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Pandemic concessions affect income
The Commercial Bank of Ceylon Group has reported mixed results for the first half of 2020, with robust top line growth negated by a combination of factors including pressure on interest margins due to reduced credit demand and interest concessions granted as pandemic relief to borrowers, increasing impairment provisions and low yields on surplus liquidity.
Comprising of Commercial Bank of Ceylon PLC – the country’s largest private bank – its subsidiaries and associates, the Group saw its assets grow by a healthy 11.19% over the six months to cross the milestone Rs 1.5 trillion mark in the second quarter of the year, and gross income improve by 2.15% to Rs 75.167 billion in the review period.
However, with interest income declining by 5% to Rs 61.393 billion for the six months ending 30th June 2020 and by 11.05% in the second quarter alone, mainly due to recognition of a day one /modification loss on interest concessions offered to customers affected by the COVID-19 pandemic under the special concessions mandated by the Central Bank and the Bank’s own concessionary payment schemes, net interest income for the period reviewed reduced by 5.71% to Rs 22.767 billion and by 16.98% to Rs 9.984 billion in the second quarter, adding pressure on net interest margins, the Bank disclosed in a filing with the Colombo Stock Exchange (CSE).
The Bank’s ability to limit the decline in net interest income for the six months to 5.71% was due to its success in reducing interest expenses by 4.57% to Rs 38.626 billion via timely repricing of its liabilities in the review period.
“The ups and downs reflected in our six-month results are symptomatic of the combination of factors that were in play, the pre-pandemic slowing down of business and the consequent rise in impairment charges, and many concessions, voluntary as well as regulator-mandated, that the Bank had to provide in support of customers affected by the impacts of COVID-19,” Commercial Bank Chairman Mr Dharma Dheerasinghe commented. “There were also other gains in some areas that helped cushion the negative impacts to some extent. We believe this is all par for the course.”
The Bank’s Managing Director Mr S. Renganathan elaborated that although total operating income had increased by a respectable 10.34% to Rs 35.437 billion in the review period, impairment charges and other losses had increased significantly by 67.56% to Rs 9.261 billion for the six months. The increase in provisions was mainly due to the higher credit risk on account of facilities under moratorium, additional collective impairment provisions made under stressed scenarios for certain identified industries and a decision to apply increased weightages for the worst case scenario when assessing the probability-weighted forward looking macro-economic indicators and Loss Given Defaults with the objective of capturing the impact of COVID 19 on the Expected Credit Loss computation as at June 30, 2020, resulting in net operating income reducing by 1.56% to Rs 26.176 billion. “Banking has become a balancing act more than ever before, with different indicators contributing to a see-saw effect,” he said.
In this milieu, the Bank contained operating expenses for the six months to Rs 12.986 billion, a growth of just 2.72% over the corresponding period of 2019, enabling it to post an operating profit of Rs 13.191 billion before taxes on financial services, which reflected a reduction of 5.44%, Mr Renganathan disclosed. “We believe this is a creditable achievement in the context of the conditions that prevailed,” he said.
With taxes on financial services for the period reducing by 42.48% to Rs 2.073 billion due to the abolition of the Debt Repayment Levy (DRL) and Nation Building Tax (NBT) from January 2020 and December 2019 respectively, the Group recorded profit before income tax of Rs 11.117 billion, an improvement of 7.40% over the first half of 2019.
Income tax expenses reduced by a marginal 0.24% to Rs 3.669 billion due to tax concessions on the Bank’s Sri Lanka Development Bonds portfolio that were not available in the corresponding period of last year, enabling the Group to report profit after tax of Rs 7.448 billion, a growth of 11.61%.
Taken separately, the Commercial Bank of Ceylon generated a profit before taxes on financial services of Rs 12.511 billion for the six months under review, a decline of 8.17%. Mirroring the Group trend the Bank achieved profit after tax of Rs 6.961 billion, an improvement of 7.65%.
Total assets of the Group grew by Rs 158 billion or 11.19% since 31st December 2019 to Rs 1.567 trillion as at 30th June 2020. Asset growth over the preceding 12 months was Rs 200.568 billion or 14.68% YoY.
