Weaker rupee lifts ComBank first quarter profits amid massive Fx gains and higher interest income

• Total assets cross Rs 2tn, first private sector bank to achieve the milestone

Sharp depreciation in the rupee against the dollar helped Commercial Bank of Ceylon PLC (ComBank) to record a massive jump in assets and thereby its profits in the three months to March 2022 (1Q22).

Sri Lanka’s largest private lender by assets reported earnings of Rs.9.42 a share or Rs.11.68 billion for the January-March quarter, helped to a large extent by the sharp fall in the rupee, which sent exchange gains to massive levels, offsetting the losses from the revaluation losses on foreign currency assets and liabilities in the period. 

As a result, the earnings rose 73.12 percent Year-on-Year (YoY) to Rs.6.75 billion or Rs.5.65 per share.
Net trading gains rose to a massive Rs.23.5 billion compared to just Rs.214.6 million a year ago due to realised and unrealised exchange profits, which resulted from the sharp depreciation of the rupee. 

This offset, “the impact of reduced capital gains from government securities in comparison with the corresponding quarter of 2021,” the bank said in an earnings release. 

This also “led to net gains from derecognition of financial assets reducing to Rs 15.143 million during the three months under review from Rs 1.776 billion reported for the corresponding period last year.” 

However, the exchange losses on the revaluation of foreign currency assets and liabilities and the exchange impact on impairment charges on loans and advances and government securities denominated in foreign currency resulted in a net loss of Rs.12.22 billion in the quarter compared to a gain of Rs.3.67 billion in the corresponding quarter in 2021. 

The revaluation of foreign assets and liabilities at the weaker rupee also helped ComBank to become the first private lender with assets over Rs.2.0 trillion as the bank ended the quarter with an asset base of Rs.2.23 trillion by March end. 

Meanwhile, the bank’s normal banking business reported Rs.18.82 billion in net interest income compared to Rs.15.48 billion in the corresponding quarter in 2021, which translated into a robust 21.6 percent growth. 
The loan book growth and the rupee depreciation impact helped the bank’s top line growth in the quarter as the weaker rupee helped boost the income from dollar denominated assets in rupee terms. 

As a result, the interest income rose by 19.4 percent YoY to Rs.37.85 billion. 
The corresponding impact of the weaker rupee on dollar denominated deposits and borrowings also sent interest expense up by 17.3 percent YoY to Rs.19.0 billion. 
The bank’s net interest margin—the spread between the yields on loans and other interest bearing assets and the cost of funds on deposits and other liabilities— moved little to 3.55 percent in the March quarter from 3.51 percent in the previous quarter ended in December 2021. 

The loans and advances grew by a mammoth Rs.129 billion or 12 percent in the three months, bulk of which came from the revaluation of dollar denominated loans at the weaker rupee in March-end. The rupee loans grew by only Rs.22 billion, logging an extremely modest 2.7 percent growth. 

Meanwhile, the deposits also rose by an even larger Rs.218 billion or 15 percent in the three months but the rupee deposits growth was just Rs.29.6 billion or 2.8 percent.  

The net fee and commission incomes rose by a robust 35.2 percent YoY to Rs.4.09 billion. 
The bank set aside Rs.5.96 billion on potential losses from loans and other losses in the quarter, down 16.7 percent from the same period, last year. 

The exchange impact on impairments on foreign currency assets were recognised as part of net other operating income. 

The bank reported gross non-performing loans ratio of 3.58 percent by the end of March, slightly improving from 3.85 percent at the end of December 2021. 

However, the sector expects the asset quality to deteriorate sharply both as a result of the increased defaults and near zero growth in new loans after the Central Bank raised policy rates by 700 basis points, and the worsening economic conditions which have made things tougher for businesses and individuals who have borrowed.  
DFCC Bank PLC has 12.12 percent stake in ComBank being its single largest shareholder while the Employees Provident Fund has 8.62 percent being its third largest shareholder. 

The Fund also has another 7.78 percent being the bank’s largest non-voting shareholder. 

ComBank remains adequately liquid but its regulatory capital adequacy ratios, although remaining marginally above the revised regulatory minimums came under some pressure from the sharp depreciation of the rupee, which increased the risk weighted assets massively and the mark-to-market losses on government securities after the interest rates rose sharply.