COMMENTARY RELATING TO THE NINE MONTHS ENDED 31 DECEMBER 2007

Profitability
The non-audited profit of the bank, its subsidiaries together with the share of associate companies profit before corporate tax and financial services VAT for the nine months ended 31 December 2007 (current period) was Rs 3,642 million, an increase of 19 pc over the Rs. 3,051 million in the previous comparable period (April to December 2006). The finanancial services value added tax and income tax expense was Rs 1,924 million being 53 pc of this profit and the profit attributable to equity holders after minority interest was Rs.1659 million an increase of 21 pc over the comparable period.  The consolidated annualized return on equity was   14.7 pc a decrease from the 14.9 pc recorded in the comparable period.  Consolidated diluted earnings per share for the current period increased to Rs 13.25 from Rs 12.37 in the comparable period.

Lending Activities
The gross approvals of DFCC Bank during the current period was Rs10,412 million being 39 pc lower than Rs17,130 million in the comparable period reflecting the lower credit demand for capital asset funding and leases of acceptable credit quality in the high interest rate environment that prevailed. The Bank was particularly cautious in expanding the fixed rate medium term leases due to credit and market risk concerns and also due to changes to tax structure introduced in the last budget that affected the profitability of this product. The undisbursed approved credit on 31 December 2007 was Rs7,632 million.  The combined gross advances of the Bank and its commercial banking subsidiary DFCC Vardhana Bank (DVB) amounted Rs 58,551 million, a growth of 5 pc during the financial year.

Risk Management
The gross non-performing loans and advances ratio of the Bank declined from 7.3 pc on 30 September to 6.2 pc on 31 December 2007. This is higher than the 4.5 pc on 31 March 2007. However, we consider the portfolio risk level to be acceptable in the context of prevailing high interest rate regime reducing the debt service capacity of borrowers and the developmental role of the Bank with a significant credit exposure to small and medium enterprises located in underdeveloped provinces.  The Bank’s business model does not expose it to significant market risks and this risk was managed through appropriate pricing strategies.

The Senior long term debt of the Bank continued to be rated AA (lka) by Fitch ratings Lanka.

Subsidiaries, Associates and Joint Ventures
The Bank invested an additional Rs857 million in DVB by taking up its entitlement of the rights issue. This investment made in December 2007, enabled DVB to comply with the minimum equity requirement of Rs2,500 million on 31 December 2007, mandated by Central Bank.

The investments in the rights issue of Commercial Bank of Ceylon (CBC) in the first quarter and DVB totaling Rs2.5 billion were financed by the rights issue of DFCC Bank of Rs3 billion. 

The share of profit after tax of CBC excluding dividends received for the period included in the consolidated financial statements was Rs 423 million in the current period, compared with Rs 416.million in the comparable period. The contribution from DVB was Rs 106 million compared with Rs 87 million in the comparable period.

The Bank is in the process of setting up an equally owned joint venture investment bank with Hatton National Bank. Preliminary regulatory clearances have been obtained for this venture. The new company is expected to commence operations shortly.

Expansion
The operations of both DFCC Bank and DVB, 95 pc owned subsidiary, continue to be managed to optimize synergy benefits and continues to build commercial banking capacity, expand the distribution network and develop alternate delivery channels. 7 units were opened in the current period and the Bank and DVB now have 44 operating units of which 22 are outside the Western Province. The units outside the western province employ 210. These expansion initiatives are consistent with government policy as set out in the “Mahinda Chinthanaya”

Efficiency
The combined non-interest expense to operating income ratio of DFCC Bank and DVB (cost/income ratio) was 32 pc in the current period being the same as in the comparable period.  For purposes of this ratio the non-interest expense exclude provision for bad and doubtful debts and Value Added Tax on financial services. This ratio compares favorably with industry norms.

Development Banking
DFCC Bank continued to administer renewable Energy for Rural Economic Development Project (RERED) successor to the previous Energy Services Delivery Project (ESD) partnered by Government of Sri Lanka and the World Bank and successfully implemented off-grid electrification of 10,930 households mostly located outside the Western Province during the 9 month period. This project emphasizes hydro and solar home systems with the objective of delivering affordable and environment friendly electricity.  The Bank was associated with this project from 1997 and has successfully implemented off-grid electrification of over 120,000 households island wide since inception and 110 MW of power has been connected to the national grid since then under these two projects. The successful implementation of the projects has received recognition by the World Bank and the Government and the model is being emulated by countries at a similar stage of developing rural electrification. 

In a July 2007 the World Bank in a publication titled “DFCC Bank – One Among the Successful Few” published in connection with the golden anniversary of the Bank, recognized the Bank as a development finance institution that evolved over the years to become one of the more successful banks in the country, and probably in the region, without losing its focus on development. Going forward the Bank intends to continue its involvement in development finance whilst taking necessary steps to cater to its varied stakeholders and create value for its shareholders.

Nihal Fonseka
General Manager/Chief Executive Office
21 February 2008