Moderate loan growth weighs on Sampath 3Q; asset quality improves

Sampath Bank PLC’s net interest income fell during the three months to September (3Q20) due to nascent growth in new loans while the margins compressed amid falling interest rates and soaring deposits. 

The bank reported net interest income of Rs.9.2 billion, down 22.1 percent year-on-year (YoY) as the growth as individual companies set aside considerable amount of cash in savings and term deposits amid slow growth in new loans. Sri Lanka’s third largest private lender by assets gave Rs.5.1 billion in new loans during the July-September quarter, up from Rs.3.3 billion in the previous quarter ended in June bringing the total amount of loans for the nine months to Rs.33.2 billion. 

This is compared to Rs.127.8 billion in new deposits, of which Rs.57.2 billion came in during the quarter under review. 

This lopsided growth in assets and liabilities weighed on the bank’s net interest income while the interest margin compressed from 4.46 percent to 3.46 percent through September as market rates were on a fast descent in response to the dovish monetary policy adopted since the beginning of this year.  

The bank reported earnings of Rs.3.19 a share or Rs.1.22 billion for the July-September quarter compared to Rs.6.81 a share or Rs.2.6 billion in the comparable period last year. 

 Lower fee incomes, higher impairment provisions made on investments in foreign currency denominated government bonds and narrower exchange income resulted from slight appreciation in the rupee against the dollar, weighed on the bottom line. 

“Low credit demand due to the economic downturn significantly affected the credit related fee income. Further, the low usage of credit cards due to the pandemic situation affected credit card related commission income,” the bank said in an earnings release. 

However, fee incomes of digital products had surged as people who avoided travel and in-person contacts created traffic into digital banking platforms. 

The lessons learnt from the initial lockdowns put both the bank, its staff and the customers in a better stead to operate seamlessly without hiccups, the bank said in reference to the new set of restrictions that came into effect since October. 

Meanwhile, the bank made significantly high impairment provisions on foreign currency denominated government bonds, going by the sovereign rating downgrade by Fitch Ratings and Moody’s Investors Service and their often-gloomier economic forecasts.

“The sovereign rating issued by Fitch Ratings is used to determine the probability of default of foreign currency denominated government bonds,” the bank said.  

“However, Moody’s Investors Service downgraded the Sri Lanka Sovereign rating by two notches to Caa1 in September 2020, which is now one notch below the current rating (B-) issued by Fitch Ratings. However, the bank recognised an additional impairment provision of Rs.388 million during the quarter ended 30th September 2020 by applying a probability of 50 percent that Fitch Ratings too would downgrade the sovereign rating in their next review,” the bank said in an accompanying note to the interim results. 

The bank provided Rs.4.1 billion for possible loan defaults and impairments against other financial assets including the government bonds for the quarter compared to Rs.3.4 billion in the same quarter last year. 

The bank made additional impairment provisions against individually significant customers who reflected signs of stress while collective impairments were raised on major portfolios such as term loans, overdraft and import loans. 
The bank’s gross non-performing loan ratio eased to 6.87 percent in September from 7.03 percent in June, and not too far from 6.37 percent at the beginning of the year levels, reflecting some improvement in asset quality, even with a nascent loan growth. 

This is amid some apocalyptic forecasts on the banking sector asset quality floated by rating agencies and other experts.

The bank said 50 percent of its customers received the moratorium relief. The bank also disbursed Rs.8.0 billion out of the Rs.178 billion approved under the Central Bank’s Saubagya re-finance scheme.

Vallibel One PLC, controlled by business magnate Dhammika Perera has 14.95 percent stake in the bank as its single largest shareholder while Employees’ Provident Fund has 9.97 percent stake being the second largest shareholder.