Combank March quarter showed signs of strong economic recovery before pandemic grounded it to a halt
Commercial Bank of Ceylon PLC’S (Combank) March quarter performance showed consumption had picked up in economy after taxes were cut, interest rates were reduced and sentiments turned positive following the presidential election last year, as the bank witnessed a stellar start to the year with strong rebound in new loans and higher earnings on the back of lower taxes.
The bank’s operating results for the three months ended March 2020 (1Q20) gave a clear testament for what could have been a strong recovery in both the sector as well as the economy from the stimulus package before the pandemic came from China reversed almost all those gains made.
Combank reported net operating income before all taxes of Rs.6.45 billion for the quarter under review, down 5.24 year-on-year (YOY), as the economic uncertainty created by the new coronavirus made the bank to provide more than three times it provided a year ago for possible bad loans.the bank provided Rs.6.7 billion as credit costs for the three months compared to Rs.1.9 billion in the year earlier period as the bank still attempts to assess the breadth and the depth of the economic crisis caused by COVID-19.
“The bank considered the probability of default, loss given default and economic factor adjustment computed as at December 31, 2019, in order to estimate the expected credit loss as at March 31, 2020, as there was no sufficient information available to make any adjustments to capture the COVID-19 impact.however, the bank increased weightage assigned for worst case scenario by 10 percent from base case scenario when assessing the probability weighted forward looking macro-economic indicators,” Combank said in a note accompanying the interim results.
The operating profit also received a windfall from fee and commission incomes and other operating income. The latter grew from the depreciation of the rupee against the dollar resulting in an exchange profit of Rs.6.6 billion against a loss of Rs.298.8 million in the year earlier period.
Meanwhile the bank reported an unrealised loss of Rs.2.35 billion from its forward foreign exchange contracts compared to a profit of Rs.740.8 million a year ago.
The bank gave loans of Rs.28.7 billion for the period, at a stretch of Rs.10 billion a month, as the economy gathered steam triggering demand for fresh loans from both businesses and consumers alike after years of economic stagnation.
Combank increased its interest income by 1.18 percent YOY to Rs.32.4 billion and the interest expense declined by 1.44 percent YOY to Rs.19.6 billion as the bank was re-pricing its assets and liabilities judiciously taking advantage of the declining interest rates.
Meanwhile, the bank increased its deposits by Rs.51.3 billion during the three months with low cost deposits consisting of current and savings accounts also showing an improvement, helping the bank to keep its margins.
When the interest rates come down in the economy, it narrows the room for banks to charge high interest rates from their borrowers and thereby their own interest margins come down. However, lower interest rate also enable banks to go after more borrowers to increase their loan books, which helps them to record higher profits.
COVID-19 outbreak has however made this extremely difficult as existing borrowers delay repayment while new borrowers scale back borrowing at least until economy picks up. The Central Bank this week extended further liquidity support to banks by easing regulatory requirements and making available liquidity under the Sri Lanka Deposit Insurance Scheme for those who face liquidity shortages due to moratoriums extended to borrowers.
Meanwhile, Combank reported earnings of Rs.3.66 a share or Rs.3.76 billion in total earnings for the quarter under review, compared to Rs.3.05 a share or Rs.3.13 billion in the year earlier period.
The abolition of Nation Building Tax and Debt Repayment Levy enabled the higher bottom line.
The profit could be even higher had the proposed corporate income tax rate of 24 percent been given the Parliamentary approval.
Employees’ Provident Fund has 9.63 percent stake in Combank being its largest shareholder.