Total assets grew by 18.54% to Rs. 607 Bn. with deposits and gross loans & advances growing by 15.50% and 10.31% to Rs. 451 Bn. and Rs. 379 Bn. respectively. It is noteworthy that the Bank has been able to maintain compound annual growth rates in excess of 18% in both deposits and loans & advances over the past decade
The year 2013 proved to be a challenging year for the banking sector in Sri Lanka. Despite a lower demand for credit, a narrowing of margins and rising levels of non-performing loans, our operational resilience saw us stay ahead of the industry. The Bank concluded the year with profit after tax recording Rs. 10.445 Bn. and total assets surpassing Rs. 600 Bn.
Global Context
Global economic activity and trade picked up in the second half of 2013, with world output averaging a 3.0% YoY growth (2012: 3.1%), we see a clear shift in economic power away from advanced economies to emerging economies. That situation, whilst still prevalent, shows slight change with growth in advanced economies picking up whilst emerging economies are entering a slower phase of growth. However, in a more positive light, an increase in exports could be expected as advanced economies continue to grow; and stronger domestic consumption could support greater economic activity in emerging economies.
Operating Environment
Sri Lanka’s economy grew by an estimated 7.2% in 2013, after averaging 7.5% growth rates in the previous three years. The subdued global growth which negatively impacted exports and the lag effect of tight monetary policy measures introduced in 2012 were some of the factors that impacted economic growth during 2013.
The industry and services sectors contributed significantly to the growth of the economy, largely driven by increased domestic demand, continued infrastructure development and growth in tourism.
The Sri Lanka Rupee was relatively stable with increased flow of capital into the banking sector, which included bond issuances by banks. The Sri Lanka Rupee depreciated by 2.34% against the US $ in 2013, a phenomenon that was common with many competing trading nations.
The lowering of policy interest rates and the Statutory Reserve Ratio saw market interest rates decreasing during the year. Inflation was controlled to single digit levels.
The Banking sector posted a moderate growth in assets. Non-performing loans (NPL) increased across the industry, largely due to a global decline in the price of gold that affected recoveries of gold-pledged loans. However, strong capitalisation and liquidity helped maintain stability of the banking sector throughout the year.
Financial Performance in Summary
The Bank continued its growth momentum despite challenges in the banking sector, and stayed ahead of industry average growth rates in business volumes and the underlying streams of revenue.
Total assets grew by 18.54% to Rs. 607 Bn. with deposits and gross loans & advances growing by 15.50% and 10.31% to Rs. 451 Bn. and Rs. 379 Bn. respectively. It is noteworthy that the Bank has been able to maintain compound annual growth rates in excess of 18% in both deposits and loans & advances over the past decade.
The forecast demand for credit in 2013 failed to take off, while asset quality deteriorated. The NPL ratio increased across the industry to levels not seen in recent times, fuelled in part by gold backed advances. The Bank contained the rise in NPLs through constant monitoring and focused recovery efforts, closing the year with an NPL ratio of 3.88% as against an industry average of 5.4%.
Margins came under pressure in the wake of a declining interest rate regime which saw assets being re-priced faster than the liabilities. Accordingly, while the Bank’s interest income grew by 18.03%, a higher 23.63% increase in interest expenses saw the net interest margin decreasing from 4.80% in 2012 to 4.53% during the year.
On the brighter side, we bettered many key performance indicators. The Bank’s cost to income ratio improved to 46.32% (2012: 47.02%), while capital adequacy ratios grew from 12.64% to 13.27% for Tier I and from 13.85% to 16.91% for Tier I & II during the year.
Moving forward, we expect interest rates to be stable in 2014 and provide the impetus for a higher credit growth. Indeed, we had already seen some upward momentum in commercial lending during the fourth quarter.
As we head into 2014, many commercial projects that were not previously deemed financially viable could gain new life in this more favourable interest rate environment. Even though our margins will be leaner, it would be compensated through growth in volume and improved asset quality with borrowers finding their credit obligations more affordable.
Focused on Customers
The Bank provides a full spectrum of products and services, delivered through one of the widest networks among the Sri Lankan banks - with 235 customer service points and the country’s largest network of 585 ATMs. To further underline our leadership in customer convenience, we opened a 24-hour automated banking centre in Colombo, along with 8 new branches in Sri Lanka and another one in Bangladesh during the year. In addition, we introduced Saturday and Sunday banking at a number of strategically located branches.
Commercial Bank has the largest active debit card base in Sri Lanka. We issued more than 400,000 new cards during the year, bringing the total number in use to a record 3 Mn. Purchases made using Debit Cards too grew by more than 30% YoY. At the same time, we kept pace with customers’ changing preferences by offering easier access to products and services via Internet and mobile banking. By promoting this channel migration, we not only make banking more convenient to the customer but also significantly reduce the transaction costs for the Bank.
Taken together, these customer-focused efforts inspire deeper loyalty, which in turn translates into value for shareholders. Our customers appreciate the confidence that comes from dealing with a responsible and a strong bank, and investors experience such confidence for the same reasons.
