Seylan Bank 3Q hurt by higher credit costs, weak margins and slowdown in new loans

Higher provisions made for possible bad loans, weak margins amid rising funding costs and slowdown in the growth for new loans dragged down the September (3Q18) quarter profits of Seylan Bank PLC. 

Seylan Bank reported Rs.4.38 billion in net interest income for the three months ended September, 2018, up by a moderate 5.90 percent year-on-year (YoY) as a result of the growth in interest cost accelerating against an increase in interest income. 

In recent times the bank was seen offering attractive interest rates on deposits. This exercise appears to have made the bank’s deposit cost going up, exerting pressure on the interest margins.

The Rs.13.6 billion growth in deposits was the highest in the three quarters, but came at a cost of low cost deposits of the bank. 

The low cost deposits measured by the Current And Savings Accounts (CASA) ratio fell to 28.53 percent at the end of September from 31.19 percent at the beginning of the fiscal year. 

During the nine months, the bank raised Rs.26.9 billion in new deposits and the bank has a total deposit portfolio of Rs.334 billion. 

On the other hand, the bank grew its new loans by a modest Rs.9.6 billion in the third quarter, significantly down from Rs.16 billion in the second quarter. 

Banks overall had become wary of growing their loan books aggressively from the beginning of the second half of the year due to rising non-performing loans amid a weak Sri Lankan economy, and the potential impact on their capital adequacy levels. 

During the nine months, Seylan Bank grew its loans by Rs.34.6 billion or 12.06 percent to Rs.321 billion. 

Meanwhile the gross non-performing loans ratio rose sharply to 5.58 percent from 4.42 percent at the beginning of the year.  

After a short spell of rapid loan growth and profits triggered by artificially low rates, which was made possible by excessive money printing, Sri Lankan banks are now experiencing a period  characterized by low growth, weak earnings, rising credit costs and non-performing loans. 

Meanwhile, the total operating income of the bank rose by little under 6.0 percent to Rs.5.79 billion. 

The net fee and commission income, which is mostly linked to core banking performance, ended up 1.32 percent YoY to Rs.990.9 million. 

Net trading income turned positive to Rs.502.1 million for the quarter from a net loss of Rs.201.8 million in the same period last year. 

However, the net operating income stayed flat at Rs.5.2 billion due to hefty collective impairment charges and the sharp increase in the individual impairments. 
The collective impairments were Rs.247.6 million from an impairment reversal of Rs.4.8 million a year ago,  and individual impairments or provisions made against selected large facilities upon showing some weakness, rose to Rs.331.4 million from Rs.267.9 million a year ago. 

The earnings for the quarter was Rs.3.13 a share or Rs.1.14 billion compared to Rs.3.34 a share or Rs.1.22 billion a year ago. 

Seylan Bank’s share closed 80 cents or 1.20 percent firmer to end at Rs.67.30 on Friday. 

Meanwhile, for the nine months ended September 30, 2018, the bank reported earnings of Rs.8.54 a share or Rs.3.13 billion compared to Rs.9.19 a share or Rs.3.36 billion a year ago. 

The net interest income for the period was Rs.13.05 billion, up 14.2 percent from a year ago. 

The Sri Lankan government holds 32.36 percent stake in Seylan Bank through Sri Lanka Insurance, Employees’ Provident Fund and Bank of Ceylon. 

Ishara Nanayakkara-controlled Brown & Company PLC and LOLC Investments Ltd. together holds 23.52 percent stake in the bank.