Sampath Group continues with growth momentum in 1Q

Sampath Bank Group

The Group, which consists of Sampath Bank and four subsidiary companies, continued with the growth momentum in the first quarter of 2012, by posting impressive results in many key areas over the last year same period.

Pre-tax profit of Rs. 2,238.2 m of the Group for the 1st Q 2012 was a growth of Rs. 777.4 m or 53.2%, over the previous year’s 1Q pre-tax profit of Rs. 1,460.8 m, with Sampath Bank, as the main entity of the Group, contributing bulk (96%) of the profit. The post-tax profit of the Group amounted to Rs. 1,495.0 m, recording a growth of Rs. 502.5 m or 50.6%, over the post-tax profit of Rs. 992.5 m for the last year same period.

Profit of the Bank

The Bank’s pre-tax profit which rose to Rs. 2,150.8 m in 1Q 2012, reflected an increase of Rs. 802.2 m or 59.5% over the pre-tax profit of Rs. 1,348.6 m for 1Q 2011. The post-tax profit of the Bank recorded a growth of 59.1% over the same period of last year, rising from Rs. 898.8 m in 2011 to Rs. 1,430.0 m in 2012.

The lower PAT growth rate of 50.6% at the group level was mainly due to the drop in profits of the Stock Brokering subsidiary, SC Securities Company, arising from the current situation in the Colombo Stock market.

Contributory factors for the Bank’s improved results:

Net Interest Income (NII)

NII, which is the main source of income from the fund based operations and representing over 50% of the total operating income, rose from Rs. 2,060.5 m in 1Q 2011 to Rs. 2,458.6 m in 1Q 2012, recording a significant growth of 19.3%.

This increase was achieved despite the Net Interest Margin (NIM), which stood at 4.22% in 1Q 2011 dropping to 3.86% in 1Q 2012, as a result of cost of funds increasing at a faster rate than the rise in average yield rates of both the customer advances and government securities held.

Hence, this significant growth in NII was largely due to the high growth rates recorded by the bank in key business volumes, namely 33.7% in customer advances, 31.9% in total assets and 25.3% deposits during the one year period ended 31 March 2012.

Exchange income

The above income, the key contributory factor for the high profit growth in the 1st Q2012, rose from Rs.137.9 m in the 1st Q 2011 to Rs. 1,427.6 m in the 1st Q 2012, recording a growth of Rs. 1,289.7 m or 935%. This was facilitated mainly by the increase in the revaluation gains on the foreign currency reserves held in the Bank’s FCBU, aided by a sharp depreciation of Rupee against the US Dollar in 2012 (Rs. 113.9 as at 31st Dec 2011 to Rs. 128.20 as at 31 March 2012) and the substantial increase in the dealing room’s trading profits.

Other income

Other income of the Bank, bulk of which is commission and fee-based income, too recorded a growth of Rs. 100.7 m or 14.6% in 1Q 2012 over the same period in 2011 as a result of Increased economic activity in the market and the rapid growth achieved by the Bank in its lending activities. The only source of other income, which recorded a negative growth (85.6%) in 1 Q 2012 was capital gain on share trading, which amounted to Rs. 11.3 m as against Rs. 78.6 m reported in 1Q 2011.

Operating expenses

Operating expenses of the Bank, which stood at Rs. 1,838 m in 1Q 2011, rose to Rs. 2,132 m in 1Q 2012, recording an increase of Rs. 294 m or 16%. This growth in operating expenses was largely due to the incremental cost incurred in connection with the opening of 35 new branches in 2011and the increase of 697 in the staff cadre, which too was due to the expansion drive.

The Bank anticipates that the cost increase rate would be somewhat lower in years to come, in view of the moderation expected in the branch expansion program, given the fact that Bank’s branch network has now adequately covered most of the potential locations of the country.

Loan loss provisions and Provision Cover

Though the Provision Cover recorded a marginal decline and stood at 71.36 % at the end of 1Q 2012, due to the recoveries made against the underlining NPLs, the specific Provision Cover still remained at a higher level, compared to the industry average of 45 % on 31 December 2011. Together with the general provisions, the total Provision Coverage Ratio of the bank stood at 85.35 % as at 31.03.2012.

With a low NPL ratio of 2.55% and high provision cover of 77.3 % at the beginning of the year 2012, the need for specific provisions become naturally low and consequently the charge on specific provisions in 1Q 2012 amounted to Rs. 72.5 m, as against Rs. 153.2 m made in 1Q 2011. However, the regulatory general provision made against performing advances had to be increased due to significant credit growth recorded in 1Q 2012.

