RESULTS FOR THE HALF-YEAR ENDED 30th SEPTEMBER 2008

This release relates to the Results for the half-year ended 30th September 2008.

Profitability

The Bank’s own non-audited profit after tax for the half year ended 30th September 2008 (current period) was Rs 781 million an increase of 28 pc over the comparable period (April to September 2007). The consolidated profit attributable to equity holders after minority interest in the current period however was Rs 974 million a decrease of 9 pc over the comparable period. The reasons are explained under the caption Subsidiaries, Associates and Joint Ventures.

The current period includes a one off capital gain of Rs 176 million (after Financial Services VAT) arising from the disposal of a quoted share investment and reconstitution of the ownership structure of DFCC Stockbrokers (Pvt) Limited concurrent with the Bank’s equity investment in Acuity Partners (Pvt) Limited, a 50-50 joint venture company on 1st July 2008. This gain is exempt from income tax. Although the Bank has recognized the full profit on transfer of shares in DFCC Stockbrokers (Pvt) Limited to Acuity Partners (Pvt) Limited, only 50 pc of this profit is recognized in the consolidated income, since only 50 pc of the effective ownership is transferred to the other venturer, Hatton National Bank PLC. These adjustments are made as at 30th September 2008 but the income for 3 months ended 30th September 2008 derived from Acuity Partners (Pvt) Limited will only be consolidated with a 3-month gap since the financial year of Acuity Partners (Pvt) Limited ends on December while the financial year of the Bank ends in March.

As reported in the commentary on the first quarter results, a legislative change that became effective from March 2008 further increased the charge for Financial Services Value Added Tax for this financial year. The Rs 290 million incurred for the half year was Rs 48 Million higher than what it would have been on the basis of the previous computation methodology.

Consolidated earnings per share for the current period decreased to Rs 7.59 from Rs 8.58 in the comparable period. Since the exercise price of outstanding stock options is currently higher than the market price there is no dilution of the basic earnings.

Lending Activities

The combined gross advances of the Bank and DFCC Vardhana Bank Ltd (DVB) as at 30th September 2008 amounted to Rs 58,213 million recording a marginal reduction in the half year ended 30th September 2008 primarily due to the contraction of portfolio in DFCC Bank by Rs 2,184 million. In contrast the portfolio of the commercial bank subsidiary, DVB increased by 13.6 pc to Rs 13,201 million on 30th September 2008.

The primary focus of the Bank is to finance the capital assets for expansion, modernization and new business enterprises. In the context of the current high interest rate regime and economic turmoil in the global markets there was a tendency for some of such capital intensive projects to be deferred and this led to a slight reduction in the loan portfolio since new disbursements did not keep pace with loan repayments. The high interest rate environment and the cautious approach to credit expansion contributed to a contraction in the lease portfolio.  Despite this scenario, some big ticket transactions resulted in the gross new advances approved for the half year to reach Rs 8,283 million, 8 pc higher than the amount in the comparable period.

Conversely the credit demand for working capital emanating from inflation adjusted prices for stocks, lengthening of trade cycle and higher utility and other resource cost tend to increase and is reflected in the portfolio increase of the commercial banking subsidiary, DVB.

Despite a contraction in advances portfolio the Bank was able to improve the margins by judicious optimization of the interest differentials between the lending rates, Government Securities yield and the cost of borrowing while controlling the non-performing portfolio.

Risk Management

The gross non-performing loans, advances and leases (NPA) ratio of the Bank was maintained at 7.8 pc, the same level as on 30th June 2008 on a lower portfolio.  The NPA is however higher than the 6.2 pc recorded on 31st March 2008.  The bank continues to make prudent general and specific provisions, at times over and above the minimum mandated by the Central Bank of Sri Lanka.

The consolidated non-performing loans and advances ratio of both the Bank and its commercial banking subsidiary DVB was 8.5 pc on 30th September 2008 an increase from 6.3 pc on 31st March 2008. The ratio of DVB is based on the portfolios outstanding   on  31st December 2007  and  30th June 2008  respectively.

The total provisions covered 52 pc of the consolidated gross NPA while the unprovided NPA was 14.2 pc of equity of the Bank.

The Bank’s business model does not expose it to significant market risks and this risk was managed through appropriate pricing strategies.

The Bank’s cautious approach to portfolio growth in the current difficult economic environment and emphasis on liquidity management had a salutary impact on the liquidity levels further strengthening the stability of the Bank, which remains well capitalized.

In October 2008, the rating agency Fitch, reaffirmed the Bank’s national long term rating of AA (lka) with a stable outlook.

Subsidiaries, Associates and Joint Ventures

The share of profit after tax of Commercial Bank of Ceylon PLC (CBC) included in the consolidated financial statements was Rs 534 million in the current period, compared with Rs 513 million in the comparable period. The contribution from DVB was Rs 55 million compared with Rs 72 million in the comparable period.  Specific provisions in respect of a few borrowers affected DVB. The relatively higher cost of funds when compared to a mature commercial bank with a large legacy savings account portfolio and the emphasis paid to being comfortably liquid also affected margins. DVB’s network expansion in 2007 and this year and the recent initiative to diversify its distribution through the post office network will help it to build up a lower cost of funds in the medium term. Since both CBC and DVB end their financial year in December, the consolidated financial statements for 30th September include the results for the six months to 30st June. 

The one off loss for the half year ended 30th September 2008 by Lanka Ventures PLC (LVL) a 58.34 pc owned subsidiary of the Bank reduced the consolidated profit attributable to the equity holders of the Bank in the current period which was 9 pc lower than the comparable period.

The loss for the half-year ended 30th September 2008 reported by LVL was primarily due to an income tax provision made in the quarter ended 30th September 2008. This provision was necessitated by a judgment in favour of the Revenue Authority upholding the validity of the assessments issued for prior years. Although LVL has been granted leave to appeal to the Supreme Court against this judgment, the company made a provision of Rs 130.2 million for the probable amount of the liability. A further amount of Rs 105.3 million continues to be recognized by LVL as a contingent liability.


Nihal Fonseka
General Manager/Chief Executive Officer
28th November 2008