Near Rs. 3 b 1H pre-tax profit for Sampath Group

Sampath Bank Group has achieved a near Rs. 3 billion (Rs. 2.97 billion) pre-tax profit at Group level in the first half, reflecting a 58% growth over the corresponding period of last year. After tax profit grew by 56% to Rs. 2.13 billion.

At Bank level, pre-tax profit of Rs. 2.8 billion in the 1H 201l, reflect an increase of Rs. 1.03 billion or 58.3% over a year earlier. The post-tax profit of the bank recorded a growth of 52.7 % to Rs.1.98 billion.

“We continued our growth momentum in the first half of 201l, by posting impressive results in all key areas over the last year same period,” Sampath Bank Managing Director Harris Premaratne told an investor and media forum.

It was the first bank to release not only six month results but also audited accounts, which is rare. Deputy Managing Director Aravinda Perera emphasised on the latter, saying audited accounts makes the performance more credible and boosts public confidence in Sampath Bank.

The Bank said marked improvements in performance of all four subsidiary companies during the period under review facilitated a higher profit growth rate at the group level in 2011.

The performance had been achieved midst many challenges posed by market forces and the expansion drive undertaken by Bank. The mark to market losses in 1H 2011, arising from the market price fluctuations on the equity and Treasury Bill investments held by the Bank in the trading portfolio, amounted to Rs. 146.3 m, as against a net gain of Rs. 195.7 m from this source, in the corresponding period last year.

In addition, the revaluation losses arising from the appreciating rupee against the US dollar amounted to to Rs. 93.6 m, as against a loss of Rs. 43.5 m last year. The rupee appreciated against the US dollar by Rs. 4.10 over the period, from Rs. 113.60 as at 30 June 2010 to Rs. 109.50 as at 30 June 2011.

                Though the Bank realised capital gains of Rs. 411.2 m by selling part of the scrip dividend shares received in 1H 2011, this was a shortfall of Rs. 259.3 m compared to the capital gain of Rs. 670.5 m realised in the 1H 2010 and this was partially due to the fall in the market value of shares on the Dhaka Stock Exchange.

The Net Interest Margin (NIM), which dropped from 5.27% in the 1H 2010 to 4.11% in the 1H 2011, eroded a substantial amount of Net Interest Income (NII). This resulted in a NII drop of Rs. 73.34 m, despite the rapid growth recorded in the fund based operations of the Bank, as reflected by the growth rates of 24.4% and 46.5% achieved respectively in deposits and advances during the one year period ended 30 June 2011.

The drop in NIM in turn was mainly due to the return on interest earning assets falling at a faster rate than the drop in cost of funds on deposits, as a result of changes that took place in the interest rate structure of the market. However, the Bank is in the process of taking effective strategies to improve the NIMs in future.

The expansion drive of the Bank, which entailed opening of 71 branches during the last two years and recruitment of over 752 staff to manage this expansion drive, coupled with the cost of annual wage increases given effect, caused an increase in the Bank’s operating expenses which amounted to Rs. 702.08 m or 23.1%. As a result, the Cost/Net Income Ratio of the Bank too rose to 59.86% for 1H 2011 from 53.47% in 1H 2010, which however is expected to undergo a natural drop, with these new branches raising business volumes in future.

Despite the above challenges, the Bank was able to show a strong bottom line growth, due to the positive contributions from many other factors.

Aided by the increased economic activity in the market, the Bank achieved a rapid growth in its lending activities, amounting to 46.5% during the one year of period ended 30.06.2011 and 19.6% in 1H 2011.

Though the declining lending rates eroded part of the interest revenue on this credit growth, it paved the way for generating a higher fee-based and commission income from sources directly linked to lending activities. Consequently, the fee-based and commission income of the Bank recorded an impressive growth of Rs. 409.26 m or 44.2% in the 1H 201l, over the same period in 2010.

As a result of the Bank’s improved credit quality as reflected by the low NPL Ratio of 3.19% on 30 June 2011 and the high Provision Cover of 88.9% achieved by the end of previous year, the requirement on specific provisioning was naturally low in 1H 2011.

Consequently, the charge on specific loan loss provisions amounted to Rs. 208.70 m in 2011 (even with an additional provision of Rs. 100 m included therein), as against Rs. 1,385.96 m made in 1H 2010, which too was inclusive of an additional provision of Rs. 1,135 m. These additional specific loan loss provisions were made in line with the Bank’s policy of making such provisions against identified NPLs, ignoring the collateral held, aimed at improving the Provision Cover of the Bank.

