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The Commercial Bank Group has reported a six-month financial performance that mirrors the impacts of the country’s macro-economic variables, with solid operational gains negated by extraordinary provisioning in the second quarter for impairment charges and other losses.
Comprising of the Commercial Bank of Ceylon PLC, its subsidiaries and an associate, the Group posted a gross income of Rs 119.517 billion for the six months ended 30th June 2022 and Rs 64.944 billion for the second quarter, achieving a healthy topline growth of 49.52% and 66.41% respectively.
Interest income grew by 39.08% to Rs 88.117 billion for the six months, and by 58.78% to Rs 50.270 billion for the second quarter primarily due to repricing of assets. With rising interest rates and the consequent repricing of deposits, interest expenses increased by 47.23% to Rs 47.404 billion for the six months, and by 77.61% to Rs 28.380 billion for the second quarter. As a result, net interest income for the six months improved by 30.66% to Rs 40.713 billion, while net interest income for the second quarter reported a higher growth of 39.59% to Rs 21.890 billion.
Commenting on the period reviewed, Commercial Bank Chairman Prof. Ananda Jayawardane said: “Our six-month results are a case study on how macro-economic challenges can neutralise solid operational performance. We have achieved encouraging operational performance across the board, but have been compelled, as any prudent institution would do, to make adjustments that respond to the deteriorating economic environment, ensuring that the Bank meets its obligations to all stakeholders and retains its inherent financial strength and stability.”
The Bank’s Managing Director and CEO Mr Sanath Manatunge added: “The mercurial policy environment we operate in, requires agile responses as well as forward-looking decisions, however tough they may be. Our second quarter results are particularly influenced by additional impairment charges that impacted on profit growth, but represent a realistic management of credit risk. Banks will be required to perform a balancing act of this nature in the short and medium term until external conditions improve.”
According to the Interim Financial Statements filed with the Colombo Stock Exchange (CSE), the Commercial Bank Group achieved a solid growth in fee and commission income, which was up 65.56% to Rs 11.759 billion for the six months mainly due to a noteworthy improvement in fee and commission income of 79.21% to Rs 6.366 billion for the second quarter; which helped net fee and commission income for the first half of 2022 to improve by 55.41% to Rs 8.878 billion compared to Rs. 5.712 billion reported for the corresponding period of 2021.
Further, other income, which comprises of net gains from trading, net gains from derecognition of financial assets and net other operating income, grew by 107.32% to Rs 19.642 billion for the six months and by 117.88% to Rs 8.309 billion for second quarter of 2022. Net gains from trading for the six months amounted to Rs 32.102 billion compared to Rs 1.425 billion recorded for the corresponding period of the previous year. This was primarily from realized and unrealized gains from forward exchange contracts, spot and swap transactions. However, the revaluation of foreign currency assets and liabilities and the exchange impact on impairment charges on loans and advances and Government Securities denominated in foreign currency resulted in a net other operating expense of Rs 12.524 billion for the first half of 2022, compared to the net other operating income of Rs 5.213 billion reported for the corresponding period of last year.
Total operating income for the six months under review amounted to Rs 69.232 billion, an improvement of 49.39%. The figure for the second quarter was Rs 34.988 billion, reflecting an even stronger growth of 57.72%.
The Group reported impairment charges and other losses totaling to Rs 35.219 billion for the six months and Rs 29.258 billion for the second quarter alone, reflecting increases of 157.93% and 350.24% respectively. The exchange impact on impairment charges on loans and advances and Government Securities denominated in foreign currency was adjusted in Net Other Operating Income where the corresponding exchange gains are recognised.
Elaborating on the increased impairment provisioning, Mr Manatunge said the Bank provided substantial impairment charges on loans and advances in respect of individually significant customers as well as collectively for other customers and those customers in the risk-elevated sectors, as necessitated by the most recent developments in macro-economic indicators impacting the credit risk. “We also continue to recognise additional impairment provisions by way of management overlays on account of loans under moratoriums”, he said. “In the second quarter, the Bank also recognised substantial impairment provisions on its foreign currency denominated government securities owing to the recent downgrading by rating agencies of Sri Lanka’s sovereign, and the announcement by the government that it is considering a consensual restructuring of the country’s external debt via an economic adjustment programme supported by the IMF. Accordingly, the Bank has increased impairment provisions on account of foreign currency denominated government securities during the second quarter.”
Consequently, the growth in the net operating income for the six months under review reduced to 4.05% or Rs 34.014 billion, while the figure of Rs 5.730 billion for the second quarter reflected a decline of 63.47%.
