When I began last year’s Review of Operations, I recall stating that even though challenges will continue, we will always have a response to those challenges. This is surely a strong hallmark of CDB and has always been the foundation to our Game Plan. Despite challenges, each year, CDB has posted results that have overcome challenges, enabling us to grasp opportunities and hone our strengths.
It is in this backdrop that I present to you the Operational Review for the year in which CDB has performed considerably well. We have responded admirably to those challenges, while the country meanwhile has set for itself an ambitious course, in which we are surely a part of that blueprint.
Sri Lanka in Perspective
The envisaged post war broader economic framework presented by the Central Bank of Sri Lanka (CBSL) shows that high growth, low inflation and low interest rates have been on a sustainable track, with inflation remaining at single digits for five consecutive years. Post war interest rates movements have been on a relatively narrow bandwidth and have been on a downward trend since the beginning 2013, dipping even lower to historically low levels.
Sri Lanka has done exceptionally well. GDP growth rebounded in 2013 recording a growth of 7.3% against the 6.3% recorded in 2012, a consolidation over the two previous years’ recorded growth of over 8%. However, this consolidation is necessary in the longer term as it creates a sustainable foundation for the country to grow and construct its development agenda upon.
A key challenge to the Banking and Financial Services sector has been the need to adapt and respond to fast-transforming market dynamics. Having experienced higher credit growth above 30% prior to 2012 due to accelerated post war growth, the credit ceiling imposed in 2012 saw definite curtailment of credit. However, when this ceiling was removed in December 2012, the anticipated credit growth did not materialise, remaining sluggish, despite interest rates remaining low. Having now gained some momentum albeit very slowly, the gradual upward slide should gather speed in the second half of 2014.
Numerous positives meanwhile have emerged in the macroeconomic environment, reflecting the country’s ability to achieve long term sustainable economic growth. Exports have seen a resurgence both qualitatively and quantitatively, gaining even stronger momentum in the first quarter of 2014. The tourism industry has continued to exceed its targets in arrivals, foreign exchange earnings and investment capacity, while remittances and inflows have also contributed strongly to adding fillip to the Balance of Payments and foreign reserves. In response to these, the banking and financial services sector has experienced an excess liquidity scenario in the short-term.
CDB has thus continued to be consistent in our performance delivery. Each promise we made last year, has been delivered, despite the fact that the macro milieu we have been operating in has been evolving and challenging. I must make special mention of our highly motivated team, a group of professional men and women for whom no challenge is insurmountable; in fact they thrive in an environment such as this, innovating new ideas, strengthening relationships and always seeking opportunities. It is their spirit and passion that allows me to present to you these noteworthy results this year.
Performance Optimised
Our Balance Sheet surpassed the milestone of Rs. 30 Bn, notched at Rs. 33.8 Bn reflecting a growth of 38%. On analysis, this figure posits that CDB has been growing at an average of Rs. 2.33 Bn in each quarter of this financial year. Our Loan Book inclined 32% recording Rs. 25.73 Bn at year end, while the deposit base also grew by 38%, to stand at Rs. 24.51 Bn. Total loan/lease approvals and disbursements during the FY 2013/14 was seen at Rs. 14.7 Bn and Rs. 12.9 Bn, reflecting an increase of 37% and 34% respectively. Capital funds moved upwards to Rs. 3.6 Bn, at a growth of 20.70%.
Gross Non-Performing Loans (NPL) increased to 5.19% and Net NPLs to 2.73%. This is undoubtedly lower than industry average, but given our spirit of always wanting to be better, the focus on improving our NPL position has been very strongly emphasised upon and continues to be so. One of the key factors impacting our NPL ratio has been the increase in the repossessed vehicle stock as a result of CDB changing our policy on the disposal of vehicles. We have now begun disposing vehicles through CDB Vehicle Sales Units (VSU) which function under our branch network, to attract better prices and more accessibility of these products to our customers. This was an initiative we began this financial year, seeing a pragmatic slowing down of disposals. The NPL ratio excluding the yard vehicle stock recorded 3.39% on gross basis and 0.84% on net.
