Cargills Bank to focus on aggressive recovery post challenging 1H 19

• Trims quarterly losses from Rs. 196 m to Rs. 64 m
• Loan book in core focus segment of retail and SME remains stable 
• Bank supports CBSL initiated moratorium to hospitality sector; on Rs. 980 m portfolio

Rising NPAs and a subdued macroeconomic environment hindered top and bottom line performance for Cargills Bank during the six months ended 30 June (1H 19) resulting in a loss after tax of Rs. 261 million as compared with a profit after tax of Rs. 70.8 million in the corresponding period of the previous year (1H18) which has been reported under LKAS 39 and not restated. 

The bank’s interest income grew at a modest pace of 9% Year-on-Year (YoY) to Rs. 2.04 billion, given the suspended interest component arising out of the increased NPAs during 1H19. However, net interest income contracted by 13% YoY to Rs. 860.6 million due to increase in interest expense resulting from foreign currency borrowings and growth in term deposits.

Fee and commission income during 1H19 rose by 61% YoY to Rs. 163.2 million, while net fee and commission income also recorded positive results supported by increased usage of Cargills Bank Debit and Credit cards. Net fee and commission income increased by 40% YoY up to Rs. 105 million while total other income increased by 12% YoY to Rs. 91.1 million.

Cargills Bank continued to invest in expansion of several of its business segments over the half year period. Personnel costs reflected a 17% YoY increase consequent to an increase in the workforce in the Card Centre, its sales force and Retail Banking, etc. Whilst other operating expenses, depreciation and amortization also increased by 41% YoY largely due to investments and expenditure in cards related activities and systems. 

Challenging macroeconomic conditions were reflected in modest growth in the Bank’s lending portfolio and deposit base which recorded 11% YoY and 8% YoY growth to 26.5 billion and 21.5 billion respectively, as compared to 31 December 2018. 

Given the bank’s relatively modest loan portfolio, the impact of a few large ticket loans continued to act as a significant impediment on profitability, prompting the development of individualized action plans for the recovery of the remaining dues. 

By the end of the first half, NPA stood at 13.8% with  large ticket  loans in the NPA collectively amounting to approximately Rs. 2.3 billion or approximately 60% of the bank’s total NPAs – triggering prompt action to negotiate timely resettlement commitments from these borrowers – primarily in the corporate and mid-market segment. Subsequent recovery actions have brought down this large ticket NPA total to Rs. 1.64 billion reducing it to 43% of the bank’s total NPA as at 30th June 2019. The Bank continues to focus on robust recovery initiatives. 

While the bank’s NPA position is challenging, our relatively recent entrance into the market means that our portfolio is relatively modest, particularly given the extremely strong position of our regulatory capital reserves which currently stands at over 2.5 times the stipulated minimum.

“The fragmentation of NPAs – with primary exposure being in corporate and mid-market further validates the overall strategic emphasis of the bank towards retail and SME, hence the overall growth prospects of the bank remain unhindered,” Cargills Bank MD/CEO Rajendra Theagarajah said. 

Capital management

The bank’s regulatory capital ratios were maintained well above the statutory minimum requirements with substantial regulatory capital buffer. The Common Equity Tier 1 Capital Ratio and Tier 1 capital Ratio both stood at 28.5% at the end of the quarter while the bank’s Total Capital Ratio was held steady at 28.8%, as compared with minimum regulatory requirements of 7%, 8.5%, and 12.5% respectively.

Credit rating

During the first half of the year, as previously reported, Cargills Bank secured a multi-notch upgrade from Fitch to A-(lka) with Stable Outlook. Fitch Rating attributed the upgrade to its “assessment of support from its ultimate parent, CT Holdings PLC (CTH), and our expectation that the bank is likely to receive extraordinary support from its ultimate parent, if needed”.

The future

The bank also achieved several important milestones during the period in review, including securing of PCI-DSS Certification – making it one of only two Licensed Sri Lankan Commercial Banks to have received this vital certification. 

Following the launch of Just-Pay low-value acquiring with Lankapay, Cargills Bank is working with an energised fintech industry, to enable a stream of large volume, low ticket payments that are anticipated to generate substantial growth and a thriving business over the medium term through social inclusion

Additionally, the bank is rolling out card POS and Internet Payment Gateway acquiring, which will complement its growing credit and debit card base.

In first half 2019, the bank secured a medium term loan facility of Rs. 900 million from a multi-national lender being the first non-deposit funding for the bank. The bank is presently in the process of finalising the senior debenture issue in the second half of 2019. This would ease pressure on deposit mobilisation which is now slow-paced pursuant to CBSL capping of interest rates. 

The bank is conscious on the need to focus on returning to operating profit in the next two quarters of the year. Cargills Bank has taken the initial steps towards the listing of its shares within the time frame stipulated by the Central Bank. The bank has also been engaged with selected institutional investors, who would add value to the bank’s business model, in its capital raising process to comply with the minimum capital requirement by end 2020 and in the digital journey.