ComBank Group navigates devaluation impact in complex Q1 performance

Commercial-Bank

  • Total assets cross Rs 2 Tn., first private sector bank to achieve the milestone
  • Mainly influenced by Rupee devaluation, loan book grows by Rs 133 Bn., deposits by Rs 234 Bn. in 3 months
  • 3-month net operating income up 66% to Rs 28.3 Bn.
  • Posts other operating income of Rs 11.3 Bn. primarily from realized and unrealized exchange gains

The Commercial Bank Group has posted a balanced financial performance for the first quarter of 2022, highly influenced by the sharp devaluation of the Rupee impacting key performance indicators both positively and negatively.

The Group, comprising of the Commercial Bank of Ceylon PLC, its subsidiaries and an associate, reported gross income of Rs 54.573 billion, total operating income of Rs 34.244 billion and net operating income of Rs 28.284 billion for the three months ended 31st March 2022, recording improvements of 33.41%, 41.74% and 66.33% respectively.

YOY growth in the loan book coupled with the positive impact of the unprecedented deprecation of the Rupee witnessed in March 2022 on interest income from the foreign currency denominated assets portfolio saw interest income for the three months increasing by 19.41% to Rs 37.847 billion. Interest expenses too increased by 17.30% to Rs 19.024 billion due to the YOY growth in the deposit portfolio as well as a substantial increase in interest expenses booked on deposits and borrowings denominated in foreign currency owing to the sharp depreciation of Rupee. As a result, the Group posted net interest income of Rs 18.823 billion for the quarter, an improvement of 21.62%.

Commenting on the quarter reviewed, Commercial Bank Chairman Prof. Ananda Jayawardane said: “These are extraordinary times for business in Sri Lanka and for banks in particular. It takes a great deal of exceptional financial acumen and maturity to navigate the mercurial challenges that prevail. Our results for the first quarter reflect the depth of the managerial skills at the disposal of the Bank.”

The Bank’s newly-appointed Managing Director and CEO Mr Sanath Manatunge said: “The unprecedented depreciation of the Rupee impacts income and profits as well as key balance sheet indicators. This can have a distortionary effect on performance. We have nevertheless posted solid results and are constantly taking swift actions and necessary measures to minimise the negative impacts of the rapid changes taking place in external factors.”

According to interim financial statements filed with the Colombo Stock Exchange (CSE), the Group’s other operating income more than doubled to Rs 11.333 billion in the three months reviewed while net fee and commission income improved by 35.21% to Rs 4.088 billion, and combined with net interest income, contributed to the growth in the total operating income of the Group.

Meanwhile, the growth in the net operating income was helped by impairment charges and other losses reducing by 16.71% to Rs 5.961 billion. The exchange impact on impairment charges on loans and advances and Government Securities denominated in foreign currency was recognised in Net Other Operating Income where the corresponding exchange gains are recognised.

The Group recorded a net gain of Rs 23.542 billion from trading via realized and unrealized exchange profits resulting from the sharp depreciation of the Rupee, offsetting the impact of reduced capital gains from government securities in comparison with the corresponding quarter of 2021, which led to net gains from derecognition of financial assets reducing to Rs 15.143 million during the three months under review from Rs 1.776 billion reported for the corresponding period last year. However, a net loss of Rs 12.223 billion was posted in other operating income due to the exchange losses on the revaluation of foreign currency assets and liabilities and the exchange impact on impairment charges on loans and advances and Government Securities denominated in foreign currency.

Consequently, net operating income increased to Rs. 28.284 billion from Rs. 17.005 billion reported for the corresponding quarter of 2021, an improvement of 66.33%.

 With operating expenses of Rs 8.721 billion for the three months reflecting a lower rate of increase of 23.66% in comparison to the 66.33% growth achieved in net operating income, the Group reported operating profit before taxes on financial services of Rs 19.563 billion, recording a higher growth of 96.56%.

VAT on Financial Services for the quarter more than doubled to Rs 3.155 billion due to the increase in profits liable for VAT as well as the upward revision of the VAT rate from 15% to 18% effective 1st January 2022. As a result, the Group’s profit before income tax for the three months grew by 95.21% to Rs 16.406 billion.

