The Commercial Bank of Ceylon Group has ended 2022 with a solid operational performance, having navigated the perfect storm with a series of forward-looking strategies that included making the highest-ever impairment provision in a year in the history of the institution.
In a period of unprecedented macroeconomic variables, the Group comprising of Sri Lanka’s biggest private sector bank, its subsidiaries and an associate, saw its assets grow by Rs 516.063 billion or 26.02% to approach Rs 2.5 trillion, gross income grow by 71.31% to Rs 280.387 billion and interest income improve 67.44% to Rs 222.393 billion, with the sharp depreciation of the Sri Lanka Rupee exerting a distortionary impact on some key indicators.
In a filing with the Colombo Stock Exchange (CSE), the Group reported that the value of its loan book had grown by Rs 151.239 billion or 13.81% over the 12 months ending 31st December 2022, assisted by the impact of the sharp depreciation of the Rupee on foreign currency loans and advances. Discounting the impact of the Rupee depreciation, the loan book recorded a marginal growth during the year, amidst a sharp decrease in credit to the private sector. Deposits had increased by Rs 505.103 billion or 34.30%, with the depreciation of the Rupee also accounting for part of the growth.
The Group made a provision of Rs 71.924 billion for impairment charges and other losses, an increase of Rs 46.784 billion or 186.10% over the Rs 25.140 billion provided in respect of 2021. This resulted in net operating income reducing by 5.47% to Rs 64.712 billion for the 12 months and by 24.90% to Rs 13.147 billion for the fourth quarter, despite the fact that total operating income for the year had improved by a robust Rs 43.038 billion or 45.98% to Rs 136.637 billion.
Commenting on the countervailing external factors that impacted the results, Commercial Bank Chairman Prof. Ananda Jayawardane said the domestic macroeconomic pressures emanating from the country’s deteriorating external financing position exerted severe stresses on the foreign currency liquidity and the capital adequacy of banks, making it necessary for managing liquidity to be given priority in the year under review. Although an increase in the cost of funds is inevitable, all possible steps have been taken to reprice and rebalance financial assets, increase fee-based income and to maintain non-interest costs at acceptable levels, he said.
Commercial Bank Managing Director and CEO Mr Sanath Manatunge disclosed that a substantial portion of the impairment charge is on account of Government Securities denominated in Foreign Currency, in view of Sri Lanka’s Sovereign rating downgrade and the debt restructuring programme currently being negotiated by the Government. In this context, he said the Bank is determined to address issues relating to rebalancing the balance sheet, creating a culture of capital-based decision-making, divisional capital allocation, and aligning systems and processes to ensure a higher level of governance, and cost-effective growth on a priority basis.
According to the Group’s financial statements for 2022, despite the heightened challenges of the fourth quarter of the year, gross income for the three months grew by 94.41% to Rs 84.814 billion while interest income improved by 97.14% to Rs 72.136 billion, partly due to an increase in interest-earning assets, rise in interest rates and higher foreign currency income due to the depreciation of the Rupee. However, interest expenses for the quarter rose 183.96% to Rs 50.285 billion in contrast to the increase of 107.42% reflected in the full year’s interest expenses of Rs 137.728 billion. The shift from low cost funds to high cost funds, resulting from the higher interest rates on Rupee deposits as well as the increased cost of living which directly affects savings, also caused a significant drop in the Bank’s CASA ratio. The Bank’s CASA ratio, an industry benchmark, stood at 38.36% at the end of the year reviewed, as against 47.83% at end 2021 and 42.72% at end 2020.
Consequently, while net interest income for the full year improved by 27.48% to Rs 84.665 billion, the figure of Rs 21.851 billion for the fourth quarter reflected lower growth of 15.72%, as the full impact of the increased interest rates and the shift from low cost to high cost funds was felt in the final quarter of the year.
