Asset quality fallout, IFRS 9 dent Sampath Bank 4Q

Sampath Bank PLC suffered a decline in profits during the three months ended December 31, 2018 (4Q18) as the lender became a casualty of the general weakening of banking sector asset quality and the first time adoption of a new accounting standard resulting in significantly higher provisions for possible bad loans. 

Sampath Bank, the third largest private lender by assets, reported earnings of Rs.9.88 a share or Rs.2.66 billion in total profits for the October-December quarter, a 31.8 percent decline from the Rs.18.06 a share or Rs.3.9 billion in total earnings reported for the same period last year. 

The heaviest drag on the profit came from the credit costs or the provisions made against possible bad loans and other financial assets.   

Such losses surged to a little over Rs.5.0 billion for the December quarter alone from about Rs.400 million set aside for such losses in the corresponding quarter 
last year. 

Apart from the general portfolio quality deterioration seen across the industry, the shift in provisioning models from the incurred credit loss method to the expected credit loss method under the new financial reporting standard IFRS 9 also resulted in some considerable additional provisions.

“2018 was a challenging year for the banking sector as many key sectors of the economy came under pressure. 

“With most businesses seeing poor results right from the start of 2018, all banks including Sampath Bank began to experience non-performing advances growing in the second and third quarters. 

“Consequently, Sampath Bank’s non-performing assets ratio which stood at 1.64 percent as at December 31, 2017, went up to 4.25 percent by end of the third quarter in 2018, prompting immediate action to arrest the situation. 

“And thanks to the proactive measures taken in a timely manner, the bank’s non-performing assets ratio improved from 4.25 percent as at 30th September 2018 to 3.69 percent by the end of the financial year 2018”, Sampath Bank said in an earnings release.

  
However, the pre-provision operating profits of the bank rose by a strong 40 percent year-on-year (YoY) to Rs.16.3 billion supported by strong growth in fund based incomes and non-fund based incomes. 

The net interest income, which was supported by a 14.8 percent increase in total loans during 2018, rose by 36 percent YoY to Rs.11.6 billion while the net fee and commission incomes rose by 15 percent YoY to Rs.2.71 billion.

The other operating income rose from Rs.691.3 million to Rs.2.81 billion due to realised exchange income resulted from the sharp depreciation of the rupee in 2018. However, the bank suffered a net trading loss due to the mark-to-market loss triggered by forward exchange contracts. 

Meanwhile, for the financial year ended December 31, 2018, the bank reported earnings of Rs.46.85 a share or Rs.12.6 billion compared to Rs.58.74 a share or Rs.12.7 billion in total earnings in 2017. 

The net interest income rose 35 percent YoY to Rs.40.87 billion and the pre-provision operating profits rose by a similar percentage to Rs.57.2 billion. 

However, the bank set aside a whopping Rs.11.4 billion for credit costs, out of which Rs.6.6 billion was for individual clients with considerably larger exposures and Rs.4.82 billion for collective impairments.

The bank gave loans just shy of Rs.100 billion for the year to Rs.669 billion while the deposits grew by Rs.64.3 billion or 10.3 percent to Rs.690.4 billion. 

Sampath Bank announced a first and final dividend of Rs.16.25 a share or Rs.4.56 billion consisting of Rs.5.00 as cash and the balance as scrip dividend as the bank is seen trying to keep the majority of the profit as retained earnings in an attempt to beef up its Tier I capital base which rose to 10 percent of total risk weighted assets or loans of the bank from January 1, 2019. 

Last week, Fitch Ratings sent a note to National Development Bank PLC against its aggressive loan growth to retail and SME segments, which is believed to be more susceptible to economic and market volatilities and its ability to meet the elevated capital adequacy ratios in view of the bank crossing the Rs.500 billion asset base in 2019.

The rating agency cut NDB’s Outlook to ‘Negative’ from ‘Stable’ while affirming its ‘A+’ rating. 

Sampath Bank in November announced a Rs.5.0 billion subordinated debenture issue with an option to upsize the issue to Rs.7.0 billion in order to beef up its Tier II capital adequacy ratio. 

Sampath Bank raised a total of Rs.33 billion both Tier I and Tier II capital since the final quarter of 2017 through 2018 to stay above the rising capital adequacy requirements under BASEL III. 

Billionaire businessman Dhammika Perera controlled Vallibel One PLC has 14.95 percent stake in Sampath Bank being its single largest shareholder.