The Group’s income tax expense for the period under review amounted Rs 4.631 billion, a 188.2% increase as a result of the increase in taxable profits and the figure for the corresponding quarter of 2021 being reduced by the reversal of the over-provision for 2020 resulting from the reduction in the tax rate from 28% to 24%.

Consequent to the extraordinary increase in income tax for the reviewed quarter, the Group reported profit after tax of Rs 11.775 billion for the three months, an improvement of 73.23%.

Taken separately, Commercial Bank of Ceylon PLC posted a profit before tax of Rs 16.089 billion for the three months, achieving a growth of 96.61% and a profit after tax of Rs 11.548 billion, recording an improvement of 73.44%.

Total assets of the Group and the Bank crossed the milestone of Rs 2 trillion during the quarter, making Commercial Bank the first private sector bank in the country to achieve this significant milestone. The total assets of the Group stood at Rs 2.287 trillion as at 31st March 2022, an increase of Rs 304 billion or 15.28% since December 2021, with gains from the depreciation of the Rupee in March 2022 too contributing to the growth. Asset growth over the preceding 12 months was Rs 462.259 billion or 25.34%.

Gross loans and advances of the Group increased by Rs 133 billion or 12.16% to Rs 1.228 trillion, while the growth of the loan book of the Group over the preceding year was 24.47%.

Total deposits of the Group recorded a growth of Rs 233 billion or 15.88% in the quarter reviewed and stood at Rs 1.706 trillion as at 31st March 2022, while the YOY deposit growth was 26.73%.

In other key indicators, the Bank’s basic and diluted earnings per share improved by 66.85% from Rs 5.58 to Rs 9.31. Total equity attributed to shareholders of the Bank increased by Rs 4.122 billion or 2.5% to Rs 169.016 billion. With the increase in the number of shares due to the scrip dividend for 2021, the Bank’s net assets value per share reduced to Rs 136.33 from Rs 138.08 as at end 2021.

The Bank’s Tier 1 Capital Adequacy Ratio (CAR) stood at 9.835% as at 31st March 2022, and its Total Capital Ratio at 13.087%, both marginally above the revised minimum requirements of 9% and 13% respectively imposed by the regulator consequent to the COVID-19 pandemic. Capital adequacy ratios were impacted by an increase in risk-weighted assets due to the growth of the assets denominated in foreign currency as a result of the unprecedented depreciation of the Rupee and mark to market losses on government securities in the Fair Value through Other Comprehensive Income (FVOCI) portfolio due to the unprecedented increase in market interest rates during the quarter under review.

In terms of liquidity, the Bank’s statutory liquid asset ratios for its domestic banking unit and offshore banking unit stood at 39.68% and 31.90% respectively, well above the minimum requirement of 20%. In terms of asset quality, the Bank’s impaired loans (stage 3) ratio stood at 3.58% while its stage 3 impairment to stage 3 loans ratio stood at 43.51% as at 31st March 2022, compared to the ratios of 3.85% and 42.76% reported as at end 2021.

In key profitability indicators, the Bank’s net interest margin, return on assets (before taxes) and return on equity improved to 3.55%, 3.12% and 28.05% respectively for the three months ended 31st March 2022 compared to 3.51%, 1.74% and 14.66% respectively for 2021. In the meantime, the Bank’s Cost to Income Ratio (CIR) before VAT on Financial Services improved to 25.33% for the quarter under review from 31.61% for 2021 and 33.95% for 2020. The cost to income ratio inclusive of VAT on Financial Services improved to 34.67% from 37.97% for 2021 and 39.96% for 2020.

The Bank’s CASA ratio, an industry benchmark, stood at 48.10% at the end of the three months reviewed, as against 47.83% and 42.72% respectively as at end of 2021 and 2020.

Commercial Bank is Sri Lanka’s first 100% carbon neutral bank, the first Sri Lankan bank to be listed among the Top 1000 Banks of the World and the only Sri Lankan bank to be so listed for 11 years consecutively. It is the largest lender to Sri Lanka’s SME sector and is a leader in digital innovation in the country’s Banking sector. The Bank’s overseas operations encompass Bangladesh, where the Bank operates 19 outlets; the Maldives, where the Bank has a fully-fledged Tier I Bank with a majority stake, and Myanmar, where it has a microfinance company in Nay Pyi Taw.

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