Sampath Bank reaffirms strength amidst challenging economic conditions

Chairman Harsha Amarasekera (left) and Managing Director Nanda Fernando

Backed by its solid capital base and prudent risk fundamentals, Sampath Bank said yesterday it continued to prove its ability to navigate itself prudently during this unprecedented economic crisis.

Notwithstanding the extremely challenging economic conditions, Sampath Bank has registered a profit before tax (PBT) of Rs. 15 billion and a profit after tax (PAT) of Rs. 13.1 billion for the year ended 31 December 2022.

Among key highlights of the financial results declared by Sampath Bank and the Group for 2022 were Strong Net Interest Margin (NIM) of 5.66% on the back of rising Average Weighted Prime Lending Rate (AWPLR); 235% growth in exchange income stemming from the sharp depreciation of LKR against the USD by Rs. 164.75; sizable 69.4% increase in net fee and commission income during the year, driven by trade-related operations and card business and additional impairment provisions on loans and investments in order to absorb potential losses.

Sampath Bank in a statement said the combined impact of the recurring foreign exchange shortages coupled with the steep LKR depreciation resulted in a shortage of essential food, medication, fuel and gas. This, together with the daily power outages, resulted in triggering high inflation and widespread civil unrest. The bank’s well-planned business strategies coupled with higher vigilance and proactive risk management measures enabled Sampath Bank to remain resilient and prioritise stakeholder interests, amidst these negative economic headwinds. Taking the above into account, the bank accelerated its Corporate Social Responsibility activities by continuing to engage in multiple projects under its flagship “Weweta Jeewayak” program in order to sustain rural agricultural livelihoods, a bedrock of the economy.

Fund based income

Net interest income increased substantially in the year under review from Rs. 41.7 billion in 2021 to Rs. 73.5 billion in financial year (FY) 2022, reflecting a solid 76.4% growth. While interest income attributed to loans and advances declined owing to the bank’s decision to prudently manage the lending activities in light of severe macroeconomic stress, the adverse impact of this approach was offset by the continuous upward movement in market interest rates. With AWPLR increasing rapidly throughout the year, the bank benefited from frequent repricing of the loans and advances portfolio during 2022. Similarly, interest income from treasury bills and bonds increased due to the unprecedented rate hikes in 2022 while interest income on foreign currency (FCY) loans increased substantially owing to LKR depreciation. As a result, interest income for the year 2022 reached Rs. 158 billion, denoting an increase of 83.3% over the previous year.

However, interest expenses too saw an increase as banks were compelled to increase interest rates on deposits in line with treasury bill rates during the latter part of 2022. As a result, Sampath Bank’s LKR term deposit base increased by Rs. 158 billion while the bank’s LKR current and savings account (CASA) base reduced by Rs. 111 billion during the year. Proactive and timely asset and liability management ensured that the escalation was well managed.

With interest income outpacing the interest expense, NIM for the reporting period reached 5.66%, 205 bps higher than the NIM registered at the end of 2021.

Non-fund based income

With card and trade related activities generating robust results compared to the previous year, total Net Fee and Commission Income (NFCI) of the bank grew by 69.4% from Rs. 11.5 billion reported in 2021 to Rs. 19.4 billion in the year under review.

A combination of volume growth and a substantial tariff increase enabled trade related services to establish itself as a strong contender, contributing 42% towards overall NFCI for the current financial year and recording a growth of 159% over previous financial year.

SampathCards too posted a significant growth of 67% over the previous financial year and accounted for 30% of the total NFCI mix.

The net other operating income for the year was Rs. 19.7 billion, an increase of 311% year on year which was driven by Rs. 164.75 drop in value of the LKR against USD. Total net foreign exchange income reported for the period increased to Rs. 16.3 billion in 2022, up from the Rs. 4.8 billion recorded last year. The bank reported exchange gains of Rs. 18.5 billion under other operating income in 2022 (2021: Rs. 4.2 billion) and Rs. 2.2 billion unrealised exchange loss under net trading income for 2022 (2021: gain of Rs. 636 million).

Impairment charge

The bank recorded Rs. 62.7 billion as total impairment charge for the year under review, of which  

Rs. 54.3 billion relates to provisioning on account of loans and advances, while Rs. 7.8 billion is attributed to investments in financial instruments including Sri Lanka Development Bonds (SLDBs) and Sri Lanka International Sovereign Bonds (SLISBs). A further impairment provision of Rs. 0.6 billion has been recognised against credit related commitments and contingencies.

