DFCC Bank records Rs. 6.1b profit in 1H

DFCC Bank recorded non-audited profit after tax for the half year ended 30 September 2010 (current period) of Rs. 6,110 million and consolidated profit for the current period was Rs. 3,892 million.

The results of the current period include profit relating to the sale and change of classification of part of the Bank’s shareholding in Commercial Bank of Ceylon PLC (CBC). The contribution to profit after tax from the transactions related to CBC was Rs. 5,365 million for the Bank and a lower amount of Rs. 3,025 million in the consolidated income statement. The difference was due to the equity accounted higher carrying value of the shares in the consolidated balance sheet.

The Bank sold shares in CBC amounting to 13.5% of issued voting shares during the current period. A holding of just under 15% is now classified as an investment security. The carrying value of this investment is at cost (Rs. 31.31 per share) in the Bank’s balance sheet and at equity accounted cost (Rs. 78.61 per share) as at the time CBC ceased to be an associate company, in the consolidated balance sheet.

The investment in CBC was treated as an investment in associate company until 1 June 2010. The consolidated income statement for the current period therefore includes the proportionate share of the profit after tax of CBC for April and May 2010 based on non-audited half-year financial results of CBC.

The share of profit of CBC for the period January to March 2010 was accounted through the Reserves. The post tax profit of the Bank excluding the impact of the transactions in CBC shares was Rs. 725 million in the current period compared to Rs. 895 million in the previous period.

The main reason for this reduction is the significant increase in gross specific provision for bad and doubtful loans and leases made in the first quarter. The second quarter post tax profit of the Bank was Rs. 465 million in the current period, a 9% increase over Rs. 427 million in the previous period.

Lending activities

The gross advances of the Bank as at 30 September 2010 amounted to Rs. 38,025 million, a reduction of 3.5% in the half-year ended 30 Sept. 2010. The reduction is lower than 4.6% in the first quarter and is mainly due to prepayment of some large corporate loans. This reduction was however compensated by higher growth in gross advances in the commercial banking subsidiary DFCC Vardhana Bank Ltd. (DVB).

Thus the combined gross advances of the Bank and its commercial banking subsidiary DVB was Rs. 54,550 million. Consequently the combined credit portfolio on 30 September 2010 is only 0.2% lower than the combined credit portfolio one year ago.

As stated in the commentary for the first quarter results the pipeline of projects under consideration and committed projects is showing signs of improvement that portends renewed business confidence in the context of low interest rate and inflation regime with political stability. The gross non-performing loans, advances and leases (NPA) ratio of the Bank was 10.5% reduced from 11.6% on 30 June 2010 and the current trends are that many businesses see a turnaround from improved domestic demand for their products and services.

As at 30 September 2010, the specific provision cover was 50% and the non-performing loan exposure net of specific and general provisions (disregarding collateral value) as a percentage of equity of the Bank on 30 September 2010 was 7%.

Subsidiaries, associates and joint ventures

The contribution to profit after tax from DVB was Rs. 90 million compared with Rs. 76 million in the comparable period. This increase was largely due to reversal of specific provision through recoveries. CBC is no longer an associate company and therefore the results for the second quarter do not include the proportionate profit after tax of CBC.

The contribution to consolidated profit from subsidiaries (other than DVB) and the joint venture company amounted to Rs. 57 million in the current period compared to Rs. 27 million in the previous period.

Bonus issue

On 1 November 2010 Bonus Shares in the proportion of 1 for 1 were allotted to shareholders. In accordance with the provisions of the DFCC Bank Act No. 35 of 1955 the Bonus Issue was paid by capitalisation of the share premium account at the par value of Rs. 10 per share. The Bonus Issue is the highest in the recent history of the DFCC Bank and by doubling the number of shares issued it offers an opportunity for wider investor participation.

Solvency and regulatory developments

Consequent to the sale of CBC Shares the Bank has significantly augmented its equity capital, which is an important measure of solvency. Both the Bank and its commercial banking subsidiary DVB have retained their long term unsecured credit ratings by Fitch at AA(lka) and AA- (lka) respectively.

The Bank has reviewed its internal general provisioning policy on leases in the context of improved economic environment and demonstrated performance of the portfolio and reduced the general provision from 3% to 2% for new leases booked after 1 July 2010. The provision of a 3% general provision in respect of the outstanding portfolio as at 30 June 2010 remains unchanged.

The Central Bank has also introduced a mandatory deposit insurance scheme that covers deposits up to Rs. 200,000 per depositor. The higher capital of both DFCC Bank and DVB has resulted in lower premium of 0.1% per annum for both banks. (The normal premium for Banks is 0.125% per annum). The deposit base of DFCC Bank is relatively small and even in the case of DVB at current levels the cost and its impact on the income is relatively low.