- DFCC Group recorded a PAT of LKR 2 Bn.
- Total operating income is up by 93% to LKR 11 Bn.
- Impairment charges of LKR 4.7 Bn reflecting the current economic stresses.
The following commentary relates to the unaudited Financial Statements for the period ended 31 March 2023, presented in accordance with Sri Lanka Accounting Standard 34 (LKAS 34) on “Interim Financial Statements”.
Financial Performance
Profitability
DFCC Bank PLC, the largest entity within the Group, reported a Profit Before Tax (PBT) of LKR 2,684 Mn and a Profit After Tax (PAT) of LKR 1,749 Mn for the quarter ended 31 March 2023. This compares with a PBT of LKR 143 Mn and a PAT of LKR 366 Mn in the previous period.
The Group recorded a PBT of LKR 3,001 Mn and PAT of LKR 2,062 Mn for the quarter ended 31 March 2023 as compared to LKR 326 Mn and LKR 527 Mn respectively in 2022. All the member entities of the Group made positive contributions to this performance.
The Bank’s Return on Equity (ROE) increased to 10.88% during the quarter ended 31 March 2023 from 5.04% recorded for the year ended 31 December 2022. The Bank’s Return on Assets (ROA) before tax for the quarter ended 31 March 2023 is 1.63% compared to 0.46% for the year ended 31 December 2022.
Net Interest Income
The Bank’s Net Interest Income (NII), increased by 75% over Q1 of 2022 to reach LKR 8.34 Bn by the quarter end of March 2023. The tight liquidity conditions in the domestic money market have resulted in rising market interest rates. As a result, the Bank’s deposit and lending products experienced a significant increase in interest rates during the period under review. While the higher interest rates may have continued to depress the lending portfolio, it led to an overall improvement in Net Interest income (NII). Strategically, the Bank increased the fixed income investment portfolio, which contributed significantly to an increase in investment interest income. In line with the increase in the AWPLR over the past 12 months, the interest margin increased from 3.80% in March 2022 to 5.93% by March 2023.
Fee and Commission Income
The untiring efforts of the Bank’s staff led to increased remittances, trade-related commissions and other fee income lines which contributed to the increase of non-funded business during the period. Fee income
generated by credit cards also increased significantly in line with the volume of the transactions. Accordingly, net fee and commission income have increased to LKR 1,064 Mn for the quarter ended 31 March 2023, compared to LKR 639 Mn in the comparative period in the year 2022.
Impairment Charge on Loans and Other Losses
The impaired loan (stage 3) ratio has increased from 4.36% in December 2022 to 4.80% as of 31 March 2023, a continuation of the trend in the prevailing economic condition. To address the current and potential future impacts of the current economic conditions on the lending portfolio, the Bank made adequate impairment provisions during the period by introducing changes to internal models to account for unseen risk factors in the current highly uncertain and volatile environment. With these provisions made to cover the additional risks in the economic environment, the impairment charge recorded an increase of 67% against the comparative period and stood at LKR 4.69 Bn for the quarter ended 31 March 2023 compared to LKR 2.81 Bn in the comparable period.
Operating Expenses
The operating expenses for the quarter ended on 31 March 2023 increased due to an increase in IT-related expenses as a result of infrastructure upgrades, as well as cost increases due to inflation and the Sri Lanka Rupee devaluation. However, the numerous process automation and workflow management systems introduced over the period helped curtail and manage operating expenses at reduced levels.
Other Comprehensive Income
Changes in the fair value of investments in equity securities and fixed income securities (treasury bills and bonds) and movement in hedging reserves are recorded through other comprehensive income.
Due to the application of hedge accounting, the impact on the bank equity due to the exchange fluctuation was minimized. A fair value gain of LKR 2,034 Mn was recorded on account of equity securities outstanding as at 31 March 2023. The increase in the share price of Commercial Bank of Ceylon PLC during the period was the main contributor to the reported fair value gain in equity securities. The favourable movement in the treasury bills and bonds yields resulted in a fair value gain of LKR 908 Mn during the period.
Business Growth
Assets
Despite the challenges faced by the economy and the banking sector, DFCC Bank’s total assets increased by LKR 9.8 Bn, recording a growth of 1.75% from December 2022. In line with the bank’s growth strategy and the current economic situation, an increase in investment in fixed income securities, combined with positive fair value movement in both fixed income securities and equity securities, has contributed to a 49% increase in investment in financial assets at fair value through other comprehensive income as of 31 March 2023 compared to the balance as of 31 December 2022. With increased provision for expected credit losses and appreciation of the Sri Lanka Rupee, the net loan portfolio has recorded LKR 357 Bn as at 31 March 2023.
Liabilities
The Bank’s deposit base experienced a growth of 2.29%, recording an increase of LKR 8,490 Mn to LKR 378,805 Mn from LKR 370,314 Mn as at 31 December 2022. This resulted in recording a loan to deposit ratio of 104.33%. Further the CASA ratio is 18.05% as at 31 March 2023. The Bank’s funding costs were also contained by using medium to long-term concessionary credit lines. When these concessionary term borrowings are considered, the CASA ratio further improved to 29.86% and the loans to deposit ratio improved to 89.02% as at 31 March 2023.
Equity and Compliance with Capital Requirements
DFCC Bank’s total equity increased to LKR 57 Bn as at 31 March 2023 with the recorded profit after tax of LKR 1.75 Bn. The favourable movements in the equity portfolio and fixed income security portfolio classified as fair value through other comprehensive income and positive movement in hedging reserve also resulted in an increase of the Bank’s total equity.
As at 31 March 2023, the Bank Recorded Tier 1 and Total Capital ratios of 10.171% and 12.848%, respectively. The Bank’s Net Stable Funding Ratio (NSFR) was 128.24%, and Liquidity Coverage Ratio (LCR) – all currency was 226.43% as at 31 March 2023. All these ratios were maintained above the minimum regulatory requirement.
