SDB on the move with 167% increase in quarterly profits

SANASA Development Bank PLC (SDB) closed the nine months as at 30 September 2017 with a pre-tax profit of Rs. 526 m, up by 16% over the corresponding period in the previous year. The bank’s quarterly profit after tax (PAT) for 3Q2017 reported a significant 167% increase against the 3Q2016. With these growth rates, SDB recorded a PAT of Rs. 331 m, up by 35% on year on year (YoY) basis.

The net interest income (NII) increased by 24% on YoY basis. When compared to the 3Q2016, the NII growth was 29% during 3Q2017, which was driven by the growth in business volumes. The faster increase in deposit rates which mirrored market trends due to tight liquidity, resulted in interest expenses increasing by 41% whilst the corresponding increase in interest income marked a lower rate of 34%. However, due to prudential measures adopted, the increase in the net interest margin of the bank was restricted to +0.92 bps as at 30th September 2017. The bank expects its NIMs to improve further in the forthcoming quarter with the stability of market rates and improved liquidity evidenced during 3Q2017.

Impairment charges recorded a 53% increase mainly due to the increase in collective impairment under the retail, SME and leasing portfolios. The individual impairment charges which saw an increase in the same period in the previous year due to fall back in recovery targets on retail, while leasing portfolios have been fully arrested in 3Q2017. 

The retail and SME loan book has shown an improvement in portfolio quality whilst leasing book impairment has remained at levels reported in the previous years. The trend in impairment of pawning portfolio has also shown improvement during 2017 and it is expected to further improve the same in the coming months. When compared with December 2016, SDB’s gross NPL ratio was higher YTD by +0.10 bps and reported as 2.20% by the end of the quarter, and remains lower than the industry average of 4.5% for LSBs and 2.7% for LCBs.

Expenses recorded a growth of 17% with personnel and other operating expenses contributing towards this increase. The other expense growth of 26% is owing to the increase in business volumes, branding and marketing cost and ongoing business transformation program activities. The bank also witnessed the conclusion of centralising its operations, centralisation of credit assessment and credit administration function through automation. 

The improved cost to income ratio reported during the period under review was supported by cost efficiencies stemming from centralisation and automation of previously decentralised manual processes. Apart from the cost optimisation, the automation and centralisation of operations has enhanced the customer service levels by reducing the branch level back office operational functions.  

The ongoing business transformation program, project ‘Quantum Leap’ is envisaged encompassing large revenue generating pillars around. First being the customer value proposition (CVP) development to enhance the apex banking role for SDB for their specialised market niche of cooperative sector and diversifying into expanding apex as well as building new propositions to target specific retail and SME banking. Second being the branch Optimisation Program (BOP), with a focus upon enhancing the role of the branch in sales productivity as well as establishing lean operations environment. The project will be fully rolled out by 31 December. The interim results of this transformation are quite visible in 3Q2017 results, while it is expected the relevant transformation will bring in more synergy to the bank in coming years.

SDB continued to penetrate the market by expanding/relocating its branch network to be more accessible to its customers. During the 9MCY2017 SDB has opened three new branches and relocated seven branches. This coupled with extensive business promotion and marketing activities, introduction of attractive savings products and investment made in project ‘Quantum Leap’ have contributed towards expanding delivery channels and improving service deliverables. The results in all the SME investments are visible in the lending and deposit growth in 9MCY2017. 

Total assets growth of the bank for 9MCY17 is 20%, driven by loan book growth of 19%. The loan book growth in 9MCY17 has been largely driven by the SME and higher margin retail segments, which now account for roughly 23% and 70% of the loan book respectively. 

Under the ongoing business transformation program project ‘Quantum Leap,’ the bank has been repositioning itself in order to increase its exposure to the MSME segment as its core micro customer base is ready to graduate as MSMEs. On the funding side, customer deposits have grown by 24% in YTD 9MCY17 driven largely by the retail and co-operative sectors. The 24% deposit growth has increased the total deposit base to Rs. 56 b by the end of September 2017. The bank’s savings base increased by Rs. 2 b during 9MCY17, bringing the savings to a deposit ratio of 17%.

In an effort to strengthen its capital base, the bank successfully concluded a private placement of ordinary shares at Rs.140 per share and a convertible debt instrument which is fully compliant with Basel - III requirements from Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V., a Dutch development bank commonly known as FMO, SBI-FMO Emerging Asia Financial Sector Fund and its long standing partner International Finance Corporation (IFC) to raise Rs. 2.4 b. Under this, SDB has issued 10,438,143 new ordinary voting shares for these three institutions. Consequently SDB’s outstanding voting shares have increased to 54,778867 shares. With this fresh capital infusion the total capital base of the bank at the end of 3Q2017 was Rs. 7.1 b. 

With the growth plans in the pipeline, the management is confident in achieving CBSL’s new minimum capital threshold of Rs. 7.5 b set for LSBs by the end of 2018.  At the end of 3Q2017, the bank’s common equity tier – 1 capital ratio and Tier – 1 capital ratio stood at 12.02% where the total capital ratio stood at 14.25%, which is well above the statutory minimum of 5.75%, 7.25% and 11.25% respectively.

With these new partnerships bank is now focusing on increasing operational efficiencies through financial technology (Fintech). The management believes this will enable bank to increase its penetration into untapped market segments across the country.  

Commenting on the success in 9MCY2017, the SDB Chief Executive Officer Nimal C. Hapuarachchi added: “Over the years, we have been able to support a large number of individuals, households and communities across the country, to empower themselves from the grassroots level to a sustainable level of growth in the medium and long term through responsible financing. With the recently concluded capital infusion, bank is now poised to grow its loan book with Micro, Small and Medium (MSME) financial products, which is part of the backbone of the economy.” 

Hapuarachchi further mentioned the role of Fintech planned by the SDB in its future business model will bring in state-of-the-art experience to our customers. He also stated that the outlook of the bank is positive and he expects the bank to close the financial year with greater value creation to all its stakeholders.     

Speaking on the success, SANASA Development Bank PLC Chairperson M.S. Kiriwandeniya stated, “The support received from our shareholders has been immense and I am pleased to see the faith shown by them at this crucial juncture in the bank’s progress.”

“While we are gearing ourselves to step into the next level of service in the SME sector, we are also constantly keeping our pulse on the needs of our core clientele and improvising products to suit their needs and demands. In fact this key factor has been SDB’s core strength in the past and SDB will continue to serve our existing customer base to the fullest while reaching the doorsteps of the customers and enhancing service level through Fintech solutions, to future proof the bank,” the Chairperson added. 

She further thanked all the investors who participated in the recently concluded private placement amidst volatility in the capital markets, which enables SDB to drive the Bank towards growth and stability in 2018.