DFCC Bank records robust loan growth; fair value re-classification buttresses earnings

DFCC Bank PLC had some robust growth in loans during the first three months of 2020 until lockdowns came into place mid-March while the re-classification of fair value losses on Commercial Bank shares it owned helped to generate higher profits for the quarter. 

The bank reported a net interest income of Rs.10.3 billion for the quarter ended March 31, 2020 (1Q20), little changed from a year earlier, while the interest expenses rose by 5 percent year-on-year (YoY) to Rs.7.3 billion. 

That resulted in a net interest income of Rs.3.0 billion, down 9 percent YoY as the margins narrowed while the interest rates declined. 

The bank gave Rs.20.1 billion in new loans indicating a re-invigorated growth at the beginning of the year in response to lower rates, taxes and renewed optimism before the pandemic halted it in mid-March. 

The retail lender with a development lending tilt saw growth across its lending portfolio. A part of its loans is funded by long-term concessionary borrowings, an advantage not many retail lenders enjoy. 

Such funding lines also help the bank to reduce its overall cost of funds, which otherwise has to be raised through low-cost deposits such as current and savings accounts.
The bank raised Rs.8.6 billion in deposits during the three months, lagging well behind the loans. The bank recently launched a new deposit campaign offering a relatively higher deposit rate for one-year deposits for senior citizens above 55 years of age.  

This is whilst the deposit rates have trended down in the market.  

The bank’s fee and commission incomes grew by 23 percent YoY to Rs.547.1 million. Operating profits were Rs.1.68 billion, up 10 percent YoY, after making Rs.573.5 million in provisions for possible bad loans.

This was a substantial increase from the Rs.23 million provided in the same period, last year, as bank expects some significant toll on borrowers’ ability to service their loans.

Meanwhile, the bank reported earnings of Rs.3.33 a share or Rs.983.2 million in total earnings for the quarter under review compared to Rs.2.23 a share or Rs.590.5 million in the same period a year ago. The profits were substantially higher due to re-classification of fair value losses on the shares the bank holds in Commercial Bank of Ceylon PLC with the option given as per the Section 3 of the ‘COVID-19 Pandemic: The Implications on Financial Reporting,’ guidance issued by the Institute of Chartered accountants of Sri Lanka, the bank said. 

Meanwhile, the fair value was also measured as at December 31, 2019 as the market values as of March 31, 2020 could not be accepted as realistic due to the large-scale sell-offs during that period. 

Such losses during the same period last year amounted to Rs.583 million net of taxes, the bank said. While the bank expects the moratorium and concessionary working capital loans introduced by the Central Bank to help businesses to recover, the minimum cash flows during moratorium period and the delayed payments by those who do not enjoy the moratorium are likely to have a negative impact on earnings, cash flows, and liquidity position in the ensuing period. 

The government owns 30.54 percent in DFCC Bank via Bank of Ceylon, Sri Lanka Insurance Corporation, Employees’ Provident Fund and Employees’ Trust Fund Board.