Sampath ends 3Q with group net profit up 51.7% to Rs.3.2 b

Tuesday, 1 November 2011 01:36 -     - {{hitsCtrl.values.hits}}

Sampath Bank Group, which consists of Sampath Bank and four subsidiary companies, continued its growth momentum in the first nine month period of 2011, by posting impressive results in all key areas over the same period last year.

The consolidated pre-tax profit of Rs. 4,670 m of the Group for the first nine months of 2011 was a growth of Rs. 1,458 m or 45.4 %, over the previous year’s pre-tax profit of Rs. 3,212 m, with Sampath Bank contributing bulk (94%) of the profit, as the main entity of the Group.

The post-tax profit of the Group for the first nine months of 2011 which amounted to Rs. 3,285 m, recorded a growth of Rs. 1,119 m or 51.7%, over the post-tax profit of Rs. 2,166 m for the same period last year. The tax benefits received as a result of reduced corporate tax rate (from 35.0% to 28.0%) helped to record this higher post-tax profit growth rate, than pre-tax profit growth rate in 2011.

The bank’s pre-tax profit of Rs. 4,406 m in the first nine months of 2011 reflected an increase of Rs. 1,413 m or 47.2% over the pre-tax profit of Rs. 2,993 m for the first nine months of 2010.             

The post-tax profit of the bank recorded a growth of 52.3% over the same period of last year, rising from Rs. 2,009 m in 2010 to Rs. 3,060 m in 2011. The above profit growth was achieved despite many challenges posed by external market forces and the expansion drive undertaken by the bank.

The mark to market losses in the first nine months of 2011, arising from the market price fluctuations on the equity and Treasury Bill investments held by the bank in the trading portfolio, amounted to Rs. 203.8 m, as against a net gain of Rs. 520.1 m from this source, in the corresponding period last year.

In addition, exchange gains arising from the foreign exchange transactions recorded a negative growth of Rs. 29 m, dropping from Rs. 521 m in the first nine months of 2010 to Rs. 492 m in the same period of 2011, largely due to volatile market conditions and continuous appreciation of the rupee against the dollar. The rupee appreciated against the dollar by Rs. 1.75 over the one year period, from Rs. 111.95 as at 30 September 2010 to Rs. 110.20 as at 30 September 2011.

Though the bank realised capital gains of Rs. 413.8 m by selling part of the scrip dividend shares received from Lanka Bangla Limited, it was a shortfall of Rs. 246.9 m, compared to Rs. 660.7 m realised in the first nine months of 2010 from the same source. However, the bank realised another capital gain of Rs. 364.6 m in 2011, by selling the Visa/Master shares held by the bank, which had been received free of charge a few years ago.

The net interest margin, which dropped from 5.08% in the first nine months of 2010 to 4.17% in 2011, eroded a substantial amount of growth in net interest income. Nevertheless, it was possible to achieve a growth of 4.0% in net interest income, aided by the remarkable growth recorded in the fund based operations of the bank, as evidenced by the growth rates of 25.5% and 38.3% achieved respectively in deposits and advances during the one year period ended 30 September 2011.

The drop in net interest margin in turn was mainly due to the return on interest earning assets not growing as compared to the increase in cost of funds on deposits and borrowings. However, the bank took effective strategies to improve the net interest margins and results are evidenced from the increase in net interest margin to 4.17% by September 2011, from 4.11 % in June 2011.

The expansion drive of the bank, which entailed the opening of 76 branches during the last two years and recruitment of over 768 staff to manage this expansion drive, coupled with the cost of annual wage increases given effect, caused an increase in the bank’s operating expenses, which amounted to Rs. 1,018.7 m or 21.5%. Nevertheless, the cost /net income ratio of the bank remained unchanged at 59.15% in 2011 from 59.15% in the 2010. This ratio is expected to undergo a natural drop, with these new branches raising business volumes in future.

Despite the above challenges, the bank was able to show a strong bottom line growth, due to the positive contributions from many other factors.

Supported by the increased economic activities in the market, the bank achieved a rapid growth in its lending activities, amounting to 38.3% during the one year period ended 30 September 2011 and 26.3% in the nine month period in 2011.

