Fair value and capital gains from G-Secs and lower taxes cushion ComBank’s 2Q

• Impact from moratoria, low credit demand and yields due to declining rates affect top line

Commercial Bank of Ceylon PLC reported subdued top line performance amid low business volumes and impacts stemming from the relief afforded to its clients affected by the pandemic but the gains made from its investments in government securities (G-Secs) and lower taxes softened the impact on its bottom line. 

Commercial Bank, Sri Lanka’s largest private sector bank with assets of Rs.1.5 trillion, reported a net interest income of Rs.9.9 billion for the three months to June, down 17 percent from the comparable period last year, as the bank recognised the full impact coming from the interest concessions under the regulator-mandated moratoria and the bank’s own concessions on day one of the quarter. 

The bank’s share ended 50 cents lower at Rs.82 at the close of trading yesterday, giving a total market capitalisation of Rs.80.7 billion to the bank. Meanwhile, the bank saw its loan book contracting by nearly Rs.19 billion during the three months, as private credit had a degrowth during the quarter, clouded by the pandemic’s effects, since most of the economic activities either became slow or came to a complete standstill. 

The bank has a loan book of Rs.930.4 billion and a deposit portfolio of Rs.1,138.2 billion by end-June. The deposits swelled by Rs.33.6 billion in the three months, as both retail and institutional clients parked their cash in banks with limited spending options and want of liquidity – a phenomenon seen across the industry. 

Meanwhile, the bank’s net interest margin narrowed to 3.04 percent, from 3.52 percent in March, due to the faster decline in rates in the market. This resulted in lower income from its larger liquid asset portfolio as the yields of government securities are on the decline. 

When a bank has no growth or degrowth in its loans while its deposits and other fundings rise, it parks such funds in government securities, which becomes part of the bank’s liquid assets until it meets demand but the return on such assets is much lesser than what they could have earned by lending to others as loans. 

During the quarter, Commercial Bank decided to raise a rupee equivalent of US $ 50 million from International Finance Corporation, IFC Financial Institutions Growth Fund LP and IFC Emerging Asia Fund LP, via a private placement of 125 million voting shares at Rs.80 a share. 

The bank reported earnings of Rs.3.43 a share or Rs.3.6 billion for the April-June quarter, compared to Rs.3.36 a share or Rs.3.5 billion in the year earlier period. 

The earnings were buttressed by the Rs.2.3 billion worth of trading gains made from treasury bills and bonds and Rs.1.8 billion worth of capital gains made from sale of some government securities during the period. 

This softened the impact came from lower net interest income and fee incomes as fee incomes fell by 31 percent to Rs.1.64 billion from a year ago period. 

The absence of nations building tax on financial services and debt repayment levy also helped the bank’s earnings, which otherwise would have absorbed at least another billion rupees of operating profits. 

The bank provided Rs.2.6 billion for possible bad loans in the quarter, compared to Rs.3.6 billion in the same period last year. The gross non-performing loans ratio rose to 5.37 percent, from 5.27 percent in March and 4.95 percent in December 2019.