RESULTS FOR THE NINE MONTHS ENDED 31 DECEMBER 2006
The non-audited group profit after tax, attributable to equity holders of DFCC Bank, for the nine months ended 31 December 2006 (current period) was Rs1,347 million, an increase of 10pc over the Rs1,225 million in the previous comparable period (April to December 2005).
Composition of Group PAT in the consolidated financial statements attributable to equity holders of DFCC Bank is given below. In the consolidated financial statements the reported profit before tax and after tax is adjusted for inter company dividends, and other consolidation adjustment, which are eliminated in the consolidation process
| |
Current
Period |
Previous
Comparable period |
Variance
% |
Rs.m |
Contribution
%
|
Rs.m |
Contribution
%
|
DFCC Bank’s operations – PBT (as reported)
|
1,384 |
- |
|
- |
15 |
| Inter company dividend |
(223) |
|
(128) |
|
74 |
Other consolidation
adjustment |
- |
|
(5) |
|
- |
Adjusted PBT |
1,161 |
|
1,073 |
|
8 |
DVB Subsidiary – PBT |
149 |
|
69 |
|
116 |
DFCC & DVB PBT |
1,310 |
|
1,142 |
|
15 |
DFCC & DVB Tax |
(606) |
|
(379) |
|
60 |
DFCC & DVB PAT |
704 |
52 |
763 |
62 |
(8) |
Other Subsidiaries PAT |
59 |
4 |
90 |
7 |
(34) |
| Associate Companies*–PAT |
584 |
44 |
372 |
31 |
57 |
Total PAT |
1,347 |
100 |
1,225 |
100 |
10 |
- Mainly Commercial Bank of Ceylon Limited. The PAT of National Asset Management Limited included under Associated companies in the current period is Rs1.3 million
|
The financial year of the associate company, Commercial Bank of Ceylon Limited (CBC) and two subsidiaries, DFCC Stockbrokers (Pvt) Limited and DFCC Vardhana Bank Limited (DVB) ends on 31 December. Thus the nine months results for the period 1 April 2006 to 31 December 2006 includes the results of these companies for the period 1 January 2006 to 30 September 2006. The results of DFCC, DVB and CBC for the quarter to 31 December 2006 include the mandatory general provision of 0.1 pc of the performing and over due loans and advances balance on 31 December 2006 imposed by Central Bank
DFCC Bank
The profit before Value Added Tax and Income Tax expense was Rs1,652 million in the current period an increase of 19 pc over Rs1,386 million in the comparable period after charging the recently mandated general provision which amounted to Rs 41 million for the quarter ended 31 December 2006.
The Bank continued to maintain and improve the momentum of growth during the quarter 31 December 2006. Loans and advances net of provisions on 31 December 2006 was Rs42,506 million, compared to Rs33,110 million on 31 December 2005, a year on year increase of 28 pc. This quarter recorded a growth of Rs3,130 million while growth in the first six months of this financial year ended 30 September 2006 was only Rs3,062 million. Both term loans and financial leases contributed to this growth.
Market interest rates recorded a rising trend and had an impact on the cost of funds; however, the Bank was able to maintain the interest margin in the current period at the same level as in the previous period by re-pricing its variable rate assets.
The non-performing loans and advances as a percentage of the total loans and advances were 6.1 pc at 31 December 2006, a reduction from 7.4 pc on 30 September 2006. This improvement was due to the containment of advances that were newly classified as non-performing during the third quarter, recovery of previously provided advances and the growth in the credit portfolio.
The cumulative provision on non-performing loans as at 31 December 2006 was 24.5 pc of gross non-performing loans and advances. If non-performing loans fully provided and written off for accounting purposes are reinstated for purposes of computing this ratio, 52 pc of the non-performing loans are covered by full or partial provision. At this stage the Bank has not made any changes to the general provisioning policy based on sector risk assessment but is in the process of reviewing the policy in the light of the recently imposed mandatory requirements.
The Bank is subject to both Income Tax and Value Added Tax on financial services (VAT), a de facto supplementary tax on profits. The income tax rate applicable for this financial year is 35%, compared to 30% in the previous year.
VAT on financial services is at the rate of 20 pc with effect from 1 January 2006, the highest VAT rate and which additionally is not a deductible expense for income tax purposes. Prior to 1 January 2006 the VAT rate was 15 pc.
Since the bank adopts the full liability method for deferred tax, the increase in the rate of income tax had a significant impact on the provision charged for deferred tax brought forward.
