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First half performance in licensed commercial banks:
Drop in lending rates affects income
Prasad Polwatte and Asanka Liyanage
Domestic financial markets were somewhat volatile at the beginning of
2009. It became more liquid and stable in the second half of 2009 and
first half of 2010 with the declining inflationary pressures and the
easing of monetary policy, resumption of capital inflows due to reduced
risk aversion and improved investor sentiment following the end of the
hostilities. stronger capital positions and enhanced risk management
infrastructures that had been instituted have placed the financial
sector on a stronger footing to absorb the impact of the economic
slowdown.
Financial markets were more stable with improved liquidity and
declines in interest rates from the beginning of 2010.
The exchange rates were more stable. Equity prices have surged
upwards during the year. The banking sector sustained its earnings via
an increase in investment income from government securities and
equities.
Almost all banks have adopted investing funds in long term
investments rather than in short term investments. On the other hand
they encourage short term borrowings as it was less costly than the long
term borrowings.
In this article an effort has been made to compare and contrast the
performance of Licensed Commercial Banks (LCBs) first half 2009 and
2010. Both public and private LCBs overall performance was comparatively
higher in first half of 2010 compared to the 2009. All of the key
performance indicators showed positive signs averagely within the
sector.
Summary of Key Performance Indicators of first Half of 2010 and 2009
of Leading LCBs is presented in table 1.
Table 1: Summary of Key Performance Indicators
Name of Profit for Total Assets Market price Return on Return on
the Bank the period Rs Mn at half end shareholders’ Assets
Rs Mn Rs funds% before tax %
2010 2009 2010 2009 2010 2009 2010 2009 2010 2009
Peoples 2,178 1,310 500,901 442,640 N/T N/T 23.40 15.90 1.70 1.20
BOC 2,195 1,793 587,026 493,829 N/T N/T 17.62 15.08 1.28 1.11
COM 2,314 1,977 337,943 273,517 178.50 134.00 15.98 15.11 2.46 2.35
HNB 1,792 1,773 286,240 266,971 282.00 120.00 14.96 16.84 2.05 2.07
SAM 1,302 830 170,253 143,405 359.25 109.00 21.18 16.62 2.19 2.19
SEY 511 138 140,946 137,951 81.75 35.00 9.41 3.89 1.18 0.19
DFCC 6,031 661 61,574 56,171 267.75 135.25 37.10 12.90 12.10 4.30
NDB 699 896 94,938 86,888 245.00 153.00 11.51 13.35 1.33 1.60
NTB 444 211 78,058 77,295 55.50 30.50 17.58 10.96 2.28 2.10
PABC 151 299 23,909 20,122 32.00 13.75 13.76 34.21 1.34 3.06
Source: Published Interim Financial Statements of respective banks |
An overall drop apart from DFCC bank can be seen in total revenue
compared to 2009 first half in 2010. The main reason was drop in
interest income by averagely 15 percent in 2010 first half compared to
2009.
In the case of DFCC bank the results of 2010 included profit relating
to the sale and change of classification of part of the Bank's
shareholding in Commercial Bank of Ceylon PLC (CBC).
Table - 2 Average Weighted Prime Lending Rates (AWPLR)
As at Date Weekly Monthly Six Month
30-06-2010 10.37 10.47 10.68
30-06-2009 15.54 16.20 18.38
Source. http://www.cbsl.gov.lk |
Table - 3 Treasury Bills Interest Rates
As at Date 91 days 182 days 364 days
30-06-2010 8.07 8.93 12.34
30-06-2009 11.41 12.03 12.34
Source. http://www.cbsl.gov.lk |
The contribution to profit after tax from the transactions related to
CBC was Rs 5,282 million for the Bank.
The main reason for the drop in interest income was drop in lending
rates from 15 percent- 18 percent to 10.3 percent- 10.6 percent range in
2010 (Source. http://www.cbsl.gov.lk/). Even though an increasing trend
was visible in the growth in Advance portfolio of the banks
(Approximately 5 percent -10 percent) but the interest income had
dropped mainly due to the decrease in Average Weighted Prime Lending
Rates (AWPLR).
On the other hand LCBs concentrated on Government securities
specially Treasury bills, of which interest rates were decreased by
considerable percentage. Details are as follows.
Table 2
A material decrease in interest expense was shown in first half of
2010 to 2009. (Averagely 25 percent to 40 percent drop in all banks).
The decrease in the Average Weighted Deposit Rates (AWDR) was the main
factor for this interest cost reduction. It is clearly evident in the
following table.
Table 4
Table - 4 Average Weighted Deposit Rates (AWDR)
Date Monthly 6 month Fixed Deposit
Rate Rate Rate
30-06-2010 7.00 7.26 9.40
30-06-2009 11.12 11.48 15.26
Source. http://www.cbsl.gov.lk |
The deposit growth in 2010 first half has not proportionately
increased the interest cost in LCBs due to the drop in AWDR. On the
other hand banks were unable to attract more deposits since short term
deposit interest rates were less attractive and customers tend to switch
for more attractive investment opportunities in Capital/Money markets.
Apart from NDB and PABC all other banks have recorded an increase in
their profit after tax in first half of 2010 compared to 2009. The same
increase can also be notified in Net asset per share, ROE and ROA.
Both Public and Private LCBs overall performance was improved in
first half of 2010 compared to 2009. All of the key performance
indicators showed positive signs averagely within the sector.
Table - 5 Market Prices and Book Price per Share
Date COM HNB SAM SEY DFCC NDB NTB PABC
30.06.2010 178.50 282.00 359.25 81.75 267.75 245.00 55.50 32.00
Market price
30.06.2010 134.00 120.00 109.00 35.00 135.25 153.00 30.50 13.75
Market price
30.06.2010 79.41 103.97 167.3 43.48 155.43 135.90 26.63 17.44
Book Value
Over/(Under) 99.09 178.03 191.95 38.27 112.32 109.10 28.87 14.56
value
Variance in 33.21 135.00 229.59 133.57 97.97 60.13 81.97 132.73
prices
Source http://www.cse.lk |
Two line charts
Share prices of all banks had been grown rapidly in 2010 compared to
the same half in last year. A substantial increase could be seen in all
banking sector companies.
It is clearly evident in the following table. (Please note in the
case of Commercial bank price mentioned at 30.06.2010 is after 1:2 share
split)
The banking sector is continuously seeking opportunities at North and
East for their market exposures. On the other hand the CBSL is of the
view that further decrease of interest rates in future is possible and
the banking sector should take in to account the amount of customer
deposits that can be overlooked due to further decrease in the interest
rates.
LCBS will face great challenges in the second half to sustain its
level of performance of the first half 2010. |
