Chief Executive’s Review

“All in all, the outcome was a record performance by DBB with operating income before VAT and NBT growing 33% to LKR 6.1 billion from LKR 4.6 billion and profit after tax up 38% to LKR 4.4 billion from LKR 3.2 billion”

Our DFCC Banking Business (DBB) model is one that is based on an operational merger between DFCC Bank’s development banking business and DFCC Vardhana Bank’s commercial banking business. The robustness of this model, which has been in place since 2003, was clearly demonstrated by its strong performance during the period under review. In reviewing its performance, I would like to draw a parallel with equity and fixed income markets where more often than not, one market’s inferior performance is mitigated by the other’s superior performance. In a nutshell, this was the story of DBB’s fortunes in FY 2015, where the decrease in the core income was more than compensated for by the increase in ancillary income.

The defining characteristic of the period under review was the decline in interest rates. While interest rate movements are a typical feature of well-functioning financial markets, unusually, for various reasons peculiar to the domestic market, the drop in on-lending interest rates outpaced that of benchmark deposit and savings rates, and that led to a contraction in net interest margins. DBB’s challenge therefore was to post a strong performance notwithstanding the fact that its core business income was likely to come under some pressure. This is because DBB’s funding is to a great part obtained from long-term sources where the repricing lags behind downward movements in market rates. With proactive planning, our response was to consciously grow the loan book whereby the increased interest income would compensate for the narrowed interest margin. In tandem, the concerted push in the commercial banking business saw additional fee income from trade finance and commercial banking services. DBB also tapped other income sources, which included capital gains from sales of matured investments and fee income from overseas consultancy assignments.

Another key factor that contributed to the improvement in overall performance was stringent cost management, which contained the rise in operating costs resulting from the increases in head count and branches and the charge for Nation Building Tax. Additionally, DBB continues to harvest the rewards from an Organisational Improvement Effectiveness Programme, and has consistently maintained one of the lowest cost to income ratios in the banking sector.

All in all, the outcome was a record performance by DBB with operating income before VAT and NBT growing 33% to LKR 6.1 billion from LKR 4.6 billion and profit after tax up 38% to LKR 4.4 billion from LKR 3.2 billion. Meanwhile, total Group assets surpassed the LKR 200 billion mark, rising to LKR 211 billion from LKR 175 billion. Other subsidiaries in the DFCC Bank Group - Lanka Industrial Estates and Synapsys and the joint venture - Acuity Partners, also reported good results and contributed well to the Group’s performance.

I would also like to comment on the landmark issue by DFCC Bank in August 2014 of LKR Five billion in senior, unsecured redeemable rated debentures. This was the first debenture to be issued to the market bearing a single digit coupon rate, despite which the issue was three times oversubscribed on the first day itself. This speaks volumes for DFCC Bank’s standing in the market.

During calendar year 2015 three events with great bearing on DBB’s business model took place, as elaborated in the Chairman’s Message. To summarise, (i) DFCC Bank was incorporated under the Companies Act as a public company listed in the Colombo Stock Exchange with the name ‘DFCC Bank PLC’; (ii) the proposed merger of DFCC Bank, DFCC Vardhana Bank and National Development Bank was terminated; and (iii) the Boards of DFCC Bank and DFCC Vardhana Bank decided to pursue the legal amalgamation of both entities, subject to regulatory and shareholder approval. These will lead to the transformation of DFCC Bank’s business model to that of a Full-Service Bank, but without any dilution of DFCC Bank’s core business of development banking.

My sincere thanks and deepest appreciation go out to the various stakeholders of DBB, particularly our customers. It is their steadfast loyalty and continued patronage that has underpinned DBB’s fortunes through the years.

I gratefully acknowledge the cooperation extended by officials of the Central Bank of Sri Lanka, the Ministry of Finance and other Government agencies. I also thank the various bilateral and multilateral lending institutions, the investors in our bonds and debentures and depositors for the confidence that they have displayed in DBB.

A special note of appreciation goes to the DBB Team. Even while being involved in the now terminated amalgamation process with NDB Bank, they did not allow themselves to be distracted from seeking to achieve the lofty and challenging targets set for DBB. This Team is the bedrock and the heart and soul of DBB.

In conclusion, the fact that DFCC Bank is now a Public Limited Company has great bearing in the present context. The year 2015 marks the sixtieth anniversary of our development banking business. As a Diamond Anniversary, it signifies a new phase – a phase that is exemplified by the evolving character of DFCC Bank and the DFCC Banking Business. Diamond is renowned as a material with superlative physical qualities, most of which originate from the strong bonding between its atoms. It is formed over time under pressure and high temperatures and is the hardest known substance on Earth. It can be shaped into a myriad of facets. A likewise process is taking place in the evolution of the DFCC Banking Business.

The proposed amalgamation of the two legal entities - DFCC Bank and DFCC Vardhana Bank - will, through synergies and other means, realise a value creation greater than that of the sum of the two parts. It will enable a more effective utilisation of capital and level the playing field when it comes to resource mobilisation. It will also facilitate a fully seamless functioning in all operational areas. Above all, there will be no loss of focus on DFCC’s development banking mandate, but rather, it will remain at the core of DBB’s Full-Service Banking Business model.

The final facet of the diamond will thus be fashioned to create the perfect stone. And, as the adage goes, ‘a diamond is forever’.

Arjun Fernando
Chief Executive

15 May 2015