The combined effect of these two rate increases in the current period was Rs 208 million as summarized below:
|
Rs million |
Taxable profit in the current period |
1,559 |
Additional tax expense in the current period @ 5 pc (35 - 30) |
78 |
Additional Deferred tax expense in the current period
@ 5 pc (35- 30) |
63 |
Additional financial VAT due to rate increase from 15 pc in the comparable period to 20 pc in the current period |
67 |
Total increase in both taxes in the current period due to rate increase. |
208 |
The mandatory general provision imposed by Central Bank referred to earlier is not a deductible expense for tax purposes. The foregoing changes to the tax regime caused the aggregate VAT and Income tax in the current period to increase by Rs 208 million.
Consequently, the profit after tax of the Bank for the current period was Rs822 million a reduction of 4 pc over Rs 854 million in the previous comparable period. The burden of income tax exacerbated by the disallowance of financial service VAT and the mandated general provision resulted in the annualized return on assets declining to 2.1 pc in the current period from 2.6 pc in the year to 31 March 2006. This is borne out by the fact that the annualized return on assets at the profit before income tax improved to 3.6 pc in the current period from 3.5 pc in the year to 31 March 2006.
The gross credit approvals including leases was Rs17,130 million in the current period compared to Rs 17,121 million in the previous comparable period. There was a substantial increase in the approvals during the third quarter. The loans and leases approved but un-disbursed was Rs 10,076 million on 31 December 2006.
The issued and paid-up ordinary share capital of DFCC Bank increased to Rs865 million on 31 December 2006 from Rs576 million on 31 March 2006 consequent to the bonus share issue of 1 for 2 approved by the shareholders on 30 June 2006.
DFCC Bank participated in the rights issue of ordinary shares by its subsidiary, DVB in December 2006 by making an investment of Rs287 million subscribed at par value. The Bank was allotted additional shares not taken up by minority shareholders and consequently its current ownership in DVB increased marginally to 95.42%. This investment enabled DVB to meet the minimum capital requirement stipulated by Central Bank as at 31 December 2006. Although Central Bank announced that banks could ask for additional time to meet this general requirement, DVB has met the requirement for 2006.
In order to mitigate the impact of this investment on the capital adequacy computation of DFCC Bank on a stand alone basis, DFCC Bank structured a subordinated debt issue of Rs2 billion, which qualifies as Tier II regulatory capital.
DFCC and DVB
Since the banking business of both DFCC Bank and DVB, 95 pc owned subsidiary, is managed to optimize synergy benefits, for purposes of analysis, further comments relating to the profitability, credit growth and customer deposits are based on combined results of DFCC Bank and DVB.
The combined Profit before Income Tax of the two entities increased by 15 pc to Rs1310 million in the current period, compared to Rs1142 million in the previous comparable period. PBT of DVB increased by 116 pc from a PBT of Rs69 million in the previous comparable period. The combined non-interest expense to operating income ratio of DFCC Bank and DVB (cost/income ratio) was 32 pc in the current period and 33 pc 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 is well below the industry norms due to synergies and shared services.
The consolidated net loans and advances of both DFCC Bank and DVB was Rs49,151 million as at 31 December 2006 compared to Rs41,151 Million as at 31 March 2006. The combined customer deposits of both DFCC Bank and DVB was Rs10,437 million on 31 December 2006 compared to Rs8,885 million on 31 March 2006. The non-performing loans and advances ratio of the two entities stood at 6.1 pc. DVB’s credit portfolio and the customer deposits aggregated in the above numbers as at 31 December 2006 relate to the position as at 30 September 2006.
Other Subsidiary and Associate Companies
The share of profit after tax of CBC included in the consolidated financial statements was Rs583 million in the current period an increase of 57 pc compared to Rs372 million in the previous comparable period. Profit on sale of DFCC Bank shares and mark to market gain of the trading portfolio of CBC contributed to this improvement. These results are based on 9 months to 30 September 2006 non-audited financial statements of CBC.
The published non audited results of CBC for the year to 31 December 2006, which would be consolidated with DFCC Bank in the year to 31 March 2007 financial statements reported a loss of Rs312 million by CBC in the fourth quarter resulting in a 13% reduction in the annual profit after tax for the year to 31 December 2006 compared to the previous year. The primary reason for this decline is an exceptional charge of Rs1,378 million (net of financial services VAT) arising from the past service cost consequent to the restructure of the pension scheme from a defined benefit to defined contribution plan. The full year consolidated income statement of DFCC Bank will be impacted by the lower full year PAT of CBC.
The subsidiaries other than DVB collectively contributed Rs 59 million to the profit after tax of the Group compared with Rs 90 million in the previous comparable period. Lower contribution from DFCC Stockbrokers and a prior year tax charge at Lanka Ventures Ltd caused the decline.
The Notes to the financial statements contain further disclosures relating to impact on change of accounting policies necessitated by revisions to Sri Lanka Accounting Standards and income tax related contingent liabilities.
Nihal Fonseka
General Manager/Chief Executive Officer
23 February 2007
