The Commercial Banks Group posted a balanced financial performance for the first quarter of 2022, strongly influenced by the strong devaluation of the rupee which had a positive and negative impact on the key performance indicators.
The group, comprising Commercial Bank of Ceylon PLC, its subsidiaries and an associated company, reported gross income of Rs 54.573 billion, total operating income of Rs 34.244 billion and net operating income of Rs 28.284 billion for the three months ended March 31, 2022, recording improvements of 33.41%, 41.74% and 66.33% respectively.
The year-on-year growth of the loan portfolio, coupled with the positive impact of the unprecedented depreciation of the rupee observed in March 2022 on the interest income of the portfolio of foreign currency denominated assets, saw interest income for the three months increase by 19.41% to reach 37.847 billion rupees. Interest expense also increased by 17.30% to Rs 19.024 billion due to year-on-year growth in the deposit portfolio as well as a substantial increase in interest expense recorded on deposits and borrowings denominated in foreign currencies due to the sharp depreciation of the rupee. As a result, the Group recorded net interest income of Rs 18.823 billion for the quarter, an improvement of 21.62%.
Commenting on the quarter in review, Commercial Bank Chairman, Prof. Ananda Jayawardane said, “These are extraordinary times for business in Sri Lanka and for banks in particular. It takes a lot of exceptional financial acumen and maturity to meet the prevailing mercurial challenges. Our first quarter results reflect the depth of managerial skills available to the Bank.
The Bank’s new Managing Director and CEO, Sanath Manatunge, said: “The unprecedented depreciation of the rupee is impacting revenue and earnings as well as key balance sheet indicators. This can have a distorting effect on performance. Nevertheless, we have shown strong results and are constantly taking prompt and necessary action to minimize the negative impacts of rapid changes occurring in external factors.
According to interim financial statements filed with the Colombo Stock Exchange (CSE), the group’s other operating income more than doubled to Rs 11.333 billion in the three months under review, while income net of fees and commissions improved by 35.21% to Rs 4.088 billion, and combined with net interest income, contributed to the growth of the Group’s total operating profit.
Meanwhile, the growth in net operating income was helped by impairment charges and other losses down 16.71% to Rs 5.961 billion. The foreign exchange impact on impairment charges on loans and advances and government securities denominated in foreign currencies has been recognized in other net operating income where the corresponding foreign exchange gains are recognized.
The Group recorded a net gain of Rs 23.542 billion from trading via realized and unrealized foreign exchange gains resulting from the sharp depreciation of the rupee, offsetting the impact of reduced capital gains on securities. Statement compared to the corresponding quarter of 2021, which led to a net gains from the derecognition of financial assets reduced to 15.143 million rupees in the three months under review, compared to 1.776 billion rupees reported for the period corresponding last year. However, a net loss of Rs 12.223 billion was recorded in other operating income due to foreign exchange losses on revaluation of foreign currency assets and liabilities and foreign exchange impact on impairment charges of loans and advances and government securities denominated in foreign currencies.
Consequently, the net operating profit increased to Rs. 28.284 billion from Rs. 17.005 billion reported for the corresponding quarter of 2021, an improvement of 66.33%.
With operating expenses of Rs 8.721 billion for the three months reflecting a lower rate of increase of 23.66% compared to the 66.33% growth achieved in net operating profit, the Group reported a Financial services pre-tax operating profit of Rs 19.563 billion, registering a higher growth of 96.56%.
VAT on financial services for the quarter more than doubled to Rs 3.155 billion due to the increase in profits subject to VAT as well as the upward revision of the VAT rate from 15% to 18% effective from January 1, 2022. Profit before income tax for the three months increased by 95.21% to Rs 16.406 billion.
The Group’s income tax expense for the reporting period amounted to Rs 4.631 billion, an increase of 188.2% due to the increase in taxable profits and the figure for the corresponding quarter of 2021 being reduced by the cancellation of the overprovision for 2020 resulting from the reduction of the tax rate from 28% to 24%.
