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one economic entity and as such it is appropriate 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. Since the financial year of DVB ends in December, the accounts of DVB are consolidated with a three month lag.
Net Interest Income (NII) of DBB for the period increased by 24% from LKR 3,303 m to LKR 4,092 m although total loans and advances (net of accrued interest) only increased by 8.7% year on year to LKR 108,223 m as at 30 September 2013.
The reported NII does not include the cost of hedging exchange rate risk arising from funding swaps where the DBB swaps foreign currency to LKR to fund LKR assets as part of its funding strategy. Foreign exchange loss reported under ‘other operating income for the current period of LKR 358 m is net of the cost arising from funding swaps of LKR 373 m. The revised foreign exchange gain after adjusting for the swap cost for the current period amounts to LKR 15 m.
The forward exchange contracts are accounted as a derivative and its fair value changes are reported as ‘net gain/loss from financial instruments at fair value through profit or loss’ in the income statement.
Net fee and commission income of DBB in the current period was LKR 373 m an increase of 15% over LKR 325 m in the previous comparable period. This is generated largely by DVB the commercial banking subsidiary since this source of income is largely associated with trade finance and commercial banking services.
Total charge for impairment of loans and other losses for the current period was LKR 657 m a 25% increase over LKR 527 m in the comparable period. The charge in both periods included interest on impaired loans recognised on accrual basis as interest income and hence in NII.
The cumulative allowance for impairment for loans and advances as a percentage of impaired loans and advances on 30 September 2013 was 79%, the same level as on 31 March 2013.
DBB added thirteen more branches as at 30 September 2013 compared to the number of branches one year ago on 30 September 2012. Investment in technology, rationalisation of organisation structure, additional recruitment contributed to a 20% increase in the operating expenses in the current period.
The DBB recorded LKR 1,962 m as operating profit before taxes which was an increase of 2% over the comparable period. Profit after tax (both VAT on financial services and income tax) was LKR 1,180 m, which was a decrease of 16% over LKR 1,400 m in the comparable period. The previous comparable period included an adjustment for a one off non recurrent financial services value added tax over provision amounting to LKR 184 m. DBB’s profit after tax for the previous period excluding this over provision was LKR 1,216 m which is only marginally higher than the current period.
Investments
Listed shares are classified as available for sale and carried at fair value. Fair value changes that represent unrealised gains/loss are recognised in other comprehensive income under SLFRS under previous GAAP they were carried at cost.
During the period ended 30 September 2013, due to market appreciation of listed shares there was a fair value gain of LKR 637 m. In the comparable period the fair value gain was LKR 2,120 m. A substantial proportion of the listed share portfolio is on account of investment in Commercial Bank of Ceylon PLC (CBC). The drop in the fair value gain is mainly due to the fluctuations in the share price of CBC. The percentage increase in the share price of CBC during the current period was 4% compared to 16% in the comparable period.
Equity capital
Under SLFRS, the total income for the period comprises the income reported in the income statement and other comprehensive income. Consequent to this change there are two significant changes. Shares listed in the Colombo Stock Exchange and owned by the bank are recognised at the fair value and changes in the fair value included in other comprehensive income significantly augmenting the equity capital.
Prudential indicators
The capital adequacy and liquidity ratios continued to be well above the stipulated regulatory minimum. The regulatory capital computation excludes fair value changes on financial assets classified as available for sale. Impairment allowance cover for the DBB was 79% and past due loans of three months and over not covered by impairment allowance as a proportion of equity was 6%.
