Results for the Nine months Ended 31 December 2014
February 13, 2015
Mr Arjun Fernando, Chief Executive Officer
Results for the Nine months Ended 31 December 2014
This commentary relates to the interim non-audited financial statements for 9 months ended 31 December 2014. These Financial Statements are presented in accordance with Sri Lanka Financial Reporting Standards (SLFRS) aligned with International Financial Reporting Standards (IFRS).
Group Performance
The DFCC Group recorded a consolidated profit after tax of LKR 3,594m for the nine months ended 31 December 2014 compared with LKR 2,028m in the corresponding period of the previous year (comparable period).
The contribution from Banking Business (DBB) comprising the DFCC Bank (DFCC), a licensed specialized bank and its 99% owned subsidiary DFCC Vardhana Bank PLC (DVB), a licensed commercial bank is analysed below. Apart from DBB which contributed LKR 3,390m to profit after tax, the investment banking joint venture, Acuity Partners (Pvt) Limited (APL) contributed LKR 141m (LKR 82m in the comparable period) while the subsidiary Lanka Industrial Estates Ltd, contributed Rs 102m (LKR 92m in the comparable period). The contribution from the other subsidiaries and associate company collectively was LKR 18m in the current period (loss of LKR 12m in the comparable period).
Banking Business
The Banking Business of the DFCC Group is undertaken by DFCC and DVB. 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.
The DBB recorded LKR 4,926m as operating profit before taxes, an increase of 56% over the comparable period. Profit after tax (both VAT on financial services and income tax) was LKR 3,390m, an increase of 74% over LKR 1,949m in the comparable period.
DBB recorded a credit growth of 14% during the period. The Net Interest Income (NII) of DBB for the period however decreased by 16% from LKR 5,970m to LKR 4,989m. Unlike in commercial banks our funding is mainly through long term borrowing sources. As such the reduction in NII was mainly due to the drop in lending interest rates which were warranted by market conditions and the time lag in re pricing of the long term borrowings.
Net fee and commission income of DBB in the current period increased by 25% to LKR 743m compared to LKR 596m in the previous comparable period. Fee income is generated largely by DVB the commercial banking subsidiary from trade finance and commercial banking services. Fee income also included consultancy fees earned from overseas assignments undertaken during the period.
Capitalizing on the upward momentum in the stock market, on 31 October 2014 the Bank divested the entire holding of 9.92% ordinary voting shares of Nations Trust Bank PLC and realized a capital gain of Rs 829 m. The Bank was able to divest some of the other mature equity holdings as well and generate a further capital gain of LKR 306 m during the period.
The forward exchange contracts are 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.
The revised impairment assessment methodology implemented during the first quarter has been consistently applied during the period ended 31 December 2014. The cumulative allowance for impairment for loans and advances was maintained at a healthy level of 63% as a percentage of impaired loans and advances of DBB on 31 December 2014.
Due to stringent cost management DBB was able to contain the overall operating cost increases to 11.6% over that of the comparable period while absorbing a 3.9% cost increase in the current period expenses due to a charge for Nation Building Tax which was introduced with effect from 1 January 2014.
In common with banking industry, the personnel cost is a significant proportion of the operating expenses. The personnel cost of DBB increased by 6% in the current period to LKR1,252m from LKR 1,178m in the comparable period. Salary and benefits in DBB were revised in October 2014 following a survey to bring these in line with market. DBB added four more branches during the 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. During the period ended 31 December 2014, due to market appreciation of available for sale securities there was a fair value gain of LKR 6,204 m. In the comparable period the fair value gain was LKR 1287 m.
Equity Capital
Under SLFRS, the total income for the period comprises the income reported in the income statement and other comprehensive income. The equity capital is significantly augmented due to the gain as a result of the recognition of shares listed in the Colombo Stock Exchange and owned by the bank at fair value.
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.
Proposed Amalgamation with National Development Bank PLC
A considerable amount of preparatory work relating to the proposed amalgamation has been undertaken during the period under review. The Bank will await further information on this matter from the regulators before deciding on the next steps.
Events Occurring after 31 December 2014
In terms of the DFCC Bank (Repeal and Consequential Provisions) Act No 39 of 2014 the DFCC Bank was incorporated under the Companies Act as a public company listed in the Colombo Stock Exchange with the name “DFCC Bank PLC” (Company Registration No: PQ 233) with effect from 6 January 2015 and will continue to carry on its business as a licensed specialized bank without any interruption.
Arjun Fernando
Chief Executive Officer
11 February 2015
