Sampath Bank post-tax profit grows 34.4%

Sampath Bank performed remarkably well in 2008, despite the unfavourable conditions that prevailed in the economy and many challenges faced by the Bank and financial service industry in general during this period.

Pre Tax Profit of the Sampath Bank, the main entity of the Sampath Group, crossed the Rs 2.5 Bn mark and reached Rs 2.564 Bn in 2008, as against Rs 2.218 Bn for the previous year.

This amounted to a pre-tax growth of Rs 346 Mn or 15.6%, as against the negative growth of 2.2% recorded in 2007. Post Tax Profit of the Bank for 2008 amounted to Rs 1.414 Bn, as compared to Rs 1.052 Bn for 2007, which reflected a significant growth of Rs 362 Mn or 34.4% , as against the moderate growth of 2.3% in 2007 a press release issued by Sampath Bank said.

Pre Tax Profit of the Sampath Group, which consists of the Bank, its six subsidiaries and an overseas Associate Company rose to Rs 2.787 Bn in 2008, from Rs 2.384 Bn in 2007 recording a growth of Rs 403 Mn or 16.9%, as against the negative growth of 0.5% in 2007.

Post Tax Profit of the Group crossed the Rs 1.5 Bn mark and reached Rs 1.525 Bn in 2008, as against Rs 1.201 Bn in 2007. This amounted to a Post Tax Profit growth of Rs 324 Mn or 26.9% for the Group as against the growth of 6% in 2007.

It is to be mentioned, that the above Pre and Post Tax Profit growth rates of both the Bank and Group for 2008 were significantly above the total asset growth recorded by the Bank and the Group, which amounted to 4% and 3.1% respectively in 2008. The bank is also hopeful that these profit growth rates would compare well with the industry growth rates in 2008.

Challenges

As mentioned above, these good results were achieved despite many challenges faced by the bank and the financial service industry in 2008. The economy experienced a very high interest rate scenario throughout the period. Compounding the situation, the inflation remained even at higher levels in most parts of the year, thus leading to a negative interest scenario in the economy.

This situation was very unfavourable for the deposit growth of the banking industry. The slow-down in deposit growth in the industry naturally impacted adversely on the lending capacity of Banks. On the other hand, the high interest rates on loans and advances discouraged the credit demand of the economy and increased the quantum of Non Performing Loans in the banking industry.

Furthermore, the global economic turmoil impacted adversely on the banking sector, virtually drying up the international credit lines and slowing down the credit demand in the export financing sector, by shrinking the overseas commodity markets.

Business Growth

Despite these many challenges, Sampath Bank was able to record moderate growth rates as summarized below in deposits, advances and total assets in 2008, as compared to those in 2007, which are very likely to be in line with the industry trends in 2008.

The new deposit products launched by the Bank, namely the “HIT Saver” and “Kalin Cash” made significant contributions in achieving the above deposit growth in 2008.

Contribution from Net Interest Income

The Bank’s ability to record a significant growth in profits, surpassing its moderate asset growth was facilitated by several factors. The single largest contribution came from the net interest income from the Bank’s fund based operation, which rose from Rs 5.0 Bn in 2007 to Rs 6.6 Bn in 2008, which amounted to a growth of Rs 1.6 Bn or 32.9%.

This improvement was facilitated mainly by improvements in the net interest margin of the Bank from 4.14% in 2007 to 4.89% in 2008 by 0.75%, which in turn was facilitated by several external and internal factors.

The reduction in the Statutory Reserve on rupee deposits from 10.0% to 7.75% in the fourth quarter of 2008 was the main external contributory factor for this improvement. However, the interest impact of this factor in 2008 is estimated to be around Rs 50.0 Mn. Hence, internal contributory factors, such as judicial fund management measures taken by the Bank via its Assets and Liabilities Management Committee (ALCO), timely pricing and re-pricing of products in a volatile market, coupled with timely channelling and re-channelling of funds to more remunerative areas and Dollar / Rupee currency swaps undertaken etc. have played a major role in improving the net interest margin of the Bank in 2008.

Contribution from Non-Interest Income

In addition, Commission / Fee Based and Other income of the Bank rose from Rs 1.944 Bn in 2007 to Rs 2.144 Bn in 2008, reflecting a growth of Rs 200 Mn or 10.3% over the previous year. Foreign Exchange income rose from Rs 505 Mn in 2007 to Rs 647 Mn in 2008 recording a growth of Rs 142 Mn, as against the negative growth of Rs 141 Mn in 2007.

