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| Chairman Ronald C. Perera PC (left) and General Manager/CEO W.P. Russel Fonseka
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The Bank of Ceylon said yesterday that it strengthened industry leadership position in FY22 amidst challenges.
The Bank has reported Rs. 32 billion Profit After Tax (PAT) for the year ended 31 December 2022 despite of many headwinds caused by the never experienced economic and operational environment prevailed during the year, BOC said in a statement.
It said despite of never experienced economic and operating environmental challenges prevailed, the net interest income grew by 13.6% to Rs. 126.3 billion contributing 71% to total operating income.
The increase in interest rates in line with the upsurge in policy rates and materialising the volume growth resulted 61% growth in interest from loans and advances which denotes 68% of total interest income. Interest income from investments boomed up YoY to Rs. 146.0 billion and the major portion of it derived through Treasury Bills and Bonds.
The upsurge in deposit rates increased the cost of funding, YoY interest expense hiked by 121% and as considerable portion of FDs are reprised by now, during the latter part of this year interest expense moved up by nearly threefold than previous year.
Non- Fund Based Income
As rupee depreciation is around 81% for the period, net exchange gains derived through trading activities and currency conversion represents considerable portion in non-fund based income amounting to Rs. 32.9 billion.
Similarly, net fee and commission income also contributed Rs. 16.4 billion with 15% growth as business operations are now normalised and increased number of retail transactions and trade financing activities caused in improvement in related fee income.
As conducive environment was not prevailed in the Share market activities during the year the mark to market losses of Rs. 804.4 million was resulted from equity and unit trust portfolio. However, through trading of equity and Government security the Bank was able to gain Rs. 861.3 million.
Impairment Charges for Loans and Advances and Other Financial Instruments
From January 2022 onwards, impairment provision for loans and advances and investment were provided in compliance with CBSL Directions No.13 and 14 of 2021 on Classification, Recognition and Measurement of Credit Facilities and Financial Assets.
Thus, the impairment provision for loans and advances and financial investments were calculated to capture the expected losses associated with the customers or the investment instruments based on the possible consequences in current economic conditions, sector specific risk factors, new policy reforms, present negotiations in foreign and local debt settlements by the Government.
Management overlays were applied to identify the risk elevated industries which results the significant increase in credit risk due to spillover of economic turmoil prevailing the country and exposures to those industries were assessed as underperforming to account for life time credit loss on prudent basis.
Further, the Economic Factor Adjustment (EFA) which is used in calculating the expected losses for collectively assessed portfolios were enhanced by capturing the stressed economic condition prevailed at present.
Nevertheless, the Individually Significant Customers (ISL customers) were also assessed critically given the high degree of uncertainty and extraordinary circumstances in the short-term and mid-term economic conditions mainly caused by the continuous disruptions to businesses and prudent level of ISL impairment provision were made.
The impairment provision made to compensate the ECL from loans and advances amounted to Rs. 70.7 billion during the year ended 31 December 2022. Consequently, the gross loans to impairment provision reserve ratio stood at 10% against the 6% reported by end 2021.
By considering the negotiation plans are being in the discussion table for the settlement of foreign and local sovereign debt the Bank set aside a considerable level of impairment provision for its investments in International Sovereign Bonds and Sri Lanka Development Bonds.
Operating Expenses
No exceptions, the cost escalation is experienced by the Bank too during the period under concern. The operating expenses of Rs. 47.3 billion mainly consists of personnel costs, assets maintenance expenses, deposit insurance and other overhead expenses.
13.5% YoY increase in operating expenses represents mostly from escalations in personnel cost in line with comforting the Bank’s human resource against increase in cost of living. However, amidst double digit inflation the Bank’s effective cost controlling ways and means managed the increase in other expenses below 12%.
Profit
During the year the Bank’s main focus was aligned to strengthen the balance sheet and supporting customers to regain the unprecedented challenges they faced due to economic turmoil. The Bank compromised its net interest income growth to 14% and reported the PBT of Rs. 31.0 billion with 28% decrease over the previous year.
VAT on financial services for the year increased by 22% to Rs.11.0 billion as the VAT rate increased from 15% to 18% w.e.f. 01.01.2022. The Bank paid Rs. 281.3 million to newly introduced Social Security Contribution Levy of 2.5% during the year while paying Rs. 6.7 billion as the Surcharge tax imposed as on-off tax charge during the year.
Deferred tax adjustment of Rs. 14.5 billion was made during the year mainly due to deferred tax booked on specific provision made on foreign currency denominated sovereign instruments, loans and advances and adjustment made on current tax rate in line with increase of income tax rate from 24% to 30%. Accordingly, the Bank accounted a tax reversal of Rs. 995.8 million resulting Profit After Tax of Rs. 32.0 billion.