Revenue recorded a growth of 42%, standing at Rs. 6.12 Bn. Net interest income is posted at Rs. 2.34 Bn at a growth of 38%. We are pleased that we have recorded a considerable 15% increase in Profit after Tax, to Rs. 561 Mn, amidst a substantially higher impairment charge of Rs. 339 Mn, which saw an increase of 163% and an incurred loss of Rs. 168 Mn on liquidated unredeemed gold articles. This has been mainly attributed to the impairment of pawning advances, which was negatively impacted when world gold prices saw unprecedented downwards spirals. This meant the impairment on pawning advances was much higher than envisaged initially, including reversal of accrued interest. Total charges to the income statement against gold advances amounts to Rs. 219 Mn, of which Rs. 51 Mn has been included under impairment charges, while Rs. 168 Mn has been charged under other income against incurred losses on disposal of gold articles.
Given the incertitude arising from the downward spiral in gold prices, CDB took an astute policy decision not to speculate on gold prices and accordingly, lapsed articles were liquidated. Our pawning portfolio encompassed only 5.25% of the loan book at the beginning of the period under review. We have already disposed of a majority of unredeemed articles and the remaining stock has been fully provided for, to reflect disposable market value. At present, we maintain our pawning business cautiously, offering the lowest advances in the market place, positioned on a risk averse foundation.
Our capital ratios remained strong, reflecting 12.61% and 16.00% in Tier I and Tier I & II, well above the regulatory requirement levels of 5% & 10%. Tier 2 has been buoyed with our first listed subordinate debenture issue for Rs. 1 Bn, which was oversubscribed within hours of being presented to the investing public.
A strong liquidity position is well evident with our liquidity ratio standing at 18.60% against the statutory requirement of 10%. As a result, an excess cash position of Rs. 1.9 Bn has been seen, which is way above the regulatory requirements. However, this has generated negative return and has gained the focus of our Treasury Committee, which is engaged in exploring avenues that would optimise returns and cost of funds.
Our asset liability maturity gap for which we adopt a focused strategy to narrow the ‘one year and less basket’ to 10%, has yielded positive results. The prevalent gap has narrowed to 13% as at end of this financial year.
Our cost to income ratio improved to 58.43% from 60.89% one year ago, setting us firmly on the path of achieving our set target of being below 50% within the next couple of years.
Our net interest Margin (NIM) reduced marginally from 8.28% to 8.05% during the year. We do expect our NIM to reduce further and correspondingly, to see asset quality reach higher levels. Return on Equity (ROE) is posted at 17.16% compared to 18.57% last year, attributed primarily to higher impairment charges and incurred losses due to gold backed advances. Net Asset Value (NAV) per share is recorded at Rs. 65.87, while Earnings Per Share (EPS) is Rs. 10.33 for the FY ended 31st March 2014.
“Our Balance Sheet surpassed the milestone of Rs. 30 Bn, notched at Rs. 33.8 Bn reflecting a growth of 38%. On analysis, this figure posits that CDB has been growing at an average of Rs. 2.33 Bn in each quarter of this financial year.”
Moving Beyond Quantitative Performance
Having always maintained a culture of caring and giving, our Game Plan has always collated our stakeholders as the axis to growing our business. Whether it is our team, valued business partners, shareholders, customers or the community, CDB forges and strengthens long term relationships with each of our stakeholders, engaging them in proactive dialogue to gain an insight on how our business impacts them.
While our customers are in continuous dialogue with our team as are our valued business partners and shareholders, we interact very closely with our community through our corporate responsibility initiatives, based on four primary projects. CDB Sisudiri, is the only dedicated scholarship scheme for children in families where the breadwinner is involved in the three wheeler sector, unique in its perspective and reaching out to a segment of micro entrepreneurs. The CDB IT Laboratory Project continues to present fully fledged IT laboratories to lesser privileged schools. This is an annual project and has seen CDB cover a total of 7 schools over 7 years. Our environmental initiatives, CDB Hithawathkam and Mihikathata Adaren creates awareness on the preservation and conservation of the environment.
However, our overarching CSR outlook hedges on the theme of uplifting the rural economy, which to us has immense potential in contributing significantly to the national economy. By being a proactive contributor and partner by providing access to finance to those who are most often not recognised by the formal banking system, we have brought a large segment of citizens under the singular umbrella of inclusive empowerment. This to us is truly CSR, where our initiatives are designed to have positive long term impacts on communities, which in turn construct and strengthen a sustainable economy.
The Financial Services Sector Looks Beyond
A massive transformation is deigned to take place in the financial services sector in the next few years with the implementation of the Financial Services Sector Master Plan for Consolidation. Announced by His Excellency the President in his budget speech as the Minister of Finance and later articulated by the Governor of the CBSL, this Master Plan augments the CBSL Roadmap 2014, reaching far beyond to construct a more long term foundation for the financial services sector.
