Slower loan growth, higher provision and taxes dent ComBank 1Q19

The decline in the loan book, higher impairment charges and taxes dented the March quarter (1Q19) performance of Commercial Bank (Ceylon) PLC, Sri Lanka’s largest private lender with over Rs.1.3 trillion in assets, the interim financial accounts released to the Colombo bourse showed.

The banking group recorded earnings of Rs.3.05 per share or Rs.Rs.3.1 billion for the quarter under review, compared to Rs.4.07 per share or Rs.4.1 billion reported for the same quarter last year, reflecting a net profit fall of 24 percent year-on-year (YoY).The net interest income for the period rose 10.5 percent YoY to Rs.12.1 billion. The bank’s interest margin remained steady at 3.7 percent from last year. 

The net fee and commissions grew lower than one percent YoY to record Rs.2.5 billion.

The banking group’s total operating income rose 9 percent YoY to Rs.15.1 billion but a sharp 68 percent YoY increase in impairments to Rs.1.9 billion on possible bad loans, prompted by the adoption of new accounting standards, resulted in the operating income growing only 3.5 percent YoY to Rs.13.2 billion.

The bank’s gross NPL ratio increased to 4.14 percent, from 3.24 percent as at end-December 2018, reflecting some deterioration in the asset quality. The bank’s loan book recorded a negative growth of Rs.5.6 billion since end-2018 to Rs.884.6 billion. 

Commercial Bank Managing Director/CEO S. Renganathan in an earnings release said the bank followed a more cautious approach in expanding its advances portfolio during the challenging economic conditions, which has contributed to a marginal decline in the loan book in comparison to December 31, 2018.

He said this has contributed to a drop in the net interest income and has also had a cascading effect on the group’s profit after tax. 

“Despite the decline in advances, I am happy to say that the bank has continued to support the SME sector, as reflected in the satisfactory growth of this portfolio during the quarter,” Renganathan added. The bank raised Rs.23 billion in deposits during the three months under consideration to reach Rs.1.02 trillion, an increase 2.34 percent from end-December 2018. The introduction of Debt Repayment Levy from October 1, 2018 cost the bank Rs.576.5 million during the March quarter, while the removal of the tax concession on the banking sector by the government resulted in the bank to pay higher income taxes.

The income tax expense of the bank during the quarter under review rose 4.1 percent YoY to Rs.1.8 billion, which reflected an effective tax rate of 36.4 percent as opposed to 29.8 percent in the first quarter of 2018. Due to these factors, Commercial Bank said the taxes on financial services and income tax accounted for 53.13 percent of the operating profit of the group. Commercial Bank Chairman Dharma Dheerasinghe said the rate of taxation on bank continues to be a matter of concern, particularly in the context of the challenging external conditions affecting the industry.

“As a systemically important bank and as a responsible stakeholder of the economy, we need to focus on further increasing our capacity to support key sectors of the economy and while the taxes we pay represent one form of support, there are many others including SMEs that need attention,” he said.

Meanwhile, the bank’s total Tier I capital ratio (with capital buffers) at 11.353 percent, as at March 31, 2019, was comfortably above the minimum requirement of 10 percent, which became effective from January 1, 2019 under Basel III, while the total capital ratio of 15.184 percent was well in excess of the Basel III minimum requirement of 14 percent.  State-run private sector pension fund, the Employees’ Provident Fund, has a 9.63 percent stake in Commercial Bank as the single largest investor, followed by DFCC Bank with a 8.59 percent stake.

High-net-worth investor Indra Silva has a 8.07 percent stake in Commercial Bank as the third largest shareholder.