G-Sec gains blunt pandemic hit on ComBank’s 3Q profits

Gains from government securities (G-Secs) blunted the full impact of the pandemic on Commercial Bank of Ceylon PLC’s earnings in the September quarter (3Q20) while the bank was beginning to see some pick up in new loans.
Despite the moderate credit growth and the heavy deposit build-up, Sri Lanka’s largest private lender by assets recorded 14.3 percent increase in net interest income to Rs.14.0 billion during the three months under review over the same period last year. 

The bank gave Rs.7.1 billion in new loans, recovering from Rs.19.0 billion negative loans during the June quarter bringing the total growth in loans and advances up to Rs.17.0 billion for the nine months. 

However, deposits soared by Rs.150.4 billion during the same period, of which Rs.65.5 billion came during the quarter under review.

However, the bank managed to avoid a contraction in its net interest margin, which was at 3.17 percent in September compared to 3.04 percent in June. Yet, this is lower than 3.51 percent at the end of 2019. 

It is natural for banks’ margins to grow thin when the economy’s interest rates are on a downtrend trend. But growth in net interest incomes and thereby profitability is possible through increased volumes generated through higher demand for loans due to lower borrowing costs.

However, this natural effect wasn’t easy this year due to slowdown in big-ticket loans for business investments and expansions.

Commercial Bank reported earnings of Rs.3.51 a share or Rs.3.7 billion for the July-September period compared to Rs.4.69 a share or Rs.4.8 billion in the comparable period in 2019. 

The bank more than doubled its provisions for possible loan defaults from Rs.3.0 billion to Rs.7.5 billion in the quarter. 

“The bank decided to increase the weightages assigned for worst case scenario by 20 percent while reducing the weightages assigned for base case scenario and best case scenario by 10 percent each respectively when assessing the probability weighted forward looking macro-economic indicators with the objective of capturing the impact of COVID-19 on the Expected Credit Loss computation as at September 30, 2020,” the accompanying notes to the interim financial accounts said.

The massive impact was blunted to some degree by the Rs.2.5 billion capital gain booked from the de-recognition of government securities and the marked-to-market gain of Rs.807.2 million that resulted from Treasury bills and bonds.