Impairment provisions affect DFCC’s bottom-line

DFCC Bank PLC, the banking arm of the DFCC Group, reported a drop in profit for the second quarter amidst a challenging business environment. The drop in profit was due to higher impairment provisions, as well as a one-off gain from the disposal of shares of Commercial Bank during the previous period. 

Overall, the DFCC Group, whose business covers commercial banking, investment banking, wealth management, information technology, industrial park management, and consultancy, recorded a Profit Before Tax (PBT) of Rs. 2,596 million, and Profit After Tax (PAT) of Rs. 1,861 million, for the period ended June 2018, as compared to Rs. 3,616 million and Rs. 2,944 million respectively, in the comparative period in 2017. 

Meanwhile, the Bank posted a PBTof Rs. 2,402 million, and a PATof Rs. 1,710 million, which reflects a decline of 30% and 39% respectively, compared to the same period in 2017. When adjusted for the exceptional gain from the sale of Commercial Bank Shares reported in the previous period, the declines in PBT and PAT were 5% and 10% respectively.

The impairment provision during the current period was Rs. 1,407 million, compared to Rs. 487 million in the comparable period. However, recovery processes are being rigorously pursued to minimise any actual losses that may arise from such exposures. The decline of 11% in Net Operating Income was due to the higher charge for impairment. 

On a positive note, with increased customer interest in the Bank’s commercial banking products, the Bank recorded a healthy growth of 24% in Net Interest Income,from Rs. 5303 million to Rs. 6,556 million, mainly as a result of the portfolio growth of Rs. 38,229 million in loans and receivables year-on-year, and prudent management of asset and liability re-pricing. 

In addition, total Operating Income increased to Rs. 7,662 million, compared to Rs. 7,533 million in the comparative period. Various initiatives adopted in order to grow non-interest income paid dividends, as a growth of 30% was recorded in fees and commission income, from Rs. 699 million in June 2017, to Rs. 906 million. Trading gains increased by 14% to 172 million in June 2018. However, the reason for the overall moderate growth was due to the adverse impact from revaluation of funding swap contracts, and the previous year’s one-off gain reported from sale of Commercial Bank equity shares.   

The Bank also continued to focus on expanding its branch network and delivery channels, in order to reach out to the unbanked and under-banked consumers across the country. In doing so, the Bank added nine fully-fledged branches to its branch network during the period July 2017 to June 2018. This largely contributed to the 14%increase in Operating Expenses from Rs. 2,784 million to Rs. 3,178 million in the comparable period. The Bank will continue this expansion drive, as well as focus on developing alternate channels backed by the latest technology, with customers’ interests taking precedence.

Other comprehensive income

In terms of other comprehensive income, the available for sale equity securities recorded a fair value loss of Rs. 1,907 million, due to the declining trend in the equity market. Furthermore, the Fixed Income securities recorded a fair value loss of Rs. 413 million. The regulatory change in implementation of tax with effect from 1 April 2018 for Treasury Bills and Bonds adversely affected the market prices of Treasury Bills and Bonds.

Financial position

Fortifying its position as a strong business entity, DFCC Bank’s Total Assets grew by Rs. 56,346 million year-on-year to Rs. 361,272 million, which reflects a 18.5% growth compared to June 2017, while the Bank’s Loans portfolio grew by Rs. 38,229 million to Rs. 236,666 million, compared to Rs. 198,437 million as at 30 June 2017, reflecting a growth of 19.3% year-on-year. 

The Bank’s deposit base reported an increase to Rs. 207,862 million, up 23.5% from Rs. 168,357 million in June 2017, further displaying customer confidence. The growth in customer deposits during the first half year 2018 was Rs. 14,555 million (8%). The Bank’s CASA ratio, which represents low cost deposits over the total deposits of the Bank, improved to 20.2% from 19.8% in March 2018.

DFCC Bank continues to enjoy medium to long term low cost borrowing lines, which helped to reduce the funding cost. When these term borrowings are added to deposits, the ratio improved to 28.4% as at 30 June 2018.

The Bank’s NPL ratio slightly moved up to 3.14% as at June 2018, from 3.12% recorded in March 2018, as a result of adverse environmental conditions that prevailed during this time. This is, however, in line with the industry average (3.3% as at June 2018).

Equity & capital requirements

DFCC Bank consistently maintains capital ratio above the Basel III minimum capital requirements. As at 30 June 2018, the Group’s Tier 1 capital adequacy ratio stood at 11.05%, while the total capital adequacy ratio stood at 16.56%. DFCC Bank recorded a Tier 1 and total capital adequacy ratios of 10.66% and 16.20% respectively, as at 30June 2018. The ratios are well above the minimum regulatory requirements of 7.875% and 11.875%.

Future outlook

DFCC Bank CEO Lakshman Silva said that despite profits being adversely impacted due to impairment, he is encouraged by the growth seen during the period in terms of expansion of island-wide footprint, and continued focus on launching technologically advanced products and services, such as the recently launched DFCCiConnect, which is a fully integrated Payments and Cash Management (PCM) System for businesses of any scale.

“Moving through 2018, we are determined to keep delivering our operational targets, whilst also focusing on efforts to manage costs and optimise resources. We will also further strengthen our processes and aggressively pursue recoveries. We have an ambitious vision for 2020, where we want to position DFCC Bank as a centre of excellence for commercial banking, supporting the financial aspirations of consumers from all walks of life across the country. To achieve this, we will aggressively focus on diversifying our retail banking portfolio, and strengthen our position in existing markets, as well as expand into new markets. Keeping up with the Fintech revolution, we will also focus on developing cutting-edge inclusive financial solutions that are more relevant to consumers, taking the Bank and the industry to a new level of convenience in this digital age. Throughout all of this, our main focus will always remain to build sustainable relationships with our customers, keeping our ears to the ground to identify their needs and providing them with the best possible service.”