Results for the nine months ended 31 December 2015
February 25, 2016
This commentary relates to the financial statements for 9 months ended 31 December 2015. These Financial Statements are presented in accordance with Sri Lanka Financial Reporting Standards (SLFRS) aligned with International Financial Reporting Standards (IFRS).
Overview of Financial Performance of the Group
On 1 October 2015, the Registrar General of Companies issued the Certificate of Amalgamation in terms of Section 244 (1) (a) of the Companies Act that DFCC Vardhana Bank PLC (DVB) has been amalgamated with DFCC Bank PLC in accordance with the provisions of Part VIII of the Companies Act, with DFCC Bank PLC (DFCC) surviving as the amalgamated entity.
Currently, DFCC Group comprises DFCC Bank , its subsidiaries, Lanka Industrial Estates Limited (LINDEL), DFCC Consulting (Pvt) Limited, Synapsys Limited, the joint venture company Acuity Partners (Pvt) Limited (APL) and the associate company National Asset Management Limited (NAMAL).
Pursuant to the amalgamation, DFCC changed its financial year-end from 31 March to 31 December. As such the current period results are reported from 1 April 2015 to 31 December 2015.
In the prior years, since the Bank’s financial year ended on 31 March, the results of DVB, APL and Synapsys Limited were consolidated with a three-month gap. Due to the change of the financial year, the results of these companies with a financial year end of 31 December has now been consolidated after closing the 3 month gap period of January to March. However, the results of DFCC Consulting (Pvt) Limited and LINDEL whose financial year ends on 31 March have been consolidated for a period of 9 months ending on 31 December 2015.
In this review, current period means the nine months period from 1 April 2015 to 31 December 2015 and previous year means the year ended 31 March 2015.
As the performance of the current period consist of only a nine month period, the results cannot be directly compared with that of the previous year.
The DFCC Group recorded a consolidated profit after tax of LKR 1,642million for the 9 months ended 31 December 2015 compared with LKR 4,439million in the previous year ended 31 March 2015. A comparison of the Bank level results are further distorted due to the one off gains reported in the previous year, one off expenses related to amalgamation and taxation for 12 months on profits for 9 months due to the change of financial year included in the current period’s results. 2
By far the largest contribution to profits and assets was from the Banking Business which is our core business. For comparison purposes a revised Income Statement and Statement of Financial Position prepared (of banking business) on the basis that the amalgamation took place prior to 1 April 2014 has been released to the Colombo Stock Exchange as supplementary financial information.
The profit after tax of the Banking Business in the current period was LKR 1,239million, compared to LKR 4,501 million in previous year. This is not directly comparable due to different reporting periods, and the reasons explained above.
The net interest income (NII) for the current period of LKR 5,385 million translates to a 3.6% growth on an annualised basis compared to LKR 6,929 million reported in the previous year. In spite of the very healthy credit portfolio growth in Banking Business of over 15% achieved during the current 9 month period, the NII growth was depressed due to the higher drop in lending rates in comparison to the drop in the deposit rates.
Due to the low interest regime the overall interest margin declined to 3.1% compared to 3.6% in the previous year.
Net fee and commission income in the current period was LKR 843 million compared to LKR 1,097 million in the previous year. On an annualised basis it translates to an increase of 2.4% compared to the previous year.
Net gain from trading in the previous year was LKR 496 million compared to LKR 172 million reported for the current period. The lower capital gains recorded on fixed income securities was as a result of the upward trend in market interest rates for fixed income that prevailed during the current period compared to the previous year.
Foreign exchange income too did not contribute positively towards the current period profits due to the depreciation of the LKR against the dollar.
Gain on sale of equity securities was LKR 37 million in the current period compared to LKR 1,135 million in the previous year. This drop was mainly due to the one off capital gain of LKR 829 million realized on the divestment of the entire holding of 9.92% ordinary voting shares of Nations Trust Bank PLC during the previous year.
Dividend income received by DFCC Bank makes a significant contribution to other income. This is largely from the investment in Commercial Bank of Ceylon PLC supplemented by dividend from other equity securities classified as available for sale. However due to the financial year end being advanced during the current period to 31 December 2015, dividend declared during the first quarter of 2016 are not included in the results of the current period.
Impairment allowance reported during the current period is higher compared to the previous year due to a reversal in impairment allowance in the previous year arising from a change to the impairment assessment processes. 3
The cumulative allowance for impairment for loans and advances was maintained at a healthy level of 72% as a percentage of impaired loans and advances as at 31 December 2015. The ratio of impaired loans to total loans as at 31 December 2015 was 5.1% compared to 6.1% as at 31 March 2015, indicating an improvement in credit quality.
In common with the banking industry, personnel cost is a significant proportion of the operating expenses. During the current period the main cost increases were due to one off costs incurred on account of amalgamation and costs associated with the branch expansion. Due to the change of the financial year end to 31 December, the current year income tax expense is computed based on results for a period of 12 months despite the reported results being only for a 9 month period. As a result of the change of the financial year, the Bank has estimated an additional income tax liability of LKR 180 million.
The total assets of the Group recorded a significant growth of 17% and stood at LKR 247,109 million as at 31 December 2015 compared to LKR 210,610 million on 31 March 2015. Within this growth, loans and receivables to customers grew by 18% over the previous year.
Liabilities were mainly in Sri Lankan Rupees but it also has foreign currency liabilities mainly US Dollars. Remarkable growth of 19% was achieved in customer deposits by the Group during the 9 months ended 31 December 2015 compared to the previous year.
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 2015, due to adverse market conditions the available for sale securities recorded a fair value loss of LKR 3,246 million. In the comparable year the fair value gain was LKR 5,531 million.
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 recognition of net unrealized gain on listed ordinary shares listed in the Colombo Stock Exchange and owned by the bank at fair value.
The payout ratio based on the dividend recommended by the Directors is 62% in the current period compared to 49% in the previous year. Dividend per share for the 9 months ended 31 December 2015 is LKR 2.50 per share compared to LKR 6.0 per share in the previous year. The decrease in the dividend is mainly due to the financial results for the current period being for a contracted period of 9 months and the other circumstances explained earlier.
Bank continued to remain as one of the best capitalized Banks in the industry with Group Tier 1 capital adequacy ratio at 15.39% and total capital adequacy ratio at 15.32%. The regulatory 4
capital computation excludes fair value changes on financial assets classified as available for sale.
Chief Executive Officer
24 February 2016