DFCC Bank : continues with its growth strategy despite the turbulent times in the Macro Environment

The following commentary relates to the audited financial statements for the year ended 31 December 2019, presented in accordance with Sri Lanka Accounting Standard 34 (LKAS 34) on "Interim Financial Statements". The DFCC Group comprises of DFCC Bank PLC (DFCC), and its subsidiaries - Lanka Industrial Estates Limited (LINDEL), DFCC Consulting (Pvt) Limited (DCPL) and Synapsys Limited (SL), the joint venture company - Acuity Partners (Pvt) Limited (APL) and the associate company - National Asset Management Limited (NAMAL).

DFCC Bank continues to aggressively pursue its role as a commercial bank by strengthening its core business, creating momentum in the industry with its constantly evolving best in class offerings and creating a culture of service amongst its people.

Profitability

DFCC Bank, the largest entity within the group recorded a profit after tax (PAT) of LKR 2,828 Million for the year ended 31 December 2019 excluding the fair value loss on Commercial Bank of Ceylon PLC (CBC) in comparison to profit after tax of LKR 3,646 Million recorded in the comparative year. The Bank's profit after tax with the fair value loss on CBC shares amounted to LKR 2,074 Million for the current year against LKR 2,768 Million in the comparative year. The Group recorded a profit after tax of LKR 2,300 Million for the year ended 31 December 2019 compared to LKR 3,070 Million in the comparative year. Decline in PAT is mainly due to the increase in impairment and taxes on financial services. Taxes on financial services increased to LKR 1,548 Million due to Debt Repayment Levy introduced during last quarter of 2018.

NII and fee income

Notwithstanding the turbulent environment in the country, the Bank recorded a LKR 12,662 Million in net interest income (NII) which is a 2% growth YoY. This NII Growth was possible even after Bank meeting the conditions stipulated by Central Bank of Sri Lanka to reduce the lending rates by 250 basis points by December 2019 compared with the rates applicable in April 2019. Net fees and commission income grew by 5% to LKR 2,046 Million as a result of the concentrated effort to increase non-funded business for the year ended 31December 2019 from LKR 1,944 Million in the comparative year.

Operating Expenses

As a part of its growth strategy, DFCC continuously invests in its organization and infrastructure. The bank increased its island wide footprint by commencing 20 full service branches in 30 Days. DFCC enhanced its delivery channels through core banking upgrades and the introduction of pioneering, digitally enabled products. The bank also continued to invest in its brand and franchise, to enhance top of mind awareness and greater customer engagement for the bank with the objective of increasing a higher footfall. The outlay of these investments resulted an increase in operating expenses to LKR 7,573 Million from LKR 6,604 Million in the comparative year, which expects to generate positive results to the Bank in the short to medium terms.

Impairment

The overall impairment provision increased due to adverse business environment faced by most industries. As a result, the impairment provision during the year under review increased to LKR 1,669 Million, compared to LKR 1,056 Million recorded in the comparable year. The Bank's NPL ratio as at 31December 2019 increased to 4.85% compared to 3.28% recorded at the end of previous year. NPL in the banking industry also recorded an increasing trend from 3.4% in 2018 to 4.7% as at 31 December 2019.

Other Comprehensive Income

Investments in equity securities and treasury bills and bonds (fixed income securities) are classified as financial assets and the change in fair value is recorded through other comprehensive income. Accordingly, fair value losses of LKR 1,564 Million and a net fair value gain of LKR 2,126 Million were recorded on account of equity and fixed income securities, respectively. The drop in the share price of Commercial Bank of Ceylon PLC during the period mainly contributed to the reported fair value loss in equity securities, whilst the movement of interest rates of treasury bills and bonds favourably resulted in the fair value gain that was recorded during the period.

Statement of Financial Position
Assets

Reflecting its growth Strategy, DFCC Bank's total assets increased by LKR 29,989 Million recording a growth of 8% since December 2018. This constitutes a loan portfolio growth of LKR 23,085 Million to LKR 272,818 Million compared to LKR 249,734 Million as at 31 December 2018 recording an increase of 9%. Following bank's prudent lending policies, it did not pursue aggressive growth particularly to sectors that exhibited stress.

The Bank with a view to support accelerated economic growth in the country spearheaded by the government and to address the issues faced by the stressed sectors, actively participated in offering concessionary credit and moratorium schemes to the clients as recommended by the Central Bank of Sri Lanka.

Liabilities

The Bank's deposit base as at 31 December 2019 increased to LKR 247,787 Million from LKR 242,238 Million as at 31 December 2018, which is a growth of 2%.

Accordingly, the Bank was able to report an improved loan to deposit ratio of 110% in December 2019 from 116% in September 2019. The Bank's CASA ratio, which represents the proportion of low-cost deposits stood at 22.72% by 31 December 2019. Part of the Bank's advance portfolio is funded through long term concessionary credit lines enjoyed by the bank for a long period and when consider these concessionary term borrowings, the ratio is improved to 28.96% as at 31 December 2019.

Capital Management

In order to support future growth as a full service retail bank with a development banking focus, the Bank has consistently maintained a capital ratio above the Basel III minimum capital requirements. As at 31 December 2019, the Bank recorded Tier 1 and total capital adequacy ratios of 11.34% and 15.81%, respectively, which is well above the minimum regulatory requirements of 8.5% and 12.5%, respectively.

CEO's Statement

"DFCC Bank, the Bank for Everyone is well positioned to serve the nation as a full service commercial bank through a range of financial services that will promote wealth creation across the country. Going beyond the traditional banking, we have embraced Digitalization focusing on becoming the best customer centric & digitally enabled retail bank in 2025. While enabling best experiences for our customers by creating convenience through digital footprints, we have focused on making our employees also digitally empowered to support the initiative introduced by Central Bank in order to enhance the digitally driven culture."

About DFCC Bank

DFCC Bank PLC is a fully fledged commercial bank offering the full gamut of commercial and development banking services. The Bank was also ranked amongst Business Today's Top 30 businesses in Sri Lanka and was placed in the 25th position in Brand Finance Top 100 Most Valuable Brands, 2019. DFCC Bank is rated AA- (lka) by Fitch Ratings Lanka Limited.