Based on the higher credit growth during the period, the Bank had to provide Rs. 125.14 m, as Regulatory General Provisions on performing loans in 1H 2011. However, the effect was offset by a reversal of General Provisions amounting to Rs. 179.05 m, resulting from the applicable rate being reduced from 0.9% to 0.7% in 1H of 2011. Hence, it was a net reversal of Rs. 53.9 m, as against the charge of Rs. 44.36 m against the General Provisions in 1H 2010.

On the other hand the Bank was extremely successful in making recoveries against the NPLs. Consequently, it was possible to reverse the previous loan loss provisions made to the tune of Rs. 794.7 m in 2011, as against Rs. 801.5 m reversed in 2010, which figure however was boosted by two major recoveries of Rs. 331.9 m and Rs. 271 m made in 2010.

The impairment provision of Rs. 275.9 m, made in the previous year on account of the investment in the ordinary shares of Union Bank Colombo as instructed by CBSL, was reversed and taken to the profits of 1H 2011, since the Union Bank shares are now listed on the Colombo Stock Exchange and traded at a premium above the cost.

In addition, the reduced tax rates on Financial VAT (reduced from 20.0% to 12.0%) and Corporate Tax (reduced from 35.0% to 28.0%), too helped to improve the post tax profits of the Bank in 2011. However, the benefit arising from the lower corporate tax rate on the profit growth, was offset to some extent by the lower effective tax rate of 26.6% achieved in 1H 2010 (as against 29.1% in 1H 2011), resulting from the substantially high tax free income realised in 2010.

The improved profits paved the way for most of the key financial ratios of the Bank to record significant improvements over the previous year.

Prudent lending practices which included the centralised credit model, effective post-sanctioning monitoring and intensified recovery efforts against the existing NPLs, resulted in reducing the Bank’s NPLs both in absolute and percentage terms.

The NPL volumes net of IIS which stood at Rs. 7,089.23 m as at 30 June 2010 were reduced to Rs. 4,890.55 m by Rs. 2,198.68 m or 31.01%. Similarly the NPL Ratio of the Bank was reduced substantially to 3.19% as at 30 June 2011, from 6.80% reported one year ago.

In addition, the Bank’s Net NPL/Equity Ratio (Open Credit Exposure Ratio) too was reduced to 6.15% as at 30 June 2011 from 17.55% as at 30.06.2010. Furthermore, almost all profit-based ratios of the Bank such as ROA, ROE and EPS recorded significant improvements.

Sampath also remained as one of the well capitalised banks, with the Tier I Capital Adequacy Ratio at 10.30% and the Total Capital Adequacy Ratio at 12.04% as at 30 June 2011, despite the higher credit growth of 46.5% recorded during the one year period ended 30 June 2011.

Total deposit and the total asset bases of the Bank grew by 24.4% and 28.9% respectively during the one year period ended 30 June 2011. The growth rates in the two areas during the 1st half of 2011 which amounted to 15.6% and 18.5% respectively too were impressive, going by the industry’s current growth rates. In addition, the growth in customer advances has been phenomenal, with the advances volumes recording a significant growth of 46.5 % during the one year period ended 30 June 2011 and 19.6% in 1H of 2011.

Taking in to account of the bank’s better performance in the year 2010, Bank paid a final dividend of Rs. 6.60 per share, in the form of scrip dividends in addition to the interim scrip dividend of Rs. 3 per share already paid. Even after the two share-splits, which increased the number of shares by 120% in 2010, Sampath share is currently traded at around Rs. 240.10 p.s. and this price is well above the re-stated net assets value of Rs. 107.81 per share, after the share-splits.

Currently, Sampath Bank operates with a network of 188 branches and 237 Automated Teller Machines. The opening of 40 new bank branches covering all part of the country during 2010 was a record in the banking history of Sri Lanka and this year up to now 17 new bank branches have been added, of which 10 branches were opened on one day. Plans are underway to continue with the accelerated branch expansion program in 2H 2011 as well.

In 2010 Sampath Bank has received many awards, namely Bank of the Year – 2010 for the second consecutive year by the ‘The Banker Magazine’ – London, which is considered the most prestigious award in the international banking industry, three prestigious awards at the National Business Excellence Awards 2010,conducted by the National Chamber of Commerce, First Runner Up Award 2010 by the South Asian Federation of Accountants (SAFA) for best presented accounts, Effie Advertising Awards 2010 (which has been granted considering the both effectiveness and the creativity of advertising campaign), e-Swabhimani Award 2010, in the category of e-Business and Commerce and National Best Quality Software Awards (NBQSA).

At the last year rating assessments, considering the healthy asset quality, better compliance, transparency, capital adequacy, internal control systems and processes of the Bank, RAM Ratings Lanka has assigned AA (stable) rating for Sampath Bank, in their initial rating assessment. In the same year, the overall credit rating of the Bank’s has been improved from “AA-”lka (stable) to “AA-”lka (positive) by Fitch Rating Lanka.