Macro environment and operating conditions – Sri Lanka demonstrates to have managed the COVID-19 outbreak reasonably well, while the economic fallout from the local and global lockdown will be unprecedented. It has affected supply chains significantly and the cascading effect will severely impact almost all businesses in the country. As it stands now, the impact of the economic downturn cannot be reasonably estimated.
Banking has been declared as an essential service in order to support critical activities of the economy such as facilitating importation of essential items. The customer requirements have generally been limited to essential transactions and access to cash.
Impact of COVID-19 on the Banking Industry – In light of the existing unprecedented crisis situation, the Government of Sri Lanka, through the Central Bank of Sri Lanka (CBSL), has provided a debt moratorium to businesses and individuals affected by Covid 19. This would certainly impact credit growth, credit quality, liquidity and revenue growth which would ultimately impacts the profitability of the Banks.
The CBSL has allocated a re-financing facility to support the economy while relaxing certain regulations to accommodate the banks to assist COVID – 19 affected businesses and individuals. Some of these key relaxations are related to capital conservation buffer, non-performing loan classification, Statutory Reserve Ratio, Statutory Liquid Asset Ratio and Liquidity Coverage Ratio. The Institute of Chartered Accountants of Sri Lanka (CASL) also issued a guidance note on financial reporting considerations suggesting measures that can be adopted during these uncertain times.
Impact of COVID-19 and Bank’s response – The Bank has taken all recommended measures to ensure the safety and wellbeing of its employees, customers and all other stakeholders during these challenging times and continues to adhere to the guidelines issued by the Government and health authorities.
The Bank has been able to operate all of its branches alternating between locations within its island wide network. Business continuity arrangements were initiated in order to facilitate essential business transactions and provide continued services to customers through our various channels during this period. Our investments in digital technology continued to benefit customers during this hour of need, shown by the extensive use of Bank’s digital platforms. Also maximizing the benefits of investments in technology, many staff members have been able to work from home with secure access to operating systems.
One of the key priorities of the Bank has been ensuring that it maintains a strong liquidity position during these challenging times, enabling it to meet ongoing commitments without any hindrance. Managing fund outflows, facility rollovers and utilization levels as well as arranging additional funding lines were implemented.
Financial results for the first quarter of 2020 – Group’s Operating profit before all taxes declined by 7% owing to the reasons mentioned above, while Profit after Tax increased by 24% due to withdrawal of the Debt Repayment Levy and NBT on financial services.
Interest income declined by 8% due to the lack of growth in the loan book and interest ceiling imposed from April 2019. Average Weighted Prime Lending Rate reduced by 296 basis points as at end of 1Q 2020 Vs 1Q 2019. Average loan book declined by 2.64% in 1Q 2020 Vs 1Q 2019. However, cost of funds declined at a faster rate of 13% due to effective fund management strategies supported by the growth in current and savings account balances. As a result, reduction in Net Interest margins was contained to 30bps while Net Interest Income reduction was contained at 1%.
While lending, credit cards, trade and deposit related fees recorded a drop owing to lower business volumes, Net FX gains increased during the period increasing the total net revenue to 2%. Gains on trading FX increased arising from forward FX funding swaps due to the depreciation of the Sri Lankan Rupee during the period in contrast to the appreciation in the previous period which offsets to some extent by the revaluation losses arising from balance sheet positions for the same reason accounted under Net other operating income. The Bank continued to benefit from the relatively lower funding costs of the funding swaps compared to high cost rupee deposits.
The increase in operating expenses was kept to a minimum of 1% as a result of comprehensive cost containment strategies implemented throughout the period under review, especially in times of curtailed growth in business volumes. Cross functional teams heading various initiatives on cost management, productivity and efficiency improvements resulted in minimizing increases in some large cost pools contributing to the overall management of the Bank bottom line
When assessing the impairment provisions, the Bank considered the potential impact of the COVID-19 pandemic on customers as well as the relief package introduced in the form of a debt moratorium by the government. Additional impairment provisions were made for identified customer segments impacted due to COVID-19 related developments, by assessing potential delays to the cash flow expectations based on currently available information, leading to a 46% increase in the impairment charge.
Capital adequacy and Liquidity -The Group’s Tier I Capital and Total Capital Adequacy ratios as at 31st March 2020 stood at 12.44%, and 16.62% respectively, both well above the corresponding minimum regulatory requirement of 8% and 12%, applicable as at the reporting date. CBSL reduced the Capital Conservation Buffer by 0.5% with effect from 27th March 2020. The Statutory Liquid Asset Ratio (SLAR) for the Domestic Banking Unit and the Off-Shore Banking Unit was at 24.91% and 26.74% respectively as at the reporting date.
Looking Forward – A shortfall in revenue is expected against the targets set as a result of the debt moratorium, interest rate ceilings and also due to sluggish credit growth. The bank is in the process of gathering applications for the debt moratorium by customers and the eligible applications are still being reviewed. As a result, the impact on the Bank’s future earnings cannot be reasonably estimated at the present moment. At the same time, the Bank will cautiously explore new business opportunities that may present from time to time. The Bank has also launched a number of initiatives to curtail expenses to minimise impact to profitability in line with the prevailing business environment.
Supported by a strong capital base, healthy liquidity buffers and with robust risk management models, the Bank is confident that it has the required resources to withstand the potential impacts arising from this crisis as currently foreseen. The Bank will continue to proactively assess the developments in the environment in order to implement required actions while providing necessary support to the measures taken by the government to revive the economy.