Investment provisions/reversals

The provision against mark to market losses on the trading portfolio of shares and Treasury Bills amounted to Rs. 119.5 m in the 1st Q 2012, as a net gain of Rs. 208.4 m in 1Q 2011, which includes a reversal of an impairment provision of Rs. 275.9 m made against the share investment in Union Bank.

Business growth

The growth rates in deposits and total assets during 1Q 2012 amounted to 6.2% and 9.1 % respectively and compared well with the industry’s growth rates of 5.7% and 8.1%, during the period. In addition, the growth rate in customer advances during 1Q 2012 amounted to 10.8%, as against the industry average of 6.8% during the period.

Non-Performing Advances

The NPL volumes net of IIS which stood at Rs. 5,919 m as at 31 March 2011 was reduced to Rs. 5,532.6 m by Rs. 386.4 m or 6.5% as at 31 March 2012. Though the NPL volumes rose by Rs. 296.8. m in 1 Q 2012, the NPL Ratio of the Bank was reduced to 2.55% as at 31 March 2012, from 2.65% as at 31 December 2011, which also compared well with the industry average of 3.9% as at 31 March 2012.

Key financial ratios

The improved profits paved the way for most of the key financial ratios of the Bank to record significant improvements over the previous year.

Cost/income ratio

This ratio rose to a peak level of 61.6% in 2011, mainly due to the additional cost incurred in connection with the accelerated branch expansion program and recruitment of 697 new staff to support the business expansion. However, the ratio in 1Q 2012 dropped to 50.64% with the moderation in the branch expansion program and the significant increases in the NII and foreign exchange income.

ROA and ROE

Both ratios showed significant improvements in 1Q 2012, due to the higher profit growth rate of 59.1% of the Bank during the period. The ROA after tax which stood at 1.78% in 2011 rose to 2.25% in the 1Q 2012, whereas the ROE which stood at 22.6% in 2011 rose to 29.27% during the period under review.

Statutory liquid asset ratio

This ratio dropped from 24.95% as at 31 December 2011 to 22.03% as at 31 March 2012, mainly due to the rapid credit expansion. Though, the ratio was maintained at a reasonably high level over the minimum of 20%, it was not as high as the industry average of around 31.7%, due to the prudent trade-off maintained between liquid assets and earning assets.

Capital adequacy ratios

The capital adequacy ratios, Tier I at 9.83% and Total at 11.04%, by the end of 1Q 2012, recorded marginal deteriorations compared to the level as at 31 December 2011, mainly due to the rapid credit expansion during 1Q 2012. Nevertheless, they remained above the minimum regulatory requirements. The bank is currently exploring the possibility of structuring suitable Tier-II instruments, utilising the sizeable leeway available in Tier-II.

Dividend

At the last AGM held on 30 March 2012, on the recommendation of the Directors, shareholders approved a final dividend of Rs. 9 per share, which was paid 50% in cash and 50% in the form of scrip dividend. These scrip dividend shares were priced at Rs. 175.

The total dividend of Rs. 9 per share paid for 2011 was much above the minimum dividend of Rs. 2.33 payable under the Deemed Dividend requirement. It also represented a dividend pay-out ratio of 36.9% for 2011, as against 37.4 % in 2010.

Compliance with new Sri Lanka Accounting Standards

As per the ruling issued on 2 March 2012 by the Institute of Chartered Accountants of Sri Lanka on ‘Preparation of Interim Financial Statements as per LKAS 34,’ the Bank has published the interim financial statements for 1Q 2012 under Option 2, by presenting them in accordance with the Sri Lanka Accounting Standards (SLAS), which existed immediately prior to 1 January 2012 , with disclosures on the impact on the Statement of Comprehensive Income for the three-month period under review and Net Assets (Equity) as at 31 December 2011 and 31 March 2012 respectively.

External rating

In the 2011 rating assessment, considering the healthy asset quality, better compliance, transparency, capital adequacy, internal control systems and processes of the Bank, RAM Ratings Lanka has reaffirmed AA (Stable) rating for Sampath Bank, in their rating assessment.

In the same year, the overall credit rating of the Bank’s “AA-”lka (positive) has been reaffirmed by Fitch Rating Lanka too.