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Bank of Ceylon reported a Rs. 27.5 billion profit before tax (PBT) for the nine-month period ending September 30, 2022 according to its unaudited quarterly financial statements. This performance was achieved despite numerous headwinds caused by unforeseen challenges that erupted in the economic and social landscape during the period.

Despite unprecedented economic and environmental operating challenges, net interest income increased by 32% to Rs. 107.9 billion, contributing 72% to total operating income. The increase in interest rates in line with the spike in policy rates and the volume growth reported in advances from the private sector in the previous year led to a 54% growth in interest on loans and advances, representing 68% of total interest income. Interest income from investments soared year-on-year to Rs. 102.6 billion and most of it came from treasury bills and bonds.

Soaring deposit rates have increased the cost of funding, YOY interest expense has increased by 100%, and as a considerable portion of FD is now repossessed, interest expense during 3Q-2022 has increased almost tripled compared to the corresponding period of the previous year.

A BOC press release said:

“As the depreciation of the Rupee is around 81% for the period, the net foreign exchange gains derived from currency conversion account for a considerable portion of the non-fund based income amounting to Rs. 27.5 billion. Similarly, net fee and commission income also contributed Rs. trade increased, resulting in improved related commission income.

As a favorable environment did not prevail for equity market activities during the reporting period, the equity portfolio did not contribute materially to non-fund related income.

Impairment charges for loans and advances and other financial instruments

“As of January this year, an allowance for impairment of Loans and Advances and Investments has been made in accordance with CBSL Guidelines Nos. 13 and 14 of 2021 on the classification, recognition and measurement of credit facilities and Financial assets. Thus, the allowance for impairment of loans and advances and financial investments has been calculated to take into account expected losses associated with customers or investment instruments based on the possible consequences on current economic conditions, risk factors specific to the sector, new political reforms, ongoing negotiations abroad and the settlement of local debt by the government.

“Management overlays have been applied to identify high risk industries resulting in a significant increase in credit risk due to fallout from the prevailing economic crisis in the country and exposures to these industries have been assessed as under -performing to account for lifetime credit loss on a conservative basis.In addition, the Economic Factor Adjustment (EFA) that is used in the calculation of expected losses for collectively assessed portfolios has been improved by taking into account the difficult economic situation that currently prevails. Nevertheless, individually significant customers (ISL customers) have also been critically assessed given the high degree of uncertainty and the extraordinary circumstances in the short and medium term economic conditions mainly caused by the continued business disruptions and the prudent level of ISL impairment provision on t been made. The impairment provision made to offset the ECL of loans and advances amounted to Rs 65.3 billion during the nine months ended September 30, 2022, while the provision made for Q3 2022 s amounted to 15.8 billion rupees. As a result, the ratio of gross loans to impairment provisions stood at 10% while the ratio of impaired loans (Stage 3) stood at 5.6% compared to 6% and 5.1% reported at end of 2021.

“Considering that negotiation plans are on the table for the settlement of foreign and local sovereign debt, the Bank has made a considerable level of provision for impairment of its investments in international sovereign bonds and development bonds. Sri Lanka.

Functionnary costs

“Without exception, cost escalation is also being suffered by the Bank during the reporting period. Operating expenditure of Rs. deposit insurance and other general expenses The 16% year-on-year increase in operating expenses was mainly due to the escalation of personnel costs, in line with the reinforcement of the Bank’s human resources against the increase in the cost of living. However, in an environment of double-digit inflation, the Bank’s effective means of controlling costs have kept the increase in other expenses down to less than 10%.

Profit

“Operating profit before VAT on financial services stood at Rs. 35.1 billion, representing a reduction of 18% year-on-year. Value added tax on financial services of Rs. been charged for the period resulting in Rs. 27.5 billion pre-tax profit (PBT).For 3Q-2022, PBT of Rs. 5.6 billion was obtained after deduction of Rs. financial services.

“Income tax for the period showed an increase of 6%, although PBT showed a decrease from the previous year, as the excess provision for income tax relating to the year 2020 has been adjusted in the first quarter of 2021 in accordance with the reduction of the income tax rate from 28% to 24%.

Financial situation

Loans and advances

“During the period, the Bank’s total assets grew by 16% and reached Rs. 4.4 trillion, preserving its leadership in the industry. The main contributory factor is the growth of the investment portfolio which represents around 35% of the Bank’s assets. In the nine months to September 2022, lending to the private sector increased by 10% and the Bank continued to expand its support for business recovery. However, total gross loans and advances grew only marginally by 2%, with direct loans to government declining over the period. The Bank maintains adequate coverage for expected losses and the provision reserve built up so far covers 10% of the total loan portfolio for expected losses.

“With a greater focus on maintaining portfolio quality and with a view to stopping non-performing facilities being transferred to hardcore level, the Bank set up a business recovery unit over the past year and continued to support the resumption of activities which have been severely affected by adverse events.economic repercussions.This initiative has not only benefited the Bank but also the country’s economy as it has been able to revive many businesses and thus ensure the security of employment of many. The other side of the coin that we have focused on during the year has been to boost the local economy by supporting SMEs. We strongly believe that SMEs will be the engine of growth that under -will spearhead Sri Lanka’s economic recovery.Therefore, during the period, we continued to focus on growing this sector by delivering a holistic value proposition. than just financial support,” said Mr. Rattwatte, Chairman of Bank of Ceylon.

Deposit basis

“The deposit base of the Bank during the year increased to Rs. 3.3 trillion with a growth of 16% and 68% of the deposit base consists of local currency deposits. Even so, the balance 32% which denotes foreign currency deposits stood at Rs. 1,050.8 billion.

The base of current deposits and savings (CASA) which generates funds at low cost represents 32%.

Key performance indicators

“The Bank’s return on assets (ROA) ratio came in at 0.9%, while posting a return on equity (ROE) ratio of 11.5%, leading to a year-on-year decline annual, because the net results of this year are lower than those of the previous year. The increase in risk-weighted assets with the depreciation of the Rupee, the payment of Rs. a negative impact on the Bank’s capital adequacy ratio (CAR). However, the Bank was able to maintain its Tier I Capital and Total Capital ratio at 11.7% and 14.3% respectively at the end of September 2022, both above regulatory standards.

“Despite cash flow deferrals in loan maturities, the Bank has been able to maintain a better balance between liquid assets and its liabilities. All liquidity ratios were also maintained above regulatory standards.

“The group’s financial statements include a consolidation of its nine subsidiaries and its participation in five associates. As the parent company, Bank of Ceylon plays a major role in the group and represents over 99% of the group’s asset base. For this year, nine-month period ended September 30, the group reported a PBT of Rs. 27.3 billion.

“Mr. Sumanasiri, Managing Director/CEO of Bank of Ceylon, pointed out that “the Bank’s approach to digital service delivery has now reached a more promising phase. A greater push is being seen in customer adoption of digital and virtual channels during the pandemic and we see the momentum continuing. The Bank is ready with the required infrastructure to meet this growing demand and continues to experience growth in the Bank’s digital and virtual transactions. However, we continue to serve our traditional customers and grassroots communities by further expanding our presence in the rural masses by also capitalizing on new technologies. BOC Agent Banking is our newest addition in this regard and this new delivery channel allows rural customers to do their day-to-day banking through nearby merchants without visiting a branch in a city”

“The Fitch Ratings Lanka placed the BOC in the scale of “AA-“. country No. 01.”


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Elaine R. Knight