Seylan Bank 1Q profits flat amid higher provisions and slower growth
Seylan Bank PLC reported some steady profits in the three months to March (1Q22) though the bank reported higher impairment provisions against foreign currency denominated financial investments and lacklustre growth.
The bank reported earnings of Rs.1.67 a share or Rs.966.1 million in the January - March quarter, little changed from the profits in the same period in 2021.
The bank reported net interest income of Rs.6.90 billion for the period, up 23.01 percent as the margins improved from the rising market interest rates.
The bank’s net interest margin - the difference between what the bank charges from its borrowers and other financial assets and what it pays for its deposits and other liabilities - stretched slightly to 4.34 percent from 4.05 percent at the end of December 2021.
Banks are typically in a better position to benefit from a rising interest rate environment as that generates higher margins which could potentially offset the slowdown in the growth.
However this time around, it could be different as the sudden spike in interest rates
starting from April 8 onwards is expected to tip many borrowers into default which could raise non-performing loans of the banks.
Seylan Bank reported a gross non-performing loans ratio of 3.85 percent, slightly higher from 3.64 percent at the end of December 2021.
The bank meanwhile set aside Rs.3.38 billion as provisions for losses from loans and other assets, compared to Rs.2.17 billion in the same period in 2021, but the bulk of the provisions in the March quarter came from what the bank provided on account of the potential losses stemming from the government securities denominated in foreign currency as the country declared a technical default on April 12 on most of its foreign denominated liabilities.
The net feee and commission income grew by a robust 24.2 percent to Rs.1.44 billion on the back of higher card spend by the people and trade finance related fees which to a certain degree is offset by the decline in the fees from guarantees and loans, as the growth was anemic.
Meanwhile, the net trading gains had a sharp upsurge to Rs.3.63 billion in the three months compared to a loss of Rs.611.4 million in the same period in 2021, mainly coming from the net gains from derivative financial instruments connected to foreign exchange contracts, as the rupee depreciation bode favourably on the bank for holding such instruments.
However, other operating income, which recognises the revaluation gains and losses of foreign currency denominated financial instruments, recorded a loss of Rs.2.76 billion compared to a profit of Rs.1.19 billion. This line item typically recognises the foreign exchange impact on the impairments too.
Meanwhile, the bank’s operating costs grew by 6.2 percent to Rs.3.63 billion.
As the bank is beginning to feel the impact of inflation on its operating costs, the bank said it is expediting the roll-out of lean initiatives and automation across its network while rationalising the expenditure on key controllable cost lines while inculcating a culture of working smart.
While the companies started working smartly since the beginning of the pandemic with the work shifting digital and remote, most of the employers were quick to return to normal ways of working as they recalled their office based staff all five days a week as the virus risk abated.
Meanwhile, the bank’s portfolio growth came in at lacklustre levels in the quarter, unsurprised given the rising rates and the deteriorating economic conditions which compelled bank to tighten their credit standards, effectively closing the lending taps.
For instance, Seylan Bank’s rupee loans taken separately expanded by Rs.7.81 billion or an extremely modest 1.8 percent while the deposits fell by Rs.1.29 billion or 0.31 percent from December levels.
The rupee denominated portfolio makes more sense as the cumulative portfolios which include the foreign currency loans and deposits distort the true growth as they get revealed at the quarter end exchange rate which fell by nearly 50 percent from the beginning of the year.
While the bank’s capital levels remain above the regulatory minimums, its Tier II capital ratio is nearing its regular minimum of 12.50 percent with its ratio at 12.78 by the end of March.
The bank’s nearly Rs.26 billion worth of Tier II bond issues are currently on hold.