Impairment on loans and advances

Customers’ arrears position escalated during the year due to an unprecedented erosion of disposable income, deteriorating business prospects amidst the breakdown of economic fundamentals, the fuel and energy crisis, social unrest and political instability. Having considered these adverse movements, the bank with its conservative policy increased the impairment provisions booked against loans and advances in the current financial year.

Impairment on Individually Significant Loan (ISL) customers: The bank has evaluated a substantial portion of its customers under the ISL category giving due consideration to their financial strength as well as the external macro-economic pressures. The adequacy of impairment provisions in respect of ISL customers in the tourism and other similarly affected industries were also further reviewed and where necessary adequate impairment provisions were recognised. Accordingly, the bank charged Rs. 32.7 billion as impairment provision against ISL customers in 2022, an increase of Rs. 27.6 billion compared to 2021.

Collective impairment: The Probability of Default (PD) rates applicable on the portfolio increased, reflecting financial stress experienced by customers. The stagnant economy and restrictions imposed by regulators on foreclosures created difficulties for the bank in recovering defaulted facilities. As such, Loss Given Default (LGD) rates also increased over the course of the year.

Further, the bank reviewed the probability weightage for the worst-case economic scenarios and increased it further during the reporting period. In addition, the bank continuously refined the economic factor adjustment methodology to reflect the heightened economic vulnerabilities and captured the latest available data for economic variables. This enabled the bank to book adequate impairment provisions to address the potential credit risk associated with the current economic challenges. The bank also continued to recognise impairment provision against customers who exited the moratorium at the end of December 2021 and June 2022 as some customers have requested further concessions given the current economic outlook.

Industries considered under elevated risk were further expanded to capture a broader range of industry-specific stress factors. The potential impact of rising inflation, higher interest charges and increase in taxes on the retail segment were some of the other factors that were considered in recognising impairment provisions.

Taking into account the increased credit risk, the bank reclassified a substantial number of customers under stage 2 on prudential basis, in addition to the days past due classification during the year under review. Accordingly, 33.2% of the total advances portfolio as of 31 December 2022 is classified under stage 2 (2021: 31.1%).

A combination of these measures saw impairment charge on loans and advances increasing to Rs. 54.3 billion in FY 2022, up by 328% from Rs. 12.7 billion in 2021.

Impairment on financial instruments

Following the announcement made by the Government in April 2022 stating the Government’s intention to restructure its external public debt and the subsequent downgrade of Sri Lanka’s sovereign rating by global rating agencies, the bank moved to make substantial provisions in anticipation of possible haircuts on foreign currency denominated Government security instruments. For the year ended 31 December 2022, impairment charge of Rs. 7.8 billion was made against the total foreign currency denominated Government securities and the cumulative impairment provision as of 31 December 2022 stood at Rs. 18.3 billion. Meanwhile, the bank was able to significantly reduce provisions made against SLDBs by exercising the option to convert maturing SLDBs into LKR denominated bonds/bills. In this regard, Sampath Bank accepted LKR bonds, bills etc. in place of $ 162 million worth SLDBs that matured during 2022. The bank expects to once again exercise the conversion option when a further $ 104 million worth of the SLDB portfolio matures in 2023.

Operating Expenses

Operating expenses increased by 35.7% year on year, amidst higher personnel costs and a culmination of widespread price increases that drove up other operating expenses. Compared to the previous financial year, personnel costs grew by 30.9% in 2022 mainly owing to salary increases. Other expenses also increased by nearly 50%, due to a combination of inflationary conditions and high cost of imports precipitated by the devaluation of the LKR against the US Dollar.

Tax Expenses

Total tax expense of the bank for FY 2022 was Rs. 7.1 billion, which comprises Income Tax (Rs. 1.9 billion), Value Added Tax on financial services (Rs. 5 billion), and Social Security Contribution Levy (Rs. 0.2 billion).

Not included in the above tax expense is the newly imposed one-off Surcharge Tax of Rs. 2.7 billion, which was paid in 2022. The Surcharge Tax was calculated at 25% of the taxable income for the year of assessment 2020/2021 and it was directly set-off against opening equity in line with the Statement of Alternative Treatment (SoAT) on accounting for surcharge tax issued by Institute of Chartered Accountants of Sri Lanka.

