Combination of factors dim ComBank 4Q; full year earnings grow modestly

Commercial Bank of Ceylon PLC saw its earnings for the quarter ended December (4Q18) declining, as the country’s largest private lender failed to reflect its solid loan growth in its net interest income amid attempts to reverse the impact from weakening asset quality.

The lender with assets of Rs.1.3 trillion saw its earnings falling by 16 percent year-on-year (YoY) to Rs.4.06 billion or Rs.4.05 a share for the quarter under review, as hefty provisions against possible loan losses, trading losses and higher taxes wiped off much of the lender’s profits. ComBank share closed 40 cents up on Friday at Rs.107.10. 

The bank’s asset quality weakened as the gross non-performing loan ratio increased to 3.24 percent from 1.88 percent a year ago. 

ComBank reported net interest income of Rs.9.46 billion, down 13.4 percent YoY as the bank failed to move its needle from last year’s margins. 

The bank’s net interest margin for 2018 was 3.67 percent barely changed from 3.62 percent a year ago.  

This was despite the economy operating with increasing interest rates throughout the year. 

Rising interest rates help lenders to stretch their margins and then record higher profits although the volumes are dented. The total pre-provision operating income of the bank rose by19.5 percent YoY to Rs.15.56 billion helped by a significant increase in other operating incomes. 

The other income for the quarter under review was Rs.4.62 billion compared to a loss of 398.2 million in the year earlier period.  Net trading loss for the quarter was Rs.1.59 billion, up from Rs.116.9 million. 

Meanwhile, the bank charged Rs.1.4 billion as provisions against possible bad loans under the new IFRS 9 on impairments. 

Out of that, Rs.946.2 million were for loans and advances to other customers, compared to a provision reversal of Rs.681.6 million in the year earlier period. 

Provisions for loans and other financial assets rose significantly in 2018 after the adoption of the new financial reporting standard as it changed the provisioning model from the incurred credit loss method to a more forward looking expected credit loss method. 

The new standard eroded profits of the banking sector significantly in 2018 due to its first time adoption.

Meanwhile, for the full year ended December 31, 2018, ComBank provided a whopping Rs.8.83 billion under credit loss expenses, up from just Rs.989.6 million in 2017. 

The bank reported full year earnings per share of Rs.17.55 or Rs.17.73 billion in total earnings in 2018 compared to Rs.17.05 a share or Rs.16.61 billion in total earnings for 2017. 

The net interest income for the year was Rs.45.6 billion compared to Rs.39.6 billion. The pre-provision operating income rose by 31 percent YoY to Rs.64.86 billion.

 The bank gave loans of Rs.135.5 billion during the year and raised Rs.132.9 billion in deposits recording increases of 17.9 percent and 15.6 percent respectively. 

The bank in December announced a Rs.15 billion debenture issue to support its Tier II capital and future lending. 

ComBank last week announced a final dividend of Rs.2.00 per share in the form of scrip dividend on both its voting and non-voting shares. 

The bank also approved a move to establish an employee share option plan to issue up to 2.5 percent of voting shares between 2019 and 2021. 

DFCC Bank, being the largest shareholder of ComBank held 13.56 percent shares as at December 31, 2018, while the Employees’ Provident Fund, the country’s largest private sector pension fund managed by the government, had 9.63 percent stake.  The bank’s 9th largest shareholder, Norges Bank, the Central Bank of Norway, had upped its shareholding in the bank to 18.4 million shares from 11.2 million shares in September. Norges Bank is also the largest non-voting shareholder of ComBank with 15.4 percent stake.