DFCC posts Rs. 2.2 b after-tax profit for 9 months

The DFCC Group recorded a consolidated profit after tax of Rs. 2.2 billion for the nine months ended 31 December 2011 compared with Rs. 4.45 billion in the corresponding period of the previous year (comparable period).

This profit for the comparable period included a one off gain of Rs. 3,001 million from the disposal of part of the equity stake in Commercial Bank of Ceylon PLC (CBC). After adjusting for this one off gain, the consolidated profit after tax recorded an increase of 43% from Rs. 1,541 million to Rs. 2,204 million. For the quarter ended 31 December 2011, consolidated profit after tax was Rs. 955 million, an increase of 47% over the comparable period.

DFCC CEO Nihal Fonseka said apart from the Banking Business, the investment banking joint venture, Acuity Partners (Pvt) Ltd, made a contribution of Rs. 117 million to consolidated profit compared with Rs. 94 million in the comparable period. The stock broking business recorded growth and Acuity also managed several successful IPOs and corporate finance mandates.

Net contribution from other Group companies was Rs. 1.5 million (Rs. 18.7 million in the previous period). The IT subsidiary Synapsys, which provides IT services to DFCC and DVB, recorded a small loss due to expenditure charged to the income statement relating to product development and overseas marketing relating to non-DFCC and DVB business.

The Banking Business of the DFCC Group is undertaken by DFCC Bank (DFCC), a licensed specialized bank and 99 % owned subsidiary DFCC Vardhana Bank (DVB), a licensed commercial bank. Both DFCC and DVB are functionally managed as one banking business with coordinated financial and operational strategies. Thus this commentary analyses 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 adjustments made 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 core business of DBB depicted strong growth with both DFCC and DVB recording strong credit growth. Total loans and advances increased 47% year on year from Rs. 57.4 billion on 31 December 2010 to Rs. 84.5 billion on 31 December 2011. The larger share of growth was in the current period of 9 months with an increase of Rs. 22 billion out of 27 billion contributed equally by both DFCC and DVB. However, the high level of liquidity in the banking system that prevailed during much of the current period resulted in intense competition and interest spread came under pressure.

This caused net interest income of DBB to record a 7.5% decline from the comparable period to Rs. 3,515 m in the current period and interest margin (net interest as a percentage of average total assets) of DBB reduced from 5.8% in the previous financial year ended 31 March 2011 to 4.9% in the current period.

DFCC’s credit growth in the current period was partly financed by liquidating surplus government securities held at the beginning of the current period. DVB whose lending mainly comprise of short term and revolving exposures mainly relied on customer deposits to finance its credit growth. Customer deposits of DVB increased by 30% to Rs. 28,703 m during the 12 months ended 31 December 2011.

Non-interest income of Rs. 1,213 m recorded by DBB in the current period was 3% higher than the comparable period. The aberration that arose from the final dividends paid by CBC for both 2009 and 2010 being recorded in the same financial year ended March 2011 was effectively countered by increases in the other constituent items contributing to non-interest income including income derived from higher volumes of foreign exchange and trade finance transactions.

Credit quality continued to improve and significant recoveries led to the release of previous impairment provisions. Recoveries exceeded the charge in the quarter as well as in the current period. Gross Non Performing Loans recorded a slight reduction and the gross Non Performing Loan ratio which reduced from 12% in June 2010 to 6.6% in March 2011 reduced further to 4.4% in December 2011.

Operating expenses of the DBB increased by 14% in the current period to Rs. 1,916 m mainly due to expenses relating to expanding the distribution network and related head count increase. The more recently opened branches are yet to break even and this contributed to the ratio of operating expenses to operating income to increase to 41% in the current period compared to 34% in the comparable period.DBB now operates from 146 locations including 19 branches where both DFCC and DVB operates.

The profit before income tax of DBB of Rs. 2,551 m in the current period was 11% higher compared to Rs. 2,294 m in the comparable period mainly due to the reduction of financial services VAT from 20% in the comparable period to 10.7% effective rate in the current period. Profit after tax of DBB for the current period was Rs. 2,032 m, 43% higher than the previous comparable period of Rs. 1,418m. DVB benefited from the lower income tax rate in the current period.

Fonseka said positive developments in the Sri Lankan economic environment contributed to increased investment in capital goods, higher requirements for trade/working capital finance and greater demand for consumer credit which in turn resulted in significant credit growth in the banking sector as a whole across all customer and many industry segments.

“In order to sustain this momentum, banks may have to seek overseas funding to supplement the limited domestic resources available for long term lending and the capital (Tier 2) required to support balance sheet growth. DBB will explore opportunities in this regard with appropriate measures being taken to manage the foreign exchange risk,” the CEO added.

The capital adequacy and liquidity ratios continued to be well above the minimum stipulated by CBSL. Specific provision cover for the DBB increased to 82% compared with 76 % in 31 March 2011 without taking into account the value of collateral held and unprovided NPLs as a proportion of equity was under 4% compared with 6% on 31 March 2011.

DVB issued unsecured subordinated debentures for Rs. 1 billion which were listed on the Colombo Stock Exchange in November 2011, thereby meeting a regulatory requirement for banks to be listed. Consequent to the listing, the name was changed to DFCC Vardhana Bank PLC. The subordinated debentures qualify as Tier 2 capital. The current credit ratings assigned by Fitch are, AA (lka) for DFCC and AA— (lka) for DVB with outlook stable for both banks.