Higher provisions, other costs overshadow ComBank’s 4Q performance

• Sets aside mammoth Rs.72bn as provisions for full year

Commercial Bank of Ceylon PLC reported subdued operating performance in the final three months of the 2022 financial year, due to sharply higher provisions against the possible bad loans and other financial assets and substantially higher operating costs. 

Sri Lanka’s biggest private lender by assets set aside Rs.19.7 billion in provisions in the three months to December, bringing its full-year provisions to Rs.71.9 billion, the highest the bank has ever provided. This was an increase from Rs.7.1 billion and Rs.25.1 billion, respectively for the two periods.  The bank’s share ended Rs.1.10 or 1.66 percent lower, at 65.00 yesterday. 

The bank reported a net interest income of Rs.21.9 billion in the three months, up 15.7 percent from the same period in 2021, reflecting the impact from the somewhat higher margins possible from elevated interest rates. 
In fact, the net interest income growth in the final three months moderated compared to the previous nine months, due to “the full impact of the increased interest rates and the shift from low-cost to high-cost funds was felt in the final quarter of the year”, the bank said in an earnings release. 

The bank’s current and savings account ratio, the portion of low-cost deposits in the portfolio, fell sharply to 38.36 percent, from 47.83 percent at the end of 2021, as people shifted part of their deposits into high-yielding term deposits, as the rates climbed sharply last year.  The bank reported a net interest margin of 3.74 percent, slightly changed from 3.51 percent at the start of the year. 

The bank reported a solid 33.1 percent growth in its total operating income to Rs.32.8 billion in the October-December quarter. made possible by both the funding and non-finding incomes. 

The fee incomes rose by 71.6 percent to Rs.6.3 billion, while the trading gains, which capture the gains from foreign exchange and swap transactions, reported Rs.1.2 billion, compared to a loss of Rs.101.1 million a 
year earlier. 

Meanwhile, the net other operating income, the other most significant source of income, also rose by 55.5 percent to Rs.3.41 billion, perhaps from the revaluation of assets and liabilities.  Further, the bank also saw its operating expenses rising by 22.5 percent to Rs.10.3 billion.

Together with the massive provisions, the bank saw its operating profit before tax plunging 68.4 percent to Rs.2.9 billion, from Rs.9.1 billion in the same period in 2021. 

The bank however reported earnings of Rs.7.08 a share or Rs.8.78 billion for the December quarter, compared to earnings of Rs.4.27 a share or Rs.5.22 billion a year ago; it recognised an income tax reversal to the tune of Rs.6.47 billion.  This was due to the increase in the bank’s deferred tax assets on provisions for impairment charges for loans and other financial assets and also due to the increase in the income tax rate to 30 percent, effective from July 1, 2022, from 24 percent hitherto existed. 

Since the effect of the increase in deferred tax assets being higher than the current tax charge, the net charge for the year reflects a negative figure, the bank said. 

The bank’s loans grew by Rs.151.2 billion or 13.8 percent last year but the true growth was only marginal when the rupee depreciation impact is discounted. DFCC Bank PLC, Y.S.H.I. Silva and the Employees’ Provident Fund held 12.12 percent, 9.90 percent and 8.62 percent stakes, respectively in Commercial Bank, as at the end of 2022.