Higher provisions weigh on NDB earnings; CEO positive of industry turnaround

Weak asset quality weighed on the performance of National Development Bank PLC (NDB) during the December quarter (4Q19), as the bank made some hefty provisions for possible bad loans in a period marred by growth slowdown, but the bank remains hopeful of a turnaround in both the sector and the economy in 2020. 

NDB reported a net interest income of Rs.4.7 billion for the quarter under review, up 9.3 percent from the same period a year ago, as the bank saw some acceleration in growth for new loans during the final three months of FY19. 

The bank gave out nearly Rs.20 billion in new loans during the last three months, 35 percent of all loans or Rs.55.9 billion for the full year. This could be a harbinger for demand for new loans during 2020 under dual policy easing in the monetary and fiscal sectors.

“The bank is confident that the overall economy as well as the banking industry will take a positive turnaround in 2020, with further policy stability, tax reliefs given to individuals and corporates including banks and financial institutions, and the relief package extended to SMEs which would act as a stimulus for economic revival,” NDB Director/CEO Dimantha Seneviratne said.

The bank’s fee and commission incomes rose by 32 percent year-on-year (YoY) to Rs.1.39 billion. 

The other operating income had a sharp decline of 77 percent YoY to Rs.183.4 million which can be attributed to the drop in realised exchange income, as the rupee behaved opposite to the sharp depreciation in 2018. 

The bank’s net operating income or the performance at operating level declined to Rs.5.2 billion from Rs.5.5 billion in the corresponding period in 2018 due to higher provisions made against possible bad loans. 

Such provisions for the quarter rose to Rs.1.4 billion from a little under a billion rupees a year ago while for the full year, such provisions rose to Rs.4.4 billion from Rs.3.8 billion in 2018. 
“The increase in impairment charges was mainly due the increase in the collective provision charge in line with the growth in the loan book. The bank also accounted for provisions at individual levels considering elevated risks due to stressed market conditions” NDB said. 

In line with the sector, the non-performing loan ratio at NDB Bank also rose sharply to 4.77 percent from 2.85 percent. 

The bank with assets of Rs.530 billion reported earnings of Rs.8.29 a share or Rs.1.8 billion for the quarter under review compared to earnings of Rs.8.92 a share or Rs.1.7 billion in the year earlier period. The modest increase in the bottom line was possible due to the reversal of taxes recognised earlier, on the income on the Sri Lanka Development Bonds portfolio, which was made possible by a new circular issued by the tax authority early this month with retrospective effect from April 2018. 

Meanwhile, for the year ended December 31, 2019 the bank reported earnings of Rs.21.53 a share or Rs.4.8 billion in total profits compared to earnings of Rs.26.33 a share or Rs.5.1 billion in total earnings in 2018. 

The bank’s 2019 growth was partly possible due to the relaxation of the minimum capital rules by the Central Bank on the domestic-systematic important banks, which were officially issued in December. 

The government effectively has control of 33.96 percent in NDB through Employees’ Provident Fund, Bank of Ceylon, Sri Lanka Insurance Corporation and Employees’ Trust Fund.