RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2009

This release relates to the Results for the six months ended 30 September 2009 released to the Colombo Stock Exchange on 3 November 2009.

Profitability
The Bank’s own non-audited profit after tax for the six months ended 30 September 2009 (current period) was Rs 895 million an increase of 14.6 pc over the comparable period (April to September 2008).

As in the case of the first quarter, the second quarter results also showed an improvement in interest margin that compensated for the contraction in the credit portfolio. Although the margin on customer advances remained at the levels of the previous quarter, proactive treasury operations to lock in high yields on government securities held to maturity helped to increase the overall interest margin.

The Bank was able to contain costs (non-interest expenses) at below the comparable period.

The portfolio contraction resulted in the release of part of the general provision previously made as mandated by Central Bank, which is 1 pc of the portfolio on which specific provisions are not made. However, the Bank made a 3 pc general provision on the finance leases portfolio recognizing impairment losses of this portfolio over and above the specific provision, based on currently available evidence. The Bank will review this provision on a quarterly basis. Gross specific provisions increased from Rs 250 million to Rs 310 million but recoveries of previously provided loans and advances also increased resulting in a decrease in the net specific provisions to Rs 96 million in the current period from Rs 111 million in the comparable period.

The foregoing enabled the Bank to post a modest increase of 11 pc in the profit before provisions and taxes in the current period.

The contraction of the lease portfolio and the consequential reduction in the deferred tax liability somewhat reduced the effective tax rate leading to an increase of 14.6 pc in profit after tax.

Unlike the first quarter results, which recorded a 6.9 pc reduction in the consolidated profit (attributable to the equity holders after minority interest) over the comparable period, the half-year results show an improvement mainly due to the return to profitability by the venture capital subsidiary Lanka Ventures PLC (LVL). The consolidated profit attributable to equity holders after minority interest in the current period was Rs 1,303 million, an increase of 31.8 pc over the comparable period. The impact of LVL was significantly higher on the second quarter consolidated results.

Consolidated earnings per share for the current period increased to Rs9.88 from Rs7.59 in the comparable period.

Lending Activities
The combined gross advances of the Bank and DFCC Vardhana Bank Ltd (DVB) as at 30 September 2009 (consolidated with a 3 months lag due to different financial years) amounted to Rs 54,732 million recorded a reduction of 6.7 pc in the 6 months ended 30 September 2009. Both DFCC Bank and its commercial banking subsidiary DVB recorded a decrease in the credit portfolio.

Demand for new credit, especially project finance and leases of commercial vehicles remained low. The initiative taken by the Government to stimulate the economy by a concerted effort to maintain a low interest rate regime and new economic activity in the North and East are likely to lead to a revival in the demand for credit. The corresponding reduction in cost of funds in the Bank, albeit with a time lag, is expected to preserve interest margin although there will be pressure until the lower rates are fully transmitted to the funding cost.

Credit Quality
The gross non-performing loans, advances and leases (NPA) ratio of the Bank was 12.1 pc and increased from 9 pc on 31 March 2009. There was a marginal reduction of NPA ratio from 12.3 pc at the end of previous quarter to 12.1 pc in the current quarter. At the consolidated level however, there was an increase to 12.2 pc compared with 11.9 pc at the end of previous quarter, 30 June 2009. The quantum of NPAs recorded a small reduction in the second quarter.

The total provisions (specific and general) covered 54.9 pc of the consolidated gross NPA. The low interest rate regime and improved market sentiment and signs of turnover and thereby reduce gross NPA.

Subsidiaries, Associates and Joint Ventures
The half-year profit after tax of Commercial Bank of Ceylon PLC (CBC) recorded a marginal decrease of 4.9 pc.

The contribution from DVB was Rs 94 million compared with Rs 56 million in the comparable period. This was a significant improvement over the first quarter results up to 31 March 2009, which recorded only a Rs 29 million contribution due to high provisions. The business environment remained difficult for small commercial banks with the lower import volumes affecting non interest income. Since both CBC and DVB end their financial year in December, the consolidated financial statements for 30 September include the results for the six months to 30 June.

Lanka Ventures PLC (LVL) recorded a profit after tax of Rs 53 million in the current period compared with a loss of Rs 94 Million in the comparable period

The contribution of other subsidiaries and investment banking joint venture company, Acuity Partners Ltd, though relatively small, improved during the current period.

DVB continued to expand its distribution network and invest in new product development with a view to benefiting from the more favourable climate that is emerging. The Bank and DVB will be opening several branches in the North and East shortly.

Nihal Fonseka
Chief Executive Officer
04 November 2009