Cargills Bank stalls in 3Q as new loans slow; deposit growth flat

Cargills Bank Limited (CBL) failed to maintain its growth momentum during the quarter ended September 30, 2018 (3Q18) as growth in new loans stalled and some sizable deposits left the bank, the interim financial accounts showed.

The bank reported 48 percent growth in net interest income over the same period last year to Rs.537.1 million as the top line was mostly buttressed by the higher market interest rates.

The bank’s loan book virtually remained unchanged during the three months to September 2018.

During the nine months to September, the bank grew its loans by Rs.3.9 billion or 18.9 percent year-on-year (YoY), but Rs.3.8 billion of that entire growth came during the previous two quarters.

The growth in interest income decelerated significantly in comparison to the growth in the interest income last year as the bank lost some Rs.4.4 billion in deposits during the quarter.

The bank, which grew its deposits by Rs.4.4 billion during the first six months, saw such deposits leaving the bank during quarter under review bringing the growth in deposits to near zero level.

In October, Fitch assigned Cargills Bank a first time rating of ‘BB’ with a ‘Stable’ outlook, which reflects the bank’s small and developing domestic franchise and the pressures on asset quality, funding and liquidity.

The bank is gradually shifting away from the hitherto dominant corporate sector to retail, SME and agricultural segments, which had 58 percent of total loans by end of June 2018, up from 39 percent in 2017.

The bank’s gross non-performing loan ratio jumped to 5.78 percent in September from 3.55 percent at the beginning of the year.

“The bank’s NPL ratio is likely to be higher than that of the industry in the short to medium term, as it expands rapidly into the more economically-vulnerable segments,” said Fitch.

“We foresee pressures on CBL’s funding and liquidity as it pursues an aggressive growth plan in the medium term, as its deposit franchise is still developing and competition for deposits is high. To address this, we believe the bank may supplement its funding mix with wholesale funding and equity,” Fitch added.
Meanwhile the bank reported a total operating income of Rs.606.2 million for the quarter compared to Rs.901.3 million in the corresponding three months last year.
The lower operating income during the quarter was due to a Rs.481 million disposal gain, recognised in the accounts during the same period last year.

Cargills Bank Ltd divested 80.34 percent stake it held in its licensed finance company to Dialog Axiata PLC for Rs.1.072 billion, resulting in a gain of Rs.480.7 million last September. Meanwhile, the net operating income or the income after credit costs was Rs.511.6 million for the quarter under review, down 41 percent YoY.
The provisions made against possible bad loans were also up significantly during the quarter. “We expect CBL’s pre-impairment profitability to improve further in the medium term, although higher credit costs from asset quality pressures and the implementation of SLFRS 9 could limit the gains. The bank’s core profitability improved in 2017, but it remained weaker than peers,” Fitch said.

The bank made an after-tax earnings of Rs.683, 000 for the July-September quarter compared to Rs.464.8 million in the same period last year, including the said capital gains.

Meanwhile, for the nine months ended September 30, 2018, the bank with assets of little under Rs.34 billion reported Rs.71.5 million in after-tax earnings compared to Rs.526.6 million earnings in the same period last year.

The net interest income for the period was Rs.1.53 billion, up 46 percent YoY.

Cargills Bank has 19 branches including eight in-store branches at selected Cargills Food City outlets.

Cargills Ceylon PLC and its ultimate parent CT Holdings PLC together hold 65 percent in Cargills Bank Limited while the Employees’ Provident Fund has another 4.98 percent stake in the bank being the second largest shareholder after the promoters.