Prudent balance asset management results in strong bottom line growth for DFCC Bank

DFCC Bank PLC reported a Profit Before Tax (PBT) of Rs. 9,559 million and a Profit After Tax (PAT) of Rs. 6,013 million for the period ended 30 September 2024 compared with the previous period’s PBT of Rs. 8,305 million and a PAT of Rs. 5,498 million. 

The Group recorded a PBT of Rs. 9,909 million and PAT of Rs. 7,128 million for the period ended 30 September 2024 as compared to Rs. 8,681 million and Rs. 7,064 million, respectively, in 2023. The bank’s Return on Equity (ROE) improved to 10.82 percent during the period ended 30 September 2024 from 12.19 percent recorded for the year ended 31 December 2023. 

The bank’s Return on Assets (ROA) before tax for the period ended 30 September 2024 is 1.86 percent compared to 1.82 percent for the year ended 31 December 2023. The bank’s total tax expense, which includes Value Added Tax (VAT) and Social Security Contribution Levy (SSCL) on financial services and Income Tax, is Rs. 6,550 million for the period ending 30 September 2024. As a result, the bank’s tax expense as a percentage of operating profit for the period stood at 52.14 percent.

The bank has continued to make downward adjustments to lending and deposit rates to align with the current accommodative monetary policy stance of the Central Bank of Sri Lanka to expand credit to the private sector. 

Lower market lending interest rates and the anticipated recovery in domestic economic activity are expected to continue supporting this expansion, thus supporting the envisaged rebound of the economy. The lower interest rates have resulted in reduced interest income and expenses compared to the comparable period of 2023. 

The bank’s Net Interest Income (NII), its core business, decreased by 12 percent to reach Rs. 20,734 million by the end of September 2024.The interest margin decreased from 5.18 percent in December 2023 to 4.20 percent by September 2024.

Despite the sharp reduction in lending rates, the bank was able to partially safeguard its Net Interest Income (NII) by investing in longer-term, fixed-rate instruments from the beginning of the year.

 “The untiring efforts of the bank’s staff led to increased credit card-related operations, which mainly contributed to an increase in fee and commission income compared to the comparable period of 2023,” DFCC said.

In line with the objective of expanding credit card operations and acquiring new businesses, fee expenses relating to credit cards also increased. By providing a positive net effect as a return to expanding the credit card operation, net fee and commission income have increased by 8 percent to Rs. 3,068 million for the period ended 30 September 2024, compared to Rs. 2,848 million for the comparative period in 2023. 

The Bank has disposed a portion of its Sri Lankan government securities classified under FVOCI, resulting in a gain of Rs. 2,383 million, underscoring the efficacy of its strategic decisions. Conversely, the sale of a part of the bank’s International Sovereign Bond (ISB) holdings incurred a loss of Rs. 2,172 million. However, this was offset by the reversal of the impairment provision of Rs. 2,453 million on the disposal of ISB, which positively impacted the overall income statement for the period.

The impaired loan (stage 3) ratio decreased from 7.03 percent in December 2023 to 6.01 percent as of 30 September 2024 due to significant growth in the portfolio, in line with positive developments in the macroeconomic environment, coupled with the bank’s concerted efforts in recoveries. 

To address the current and potential future impact of the present economic conditions on the lending portfolio, the bank made adequate impairment provisions during the period by continuing to calibrate internal models to account for unseen risk factors in the future, including additional provisions made for the bank’s exposure to risk-elevated sectors. 

Accordingly, reflecting positive macroeconomic indicators and the bank’s concerted efforts on recoveries, the impairment charges for loans and advances improved significantly to Rs. 3,577 million for the period ended 30 September 2024, compared to Rs. 11,525 million in the comparable period.

Operating expenses for the period ended 30 September 2024 increased to Rs. 10,848 million compared with Rs. 8,370 million during the corresponding period in 2023, primarily due to the increase in inflation and the adjustment to staff benefits. However, the Bank has taken numerous cost control measures, resulting in operating expenses being managed at these levels. 

Changes in the fair value of investments in equity securities and fixed-income securities (treasury bills and bonds) and movement in hedging reserves are recorded through other comprehensive income. Due to the application of hedge accounting, the impact on the bank’s total equity due to exchange rate fluctuation was minimised. 

A net fair value gain of Rs. 1,797 million was recorded on account of equity securities as of 30 September 2024. The increase in the share price of Commercial Bank of Ceylon PLC during the period was the main contributor to the reported fair value gain in equity securities. The favourable movement in treasury bills and bond yields also resulted in a fair value gain of Rs. 944 million.

The DFCC Bank’s total assets increased by Rs. 35 billion, recording a growth of 6 percent from December 2023. In line with the bank’s growth strategy and the current economy, an increase in investment in fixed-income securities has contributed to a 50 percent increase in investment in financial assets at an amortized cost of Rs. 102 billion as at 30 September 2024, compared to the balance as of 31 December 2023. Further, the bank’s net loan portfolio growth of Rs. 34 billion to Rs. 383 billion compared to Rs. 349 billion as at 31 December 2023, an increase of 10 percent, contributed to the asset growth during the period. Moreover, the bank has designated its joint venture investment as an asset held for sale in light of its strategic decision to seek avenues to divest its 50 percent ownership in Acuity Partners Private Limited. 

The DFCC Bank’s total liabilities increased by Rs. 30 billion, recording an increase of 5 percent from December 2023. This is mainly due to the Bank’s deposit base experiencing a growth of 8 percent during the period, recording an increase of Rs. 33 billion to Rs. 440 billion, up from Rs. 407 billion as at 31 December 2023. 

Further, the CASA ratio was 25.82 percent as at 30 September 2024. The bank’s funding costs include medium to long-term concessionary credit lines, primarily used to grow the lending portfolio and provide much-needed concessionary funding to our customers. Considering these concessionary term borrowings, the CASA ratio improved to 33.33 percent, and the loans-to-deposit ratio improved to 82.30 percent as at 30 September 2024.

DFCC Bank’s total equity increased to Rs. 73.3 billion as at 30 September 2024, supported by favourable movements in the equity portfolio and fixed income security portfolio classified as fair value through other comprehensive income, and positive movements in the hedging reserve, together with the recorded profit after tax of Rs. 6 billion.

Accordingly, Tier 1 and Total Capital ratios were recorded at 10.708 percent and 14.358 percent by 30 September 2024, compared to 11.490 percent and 13.511 percent, respectively, as at 31 December 2023. The bank’s Net Stable Funding Ratio (NSFR) was 121.54 percent, and Liquidity Coverage Ratio (LCR) – all currency – was 271.46 percent as at 30 September 2024, compared to 124.60 percent and 597.47 percent respectively, as at 31 December 2023. All these ratios were thus maintained well above the minimum regulatory requirement.