The Value Added Tax on Financial Services charge increased by Rs. 1 billion in FY 2022 compared to Rs. 3.9 billion charged in 2021. This was due to the applicable rate increasing from 15% to 18% with effect from 1 January 2022. Furthermore, an additional tax charge of Rs. 222 million in FY 2022 was attributed to the 2.5% Social Security Contribution Levy on value addition, introduced with effect from 1 October 2022.

The bank has captured the income tax rate increase to 30% from 24% for the latter six months of the year of assessment 2022/23. The change in claimable loan loss provision method too was adjusted with transition impact. The deferred tax assets/ liabilities were recognised at a revised rate of 30%.

Key Ratios

The Return on Average Shareholders’ Equity (after tax) dropped to 10.95% as of 31 December 2022 compared to 11.05% reported at the end of the year 2021. Return on Average Assets (before tax) stood at 1.16% as of 31 December 2022 as against the 1.44% reported for 2021.

Assets and Liabilities

Total assets of the bank grew by 10.4% during the year under review to reach Rs. 1.3 trillion on 31 December 2022, from the Rs. 1.2 trillion registered at the previous year end. The increase in cash and cash equivalents as well as net loans and advances contributed to the aforementioned growth. One primary cause of the balance sheet expansion is the LKR devaluation during the year.

Cash and Cash Equivalents

Cash and Cash Equivalents increased to Rs. 79 billion mainly due to accumulation of Nostro balances, triggered by the lack of investment opportunities in USD.

Loan Growth

The bank’s gross loans and advances increased to Rs. 920 billion at the end of 31 December 2022 from Rs. 813 billion as at end of December 2021. The LKR portfolio grew by Rs. 35 billion, reflecting an increase of 4.9% compared to the portfolio balance of Rs. 717 billion at the previous year-end. The FCY loan portfolio of the bank expanded by Rs. 71.6 billion due to the LKR devaluation in March 2022. However, if the LKR devaluation is disregarded, the core loans and advances portfolio show only a marginal growth of 3.2%. This low growth is consistent with the bank’s conscious decision to manage lending and engage in more focused credit expansion activities.

Investments

Overall, debt and other instruments decreased marginally compared to 2021, with material movement between FCY and LKR instruments. This was primarily due to the bank’s decision to accept the offer to receive treasury bonds/bills in exchange for maturing SLDBs. Thereby, investment in SLDB dropped by 33% during the year.

Deposits

On an overall basis, the total deposit base of the bank crossed the Rs. 1 trillion mark during 2022. From the Rs. 978 billion recorded at the end of the previous year, the deposit base reached Rs. 1.1 trillion on 31 December 2022, reflecting a growth of 12.76%. It should be noted however that much of this growth is attributed to the revaluation gain on the foreign currency denominated deposits. Meanwhile, steps taken by the bank’s Asset Liability Management Committee to consciously manage the high-cost term deposits portfolio contained the growth of LKR denominated deposits to 4%.

Capital And Liquidity

The bank remained well capitalised in 2022, with no requirement for capital infusion during the year. All key capital ratios were consistently above the minimum regulatory requirements.  As of 31 December 2022, the Tier 1 Capital Adequacy Ratio was at 11.92%, while the Total Capital Ratio was at 14.27%, both comfortably above the regulatory minimum of 8.5% and 12.5% respectively. The bank’s leverage ratio as at the end of December 2022 stood at 7%, well above the regulatory minimum of 3%.

The bank’s Statutory Liquid Asset Ratio stood at 27.85% at the end of reporting year, ahead of the regulatory minimum requirement of 20%. Similarly, the liquidity coverage ratio and the net stable funding ratio at 146.5% and 157.1% respectively were both well above the minimum regulatory requirements.

Dividend

The board of directors has recommended a final dividend of Rs. 4.60 per share (Rs. 3.45 per share in cash and Rs. 1.15 per share in scrip) for the financial year ended 31 December 2022 subject to the approval of the shareholders at the Annual General Meeting to be held on 30 March 2023. The bank will inform the Director - Bank Supervision of Central Bank of Sri Lanka, the Board approved detailed assessment carried out in deciding the payment of cash dividend for the year 2022. The Dividend pay-out ratio for the year ended 31 December 2022 stood at 40.1% (2021: 39%).