Sampath Bank forges ahead with strong 1Q

Sampath Bank said yesterday it was continuing with the growth momentum in the 1st quarter 2011, by posting impressive results over the last year.

The bank’s pre-tax profit, which rose to Rs. 1,348.6 m in 1Q 2011, reflected an increase of Rs. 557.1 m or 70.4% over the pre-tax profit of Rs. 791.5 m for 1Q 2010. The post-tax profit of the bank recorded a growth of 60.9 % over the same period of last year, rising from Rs. 558.6 m in 2010 to Rs.898.8 m in 2011.

Financial results of the Sampath Bank Group, which consists of the bank and four subsidiary companies, were even better. Pre-tax profit of Rs. 1,460.8 m of the Group for 1Q 2011 was a growth of Rs. 608.3 m or 71.3 %, over the previous year’s pre-tax profit of Rs. 852.5 m, with Sampath Bank contributing bulk (92%) of the profit, as the main entity of the Group.

The post-tax profit of the Group amounted to Rs. 992.5 m, recording a growth of Rs. 380.0 m or 64.2%, over the post-tax profit of Rs. 604.5 m for the last year. Marked improvements in the performance of all four subsidiary companies during the period under review facilitated recording this higher profit growth rate at the group level in 2011.

Increased economic activity in the market and the rapid growth of 42.2% achieved by the bank in its lending activities during the one year period ended 31 March 2011 paved the way for generating a higher fee-based and commission income, which recorded a significant growth of Rs. 216.1 m or 45.6% in 1Q 2011 over the same period in 2010.

Nevertheless, the exchange income recorded a negative growth (1.3%) in 2011, largely due to the revaluation loss of Rs. 36.9 m, incurred in 2011 on the FCBU’s retained profits, as against the revaluation loss of Rs. 26.0 m incurred in 2010. This was solely due to the appreciation of the rupee against the US dollar, from Rs. 113.95 as at 31 March 2010 to Rs. 110.40 as at 31 March 2011.

The bank was also very successful in managing the net charge on loan losses in 2011. As a result of the bank’s improving credit quality (as indicated by the reducing NPL volumes and NPL ratios), it was possible to reduce the provisions made on specific loan losses to Rs. 153.2 m in 2011 (even with additional provisions totalling Rs. 100 m included therein), as against Rs. 702.6 m made in 2010, which too was inclusive of additional provisions totalling Rs. 517.4 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. As the bank achieved a provision coverage ratio of 88.9% as at 31 December 2010, the need for such additional provisions was naturally low in 2011.

In addition, based on the higher credit growth during the period, a further sum of Rs. 101.0 m, was provided as regulatory general provisions on loan losses in 2011, the effect of which was however reduced by Rs. 90.4 m, o/a of a reversal of general provisions, resulting from the applicable rate being reduced from 0.9% to 0.8% in 1Q 2011.

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. 402.9 m in 2011, as against Rs. 424.5 m reversed in 2010, which figure however was boosted by a single recovery of Rs. 331.9 m made in 2010.

Increase in the bank’s operating expenses over the previous year was managed at Rs. 365.4 m or 24.8%, despite the additional expenditure incurred on account of the ambitious branch expansion programme, which entailed opening of 62 branches during the last two years ended 31 March 2011, new recruitments of over 600 staff to manage this expansion drive, higher number of staff promotions and the cost of annual wage increases given effect during the periods under review.

In addition, the impairment provision of Rs. 275.9 m, made in 2010 on account of the investment in ordinary shares of Union Bank Colombo as instructed by CBSL, was reversed and taken to the profits of 1Q 2011, since the Union Bank shares are now being listed on the Colombo Stock Exchange and traded at a premium above the cost.

Despite the rapid growth recorded in the fund based operation of the bank as reflected by the growth rates of 22.2% and 42.2% achieved during the one year period ended 31 March 2011, in deposits and advances respectively, the net interest income of the bank recorded a drop of Rs. 139 m from Rs. 2,199.5 m in 2010 to Rs. 2,060.5 m in 2011.

This was mainly due to the return on interest earning assets dropping at a faster rate than the drop in cost of funds on deposits, shrinking the net interest margin from 5.59% in 1Q 2010 to 4.22% in the 1Q 2011, consequent upon the significant changes that took place in the interest rate structure of the market. However, the bank is in the process of taking effective strategies, aimed at improving the net interest margins in future.

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.

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 introduced recently, effective post-sanctioning monitoring systems 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. 7,003.0 m as at 31 March 2010 was reduced to Rs. 5,275.9 m by Rs. 1,727.1 m or 24.66%, as at 31 March 2011. Similarly the NPL ratio of the bank was reduced to 3.64% as at 31 March 2011, from 6.89% one year ago, as against the industry’s average NPL ratio of 5.3% as at 31 December 2010.

In addition to the improvement made in the provision cover referred to above, the bank’s Net NPL/equity ratio (open credit exposure ratio) too was reduced to 6.87% as at 31 March 2011 from 20.84% as at 31 March 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 9.51% and the total capital adequacy ratio at 11.41% as at 31 March 2011, despite the higher credit growth of 42.19% recorded during the one year period ended 31 March 2011.

Total deposit and the total asset bases of the bank grew by 22.2% and 24.55% respectively during the one year period ended 31 March 2011. The growth rates in the two areas during 1Q 2011 which amounted to 7.84 % and 9.37 % respectively 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 42.2 % during the one year period ended 31 March 2011 and 13.3% in the 1Q 2011.

Taking into account the bank’s better performance in the year 2010, the bank paid a final dividend of Rs. 6.60 per share, in the form of scrip dividend 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. 285 and this price is well above the restated net assets value of Rs. 103.78 per share, after the share-splits. In terms of market capitalisation, Sampath Bank’s ranking on the CSE has now improved to the 14th position, as against the 15th position held on 31 December 2010.

Currently, Sampath Bank operates with a network of 178 branches and 229 ATMs. The bank opened 40 new branches during 2010, which was a record in the banking history of Sri Lanka, and plans are underway to continue with the accelerated branch expansion programme in year 2011 as well.

In 2010 Sampath Bank received many awards, including ‘Bank of the Year – 2010’ for the second consecutive year by the ‘The Banker’ magazine – London, which is considered as 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 both the effectiveness and the creativity of the advertising campaign), ‘e-Swabhimani Award 2010,’ in the category of ‘e-Business and Commerce’ and National Best Quality Software Awards (NBQSA).

Considering the healthy asset quality, better compliance, transparency, capital adequacy, controls, systems and processes of the bank, RAM Ratings Lanka has assigned a AA (stable) rating for Sampath Bank, in its initial rating assessment concluded recently. In addition, the overall credit rating of the bank has been improved from “AA-”lka (stable) to “AA-”lka (positive) by Fitch Rating Lanka in its last rating assessments.