Though the declining lending rates eroded part of the interest revenue on this credit growth, it paved the way for generating a higher fee-based and commission income from sources directly linked to lending activities. Consequently, the fee-based and commission income of the bank recorded an impressive growth of Rs. 624 m or 43.2% in the nine month period 201l, over the same period in 2010.

As a result of the bank’s improved credit quality as reflected by the low NPL ratio of 2.77% on 30 September 2011 and the high provision cover of 88.89% achieved by the end of previous year, the requirement on specific provisioning was naturally low in 2011. Consequently, the charge on specific loan loss provisions amounted to Rs. 273 m in 2011, (even with an additional provision of Rs. 100 m included therein), as against Rs. 1,183 m made in the first nine month period in 2010, which too was inclusive of an additional provision of Rs. 837 m. These additional specific loan loss provisions were made in line with the bank’s policy of making such provisions against identified NPLs, disregarding the collateral held, aimed at improving the provision cover of the bank.

Based on the higher credit growth during the period, the bank had to provide Rs. 143 m as regulatory general provisions on performing loans in the first nine months of 2011. However, the effect was offset by a reversal of general provisions amounting to Rs. 268 m, resulting from the applicable rate being reduced from 0.9% to 0.6% at the end of 3Q 2011. Hence, it was a net reversal of Rs. 125 m, as against the charge of Rs. 142.7 m against the general provisions in the first nine months of 2010.

On the other hand, the bank was extremely successful in making recoveries against the NPLs. Consequently in 2011, it was possible to reverse the previous loan loss provisions made to the tune of Rs. 1,010.6 m of which Rs. 215 m was a single recovery, as against Rs. 1,034.6 m reversed in 2010, which figure too was boosted by two major recoveries of Rs. 331.9 m and Rs. 271 m made in 2010.

The impairment provision of Rs. 275.9 m, made in the previous year on account of the investment in the ordinary shares of Union Bank Colombo as instructed by CBSL, was reversed and taken to the profits of 2011, since the Union Bank shares are now listed on the Colombo Stock Exchange and traded at a premium above the cost.

The improved profits paved the way for most of the key financial ratios of the Bank to record significant improvements over the previous year.

Prudent lending practices which included the centralised credit model, effective post-sanctioning monitoring and intensified recovery efforts against the existing NPLs, resulted in reducing the bank’s NPLs both in absolute and percentage terms. The NPL volumes net of IIS which stood at Rs. 6,384.7 m as at 30 September 2010 were reduced to Rs. 4,480.4 m by Rs. 1,904.3 m or 29.83%. Similarly the NPL ratio of the bank was reduced substantially to 2.77% as at 30.09.2011, from 5.47% reported one year ago.

In addition, the bank’s net NPL/equity ratio (open credit exposure ratio) too was reduced to 4.97% as at 30 September 2011 from 16.43% as at 30 September 2010. Furthermore, almost all profit- based ratios of the bank such as ROA, ROE and EPS recorded significant improvements over the last year same period.

Sampath also remained as one of the well capitalised banks, with the Tier I capital adequacy ratio at 9.87% and the total capital adequacy ratio at 11.31% as at 30 September 2011, despite the higher credit growth of 38.3% recorded during the one year period ended 30 September 2011.

Total deposit and the total asset bases of the bank grew by 25.5% and 28.8% respectively during the one year period ended 30 September 2011. The growth rates in the two areas in 2011 which amounted to 19.4% and 22.6% respectively too were impressive, going by the industry’s current growth rates. In addition, the growth in customer advances has been phenomenal, with the advances volumes recording a significant growth of 38.3 % during the one year period ended 30 September 2011 and 26.3% in the nine month period ended September 2011.

Currently, Sampath Bank operates with a network of 199 branches and 248 ATMs. The opening of 40 new bank branches covering all part of the country during the year 2010 was a record in the banking history of Sri Lanka and this year up to now 28 new bank branches have been added, of which 10 branches were opened on a single day. Plans are underway to continue with the accelerated branch expansion program in the 4Q 2011 as well.

Further, the bank’s requests to setup subsidiaries in Merchant Bank and Life Insurance have been approved by the Central Bank of Sri Lanka.