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Sri Lanka’s fastest growing bank, Pan Asia Banking Corporation Plc, reported an after-tax profit of Rs. 353.4 million for its January-March quarter (1Q’17), recording an increase of 16% from the same period last year.
The performance was largely supported by a significant increase in fee and commission income, slightly lower tax liability and the closer tab kept on costs. However, core banking performance became subdued in response to the tighter credit conditions that remained throughout the period.
The bank’s earnings per share was Rs. 3.41 by the end of the 1Q ’17, slightly less than the Rs. 3.91 reported in the same period of 2016 due to the increase in the bank’s equity resulting from the Rs. 2.0 billion rights issue in March 2017 which was promptly oversubscribed.
Meanwhile, the income tax expense for the period came down by 12% to a little under Rs. 160 million for the quarter from a year ago as a result of effective tax management.
What is also notable is the fact that despite the new equity injection, the bank was able to maintain its Return on Equity (RoE) at 18.95%, which is among the highest in the industry, albeit slightly down from the 19.97% reported three months ago.
RoE is the mostly watched performance indicator to gauge the attractiveness of the banking sector and Pan Asia Bank during its last three years has consistently remained an outlier in the industry. This demonstrates the bank’s ability to generate robust performance, reporting higher quarterly earnings year-over-year, thus ensuring consistently higher returns for its shareholders.
In spite of the mounting pressure on banking sector margins as a whole, the bank was largely able to maintain its Net Interest Margin (NIM) at 3.79%, higher than the industry average of around 3.4% although slightly down from its December mark of 3.87%.
Speaking on the bank’s recent performance, the bank’s newly-appointed Director/Chief Executive Officer Nimal Tillekeratne said this performance was a true reflection of the bank’s ability to report consistently higher financial performance even amid challenging conditions.
“I am happy to announce our financial performance for the first quarter because the bank operated under less than favourable conditions such as rising interest rates, a slowdown in demand for new loans and a risk of new addition to non-performing loans.
“Early identification of market developments, management foresight and the proactive and prudent decision-making of the bank enabled us to generate superior financial performance even in tough times.
Now that we have proved that we can deliver even under trying conditions, I am very confident that Pan Asia Bank can continue to deliver exceptional performances exceeding stakeholder expectations,” Tillekeratne said in the earnings release.
Commenting further on the recent issue of rights, he stated that the bank could meet the minimum core capital requirement of Rs. 10 billion by the end of 2017 with the strong earnings forecast for the remainder of the year.
By the end of 31 March 2017, the bank had a core capital base of Rs. 8.7 billion and a total capital base of Rs. 10.5 billion.
Speaking on the future direction of the bank, he said: “We have developed our new three-year strategy with a clear focus on serving the diverse financial needs of Sri Lanka’s growing middle income class and also to uplift the Micro and Small and Medium Enterprises segment that are considered the lifeblood of Sri Lanka’s economy.
“We are currently rolling out these strategies with the guidance of the Board of Directors, an able management team and the efficient execution by all the staff members across our 83 branches spread across all parts of the island and I am confident Pan Asia Bank is now on its path to becoming a formidable mid-sized commercial bank in Sri Lanka.”
Core banking performance
The bank’s core banking performance was impacted by the tightening of monetary and fiscal conditions because higher interest rates and higher indirect taxes dampened the demand for new loans.
Although the interest income rose by a strong 36% to Rs. 3.89 billion from a year ago, the corresponding interest expense grew by an even higher 54% year-on-year (yoy) to Rs. 2.68 billion, resulting in Net Interest Income (NII) of Rs. 1.21 billion, a modest increase of 7% from a year earlier. This is mainly due to the fact that the rise in deposit rates outweighed the rise in lending rates as the bank had to offer attractive interest rates to mobilise deposits.
The low-cost deposit base measured by the Current and Savings Account (CASA) ratio also declined to 19.6% from 20.3% in December as mid-term deposits grew much faster.
Other income acted as an anchor
Net fee and commission income acted as an important anchor to guard against tightened NIIs as such income grew by a strong 63% yoy to Rs. 339.95 million.
This is predominantly due to credit-related fee income and partly due to the fee income from credit cards.
The bank will continue to explore all avenues to grow its fee and commission income base which will serve as a strong buffer against tightening margins.
The bank is now driving its trade finance portfolio with a renewed focus leveraging its unmatched service quality to the importer and exporter fraternity in the country.
Continued improvement in efficiency
As a result of productivity and efficiency enhancement activities pursued during the last four years, the bank was able to bring down its cost-to-income ratio - a key banking sector efficiency indicator - to 54.24% from 56.03% three months ago.
Meanwhile, return on assets also rose to 1.11% from 1.05% in December.
This is a significant achievement given the general increase in the prices of the economy as well as the recent increase in value added tax.
The staff cost rose by a little under 10%, mainly due to the increased salaries and other emoluments while the other expenses rose by 16% due to the generally increase in price levels and indirect taxes.
The bank is now on an aggressive staff rationalisation program which will see excess head office staff being redeployed to the branch network which will be expanded up to 100 within the next 18 months.
Further, the new management remains committed to streamlining the processes and workflow automation to increase efficiency in all processes to enhance cost savings, speed of deliver and service quality to deliver a better customer experience.
Stronger balance sheet
The bank’s total assets remained largely unchanged at Rs. 129.12 billion during the January-March quarter as growth in both loans and deposits slowed down in response to higher interest rates.
Both loans and advances and deposits grew by a little over Rs. 2.0 billion to Rs. 100.5 billion and Rs.93.8 billion respectively.
Meanwhile, both Tier I and Tier II capital adequacy ratios received a boost from the recent rights issue proceeds of Rs. 2.0 billion and by the end of 31 March 2017, the two ratios stood at 11.07% and 13.83% respectively, significantly up from 8.37% and 11.40% in December 2016.
With the strengthening of capital buffers the bank is now well positioned to expand its asset base much faster than before.
The asset quality came under slight pressure due to new additions to Non-Performing Loans (NPL) amid a slowdown in loans. Therefore the gross NPL ratio rose to 5.63% from 4.74% in December but the bank is confident that the ratio can be brought down with the appropriate strategies already in place.
With a fresh direction under its new CEO and the new strategic plan which in now in place, Pan Asia Bank is now well poised for robust growth during the next three years.
