Reclassification of ComBank shares lifts DFCC Bank June earnings

• Fair value losses on ComBank shares booked under comprehensive incomes under CA Sri Lanka guidance 

Reclassification of investments in the shares of Commercial Bank, from the earnings to comprehensive income, helped DFCC Bank PLC to lift its June quarter earnings but the impact from narrowing margins, loss of cash flows from moratoria, heavy provisions against possible loan defaults and overall muted business volumes, weighed on the company’s core banking performance. 

Under the guidance of the Institute of Chartered Accountants of Sri Lanka, the bank reclassified its investments in Commercial Bank shares, which has a fair value of Rs.4.8 billion, under a different category—‘fair value through other comprehensive income’— enabling the company to take the marked-to-market losses of the equity portfolio away from the earnings.

The share prices of listed companies fell significantly during the market collapse caused by the pandemic, resulting in heavy marked-to-market losses for those who hold such shares, weighing on their earnings, depending on where they classify such investments in their books of accounts.  

“This reclassification helped the bank to refocus its efforts to ensure core business profitability,” stated DFCC Bank CEO Lakshman Silva. 

The bank reported earnings of Rs.2.59 a share or Rs.766.9 million for the April-June quarter (2Q20), compared to earnings of Rs.1.11 a share or Rs.271.3 million in the comparable period in 2019, which included a mammoth marked-to-market loss on the said shares it held in Commercial Bank. 

During the quarter under review, such marked-to-market losses on equity investments topped Rs.2.38 billion, recognised below the earnings, under the comprehensive sections of the income statement, compared to Rs.607.8 million in the comparable period in 2019. 

Meanwhile, the bank reported a net interest income of Rs.2.94 billion, down 7 percent from the comparable period, last year, as net interest margin compressed amid falling interest rates while the new loans had virtually zero growth during the three months. 

By end-June, the bank had a loan book of Rs.305.5 billion, little changed from Rs.305.3 billion in March. 

The bank reported impairments of Rs.812.6 million for the quarter on possible bad loans, significantly up from Rs.469.5 million in the comparable period, last year. The bank maintained its gross non-performing loan ratio at 4.85 percent, unchanged from December 2019.   

Silva remains sanguine of those who applied for the moratoria to resume servicing their loans once such concessions end. 

“With the reopening of the economy and concessions offered to its clients, the bank expects majority of the borrowers to service the facilities regularly after the moratorium periods,” he said.  

“The bank expects the debt moratorium and concessionary working capital loans introduced by the Central Bank of Sri Lanka to help the businesses to recommence their operations and reach to normalcy soon,” he added. 

Meanwhile, the bank’s fee incomes fell by 29 percent to Rs.356.9 million, from Rs.499.7 million a year ago, as the bank waived off certain fees on certain products such as credit cards under the Central Bank guidelines.  

The bank’s deposits grew by a significant Rs.21.3 billion to Rs.277.7 billion during the quarter, demonstrating that people and businesses have parked their earnings with limited options to spend during lockdowns. 

The bank in June decided to raise further Rs.7.0 billion by issuing subordinated debentures up to seven years. 

The bank last month announced that its Deputy CEO and board member Thimal Perera had been selected by the director board to succeed Silva from January 1, 2022. Perera, a chartered accountant, joined the bank in June 2017.