Impairment provisions affect DFCC’s bottom line


DFCC Bank PLC, the banking arm of the DFCC Group reported a drop in profit for the second quarter amidst a challenging business environment. The drop in profit was due to higher impairment provisions, as well as a one-off gain from the disposal of shares of Commercial Bank during the previous period.

Overall, the DFCC Group, whose business covers commercial banking, investment banking, wealth management, information technology, industrial park management and consultancy recorded a profit before tax of LKR 2,596 million and profit after tax of LKR 1,861 million for the period ended June 2018 as compared to LKR 3,616 million and LKR 2,944 million respectively, in the comparative period in 2017.

Meanwhile, the Bank posted a Profit before Tax of LKR 2,402 million and a Profit after Tax of LKR 1,710 million which reflects a decline of 30% and 39% respectively compared to the same period in 2017. When adjusted for the exceptional gain from sale of Commercial Bank Shares reported in the previous period, the declines in Profit before Tax and Profit after Tax were 5% and 10% respectively.

The impairment provision during the current period was LKR 1,407 million compared to LKR 487 million in the comparable period. However, recovery processes are being rigorously pursued to minimize any actual losses that may arise from such exposures. The decline of 11% in Net Operating Income was due to the higher charge for impairment.

On a positive note, with increased customer interest in the Bank’s commercial banking products, the Bank recorded a healthy growth of 24% in Net Interest Income to LKR 6,556 million from LKR 5303 million mainly as a result of the portfolio growth of LKR 38,229 million in loans and receivables year-on-year and prudent management of asset and liability re-pricing.

In addition, total Operating Income increased to LKR 7,662 million compared to LKR 7,533 million in the comparative period. Various initiatives adopted in order to grow non-interest income paid dividends as a growth of 30% was recorded in fees and commission income to LKR 906 million from LKR 699 million in June 2017. Trading gains increased by 14% to 172 million in June 2018. However, the reason for the overall moderate growth was due to the adverse impact from revaluation of funding swap contracts and the previous year’s one off gain reported from sale of Commercial Bank equity shares.

The Bank also continued to focus on expanding its branch network and delivery channels in order to reach out to the unbanked and under-banked consumers across the country. In doing so, the Bank added nine fully-fledged branches to its branch network during the period July 2017 to June 2018. This largely contributed to the increase in Operating Expenses to LKR 3,178 million from LKR 2,784 million (14%) in the comparable period. The Bank will continue this expansion drive as well as focus on developing alternate channels backed by the latest technology, with customers’ interests taking precedence.

In terms of Other Comprehensive Income, the available for sale equity securities recorded a fair value loss of LKR 1,907 million due to the declining trend in the equity market. Furthermore, the Fixed Income securities recorded a fair value loss of LKR 413 million. The regulatory change in implementation of tax with effect from 1st April 2018 for Treasury Bills and Bonds adversely affected the market prices of Treasury Bills and Bonds.

Fortifying its position as a strong business entity, DFCC Bank’s Total Assets grew by LKR 56,346 million year-on-year to LKR 361,272 million which reflects a 18.5% growth compared to June 2017, while the Bank’s Loans portfolio grew by LKR 38,229 million to LKR 236,666 million compared to LKR 198,437 million as at 30 June 2017, reflecting a growth of 19.3% year-on-year.

The Bank’s deposit base reported an increase to LKR 207,862 up 23.5% from LKR 168,357 million in June 2017, further displaying customer confidence. The growth in customer deposits during the first half year 2018 was LKR 14,555 million (8%). The Bank’s CASA ratio, which represents low cost deposits over the total deposits of the Bank improved to 20.2% from 19.8% in March 2018.

DFCC bank continues to enjoy medium to long term low cost borrowing lines that helped to reduce the funding cost. When these term borrowings are added to deposits, the ratio improved to 28.4% as at 30th June 2018.

The Bank’s NPL ratio slightly moved up to 3.14% as at June 2018 from 3.12% recorded in March 2018 as a result of adverse environmental conditions that prevailed during this time. This is, however, in line with the industry average. (3.3% as at June 2018)

DFCC Bank consistently maintains capital ratio above the Basel III minimum capital requirements. As at 30 June 2018, the Group’s Tier 1 capital adequacy ratio stood at 11.05% while the total capital adequacy ratio stood at 16.56%. DFCC Bank recorded a Tier 1 and total capital adequacy ratios of 10.66% and 16.20% respectively as at 30th June 2018. The ratios are well above the minimum regulatory requirements of 7.875% and 11.875%.

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