Higher impairment charges dent NDB June quarter earnings

National Development Bank PLC (NDB) recorded lower profits for the quarter ended on June 30, 2022 (2Q22), in line with its other banking peers, amid a massive rise in provisions against possible bad loans and foreign currency-denominated government securities held by the bank.

The banking group reported earnings of Rs.3.12 per share or Rs.1.18 billion for 2Q22, compared to earnings of Rs.7.08 per share or Rs.1.7 billion reported for the same quarter in the previous year.

The bank’s net interest income rose to Rs.8.8 billion during the quarter under watch from Rs.5.2 billion a year ago, with the rise in interest rates but its net fee and commission income fell slightly to Rs.1.56 billion, from Rs.1.66 billion a year ago.

For the quarter under review, the bank made provisions of Rs.7.5 billion, compared to just Rs.1.95 billion a year ago, neutralising the gains made through its core banking activities. For the first half, the provisions rose to Rs.13.9 billion, from Rs.4.1 billion a year ago.

“The greater portion of impairment charges comprised provisions made for foreign currency-denominated government securities, factoring in the revisions to the sovereign rating of the country earlier this year on account of the country’s debt restructuring measures and the impact arising from rupee depreciation,” NDB said in an earnings note.

“The bank strengthened the impairment provisions for loans, given heightened economic uncertainty exacerbated by political instability and social unrest during the period, impacting customer debt serviceability,” it added. 
The bank’s bad loans ratio deteriorated to 5.70 percent as at June 30, 2022, from 4.55 percent six months ago.
Meanwhile, the bank’s gross loans to customers stood Rs.609 billion as at end-June 2022, a YTD increase of 16 percent, comprising the impact of rupee depreciation and moderate growth stemming from all business segments. 
Customer deposits were at Rs.645 billion, an increase of 17 percent, again containing the inflationary effects of the rupee depreciation against the US dollar and also deposit mobilisation at granular level within the retail segment as well as across business segments. 

“With our strategy recalibrated to match external developments well on track, NDB was able to achieve its core banking revenue targets,” said NDB Director/CEO Dimantha Seneviratne.   “The unprecedented depreciation in the exchange rate together with severe macro-stresses that resulted in higher provisions for investments and provisions made on a prudent basis on loans to factor in expected stresses narrowed our profits.    Whilst we are augmenting the bank’s strength and stability through robust risk management frameworks amidst unique challenges faced by the financial services industry, we are also sharpening our focus on customer-centricity, so as to deliver precise solutions and support them towards gradually emerging from their economic woes,” he added. 

Meanwhile, the bank’s Tier I and total capital adequacy ratios as of June-end 2022 were 8.63 percent and 13.02 percent, ahead of the regulatory minimum levels of 8.5 percent and 12.5 percent, respectively, before considering capital relief measures on capital conservation buffers mandated by the Central Bank recently. 

Commenting on the future outlook, NDB said with customer debt serviceability directly affected and the full effects of moratoria, which ended in December 2021 now unwinding, it would place significant focus and efforts in preserving the quality of the loan book.