Massive impairment charges weigh on Sampath Bank’s March profits

• Bank says it remains well capitalised and liquid to withstand shock stemming from current economic downturn

The massive impairment charges on loans and advances and other financial assets denominated in foreign currency weighed on Sampath Bank’s profits in the three months to March 2022 (1Q22) but the bank delivered on its core banking business, with increased margins and fee incomes, although the growth moderated quite substantially. 

The third largest private lender by assets reported earnings of Rs.4.24 a share or Rs.4.85 billion in the company’s first fiscal quarter ended in March 2022, down 4.9 percent, from Rs.4.46 a share or Rs.5.10 billion in the corresponding period in 2021. 

The bank on a standalone basis provided Rs.11.8 billion in the quarter, comprising Rs.4.9 billion for loans and advance and Rs.6.7 billion for other financial assets, nearly all of which are foreign currency-denominated government securities. 
In the same quarter last year, the bank made provisions of only 
Rs.1.18 billion.  

“It should be noted that the impairment provision for the corresponding period in the previous year was comparatively low, owing to the improved business confidence and positive economic outlook during that time,” Sampath Bank said in an earnings release. 

The Sri Lankan economy was off to a fine start in the first three months in 2021, coming off from twice imposed lockdowns in 2020, only to be met with harsher lockdowns and prolonged restrictions on economic activities from the fourth week of April in 2021, on concerns of the Delta variant of the virus. 

That shock reverberated through the economy, with disrupted supply chains compounded by the foreign currency shortage from June onwards, precipitating into the present-day massive economic, social and political breakdown. 
This caused the banks to take precautions and thereby make significantly higher provisions in expectations of the economic toll on its borrowers. 

“On this basis, the bank increased the weightages for worst-case economic scenarios by considering the recent shifts in the country’s economic outlook and used the latest economic data in the calculation of the impairment allowance for 1Q 2022,” the bank said. 

“This decision was prompted by two reasons; the downgrade of Sri Lanka’s sovereign rating in April 2022 and the announcement by the Government of Sri Lanka (GoSL) that it is considering a consensual restructuring of the country’s external debts through an economic adjustment programme supported by the IMF,” the bank added.
Meanwhile, the bank reported a net interest income of Rs.14.59 billion for the quarter under review, up 42.5 percent from a year ago, as the bank said it benefitted from the upward trend in the interest income and the still larger stock of current and savings accounts (CASA) portfolio, which accounts for 46 percent of total deposits. 
This helped it to increase its net interest margin to 4.54 percent, from 3.61 percent at the end of 2021. 

The net fee and commission income also received tailwind from the increased card use, as consumers increased spending and trade-related fees, as such incomes, including other sources, rose by a robust 67.8 percent to Rs.4.84 billion. 

As the economy gets tougher with soaring inflation, people are expected to use their cards more on consumer staples, as the real incomes fall sharply as wages cannot keep pace with the prices.    Meanwhile, the realised foreign exchange income added a whopping Rs.8.0 billion gain during the quarter after the rupee shed its value by 47 percent through March 31, after the former Central Bank Governor bungled the rupee float on March 7. 
Operating expenses rose by 16.8 percent to Rs.7.03 billion, mainly due to the higher inflation remaining during the quarter.

The bank saw its loans and advances and deposits portfolios logging Rs.69.4 billion and Rs.71.4 billion increments, respectively during the three months but much of the expansion happened from the revaluation of its foreign currency-denominated assets and liabilities. 

However, the growth in the rupee loans and deposits was much more modest at Rs.27.4 billion and Rs.14.3 billion at 3.8 percent and 1.7 percent, respectively. 

The bank reported a gross non-performing loans ratio of 3.17 percent by March-end, slightly changed from 3.20 percent from December last year. 

While the increase in the risk-weighted assets mostly on account of the foreign currency-denominated loans and other assets and the cash dividends took some toll on the bank’s total capital adequacy ratio, all capital ratios stood at above the regulatory minimum levels. 

For instance, the bank’s Tier I and Tier II ratios stood at 11.44 percent and 14.20 percent, respectively when the regulatory minimums were at 8.0 percent and 12.0 percent, respectively.   
“The bank is well positioned to maintain its capital ratios at prudent levels, with sufficient buffers to absorb the shocks that may arise from economic uncertainties,” Sampath Bank said.