In the Non-Bonking Financial Institution sector, the main thrust has been to consolidate the current 58 players into twenty by 2016. Some yardsticks have been presented by the CBSL in categorising Non-Banking Financial Institutions (NBFIs). For CDB, this process is pragmatic as since 2010, we have infused a complete transformation and structuring of our organisation, which would in retrospect, seem like we were preparing for such a consolidation.
| Name | CDB as at | CDB as at | CDB growth within four years |
CBSL Threshold |
| 31.03.2014 | 31.03.2010 | |||
| Total Asset | 33.8 Bn | 6.7 Bn | 5 times | 8 Bn |
| Capital Funds | 3.6 Bn | 512 Mn | 7 times | 1 Bn |
Despite the target date plan set by the Central Bank of Sri Lanka being a challenging one, given the complexity of a merger or an acquisition, CDB is committed to implement the set policies in consultation and under the guidance of the regulator, which is aimed at infusing strength and stability to the industry as a whole.
Where do we go from here?
There are numerous questions that are posed to us at various times and two which stand out are, Where are the growth avenues? How will you grow your Loan Book? Each of our strategies is based on long term planning and sustaining our business through change and transformation. Our Game Plan has always been to grow a segment of targeted stakeholders and not be everything to everybody. For example, we have focused on the growing middle class, the base of the pyramid and the rural economy. Having seen the paradigms as soon as the country saw an end to the war, we observed the economy expanding and thus per capita income improve. This would position more households to move upwards across both economic and social boundaries.
Taking just the example of the tourism industry, there will unequivocally be a positive impact across social boundaries and an impact on diverse sectors including construction, transportation, F&B and even human resource development, which herald multiple opportunities to and in all these sectors. When each of these sectors develop, communities develop and the cascading impact of improving lifestyles become tangible.
Another of our main accents is in entrepreneurial development, identifying and strengthening entrepreneurs who have the skill and knowledge but lack institutionalised support. We partner them in improving their ventures, imbibing them into an official framework and educating them on operating their businesses on long term strategies.
CDB’s strength and ability to deliver in a fast changing industry landscape lies in synchronising the diverse aspects we have worked upon in the past few years. By focusing on a strategic expansion of our distribution network, positioning strategy, brand building and marketing, technology platform, product offering, service standards, speed of delivery and consistent and exceptional financial results, we have undoubtedly constructed a Game Plan that is strong and sustainable. We have also been recognised for our culture of compliance, given that we continue to infuse best practices in corporate governance, ethics, transparency and accountability. Into this winning equation, we add strong stakeholder relationships which has helped us create a winning organisation that can surely succeed in an intensely competitive environment.
Recognition
Hence, it is this winning spirit that has given us a host of accolades since our inception and this year was no exception. Our emphasis on compliance and governance was well rewarded when CDB was awarded a Bronze at the Annual Report Awards organised by the Institute of Chartered Accountants of Sri Lanka, while last year’s Annual Report also gained a Silver at the 2012 Vision Awards organised by the League of American Communications Professionals (LACP). We are most honoured to have been ranked among the Top 50 in the Asia Pacific region.
It was indeed a privilege to us when our commitment to our team was recognised with a bronze award at the first SLITAD People Development Awards in Sri Lanka, organised by the Sri Lanka Institute for Training and Development, for our emphasis on people development. This ties in well with the efforts we infused into our marketing initiatives including image and brand building, resulting in the prestigious Award for Branding & Marketing Excellence at the fourth CMO Asia Awards, hosted by the World Brand Congress held in Singapore.
Appreciation
As mentioned in this review, I am very grateful to my extraordinary team for their dynamism, motivation and gung-ho attitude in meeting challenging and overcoming them. They have taken absolute ownership to CDB’s vision, believing unequivocally in its very foundations and have imbued their own brand of spirit, innovation and passion to take us ahead.
I’m most appreciative to the Chairman and the Board of Directors for their leadership and guidance, which has enabled me to steer CDB to newer heights amidst challenging circumstances. We have received immense support and guidance from the Governor of the Central Bank of Sri Lanka and the Director and the other officials of Department of Supervision of Non-Bank Financial Institutions for which I am very grateful. Their focus on ensuring vigilance, supervision and monitoring gives us a strong truss to maintain our culture of compliance and governance.
A heartfelt thank you to our customers and valued business partners, who continue to display immense confidence and loyalty to us, while our community too remains vital to ensuring that our Game Plan bears fruition.
W P C M Nanayakkara
Managing Director/Chief Executive Officer
2nd June 2014