Efficiency and Productivity
Commercial Bank’s cost-to-income ratio (at 46.32% in 2013) continues to make us a leader among Sri Lankan banks and provides tangible evidence of our commitment to containing costs, rethinking processes, investing in technology and effective deployment of staff. The result is a more efficient, productive and profitable enterprise.
Ensuring Capital Strength
Taking a step to further reinforce our capital base, we negotiated a loan from the International Finance Corporation (IFC) through a 10-year, US $ 75 Mn. subordinated debt instrument. While this gives us space for future business expansion, the bullet repayment on maturity gives us considerable freedom to structure our capital planning accordingly.
Intensifying Risk Management
In addition to improving the quality of our asset portfolio, we undertook a comprehensive risk analysis of Commercial Bank’s operations, including the activities of our subsidiaries during the year.
As part of a renewed focus on managing operational risk, all Debit and Credit Cards issued by the Bank incorporated chip technology, which provides the best protection against card fraud. We also introduced new data encryption and other security solutions aimed at protecting customers’ transactional and personal information.
In addition, the Bank became the First Sri Lankan financial institution to be certified to ISO 27001:2013, the premier global standard for information security. The Bank’s Integrated Risk Management Department constantly monitors IT systems security and assists all our business divisions in minimising the risks inherent in day-to-day banking operations.
Implementation of Basel II Framework on risk and capital management in the Bank progressed well during the year under review in line with the guidelines issued by the regulator.
The Bank initiated implementing software solutions in credit, market and operational risks to facilitate migration towards advanced approaches in Basel II in the future, subject to regulatory approval. Once these projects are completed within the first quarter of 2014, the Bank would look forward to reaping the benefits of a quality database to enhance risk-based decision-making in the medium term.
The Bank also completed its Internal Capital Adequacy Assessment Process (ICAAP) framework during the year. It covers all material risks, corporate governance, internal control framework, capital planning and risk management to ensure sufficient risk management practices are in place and adequate capital is available to support all existing and potential risks.
Apart from facilitating the regulatory review process, the ICAAP framework will add value to the Bank’s strategic planning processes by way of objective capital allocation, understanding risk profiles of different business lines and assessing the impact of stress scenarios on capital adequacy.
Strengthening the Back Office
In tandem with improvements in the IT area, we strengthened many back office processes to improve productivity and ensure stability of operations. Across the board, from the introduction of state-of-the-art software and systems at Treasury to a general emphasis on centralising processes wherever possible, our focus was on having the Bank operating more securely and effectively while keeping costs relatively low.
Opportunities in Consolidation
The Government of Sri Lanka, in its budget proposals for 2014, has called for greater consolidation in the domestic banking industry. This goal was outlined more explicitly by the Central Bank of Sri Lanka in two key strategy documents, Road Map 2014 and Plan for Consolidation of the Financial Sector. The Central Bank envisions a measured but purposeful consolidation process that will ultimately see the country’s financial services sector revolves around a few large and strong banks and non-banking financial institutions. The macroeconomic goal is to shape a financial sector that is more stable and resilient, with the capital strength required to reinforce confidence in a maturing consumer economy while helping to fuel long term growth.
From the perspective of Commercial Bank, the proposed financial sector consolidation would allow us to move into different market segments. Encouraged by this, we have begun exploring opportunities for investing in an established business whose scope of operations and product/service offering complement our own.
Together to Prosperity
In 2013, The Banker magazine ranked Commercial Bank among the Top 1000 Banks in the World for the third consecutive year. This distinction recognises our success in relation to a number of key measures, including capital strength, assets, financial soundness, performance and profitability. Even more fundamentally, it reflects the strength of our people. Only through their continued, commitment, hard work and dedication, supported by effective management and planning, can Commercial Bank continue to deliver the strong performance that stakeholders expect of Sri Lanka’s leading private sector bank.
The strong values and collaborative spirit of our staff are also reflected in our commitment to corporate responsibility. As in the previous year, this Annual Report 2013 integrates the Bank’s financial and sustainability performance in a single comprehensive review.
I will close by conveying my thanks to the Chairman and the Board of Directors for their diligence and wise counsel provided. I also thank each and every member of the Commercial Bank team for their untiring efforts, loyalty and commitment to the Bank. Further, I wish to acknowledge the valuable contribution made by our team members who retired in 2013 after long years of committed service to the Bank.
I would also wish to express my gratitude to the Central Bank of Sri Lanka and its officers for their guidance on regulatory matters and to the Bank’s External Auditors, Messrs KPMG,
for their professional advice and timely completion
of the audit.
The years ahead undoubtedly hold both challenge and opportunity, often as two sides of the same coin. I feel the Bank is well-placed to leverage such situations to its advantage and in so doing journey together with our stakeholders to prosperity.
Ravi Dias
Managing Director/CEO
Colombo
February 24, 2014