Financial Position
Loans and Advances
During the period the Bank’s total assets grew by 14% and reached to Rs. 4.3 trillion, preserving its industry leadership. The key contributory factor is growth in investment book which denotes about 37% of the assets of the Bank. During the year 2022 lending to private sector grew by 10% and the Bank continued to extend its support towards business revival.
However, the total gross loans and advances showed only a marginal growth of Rs. 8 billion due to reduction in lending to direct Government and major SOEs by considerable amount during the year. Net loans and advances showed a decline of 4%, showing the Bank’s prudent approach of making provision for credit losses as part of strengthening the Balance Sheet in order to safeguard from the possible future shocks. The Bank wishes to reverse these provisions back to profit after materialising its future recovery strategies.
BOC Chairman Ronald C. Perera said: “As a systematically important bank and the largest bank in the industry, BOC has the responsibility to support the stability of the banking system and as well as the well-being of its customers. In this economic turmoil condition even if a small player in the system flops it has a spill over impact to the entire system by disturbing the functionality of entire economy. Therefore, as Bankers to the Nation we have to ensure our customers are looked after in their needy times. That’s why we focused more on maintaining the portfolio quality and with a view to addressing transforming of non-performing facilities in to hardcore level, the Bank setup a Business Revival unit during the year 2021 and continued to support the revival of the customers during the year 2022 too.
The Bank aggressively promotes this concept against the recovery culture and has been able to transfer Rs. 6.7 billion from non performing stage to performing. In this year more resources will be deployed to strengthen the Business Revival Unit and will be expand to province level in order to cater more customer base and inculcate this concept to the banking system.”
Deposit Base
The Bank’s deposit base during the year has increased to Rs. 3.3 trillion with a 16% growth. Due to high interest rate regime prevailed during the year more appetite extended for time deposits by increasing the local currency time deposit base to Rs. 1.6 trillion from Rs. 1.4 trillion.
The increase in time deposit base backed by higher interest rate and decrease in savings base resulted by higher cost of living caused the Current and Saving deposit (CASA) ratio to decrease from 36% to 29% during the year.
However, the Bank managed the liquidity position of the Bank by strategically handling its deposit base amidst the liquidity stress prevailed in the market.
Key Performance Indicators
Return on Assets (ROA) ratio of the Bank stood at 0.76% while reporting a 14.1% Return on Equity (ROE) ratio resulting a decline YoY as the bottom-line performance of this year is in low scale than previous year.
However, the Bank was able to maintain its Tier I Capital and Total Capital ratio at 12.4% and 15.4% respectively as of end December 2022, even though the increase in risk weighted assets with the rupee depreciation, payment of Rs. 6.7 billion surcharge tax which was deducted from retained earnings and rising stage III loans adversely impacted to the Bank’s Capital Adequacy Ratio (CAR).
Despite of cash flow deferments in loan instalments, the Bank was able to maintain a better trade -off between the liquid assets and its liabilities. All liquidity ratios were also maintained above the regulatory norms.
The Group Financial Statements comprise a consolidation of its nine subsidiaries and its interest in five associate companies. Being the parent company, Bank of Ceylon places the major role in the Group and denotes more than 99% of the Group’s assets base. For the year ended by 31 December 2022, Group has reported PBT of Rs. 31.1 billion.
The Bank’s strategic plan for the next three years was launched to the entire branch network on January 2023. The plan has more focus on excellence in customer service, credit quality, digital and virtual delivery channels, sustainable banking and building a high performing team. A greater surge was experienced in the customer adoption to digital channels during the pandemic and the Bank is ready with the required infrastructure to cater this growing demand, resulting an increase in the Bank’s digital and virtual transactions.
During the year 2022, Bank of Ceylon named as the No.1 Banking Brand for the 14th consecutive year by Brand Finance Lanka with the Brand value of Rs. 53.9 billion. BOC obtained the highest rank for a Sri Lankan bank in the Top 1,000 World Banks 2022 listing by the Banker magazine U.K. and adjudged at many renowned award ceremonies for its excellence in performance in digital platforms, Human Resource Management, Annual Report disclosures, sustainability, service providing, etc.
During the first week of February 2023 the Fitch Ratings upgraded the Long Term Foreign Currency Issuer Default Rating (IDR) of the Bank to ‘CC’ from ‘RD (Restricted Default)’ and Short Term IDR to ‘C’ from ‘RD’, the national rating of the Bank continued to rate at A(lka).
“With this rating upgrade, the Bank expects the international level activities of the Bank can be further expanded and trustworthiness to international counterparties has significantly increased. The Bank will be able to access external counter parties for Foreign Currency (FCY) financial at highly competitive rates” said the General Manager/ CEO of BOC, speaking to Daily ft. He further said that: “the Bank’s key focus in mid to long term is to offer high competitive rates with lower margin and cater for large volume of business by benefiting through economies of scale.”
