Message from the Chairman

“Moving on to the present, we see development banking as a continuing need for Sri Lankan businesses, at least in the medium-term, but with commercial banking as a necessary addition”

Dear Shareholders,

This year is special; it marks sixty years of DFCC Bank’s leadership in development finance. It is therefore fitting that I look back on some highlights of the Bank’s compelling story – a story of a pioneer that has ventured boldly where not many have gone before.

DFCC Bank is one of the oldest development banks in Asia. Its role is emblazoned in the mandate to ‘assist the promotion, establishment, expansion and modernisation of industrial, agricultural and commercial ventures and to encourage and promote participation of private capital, both domestic and foreign in such enterprises’.

Epitomising the phrase ‘much more than money’, our yardstick is not just the number of projects we have facilitated or the sums lent, but the role DFCC Bank has played in partnering trail blazing ventures and industry sectors. For example, a milestone was achieved in 1967 when the Bank financed Sri Lanka’s first beach resort hotel. The funding comprised both debt and equity, demonstrating our aptitude and appetite to partner with promoters in the risky start up stage. This project proved to be the forerunner to many more that heralded the launch of Sri Lanka’s tourism industry.

In the years that followed, the Bank partnered with entrepreneurs in several industries such as appliances, aquaculture, ceramics, food & beverages, garments, horticulture, packaging, plastics and rubber. Later on, it included technology-driven industries like mobile telecoms and renewable energy. In the late 1980s, Sri Lanka was the first South Asian nation to introduce cellular telecoms. DFCC Bank was part of this effort and funded the first mobile operator.

The Bank’s involvement in renewable energy is noteworthy. DFCC Bank financed, with both debt and equity, Sri Lanka’s first private sector grid-connected mini hydro power plant, which was commissioned in 1996. The success of this project was the catalyst for several others, and this subsector now supplies over 8% of the country’s electricity needs. DFCC Bank also assisted Sri Lanka’s first private sector wind power project, which has spurred other wind power projects leading to a total capacity addition of over 124 MW to the national grid. Underpinning such achievements were DFCC Bank’s administration of two highly acclaimed World Bank-assisted national projects that ran from 1997 to 2011, which addressed institutional, technological and regulatory barriers and mainstreamed private sector participation in renewable energy based power generation in Sri Lanka.

Sustainable development banking is anchored on profitability and balance sheet strength. DFCC Bank (then Development Finance Corporation of Ceylon) commenced business in 1955 with an equity capital of LKR eight million and an interest free government loan of LKR 16 million. As at 31 March 2015, that equity capital stood at LKR 48 billion, which together with total borrowings of LKR 69 billion, support a diversified loan portfolio and a pool of other assets. Net profit after tax, which first exceeded LKR one billion in 2004, quadrupled within the past decade to LKR 4.4 billion in the period under review. Gross dividend paid, which was LKR 316 million in 2005, will almost touch LKR 1.6 billion in 2015.

Over time, the Bank evolved, changing to suit new realities. From the 1990s, DFCC Bank embarked on a journey of transformation into becoming a financial services group, which culminated with the acquisition of a commercial banking business in 2003. Accordingly, the last decade witnessed a realignment of the Bank’s business processes with the birth of the DFCC Banking Business, made up of the development banking business of DFCC Bank and the commercial banking business of its 99.17% - owned subsidiary, DFCC Vardhana Bank. This unique model provides the diversification required for a more prudent balance of risk and return.

Moving on to the present, we see development banking as a continuing need for Sri Lankan businesses, at least in the medium-term, but with commercial banking as a necessary addition. In this context, the conversion of DFCC Bank to a company incorporated under the Companies Act in terms of the DFCC Bank (Repeal and Consequential Provisions) Act No. 39 of 2014 will not only permit the Bank to carry on its business as a licensed specialised bank without interruption, but also enable it to consider various options in evolving to a Full-Service Bank. As we have already advised stakeholders, the Memorandum of Understanding (MoU) executed between DFCC Bank, DFCC Vardhana Bank and National Development Bank with regard to an amalgamation of the three entities has been terminated. The termination gives the banks freedom to pursue their respective strategies without being restricted by the provisions of the MoU.

In this scenario, one obvious option is to formalise the present operational merger that constitutes the DFCC Banking Business through a legal merger of DFCC Bank and DFCC Vardhana Bank. Accordingly, the Boards of the two banks have decided that it would be in the best interests of both institutions, their shareholders and other stakeholders to amalgamate both entities and continue their activities as a single legal entity in the form of a licensed commercial bank. Provisional approval for this course of action has been sought from the Central Bank of Sri Lanka upon receipt of which, the two banks will take steps to complete the amalgamation, including obtaining shareholder approval. In this context, I wish to reassure our stakeholders that while embracing the Full-Service Banking model, we will not lose sight of DFCC Bank’s development banking mandate on which it was founded 60 years ago.

I would like to conclude on a note of appreciation. The DFCC Banking Business team deserves very special commendation for the dedication and commitment they have displayed to achieve the results presented in this report, during a year in which attention was often diverted to the DFCC–NDB merger discussions and market conditions were challenging. Our other subsidiaries and joint venture in the DFCC Bank Group also contributed well and I thank the respective CEOs and their teams.

In our sixtieth year, the relationships built with our customers remain as strong as ever and we re-dedicate ourselves to their service and remain committed to strengthening their businesses.

The support and cooperation of the officials at the Ministry of Finance and the Central Bank of Sri Lanka are gratefully acknowledged.

The contribution of my colleagues on the Board has been invaluable and I gratefully acknowledge their dedication and devotion to the Bank’s cause. Dr Chandradasa and Mr Thambiayah left the Board in January and March 2015 respectively, while Mr Perumal left in April 2015. I thank them for the guidance they provided to the Board throughout their tenures. I warmly welcome Mr Thiyagarajah Dharmarajah who joined the Board in July 2014, Ms Shibani Thambiayah and Mr Krishantha Cooray, both of whom joined in March 2015 and Mr Ananda Atukorala who joined in April 2015. I am sure the skills and experience in their respective fields, which they bring to the table, will strengthen the Board and contribute significantly to its deliberations and decisions.

On behalf of the Board, I assure all our shareholders that we are committed to achieving superior levels of performance benchmarked against the industry and will strive to further enhance the value of your shareholding. The Board has recommended a first and final dividend of LKR 6.00 per share, which is higher than the LKR 5.50 paid in the previous year.

I have reflected on the past and touched on the present. The future is ours to mould. Our achievements represent a noteworthy contribution to Sri Lanka’s development and we have stayed true to our mandate. DFCC Bank is, and always will be, concerned with ‘much more than money’.

C R Jansz

 15 May 2015