banking Business (DBB). A consolidated Income statement for DBB has been released to the Colombo Stock Exchange as supplementary financial information. This statement was derived from the interim financial statements. Since the financial year of DVB ends in December, the accounts of DVB are consolidated with a 3 month lag.
Net Interest Income (NII) of DBB for the period increased by 35% from LKR 1,574 m to LKR 2,120 m although total loans and advances (net of accrued interest) only increased by 11% year on year to LKR 108,075m as at 30 June 2013. However, the reported NII does not include the cost of hedging exchange rate risk arising from funding swaps where the DBB swaps foreign currency to LKR to fund LKR assets as part of its funding strategy. The hedging instruments are forward exchange purchase contracts accounted as a derivative and its fair value changes are reported as ‘net gain / (loss) from financial instruments at fair value through profit or loss’ in the income statement.
In order to measure the financial impact of funding swaps, the elements included in fair value changes on forward exchange contracts (viz swap premium, exchange rate movement and fair value changes on forward exchange contracts)have to be redistributed to interest expense and foreign exchange income/(loss).
The swap premiums during the current period was LKR 261m compared with LKR 266m in the comparable period. Adjusted for these costs, the NII would have been LKR 1859m for the quarter and LKR 1308m in the comparable period, a 42% increase signifying the successful outcome of the funding swap strategy that offset the pressure on interest margin in an environment where LKR interest rates progressively declined and the Central Bank of Sri Lanka relaxed its monetary policy with a view to stimulating credit demand.
Correspondingly an adjustment has to be made for foreign exchange income/(loss) reported under ‘other operating income’. With such adjustments the revised foreign exchange loss in the current period is LKR 35m (reduced from reported loss from LKR 254m). The comparable previous period income is LKR 264m (increased from reported gain of LKR 50m). Net fee and commission income of DBB in the current period was LKR 170m an increase of 5% over LKR 162m in the previous comparable period. This is generated largely by DVB the commercial banking subsidiary since this source of income is largely associated with trade finance and commercial banking services.
Total charge for impairment for the current period was LKR 351m a 33% increase over LKR 263m in the comparable period. The charge included interest on impaired loans recognized on accrual basis as interest income and hence in NII.
The cumulative allowance for impairment as a percentage of impaired loans on 30 June 2013 was 80%, the same level as on 31 March 2013.
DBB added eleven more branches as at 30 June 2013 compared to the number of branches one year ago on 30 June 2012. Investment in technology, rationalization of organization structure, additional recruitment contributed to an 18% increase in the operating expenses in the current period.
The DBB recorded LKR 958 m as operating profit before taxes which was an increase of 3% over the comparable period. Profit after tax (both VAT on financial services and income tax) was LKR 577m, marginally lower than LKR 586m in the comparable period.
Investments
Listed shares are classified as available for sale and carried at fair value. Fair value changes that represent unrealized gains/loss are recognized in other comprehensive income under SLFRS under previous GAAP they were carried at cost.
During the quarter ended 30 June 2013, due to market appreciation of listed shares there was a fair value gain of LKR 585 m. In the comparable period the fair value loss was LKR 550m. A Substantial proportion of the listed share portfolio is on account of investment in Commercial Bank of Ceylon PLC
Equity Capital
Under SLFRS, the total income for the period comprises the income reported in the income statement and other comprehensive income. Consequent to this change there are two significant changes. Shares listed in the Colombo Stock Exchange and owned by the bank are recognized at the fair value and changes in the fair value included in other comprehensive income significantly augmenting the equity capital.
Prudential Indicators
The capital adequacy and liquidity ratios continued to be well above the stipulated regulatory minimum. The regulatory capital computation excludes fair value changes on financial assets classified as available for sale. Impairment allowance cover for the DBB was 80% and past due loans of three months and over not covered by impairment allowance as a proportion of equity was under 4%.
Nihal Fonseka
Chief Executive Officer
12 August 2013
