Combank 4Q stung by weak margins, higher impairments
Sri Lanka’s largest private lender by assets, Commercial Bank of Ceylon PLC (Combank), saw its December 2019 quarter (4Q19) performance was hit by a number of issues from weak growth and asset quality, narrow margins and heavy loan-loss provisions.
Combank recorded Rs.11.9 billion in net interest income for the three months under review, slightly up from Rs.11.8 billion a year ago, as interest was suspended due to loans falling into non-performing category and margins got squeezed from interest rate caps.
“The interest expenses increased by 10.97 percent in contrast to the 9.06 percent growth in interest income (FY19), which was hampered by many factors, including lower credit growth and sharp increases in non-performing loans (NPLS) in the aftermath of the Easter Sunday incidents, as well as the lending and interest rate caps imposed by the Central Bank of Sri Lanka,” the bank said in an earnings release.
Combank’s performance is no different from the rest of the industry players, who faced a similar fate during FY19, due to a number of challenges from policy and political uncertainty, weak economic growth and Easter Sunday attacks.
Combank’s fee and commission income, which otherwise buffer the pressure on fund incomes, was little moved at Rs.3.1 billion for the quarter under review.
Meanwhile, the bank provided Rs.2.8 billion as possible bad loans for the three months alone, a substantial increase from Rs.1.8 billion in the year earlier period. For FY19, Combank provided staggering Rs.11.3 billion on possible bad loans, compared to Rs.8.8 billion in FY18. “The net operating income of the group improved by a marginal 0.58 percent to Rs.56.355 billion (FY19), mainly due to the higher impairment charges necessitated by an increase in the bank’s non-performing loans and advances portfolio, attributable to the adverse economic conditions that prevailed throughout 2019.
Consequently, the bank’s gross NPL ratio increased to 4.95 percent, from 3.24 percent, at end-2018, while its net NPL ratio followed the trend, increasing to 3.0 percent, from 1.71 percent,” the earnings release added.
Combank’s profit before all taxes fell 23 percent yearon-year (YOY) to Rs.8.0 billion while the profit before income tax but after Value-added Tax, Nation Building Tax and Debt Repayment Levy, fell 24 percent YOY to Rs.6.2 billion. The bank reported earnings of Rs.5.71 a share or Rs.5.9 billion for the October-december 2019 quarter, compared to the earnings of Rs.5.65 a share or Rs.5.8 billion in the year earlier period, due to a thumping income tax reversal. Combank’s income tax charge for the period fell to Rs.336.8 million, from Rs.2.4 billion in the year earlier period. The banks were set to receive a windfall from the income tax reversals for 2019, as the Inland Revenue Department exempted their investments in Sri Lanka Development Bonds from income tax with retroactive effect from April 2018.
However, in Combank’s case, there was not enough evidence available to ascertain whether the entire tax reversal could be attributable to the said circular from the IRD. Meanwhile, the bank reported earnings of Rs.16.80 a share or Rs.17.3 billion for FY19, compared to Rs.17.27 a share or Rs.17.7 billion in FY18.
The bank gave loans worth of Rs.30.3 billion for the entire year, which translates into a growth of mere 3.4 percent. The state-run private sector pension fund, the Employees’ Provident Fund (EPF), holds a 9.63 percent stake in Combank, as the single largest shareholder.