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Net interest income recorded a 32% increase over previous period with corresponding NIMs improving modestly. Yields on loans and advances came under stress due to low credit demand. However, the gradual decline in cost of deposits towards the latter part of the period under review coupled with improved spreads on the FIS portfolio positively impacted NIM movement. The bank continued its efforts to grow low cost balances which reaped good results recording an 11% growth and thereby improving low cost mix.
Net fees and other operating income recorded a 28% growth, with an excellent contribution coming from credit card related fees and commission. Trade finance income was at previous year levels despite a decline of import and export volumes in the market by 9% and 7% respectively for the first five months of the year in comparison to previous period.
Net trading income amounted to a loss of Rs. 242 million for the current year mainly due to losses recorded in FX income which was partly offset by gains attributed to the FIS portfolio. FX income for 1H 2012 was exceptionally high due to the currency devaluation. Current year market activity on FX front has been low with falling trading volumes, however, the larger blow came from the adverse movement in forward premiums resulting in negative marked to market impact on funding SWAPS.
Operating expenses recorded a growth of 24% as implementation of the initiatives indentified in the five-year strategic plan took place across the bank. Investments in people, products, branding and technology were channelled towards the expansion of the distribution network including digital channels.
The bank also invested in technology to support the roll out of lean management concepts across the key areas of the bank, bringing higher customer value and leaner processes. As the bank gradually transforms into a lean environment in the medium term, we anticipate considerable reduction in costs and increased productivity.
The bank’s NPLs ratio stood at 3.9% which recorded an increase over 2.8% reported in December 2012 which is in part due to the slower growth in the loan book whilst absolute NPLs also increased similar to the rest of the industry. Impairment charge for the six months increased by 100 million over the previous period mainly attributable to the pawning portfolio.
Branch expansion continued with five new branches being opened in identified key strategic geographies taking the network to 62 branches. The bank commenced a branch transformation initiative to significantly change the role of the branch to be a one-stop selling point for all the products of the bank and to be the primary contact point for building a holistic relationship with customers.
The bank continued with the first phase implementation of its digital strategy, through a focused approach to on-boarding and activating customers to its mobile banking platform. There has been an encouraging response to this channel from a cross section of geographies. With the view of enhancing customer value and productivity the bank undertook the implementation of lean concepts across the entire organisation, an exercise which was facilitated by the Boston Consultancy Group.
Reviews of high impact, critical processes of the bank were undertaken in a phased out plan during the year. This would result in processes being streamlined using enhanced technology, to bring significantly improved customer delivery times and process efficiencies across the entire value chain.
So far, roll out of lean has commenced in the areas of credit approval and recoveries of leasing and retail/SME lending, branch sales, branch transaction processing and cards underwriting. Lean process implementation will continue to be rolled out to other areas of the bank throughout the year.
Commenting on the results and achievements, Renuka Fernando, Director/CEO, stated: “First half results for our bank demonstrate strong underlying fundamentals which has withstood multiple industry challenges. We are optimistic on a possible turn around in demand for credit towards the latter part of the 2H with declining interest rates fuelling credit demand.
“The full impact of the 24% interest rate ceiling introduced by CBSL coupled with the ceiling on penal interest rates especially with respect to the leasing book will come into full effect in the 2H, throwing fresh challenges especially in the leasing and cards businesses. Anticipated earning volatility will be mitigated to some extent by the balanced mix in our lending portfolio, strong focus towards strengthening and effectively managing the collections across all businesses and stringent management of the bank’s assets/liabilities and its pricing policies.
“Execution of our five-year strategic plan including the commencement of the implementation process of a new core banking system would gather momentum in the 2H which would put further pressure on our resources and financials. We remain well equipped to handle these challenges, with a young committed team and a dynamic business model.”
