DFCC ups recurrent 1H after tax profit by 40% to Rs. 1.24 b

DFCC Group has posted a Rs. 1.25 billion consolidated after tax profit on a recurrent basis in the first half of the 2012 financial year, up by 40% over the corresponding period of last year.

The Bank announced that Group recorded a consolidated profit after tax of Rs. 1,249 m for the half year ended 30 September 2011 (current period) compared with Rs. 3,892 m in the corresponding period of the previous year (comparable period).

This profit for the comparable period included a one-off gain of Rs. 3,001 m from the disposal of part of the equity stake in Commercial Bank of Ceylon PLC (CBC). Rs. 2,921 m of this gain was in the first quarter and Rs. 80 m was recorded in the second quarter of the comparable period. After adjusting for this one-off gain, the consolidated profit after tax recorded an increase of 40% from Rs. 891 m to Rs. 1,249 m.

Apart from the banking business, the investment banking joint venture, Acuity Partners (Pvt) Ltd., made a significantly higher contribution of Rs. 84 m to consolidated profit compared with Rs. 42 m in the comparable period. The stock broking business recorded strong growth and Acuity also managed several successful private placements and IPOs.

Chief Executive Officer Nihal Fonseka said total loans and advances increased from Rs. 54 billion on 30 September 2010 to Rs. 74 billion on 30 September 2011 an increase of 37% year on year with much of the increase being recorded during the current period.

However, the high level of liquidity in the banking system that prevailed for most of the current period resulted in intense competition and interest spread was under pressure.

This caused net interest income of DFCC Banking Business (DBB) to record a 9% decline from the comparable period to Rs. 2,244 m in the current period. DVB’s initiatives to diversify its product range and market segments were successful with strong growth in pawning complementing the growth in corporate credit. In the case of DFCC the undisbursed approvals on 30 September 2011 were Rs. 16 billion, compared to Rs. 14 billion on 31 March 2011.

Non-interest income of DBB was Rs. 605 m in the current period, 33% lower than the comparable period. However, most of the constituent items of income comprising non-interest income increased in the current period.

The final dividend for 2009 was approved by CBC shareholders in April 2010 whereas the final dividend for 2010 was approved in March 2011, i.e. comparable period included the final dividend of 2009 amounting to Rs. 246 m while the current period did not.

Furthermore the market conditions in the current period resulted in a significant reduction in marked to market gains in debt and equity instruments in the trading portfolio.

The adverse impact of these factors was partly offset by capital gains realised on sale of mature equity investments and significant increase in the fee and commission income of the commercial banking business of DVB to Rs. 240 m an increase of 51% over Rs. 159 m in the comparable period.

The DBB continued to improve the quality of the credit portfolio and collect overdue amounts from delinquent accounts. As a result, the cumulative recoveries in the current period were Rs. 264 m with a significant reduction in the specific provisions made in the current period. The specific provision in the current period was Rs. 286 m compared to Rs. 779 m in the comparable period. The gross non performing loan ratio which reduced from 12% in June 2010 to 6.6% in March 2011 reduced further to 5.8% in September 2011.

Operating expenses of the DBB increased by 18% in the current period to Rs. 1,267 m mainly due to expenses relating to expanding the distribution network and related head count increase. The recently opened branches are yet to break even and this contributed to the ratio of operating expenses to operating income to increase to 44% in the current period compared to 32% in the comparable period.DBB now has a distribution network of 144 branches and extension offices.

Due to these factors the profit before income tax of DBB of Rs. 1,439 m in the current period was marginally lower by 3.3% compared to Rs. 1,488 m in the comparable period, Fonseka said.

 “However DBB benefitted from the lower taxes that came into effect in the current financial year and consequently recorded Rs. 1,132 m as profit after tax in the current period which was an increase of 20% over the comparable period,” he added.

The banking business of the DFCC Group is undertaken by DFCC Bank (DFCC), a licensed specialised bank and 99 % owned subsidiary DFCC Vardhana Bank (DVB), a licensed commercial bank. As stated in the commentary on the first quarter results, both DFCC and DVB are functionally managed as one banking business with coordinated financial and operational strategies. Thus this commentary analyses the consolidated performance of the two banks as DFCC Banking Business (DBB).

A consolidated Income statement for DBB has been released to the Colombo Stock Exchange as supplementary financial information. This statement was derived from the interim financial statements with certain adjustments for ease of analysis.

These adjustments relate to excluding the one off exceptional profit in the comparable period referred to earlier and treating CBC as if it was not an associate company during the comparable period. Since the financial year of DVB ends in December, the accounts of DVB are consolidated with a three month lag.

Commenting on prudential indicators, DFCC Bank CEO said the capital adequacy and liquidity ratios continued to be well above the minimum stipulated by CBSL. Specific provision cover for the DBB was 76% without taking into account the value of collateral held and unprovided NPLs as a proportion of equity was under 7%. The current credit ratings assigned by Fitch are AA (lka) for DFCC and AA— (lka) for DVB with outlook stable for both banks.