Seylan Bank 1Q net edges up amid narrowing margins and gilt-edge losses

Seylan Bank PLC posted a net profit of Rs.673.5 million for the quarter ended March 31, 2016 (1Q16), up 1.49 percent from a year ago amid narrowing margins and mark-to-market losses made on the investments in government securities, the interim results showed. 

The earnings per share for the quarter was slightly up from Rs.1.92 to Rs.1.95. 
The bottom line performance was hampered by hefty mark-to-market losses made to the tune of close to Rs.3 billion on the investments in treasury bills and bonds as the yields spiked during the March quarter in response to the Central Bank’s monetary tightening measures.    

The direct impact on those losses on the net profit was reflected through the Rs.517 million net trading losses while another Rs.2.4 billion is booked under the comprehensive section of the bank’s income statement as such investments are categorized under ‘available-for-sale’ category, where the gain or loss of such investments is not recognized under the 
income statement. 

Many commercial banks are expected to record sizable mark-to-market losses on their exposure to the government securities due to the rising interest rates in the economy as the securities were bought when the interest rates were lower.  

There is a negative correlation between bond yields and prices.   
Meanwhile, the banking group’s net interest income rose 4.77 percent year-on-year (YoY) to Rs.2.95 billion amid the net interest margin narrowing to 3.85 percent from 4.42 percent in December 2015. 
Seylan Bank has been aggressively campaigning for deposits offering very high interest rates resulting in higher cost of funds and thus lower margins. 

The slowdown in demand for credit is reflective from very moderate growth in the bank’s loan book. The gross loans and advances of the bank grew 4.1 percent or Rs.8.2 billion to Rs.207 billion. 
Leases, credit cards and margin trading portfolios contracted while term loans and rupee overdrafts portfolios expanded. 

The banking group has an asset base of Rs.316.2 billion, up 5.9 percent from December 2015. 
The bank opened four new branches during the quarter bring the total network of branches to 169. The bank has a staff strength of 3,125. Despite the aggressive promotions, the deposits grew by only Rs.920 million or 0.41 percent to Rs.225.45 billion during the three months. The bank’s low-cost deposit base – the current and savings account ratio – was 36.9 percent, slightly less than the industry average, hovering around 40 percent levels. 

The bank’s provisions for possible bad loans or impairments were less demonstrative of the gradually improving asset quality of the 
asset portfolio. 
The gross non-performing loan ratio was 4.71 percent, slightly up from 4.68 percent in 
December 2015. 

The return on equity narrowed to 12.13 percent from 15.62 percent. 
The capital adequacy levels – both Tier I and Tier II capital adequacy ratios – stood at 11.02 percent and 11.43 percent, respectively but the latter is nearing the regulatory minimum of 10 percent.