COVID – 19 has had an unprecedented impact on both the local and global economy. After recovering during the 1st quarter of 2021, the Sri Lankan economy experienced renewed disruptions following the emergence of the third wave of the COVID – 19 pandemic which prompted the government to reimpose strict lockdowns in most parts of the country for an extended period of time. In a bid to safeguard the economy from the consequent challenges, Central Bank of Sri Lanka (CBSL), requested commercial and specialised Banks to extend the debt moratorium to affected businesses and individuals in addition to the moratorium already granted to tourism and passenger transportation sectors.
Acting in conformity with the directives of the CBSL, Sampath Bank took immediate steps to implement the Government mandated relief measures. The Bank also leveraged its well-developed IT platforms to operate the business seamlessly during the lockdown period while continuing to provide services via its branch network in strict conformity with the health guidelines issued by the authorities. The Bank will continue to take necessary measures to assist customers to overcome the challenges posed by the pandemic.
Sampath Bank’s diversified and resilient business model proved to be valuable in navigating through the current macro-economic environment and has ensured a positive development on the bottom line of the Bank while ensuring the safety and well-being of the staff and customers during this turbulent time.
Financial results of Sampath Bank for the 1st Half of 2021:
Sampath Bank posted a profit after tax (PAT) of Rs 7 Bn for the first half of 2021, against Rs 3.9 Bn for the same period in 2020. This significant increase of 78.1% in profit after tax was the result of a 16.7% increase in total operating income coupled with strict cost controls and other innovative efforts implemented by the management. Considering the impact and uncertainty created by COVID 19 in the 1H 2020, the Bank provided a sufficient amount of impairment provision in that period. Since the Bank brought forward a sizable buffer of impairment provision from 2020, it did not require similar provisioning in 1H 2021.
As a result of the growth recorded in PAT, the return on Average shareholders’ Equity (ROE) increased by 533 bps to 12.91% as at 30th June 2021 compared to 7.58% reported at the end of the year 2020. In the meantime, Return on Average Assets (ROA) also increased to 1.67% as at 30th June 2021 against the 1.09% reported for the year 2020.
The Bank recorded a PBT of Rs 9.5 Bn for the first half of 2021 compared to Rs 5.3 Bn reported during the corresponding period in the previous year, denoting a growth of 79.3%. Driven by strong performance recorded by the Bank, in the first six months of 2021, the Sampath Group too posted significant growth, with Group PBT and PAT growing by 86.1% and 88.2% respectively over the figures reported for the corresponding period. In the period under review, the Group recorded a PBT of Rs 10.1 Bn and PAT of Rs 7.5 Bn compared to the PBT of Rs 5.4 Bn and PAT of Rs 3.9 Bn recorded in the corresponding period.
Key areas impacted on the bottom line
- Sampath Bank’s NIM for the period under review was 3.42% an improvement of 12 bps compared to the figure reported at the end of 2020 and by 7 bps over the figure reported for Q1 2021.
- Despite the improvement reported in NPL and Stage 3 loans, additional impairment provisions were charged as an allowance for a management overlay, as a buffer to cover potential
The Bank’s Net interest income for the period under review was Rs 19.2 Bn compared to the Rs 17.4 Bn reported for the corresponding period in the previous year, reflecting an increase of 10.4%. Although interest income declined by 9.1%, it was compensated by the decrease recorded in interest expenses, enabling the Bank to record a growth in NII. The Pandemic induced uncertainty and the global economic recession prevented the businesses and individuals from investing in new projects and business opportunities, which in turn created a lower demand for credit. The lower demand for credit and the low interest rate regime are the main reasons for the 9.1% drop in interest income. The interest income of the Bank stood at Rs 41.9 Bn compared to Rs 46.2 Bn recorded for the corresponding period.
Meanwhile, owing to the prudent fund management strategies, Sampath Bank was able to re-price its liability products in line with the prevailing lower interest rates. Timely re-pricing helped the Bank to register a decline in interest expenses. Interest expenses dropped by 21% to Rs 22.7 Bn in the first half of 2021 from Rs 28.7 Bn recorded for the same period in the previous year. This helped to boost the Bank’s NIM to 3.42% as of 30th June 2021, which is 12 bps higher compared to the figure recorded at the end of 2020.
Net fee and commission income (NFCI) recorded a growth of 33.5% from the figure reported in the corresponding period of the previous year. This segment comprises income from various sources such as credit, card, trade, and electronic channels. Growth in this segment was driven mainly by card-related activities. Comparatively higher business activities in Sri Lanka during the first half of 2021, was the main reason for the increase in card-related commission income.
