DFCC Group posts Rs. 702 m after tax profit in 1Q

DFCC Group has achieved an after tax profit of Rs. 702 million in the first quarter of 2011/12 financial year, up by 65% after adjusting the one off gain enjoyed in the corresponding period of last year.

The Group recorded a high Rs. 3.3 billion after tax profit in the first quarter of 2010/11 financial year including a one off gain of Rs. 2.9 billion from the disposal of part of the equity stake in Commercial Bank of Ceylon PLC (CBC) consequent to which CBC ceased to be an associate company on 2 June 2010.

The comparable period also included a contribution of Rs. 193 m as the equity accounted profit of CBC.

Apart from the Banking Business, DFCC’s investment banking joint venture, Acuity Partners (Pvt) Ltd, made a significantly higher contribution of Rs. 52 m to consolidated profit compared with Rs. 15 m in the comparable period. The stock broking business recorded strong growth and Acuity also managed several successful private placements and IPOs.

Here are excerpts from the review accompanying interim results by DFCC Bank CEO Nihal Fonseka.

Banking business

The Banking Business of the DFCC Group is undertaken by DFCC Bank (DFCC), a licensed specialised bank and 99 % owned subsidiary DFCC Vardhana Bank (DVB), a licensed commercial bank. In April 2011, the Central Bank of Sri Lanka (CBSL) has granted permission for DFCC to own up to 100% of DVB and to functionally manage it, and as such it is useful to analyse the consolidated performance of the two banks as DFCC Banking Business (DBB). A consolidated Income statement for DBB has been released to the Colombo Stock Exchange as supplementary financial information. This statement was derived from the interim financial statements with certain adjustments for ease of analysis. These adjustments relate to excluding the one off exceptional profit in the comparable period referred to earlier and treating CBC as if it was not an associate company during the comparable period. Since the financial year of DVB ends in December, the accounts of DVB are consolidated with a 3 month lag.

The high level of liquidity that prevailed during the reporting period and the resultant competition that brought the interest margin under pressure and net interest income of Rs. 1,110 m was 9% lower than in the comparable period despite year on year growth of 29% in the gross loans and advances portfolio to Rs. 67,277 m. Strong growth was recorded on a year on year basis in finance leases, pawning and corporate working capital and trade finance related advances, although the latter provided through DVB yielded relatively low margins. The project finance business undertaken by DFCC showed encouraging signs of growth during the quarter with previous approvals converting to disbursements with a time lag which is usual in project finance. The pipeline for project financing requests has built up across diverse sectors and is much stronger than a year ago.

Other income in the current period was Rs. 348 m, 21% lower when compared to the comparable period. This was mainly due to the difference in timing on the dividend paid by CBC. The final dividend for 2009 was approved by CBC shareholders in April 2010 whereas the final dividend for 2010 was approved in March 2011. The effect of this was partly offset by capital gains realised on sale of mature equity investments.

The DBB took concerted action to improve the quality of the credit portfolio which became particularly relevant in the context of narrowing interest margin on lending.

The gross Non Performing Loan ratio which reduced from 12% in June 2010 to 6.6% in March 2011 further reduced to 6.3% in June 2011. In particular,a the quality of the SME portfolio (including finance leases) which was showing signs of stress an year ago improved significantly. This enabled the DBB to discontinue general provisioning of 2% (over and above the mandated regulatory provision) for new finance leases with effect from 1 April 2011 although the legacy provisions continued to be retained. During the current period, recoveries net of provisions contributed Rs. 48 m to profit before tax compared with a charge of Rs. 349 m in the comparable period.

Operating expenses of the DBB which increased by 20% in the current period to Rs. 628 m included expenses relating to expanding the distribution network and related staffing. DBB now provides services from 124 locations (including 19 combined DFCC/DVB branches) compared with 81 a year earlier. The ratio of operating expenses to operating income was 43% in the current period compared with 32% in the comparable period due to the significant upfront investments made in enhancing distribution and brand recognition in the personal financial services sector. Personal Financial Services is still only a small segment of the DBB business and has been identified as a key future growth area for the DBB.

The DBB recorded Rs. 778 m as operating profit before taxes which was an increase of 26% over the comparable period. It benefitted from the lower taxes that came into effect in the current financial year and thereby DBB recorded a profit after tax attributable to DFCC shareholders of Rs. 600 m being an increase of 45% when compared with the comparable period.

Investments

The quoted equity investment securities of DFCC are carried at a cost of Rs. 2,807 m as at 30 June 2011 and includes the residual investment in CBC of just under 15% of voting shares being the maximum holding approved by CBSL. The aggregate market value of the investments on 30 June 2011 amounted to Rs. 15,018 m which reduced to Rs. 15,001 m on 27 July 2011.

DFCC acquired a further 3.5% and also invested in the recent rights issue of DVB and now owns 99% of DVB in which the total investment is Rs. 3,619 m.

Prudential indicators

The capital adequacy and liquidity ratios continued to be well above the minimum stipulated by CBSL. Specific provision cover for the DBB was 75% without taking into account the value of collateral held and unprovided NPLs as a proportion of equity was under 7%. The current credit ratings assigned by Fitch are AA (lka) for DFCC and AA— (lka) for DVB with outlook stable for both banks.