DFCC Group posts Rs 2,374mn PAT for nine months

CEO, DFCC, Nihal Fonseka

The DFCC Group recorded a consolidated profit after tax of Rs 2,374m for nine months ended 31 December 2012 compared with Rs 2,204m in the corresponding period of the previous year (comparable period).

The financial year of subsidiaries DFCC Vardhana Bank PLC (DVB) and Synapsys (Pvt) Ltd, joint venture Acuity Partners (Pvt) Ltd and associate company National Asset Management Limited ends on December 31 and therefore the results of these entities are consolidated with the bank with a time lag of three months.

The Banking Business of the DFCC Group is undertaken by DFCC Bank (DFCC), a licensed specialized bank and 99 % owned subsidiary DFCC Vardhana Bank (DVB), a licensed commercial

bank. Both banks function as one economic entity and as such to the consolidated performance of the two banks referred to as DFCC Banking Business (DBB) is analyzed later in this review. A consolidated Income Statement for DBB derived from the interim financial statements has been released to the Colombo Stock Exchange as supplementary financial information.

Apart from the DBB which contributed Rs 2,215m to profit after tax (based on partial consolidation in the supplementary income statement of DBB) and is analyzed below in greater detail, the investment banking joint venture, Acuity Partners (Pvt) Ltd (APL) contributed Rs 105m in the current period, 16% lower than Rs 125m in the comparable period. The current period however includes a deemed disposal gain of Rs 83m(50% of the total recorded by APL) arising from a transaction by its subsidiary Lanka Ventures PLC accounted in the Income Statement as per the previous Sri Lanka Accounting Standards. However, at the end of the current financial year, consequent to re-presentation of the full year financial statements under the new accounting standards, this deemed disposal gain would be accounted as other comprehensive income in the equity and not in the income statement as currently presented.

The investment banking business was adversely impacted by the economic environment that prevailed although there were signs of uplift toward the end of the current period. The contribution from APL’s core activities was significantly lower than in the previous period. The contribution from all other subsidiaries and associate company collectively was Rs 103m in the current period (Rs 79mn in the comparable period).

Banking Business

Net Interest Income as well as loans and advances recorded growth although DVB due to its lower base was constrained by the credit ceiling imposed on the banking sector by the Central Bank. DBB funded the credit expansion largely through customer deposit mobilization with deposits growing to Rs 60.4 billion in the current period. However, the high interest rate regime that prevailed had an adverse impact on the Net Interest Margin (NIM). On a composite basis, NIM of DBB was 4.6% in the current period compared with 4.9% in the comparable period.

The last quarter of the current period saw a reversal of the declining trend with NIM of DBB increasing to 4.6% for the 9 month period compared with 4.4%at the half year stage on an annualized basis.

Other income of DBB was Rs 1,014m in the current period, 14% lower when compared to the comparable period. This reduction was mainly due to the fact that a second interim dividend from Commercial Bank Of Ceylon PLC paid in the comparable period in Dec 2011, being declared after December 31, 2012.

As a result Rs 104.6mn was not accounted in the income statement in the current period. Also, gains from sale of non affiliated shares was only Rs 76mn in the current period compared to Rs 254m in the comparable period since market conditions were not conducive for disposing mature investments.

DBB continued with a funding strategy of selling foreign currencies, mainly US $ and generating Rs for lending activities with a better net interest income compared to the margin on foreign currency denominated loans. The market risk relating to these transactions was partially hedged through swaps. The swap cost was charged to foreign exchange income and it exceeded the foreign exchange profit from trading and translation gains thus recording an overall loss.

The gross non-performing loan ratio of DBB increased to 4.8% as at December 31 ,2012 compared with 4.3%, on March 31, 2012. The gross non performing loans of DBB increased by Rs 1,064mn during nine months ended December 31, 2012.