Following the extraordinary increase in income tax for the quarter under review, the Group recorded an after-tax profit of Rs 11.775 billion for the three months, an improvement of 73.23%.
Taken separately, Commercial Bank of Ceylon PLC posted a pre-tax profit of Rs 16.089 billion for the three months, achieving a growth of 96.61% and a post-tax profit of Rs 11.548 billion, recording an improvement of 73.44%.
The total assets of the Group and the Bank passed the Rs 2 trillion milestone during the quarter, making Commercial Bank the first private sector bank in the country to achieve this milestone. The Group’s total assets stood at 2,287 billion rupees as of March 31, 2022, an increase of 304 billion rupees or 15.28% since December 2021, with gains from the depreciation of the rupee in March 2022 contributing also to growth. Growth in assets over the previous 12 months was Rs 462.259 billion or 25.34%.
The Group’s gross loans and advances increased by Rs 133 billion or 12.16% to reach Rs 1.228 trillion, while the growth of the Group’s loan portfolio compared to the previous year was 24.47%.
The Group’s total deposits recorded a growth of Rs 233 billion or 15.88% during the quarter under review and stood at Rs 1.706 trillion as of March 31, 2022, while the year-on-year deposit growth was 26, 73%.
In other key indicators, the Bank’s basic and diluted earnings per share improved by 66.85% from Rs 5.58 to Rs 9.31. The total equity attributed to shareholders of the Bank increased by Rs 4.122 billion or 2.5% to reach Rs 169.016 billion. With the increase in the number of shares due to the stock dividend for 2021, the Bank’s net asset value per share has been reduced to Rs 136.33 from Rs 138.08 at the end of 2021.
The Bank’s Tier 1 capital adequacy ratio (CAR) stood at 9.835% as at March 31, 2022, and its total capital ratio at 13.087%, both slightly above the revised minimum requirements of 9 % and 13% respectively imposed by the regulator following the covid19 pandemic. Capital adequacy ratios were impacted by an increase in risk-weighted assets due to growth in foreign currency-denominated assets due to the unprecedented depreciation of the rupee and market value losses on government securities at fair value through other comprehensive income (FVOCI) due to the unprecedented rise in market interest rates during the quarter under review.
In terms of liquidity, the Bank’s statutory liquidity ratios for its domestic banking unit and offshore banking unit stood at 39.68% and 31.90% respectively, well above the minimum requirement of 20%. . In terms of asset quality, the Bank’s ratio of impaired loans (stage 3) stands at 3.58% while its ratio of stage 3 impairments to stage 3 loans stands at 43.51% at March 31, 2022, against reported ratios of 3.85% and 42.76%. at the end of 2021.
In key profitability indicators, the Bank’s net interest margin, return on assets (pre-tax) and return on equity improved to 3.55%, 3.12% and 28.05% respectively for the three months ended March 31, 2022, compared to 3.51%, 1.74% and 14.66. % respectively for 2021. Meanwhile, the Bank’s cost to income ratio (CIR) before VAT on financial services improved to 25.33% for the quarter under review, compared to 31.61% for 2021 and 33 95% for 2020. The operating ratio, including VAT on financial services, fell from 37.97% in 2021 to 34.67% and from 39.96% in 2020 to 34.67%.
The Bank’s CASA ratio, a sector benchmark, stood at 48.10% at the end of the three months under review, compared to 47.83% and 42.72% respectively at the end of 2021 and 2020.
The Commercial Bank is Sri Lanka’s first 100% carbon neutral bank, the first Sri Lankan bank to be listed among the world’s top 1000 banks and the only Sri Lankan bank to be so listed for 11 consecutive years. It is the largest lender to the SME sector in Sri Lanka and a leader in digital innovation in the country’s banking sector. The Bank’s overseas operations include Bangladesh, where the Bank operates 19 outlets; the Maldives, where the Bank has a fully-fledged Tier I bank with a majority stake, and Myanmar, where it has a microfinance company in Nay Pyi Taw.