DFCC Bank records modest growth

DFCC Bank has achieved a modest growth of 3 percent in post-tax profit for the 2008/09 financial year ended March 31, 2009 due to proactive measures taken by the Bank to maintain profitability and a high level of liquidity, despite the challenging economic environment.

The unconsolidated profit after tax of the Bank in the year under review (2008/09) was Rs. 1,360 million - a 3 percent increase over Rs. 1,318 million in the previous financial year.

Against the backdrop of discriminatory higher taxation in the form of financial services VAT, DFCC Bank was able to post an operating profit of Rs. 2,563 million before financial services VAT and income tax. This translated into a 6 percent increase over Rs. 2,418 million in the previous year.

This 6 percent increase was reduced to 3 percent at the post tax profit level due to the higher burden of taxes.

The proactive measures adopted by DFCC Bank to maintain profitability and a high level of liquidity, included maintenance of net interest income margin, diversification of other income sources, containment of personnel cost, containment of other operating expenses and maintenance of solvency. Net interest income of Rs. 2,905 million in the current year (2008/09) was a 9 percent increase over Rs. 2,676 million in the previous year despite the contraction in credit portfolio. This was achieved by a higher investment in high yielding Government securities.

Although the DFCC Bank posted a 3 percent profit after tax, the Group profit after tax of Rs. 2,068 million in the year under review saw an 8 percent decline over the previous year. The primary reason for this decline was the one off loss by Lanka Ventures PLC (LVL) due to additional income tax expense in relation to previous years, which crystallized as a liability in the current year.

This was due to the company's appeal against the assessment in the Court of Appeal being decided in favour of the revenue authorities and a subsequent settlement reached in the appeal made to the Supreme Court. As a result, LVL which posted a Rs. 50 million profit after tax in the current year, ended up with a post tax loss of Rs. 91 million compared to post tax profit of Rs. 80 million in the previous year; a net change of Rs. 171 million.

The adverse macro situation and the resulting slowdown in project investment took its toll on DFCC's core business of financing capital assets. At the same time, the Bank was mindful of the increasing stress on the cash flows and debt servicing capacity of customers, both existing and new, and the focus was proactively shifted from growing the lending portfolio to managing its quality, DFCC Chairman, J. M. S. Brito commented. At the Group level, the dip in profits reported by DFCC Vardhana Bank (DVB) reflected the increased level of provisioning for non-performing assets. Costs were also incurred as part of a strategy to invest in the expansion of its distribution network. This investment will duly bear a commensurate return and enable DVB to increase its future contribution to Group profit, he noted. "During the year, much effort was directed towards the areas of risk management and corporate governance", Brito underscored. "The year under review was one of immense challenges not only for the banking and financial sectors in Sri Lanka but also for the economy in general", DFCC Bank's Chief Executive Nihal Fonseka said.