This significant growth of 28.1% in foreign exchange income was mainly due to the improvement in revaluation gains to the tune of Rs 216 Mn in 2008, as against Rs 48.0 Mn in 2007, on the retained profits of the Bank’s FCBU maintained in US Dollars, plus the depreciation of Sri Lanka Rupees against the US Dollar from Rs 108.65 at the end of 2007 to Rs 113/- at the end of 2008.

In the light of these improvements in the main income sources, the total net income of the Bank rose by 26.7%, which far exceeded the growth rate of 15.5% recorded in the net income of 2007.

Operating Expenses

The operating expenses of the Bank rose to Rs 5.625 Bn in 2008 from Rs 4.230 Bn in 2007 recording an increase of Rs 1.395 Bn or 33.0 %, as against 13.13% in 2007. This significantly high growth rate in operating expenses was partially due to high inflationary trends in the market, costs incurred on opening nine new branches and the increase in Special VAT charge as commented below. Consequently, the Cost / Net Income Ratio of the Bank stood at 59.6% for the year under review, compared to 56.8% in 2007.

The Bank is mindful of the fact that this ratio is too high judging by the accepted industry norms and hence would take appropriate measures in future, aimed at reducing same to acceptable levels.

NPLs and Net Charge on Loan Losses

In line with the general trends in the market, the NPL ratio of the Bank (net of interest suspended on overdrafts) rose to 7.5% as at end of 2008, compared to 6.7% as at end of 2007. Nevertheless, the Bank was able to manage the net charge on loan losses (specific provisions + general provisions - recoveries) at Rs 809 Mn in 2008, as against Rs 936.9 Mn in 2007, utilising partially the excess provisions carried against pawning advances to the tune of Rs 241.9 Mn. On the other hand, the Bank made the full general provision on performing advances mandated by the Central Bank up 1.0 % at December 31, 2008, as against the required level of 0.9% on this date. In addition, the Bank made a provision of Rs 443 Mn o/a of diminution of value of its bond portfolio, as against Rs 66 Mn in 2007.

Special VAT and Corporate Tax

Special VAT charge for 2008 rose to Rs 962.8 Mn in 2008 from Rs 617.3 Mn in 2007, recording an increase of Rs 345.5 Mn or 56%. This unusual increase in special VAT charge was partly due to the change in the method of calculation of this tax, as required by Tax Regulations.

The corporate tax charge for the year, net of deferred tax adjustments etc, amounted to Rs 1.150 Bn for the Bank in 2008, as against Rs 1.166 Bn for the previous year. Consequently, the effective tax rate was reduced to 44.9% in 2008 from 52.6% in 2007.

Key Financial Ratios

It is also to be mentioned, that with the improved financial results for 2008, the Bank was able to improve several key financial ratios in 2008. The Return on Assets (ROA) of the Bank improved from 0.9% in 2007 to 1.04% in 2008.

Similarly, Return on Equity (ROE) improved from 13.84% in 2007 to 15.41% in 2008. The Bank’s total Capital Adequacy Ratio which was computed under Basel II, allocating capital against Credit Risk under the Standardized Approach and against Operational Risk under the Basic Indicator Approach, marginally improved to 11.95% as at end of 2008, compared to the total Capital Adequacy Ratio of 11.58% as at the end of 2007, which too was re-computed under Basel-II, for easy comparison.

Branch network

Sampath Bank, opened in 1987, soon embarked on a rapid branch expansion program. The Bank had been able to establish 114 branches / service outlets by the end of 2008. There were nine Branches opened in 2008, including three branches in the newly liberated Eastern Province, namely Akkaraipattu, Kalmunai and Batticaloa. This branch expansion drive is expected to continue in 2009, whilst due attention being paid to promoting other low cost delivery channels as well.

Dividends

In view of the good performance of the bank for 2008, the Directors have proposed a first and final Dividend of Rs 4/- per share, as against Rs 3/- per share for 2007.

Management Change

In 2008, Sampath Bank witnessed a major management change, with I.W. Senanayake, Sunil Wijesinha and Harris Premaratne taking over as Chairman, Deputy Chairman and Chief Executive Officer respectively. In addition, the Bank appointed Chief Executive Officer Harris Premaratne, Chief Operating Officer Aravinda Perera and Chief Financial Officer Ranjith Samaranayake as Executive Directors.