Operating expenses increased by 28.07% for the six months to Rs 18.031 billion, and by 32.50% for the second quarter to Rs 9.311 billion, mainly due to increases in staff-related expenses and other operating expenses owing to inflation and the sharp depreciation of the rupee during the first half of 2022, which
had a significant impact on expenses paid in foreign currency such as card-related payments, license fees and annual maintenance charges. As a result, the Group’s operating profit before Value Added Tax (VAT) on financial services reduced by 14.12% to Rs 15.982 billion for the six months under review and by 141.36% to a loss of Rs. 3.581 billion for the second quarter.
With VAT on financial services reducing by only 8.91% to Rs 2.603 billion, the Group reported a profit before tax of Rs 13.376 billion for the six months, recording a decline of 15.09% over the first half of 2021. Income tax for the period increased by 23.47% to Rs 4.198 billion despite the drop in pre-tax profit for the period under review as the figure for the corresponding six months of 2021 was reduced by the reversal of an over-provision for 2020 resulting from the reduction in the corporate tax rate from 28% to 24%, which was adjusted in the first quarter of 2021. Therefore, the Group’s profit after tax of Rs 9.178 billion for the six months reflected a decline of 25.71% compared to the corresponding period of last year.
Taken separately, Commercial Bank of Ceylon PLC posted a profit before tax of Rs 12.576 billion for the six months, recording a drop of 18.44% and a profit after tax of Rs 8.592 billion, a decline of 29.19% compared to profit before tax of Rs. 15.420 billion and profit after tax of Rs. 12.134 billion reported for the corresponding period of the last year.
Total assets of the Group grew by Rs 420 billion or 21.17% over the six months to reach Rs 2.403 trillion as at 30th June 2022. Asset growth over the preceding 12 months was Rs 469 billion or 24.23%. Notably, a significant portion of the growth in assets during the period under review was due to the sharp depreciation of the Rupee against the US dollar.
Gross loans and advances of the Group increased by Rs 205 billion or 18.71% at a monthly average of Rs 34 billion to Rs 1.300 trillion as at 30th June 2022, while the growth of the loan book of the Group over the preceding year was Rs 266 billion or 25.71%. In the meantime, total deposits of the Group recorded a growth of Rs 284 billion or 19.30% in the six months to Rs 1.757 trillion as at 30th June 2022, recording a monthly average of Rs 47 billion, while the YOY deposit growth was Rs 352 billion at a monthly average of Rs 29 billion. Once again, the primary reason for the growth in both gross loans and advances and deposits was due to the sharp depreciation of the Rupee against the US dollar during the period under review.
In other key indicators, the Bank’s net assets value per share increased by 12.69% to Rs 155.60 from Rs 138.08 as at end 2021. The Bank’s Tier 1 Capital Adequacy Ratio (CAR) stood at 10.604% as at 30th June 2022, and its Total Capital Ratio stood at 13.528%. The Bank said it expects to maintain the minimum earnings retention ratio at 60% for which the capital conservation buffer (CCB) requirement as per the Banking Act Direction No 04 of 2022 is between 1.250% and 1.875%. Accordingly, the minimum total capital ratio required to be maintained by the Bank is between 12.750% and 13.375%. The Bank has in place a capital augmentation plan towards rebuilding the CCB to 2.5% within three years as required by the said Direction.
In terms of liquidity, the Bank’s statutory liquid assets ratios for its domestic banking unit and offshore banking unit stood at 25.37% and 30.13% respectively, well above the minimum requirement of 20%. In terms of asset quality, the Bank’s impaired loans (stage 3) ratio stood at 3.65% while its stage 3 impairment to stage 3 loans ratio stood at 42.33% as at 30th June 2022, compared to the ratios of 3.85% and 42.76% reported as at end 2021.
In key profitability indicators, the Bank’s net interest margin improved to 3.71% for the six months ended 30th June 2022, while its return on assets (before taxes) stood at 1.18% and return on equity stood at 9.69%.
Commercial Bank is Sri Lanka’s first 100% carbon neutral bank, the first Sri Lankan bank to be ranked among the Top 1000 Banks of the World and the only Sri Lankan bank to be so listed for 12 years consecutively. It is the largest lender to Sri Lanka’s SME sector and is a leader in digital innovation in the country’s Banking sector. The Bank’s overseas operations encompass Bangladesh, where the Bank operates 19 outlets; the Maldives, where the Bank has a fully-fledged Tier I Bank with a majority stake, and Myanmar, where it has a microfinance company in Nay Pyi Taw.