DFCC Bank profits slump on thumping impairment provisions

DFCC Bank PLC saw its profits for the quarter ended March 2022 (1Q22) cratered as it made thumping provisions against possible bad loans and other assets expecting tougher financial and economic conditions for its borrowers in the ensuing period. But, March could perhaps be the quarter in which the banks front loaded such provisions. 
The development lender turned commercial bank reported earnings of Rs.486.7 million or Rs.1.49 a share in the January - March quarter compared to earnings of Rs. 1.55 billion or Rs.5.02 a share in the corresponding period in 2021. This marked a 69 percent slump. 

The bank made Rs.2.75 billion as provisions against loans and receivables in the three months, up 442 percent from the same period in 2021 as the economy made a hard landing in early March.

The multifold increase in commodities prices and their shortages and hours-long daily power cuts have dealt a massive blow to businesses and individuals’ incomes, which has prompted banks to make significant provisions against possible loan defaults. 

What made things worse was the April 12 announcement made by the government of its decisions to suspend most of its foreign debt, causing banks who held sizable amounts of International Sovereign Bonds and Sri Lanka Development Bonds to make provisions against losses stemming from such a default.

“In order to proactively address the current and potential future impacts of prevailing economic conditions, the bank has made prudential impairment provision on the lending and investment portfolio with a 682 percent increase compared to the comparable period,” DFCC said in an earnings release.  

Meanwhile, the bank said soaring inflation was at the frontline in pushing its operating expenses by 19 percent to Rs.2.48 billion in the quarter. 

The above weighed heavily on an otherwise modest core banking performance during the first three months by the bank. However, the economic headwinds compelled the bank to pause new lending. 

“As a result of rising interest rates, high inflation and currency depreciation, the bank did not pursue an aggressive growth strategy,” DFCC said.

Whatever the growth in portfolios came almost entirely from the foreign exchange impact as the foreign assets and liabilities get revalued at the exchange rate that stood at the balance sheet date. 

For instance, the rupee deposits portfolio of the bank nearly stood still between December 2021 and March 31, 2022 although the cumulative portfolio, which includes foreign currency deposits, grew by Rs.28.6 billion, registering growth of 8.9 percent. 

The bank made higher net interest income on the back of stretched margins, which was possible from the rising interest rates. The lagged effect of repricing of deposits further helped the topline, the bank said. 
For instance, the bank reported 76 percent surge in net interest income to Rs.4.74 billion on the back of its net interest margin stretching to 3.80 percent from 2.66 percent in December 2021. 

The fee incomes however ddeclined by 2 percent to Rs.639.6 million and there was increased card use seen in the period, reflecting that the consumer had to use their credit card more often to meet their everyday needs when their real wages and real incomes weaken at a faster pace due to runaway prices. 

The bank meanwhile reported a massive exchange loss of Rs.2.26 billion coming from the fair value changes of the forward exchange contracts with other commercial banks, compared to a year earlier period loss of Rs.879.6 million. 

Fully offsetting the impact was the Rs.2.29 billion gain made on revaluation of foreign exchange denominated assets and liabilities of the bank, which in fact inflated the size of the bank’s portfolios. 

Meanwhile, the bank also booked a dividend income of Rs.1.04 billion received predominantly from its stake in Commercial Bank of Ceylon PLC. 

While the bank’s capital and liquid asset ratios currently remain above its regulatory minimums, both its Tier I and Tier ratios are nearing their regulatory minimums of 8.0 percent and 12.0 percent, respectively. 
In March, the shareholders approved a resolution to raise Rs.6.0 billion via a rights issue aimed at bolstering DFCC’s Tier I capital. 

Hatton National Bank has 14.91 percent stake in DFCC Bank being its single largest shareholder while the government via Bank of Ceylon, Sri Lanka Insurance Corporation, Employees’ Provident Fund and Employees Trust Fund has 31.61 percent stake in the bank.