Net other operating income increased by 27.9% in the first half of 2021 compared to the corresponding period in the previous year. This growth was mainly backed by the increase in realized exchange income stemming from the 7.5% depreciation of the Sri Lankan Rupee against the US Dollar. During the first six months of 2021, the Bank recorded Rs 3.3 Bn as net other operating income compared to Rs 2.6 Bn reported in 1H 2020. The Bank recorded a Net trading income of Rs 46.3 Mn in the period under review, compared to the Rs 106.5 Mn loss registered in the corresponding period of the previous financial year. On this basis, the Bank’s net exchange income from foreign exchange transactions amounted to Rs 3 Bn for the period under review.
Operating expenses, which stood at Rs 9.5 Bn during 1H 2020, increased to Rs 10.9 Bn during the period under review, reflecting a YoY increase of 14.7%. Meanwhile, the Bank’s Cost-to-Income ratio (excluding taxes on financial services) decreased marginally to 39.5% in the first six months of 2021, from 40.2% reported for the corresponding period in 2020. This was largely due to the strict controls and other innovative efforts implemented by the Management to contain other operating expenses.
The impairment charge for the period under review dropped by 32.8% compared to the first half of the year 2020 to reach Rs 4.9 Bn by the end of the period under review. Even though the impairment charges decreased compared to the first half of the last year, this did not include reversals of any impairment provision made in the previous year.
The Bank provided a sizable amount of impairment provision during the first half of 2020, after considering the impact and uncertainty created by COVID 19 on the economic front during that time. Since then, the Bank has adopted a consistent approach to ensure impairment provisioning is in line with any potential abnormal credit behaviors of customers after the end of the moratoriums. Despite signs of an economic recovery apparent in Q1 2021, the Bank decided to continue with its prudent approach for impairment provisioning based on the same assumptions applied at the end of 2020. Following a reassessment of these assumptions, the Bank decided to apply an even more prudent approach in Q2 2021, in light of the evolving impact of COVID 19 third wave and the extension of the moratorium framework.
Accordingly, during the quarter under review, the Bank identified a larger number of customers deemed to be operating in elevated risk industries and reclassified them under a higher credit risk category (stage 2). The additional impairment provision recognized by way of an allowance for overlay as at 31st December 2020, was also further increased during the quarter against the potential losses after the conclusion of the moratoriums. As a result, cumulative impairment provision against stage 1 loans and Stage 2 loans increased by Rs 0.9 Bn and Rs 4.5 Bn, respectively in the period under review, from the figures reported at the end of 2020. Meanwhile, Stage 3 loans (net of stage 3 impairment) as a percentage of total loans and SLFRS 9 based stage 3 provision coverage ratios stood at 4.42% and 40.71% respectively for the period under review.
The Bank continued to recognise the impairment provisions on foreign currency-denominated government instruments by applying the LGD rate of 20%.
Capital ratios and requirements
The Bank maintained all capital ratios well above the regulatory requirements at the end of Q2 2021. At the end of June 2021, the Bank’s CET 1, Tier 1 and total capital ratios were at 12.45%, 12.45% and 15.83% respectively. Meanwhile, the same ratios stood at 13.44%, 13.44% and 16.41% respectively at the end of 2020. The movement in the total capital ratio during the first half of 2021 was driven mainly by an increase in the total risk-weighted assets and dividends paid for 2020. The impact was partly countered by the successful debenture issue in April 2021.
Funding and Liquidity
During the first half of 2021, the Bank raised Rs 6 Bn worth of Tier 2 capital via a Basel III compliant, listed, rated, unsecured, subordinated, redeemable 7-year debentures with a non-viability conversion. Strong investor confidence in Sampath Bank played a vital role in the successful conclusion of the debenture issue.
Sampath Bank’s liquidity position remained strong, with the liquidity coverage ratio confirming that the Bank has sufficient liquidity buffers in line with regulatory requirements. At 203.38%, the Bank’s liquidity coverage ratio (all currency) as at 30th June 2021 stood well above the regulatory requirement of 90%. Similarly, the statutory liquid asset ratio of the domestic and off-shore banking units as at 30th June 2021 was 35.08% and 32.12% respectively, which were also well above the regulatory requirement of 20%.
The net stable funding ratio of the Bank stood at 146.51% at the end of Q2 2021, indicative of the fact that the Bank is comfortably adhering to the regulatory requirement of 90%.
Deposits and Advances
Net loans and advances increased by 8.4% (annualized) in the period under review, compared to the figure reported at the end of 2020. At the end of 30th June 2021, the Bank’s gross Advance portfolio stood at Rs 794 Bn compared to Rs 759 Bn as at 31st December 2020. Consequently, Sampath Bank’s total Asset base increased to Rs 1.17 Tn at the end of the second quarter of 2021 from Rs 1.11 Tn recorded at the end of last year.
Meanwhile, the Bank’s Deposit base recorded a growth of 13.2% (annualized) from the level reported at the end of 2020. The total Deposit base at the end of Q2 2021 stood at Rs 945 Bn compared to Rs 887 Bn reported at the end of 2020.
“Success is not final; failure is not fatal: it is the courage to continue that counts.” – Winston Churchill