Gross loans and advances grew by Rs 10.829 billion or 1.16% since end 2019 to Rs 941.567 billion at the end of the six months reviewed. The growth of the loan book over the preceding year was Rs 52.644 billion reflecting YoY growth of 5.92%.
Total deposits recorded a growth of Rs 86.237 billion or 8.07% over the six months to reach Rs 1.155 trillion as at 30th June 2020, reflecting an average monthly growth of over Rs 14 billion. Deposit growth since 30th June 2019 was Rs 118.069 billion or 11.38% at a monthly average of Rs 9.84 billion.
Elaborating on some of the key elements that impacted Group performance, the Bank said net fees and commissions had reduced by 15.52% for the six months to Rs 4.088 billion as a result of a 31.37% reduction in this component in the second quarter of the year due to the disruption caused by the COVID-19 pandemic and the reduction of fees and charges by the Bank as required by the regulator. However, the negative impact of this decline was cushioned by other income growing by a whopping 173.89% to Rs 8.583 billion, principally because an increase in exchange profit and capital gains had resulted in net other operating income recording close to a four-fold increase, from Rs 1.675 billion to Rs 6.506 billion.
Gains in exchange income from swap trading and foreign currency trading and translation gains of Rs 963.3 million from US Dollar denominated reserves due to a 2.4% depreciation of the Rupee in the first half of 2020 resulted in exchange profit growing four and a half times from Rs 1.422 billion to Rs 6.387 billion, the Bank disclosed.
In addition, net gains from de-recognition of financial assets increased from Rs 355.693 million to Rs 2.134 billion in the review period mainly due to capital gains on the sale of government securities. However, the Bank posted a net trading loss of Rs 58.185 million as against a trading gain of Rs 1.103 billion because the figure for the first half of 2019 was swelled by unrealised gains of Rs 1.266 billion on forward, spot and swap transactions, as against a loss of Rs 304.493 million in the first half of 2020.
However, the negative impact of the unrealised losses on forward, spot and swap transactions was partly negated by mark to market gains of Rs 674.357 million on treasury bills and bonds as against mark to market gains of Rs 50.2 million in the corresponding six months of the previous year.
In other key indicators, the Bank’s Tier 1 capital adequacy ratio (CAR) improved to 13.020% as at 30th June 2020, helped by a reduction in risk-weighted assets due to an increase in investments in government securities and the impact of more loans being categorised as low risk weighted following the Central Bank’s direction to increase the turnover-based ceiling for the SME loans segment. The Bank’s Tier I CAR was well above the revised minimum requirement of 9% imposed by the regulator consequent to the COVID-19 pandemic, while its Total Capital Ratio of 16.866% was also comfortably above the revised requirement of 13%.
An imminent US$ 50 million equity investment in Commercial Bank by the IFC via a private placement would further boost the Bank’s Tier I capital and enhance shareholder value, the Bank said.
The Bank’s gross NPL ratio increased to 5.37% from 4.95% at end 2019 while its net NPL ratio increased to 3.19% from 3.0%.
The Bank’s interest margin reduced to 3.04% for the six months from 3.51% at end December 2019. Return on assets (before tax) and return on equity stood at 1.43% and 10.21% respectively as at 30th June 2020 from 1.66% and 13.54% at the end of 2019.
As part of its response to the COVID-19 pandemic, Commercial Bank launched a series of concessions and facilities to help businesses and individuals recover from the adverse effects of the pandemic, in addition to its conformance with regulator-mandated concessions. The Bank launched two separate bank-funded support loan schemes for SMEs and micro enterprises, special payment relief schemes for existing borrowers, special repayment plans for Credit Card customers and slashed interest rates across the board on all categories of loans.
The first Sri Lankan Bank to be listed among the Top 1000 Banks of the World and the only Sri Lankan bank to be so listed for 10 years consecutively, Commercial Bank is celebrating its 100th anniversary this year. The Bank, which won more than 50 international and local awards in 2019, operates a network of 268 branches and 873 ATMs in Sri Lanka.
Commercial Bank’s overseas operations encompass Bangladesh, where the Bank operates 19 outlets; Myanmar, where it has a Representative Office in Yangon and a Microfinance company in Nay Pyi Taw; and the Maldives, where the Bank has a fully-fledged Tier I Bank with a majority stake.