National Development Bank PLC (NDB) increased its group net profit by as much as 46.5 percent to Rs.1.25 billion for the quarter ended December 31, 2015 (4Q15) over the corresponding period in 2014, amid accelerated credit demand seen in the latter part of the year, the interim results showed. The earnings per share (EPS) rose to Rs.7.62 from Rs.5.68 a year ago.

The NDB share closed Rs.1.30 or 0.77 percent lower at Rs.168.50 last Friday. The return on equity declined to 12.59 percent from 15.78 percent in 2014. The net profit at the bank level was Rs.848.6 million for the quarter, up 41.3 percent yoy.

The net interest income (NII) for the group rose by 7.7 percent to Rs.2.1 billion but the bank’s net interest margin (NIMs) declined to 2.63 percent from 3.31 percent a year ago, “largely due to the less than favourable interest rates that prevailed in the market,” NDB said in an earnings release. The interest rates are now on the rise but the banking sector analysts opine the NIMs could come further under pressure in 2016 if the banks carry larger fixed rate corporate loans in their books.

On the contrary, higher interest rates offer much leeway for banks to maintain higher margins, the empirical evidence show. NDB has revised its revenue recognition criteria where the bank has discontinued the recognition of interest income of loan facilities if the arrears position is equal or more than three installments with effect from July 01, 2015. Meanwhile the non-fund based incomes grew by 17.5 percent to Rs.1.58 billion.

This demonstrates the group’s concerted efforts aimed at growing fee-based income to cushion the profits during challenging times.

The bank saw its gross loans and advances rising by as much as 19.3 percent or Rs.34.8 billion during the year which pushed the bank to surpass the Rs.300 billion asset base to close the year with a Rs.309.2 billion balance sheet. The bank’s balance sheet growth was 18 percent or Rs.46.5 billion in 2015 while the group now has an asset base of Rs.315.4 billion, up 17 percent. During the year, consumer loans grew Rs.4.7 billion to Rs.23.6 billion,

lease portfolio virtually doubled to Rs.16 billion from Rs.8.9 billion while the housing loans grew Rs.1.9 billion to Rs.8.3 billion, reflecting the consumption credit boom in 2015. The bank’s exposure to leases rose from 4.9 percent to 7.4 percent from the total gross loans and receivables. The growth in the lending book was almost entirely funded by the deposits which grew 21.8 percent or Rs.33.1 billion to Rs.184.9 billion.

The bank however raised Rs.10 billion via senior listed debentures in June 2015. Available for sale financial investments rose by Rs.11.5 billion. Meanwhile, the bank’s low cost deposit base—current and savings account (CASA) ratio— slightly improved from 24 percent to 25.6 percent during the year. This is much below the industry average which hovers close to 40 percent levels. Higher CASA leads to higher margin as the cost of funds becomes lower. The local banks are now offering highly attractive rates to lure customer deposits as the funds for lending is limited after the Central Bank mopped up excess liquidity through a higher reserve ratio in January 2016. NDB’s provisions for possible bad loans and other losses declined by 9.8 percent to Rs.201.2 million, predominantly due to much lower collective impairments reflected through the improvement in the quality of the assets. The gross non-performing loan ratio edged down from 2.51 percent to 2.43 percent, well below the industry average. The efficiency as reflected by the, “cost to income ratio (CIR) was 49.55 percent. Despite the year-on-year increase in the CIR, predominantly attributable to network expansion costs, the CIR of the bank was well managed within the industry norms,” the statement said. The bank, operating with 93 branches and 1,960 employees, saw the branch network going up by 10 new branches and 216 employees during the year. Meanwhile, for the year ended December 31, 2015 the banking group posted a net profit of Rs.3.54 billion (EPS of Rs.21.51), down 14 percent. On a standalone basis the bank’s net profit grew only 3 percent to Rs.3.5 billion. The lower profit was due to NII, which edged down by 1 percent to Rs.7.8 billion, net gains from financial investments, which fell by 61 percent to Rs.494 million due to marked-tomarket losses, higher individual impairments, which rose by 297 percent to Rs.561.2 million and higher operating costs. Other operating income grew by as much as 127 percent to Rs.744.9 million due to, “the higher exchange gains earned on the revaluation of the foreign currency book of the bank over the prior year, which resulted from the adoption of a free float foreign exchange rate mechanism in September 2015,” NDB said. The Tier I capital adequacy ratio (CAR) of the bank declined to 8.51 percent while the Tier II CAR fell to 12.59 percent from 10.09 percent and 14.68 percent a year ago due to the expansion in risk weighted assets/loans. As a part of the shareholder agreement between NDB Capital Holdings PLC and NDB Zephyr Partners Ltd on December 15, 2014, the former invested Rs.49.6 million in 60 percent ordinary shares and redeemable preference shares of the latter on January 2, 2016 which is not accounted for in the financial statements for the year ended December 31, 2015. As of December 31, 2015, Bank of Ceylon held 9.91 percent stake in NDB followed by the state controlled private sector pension fund, Employees’ Provident Fund with 9.69 percent and Sri Lanka Insurance Corporations’ General Fund with a 5.68 percent stake.