The Group reported fee and commission income of Rs 26.192 billion for the full year and Rs 7.986 billion for the fourth quarter, with growth rates of 64.55% and 62.47% respectively, with an increase in trade related activities and the impact of the depreciation of the Rupee on fees received in foreign currency. However, a combination of higher cards-related payments and the depreciation of the Rupee contributed to fee and commission expenses increasing by 63.87% to Rs 6.022 billion for the year. As a result, net fee and commission income improved by 64.75% to Rs 20.169 billion for the year, and by 71.61% to Rs 6.256 billion for the fourth quarter.
Other income comprising of net gains or losses from trading, net gains or losses from de-recognition of financial assets and net other operating income more than doubled, growing by 112.87% to Rs 31.802 billion for the 12 months and grew by 121.49% to Rs 4.692 billion for the last quarter. A gain of Rs 35.903 billion on foreign exchange and substantial gains from swap transactions generated a net gain from trading of Rs 35.297 billion for the year, as against Rs 1.936 billion for 2021.
The Group posted a loss of Rs 3.772 billion in net other operating income due to a net loss of Rs 5.133 billion on revaluation of assets and liabilities in the year under review.
With operating expenses for the year rising 22.34% to Rs 36.282 billion due to higher personnel costs, depreciation and amortisation, an increase in other operating expenses owing to price hikes, foreign currency payments for the maintenance of assets and an increase in the VAT rate, the Group’s operating profit before taxes on financial services reduced by 26.73% to Rs 28.430 billion for the 12 months, and by 68.43% to Rs 2.881 billion for the fourth quarter.
Consequently, the Group’s profit before tax of Rs 24.505 billion for the year reflected a drop of 25.65% over 2021. Although the income tax rate increased to 30% for the second half of 2022, the impact of income tax on the Group’s results reduced due to a reversal of the deferred tax computed at 24% for the previous year. As a result, net profit for the year improved by a marginal 0.45% to Rs 24.399 billion, and grew by 69.53% to Rs 8.939 billion in the final quarter. Taken separately, Commercial Bank of Ceylon PLC reported a profit before tax of Rs 22.598 billion for the year, a drop of 29.38% while profit after tax for the year was down only by 2.7% to Rs 22.970 billion compared with the profit after tax of Rs 23.606 billion for 2021.
In other key indicators, the Bank’s net assets value per share increased by 18.99% to Rs 164.30 from Rs 138.08 as at end 2021. The Bank’s Tier 1 Capital Ratio, and the Total Capital Ratio stood at 11.389% and 14.657% respectively as at 31st December 2022, both above the statutory minimum ratios of 10% and 14% respectively. The Bank’s interest margin improved to 3.74% for 2022, from 3.51% for 2021. The Bank’s return on assets (before taxes) stood at 1.03% and return on equity at 12.46%.
In terms of asset quality, the Bank’s impaired loans (Stage 3) ratio stood at 5.26% compared to 3.85% at end 2021, while its impairment (Stage 3) to Stage 3 loans ratio stood at 39.50% as at 31st December 2022, compared to 42.76% at end 2021. In terms of liquidity, the Bank’s statutory liquid asset ratios for its domestic banking unit and offshore banking unit stood at 35.01% and 32.37% respectively, while the consolidated liquid asset ratio for the Sri Lankan operations of the Bank stood at 35.88%, which is well above the minimum requirement of 20%.
The Bank’s Cost to Income Ratio before taxes on financial services improved to 26.29% for the period under review from 31.61% for 2021 and 33.95% for 2020. The cost to income ratio inclusive of taxes on financial services improved to 29.22% from 37.97% for 2021 and 39.96% for 2020.
Sri Lanka’s first 100% carbon neutral bank, the first Sri Lankan bank to be listed among the Top 1000 Banks of the World and the only Sri Lankan bank to be so listed for 12 years consecutively, Commercial Bank operates a network of 269 branches and 943 automated machines in Sri Lanka. Commercial Bank is the largest lender to Sri Lanka’s SME sector and is a leader in digital innovation in the country’s Banking sector. The Bank’s overseas operations encompass Bangladesh, where the Bank operates 19 outlets; Myanmar, where it has a Microfinance company in Nay Pyi Taw; and the Maldives, where the Bank has a fully-fledged Tier I bank with a majority stake.
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