The bank in 2011

With the aim of realising the vision, the Bank leveraged its business strategy during the year in such a way to consolidate its market position further while ensuring the sustainability of growth. At the beginning of the year, the Bank set very ambitious growth targets and achieved them through organic growth during the year. The Bank gained the competitive advantage through its financial strength as well as being the largest private sector Bank. Thus, Commercial Bank through its 92-year rich history has created a strong brand recall in the minds of Sri Lankan customers.

The Bank’s IT system and the IT structure act as a catalyst in devising its business strategy. In that process, the Bank adopted several IT-based initiatives to improve the customer service during the year. Upgrading of its core banking system (ICBS) to Version 9.0 is the most noteworthy IT development carried out during the year. In addition, the Bank rolled out the Oracle E Business Suite with its implementation for payments during the year. The Bank has tested and completed all preliminary work and intends to move into a comprehensive loan origination system from the beginning of 2012.

On the other hand, the Bank took several steps to improve the level of customer service during the year. The Bank conducted a customer satisfaction survey and several existing services were re-designed to improve the customer services delivery process and to ensure that customer defined service standards are met.

Bank Performance

Profitability

Amidst favourable macroeconomic environment, the Bank continued to focus on improving its performance during 2011. Overall business volumes recorded satisfactory growth while the Bank’s delivery points were further expanded during 2011. In terms of supporting the Bank’s strategy, we have enhanced our capital and maintained the liquidity position at healthy levels despite liquidity constraints in the market. Further, the Bank has remained focused on integrating risk management function to be more resilient and strong not only within the industry but also in the context of unstable market conditions overseas.

As anticipated, the Bank faced increased competition in 2011 but delivered substantially improved results in almost all segments in which the Bank operates. The pre-tax profit of the Bank increased to Rs. 10.99 Bn. in 2011 from Rs. 9.32 Bn. in 2010, a growth of 17.92% or Rs. 1.67 Bn. The main contributor to this pre-tax growth is net interest income, the principal source of income on fund based operations which reached Rs. 18.00 Bn. in 2011 from Rs. 16.42 Bn. in 2010 registering a growth of Rs. 1.58 Bn. or 9.66%. This growth was achieved amidst shrinking of interest margins in the industry. The improvement in pre-tax profit is also supported by the reduction of the Financial VAT rate to 12% in 2011 from 20% in 2010 as per the Government Budget 2011.

As you would see from our financial results, the Bank has demonstrated a sustained and consistent track record of delivering record performance in each year.

Over the last 5-years, the Bank achieved a Compound Annual Growth Rate (CAGR) of 21.13% and 31.94% in pre and post tax profits respectively.

Income from Fund-based Operations

The interest income of the Bank increased by Rs. 2.90 Bn. or 8.35% from Rs. 34.74 Bn. in 2010 to Rs. 37.64 Bn. in 2011. Increased interest income from Fixed Loans, Housing Loans, Overdrafts, Leasing, Margin Trading & Loans against Gold were the main contributory factors for this growth in interest income. The Bank experienced a lower credit growth during the first half of the year, accelerated the growth from the beginning of the 2nd half of the year.

The interest expenses for the year were Rs. 19.64 Bn. and reflected an increase of Rs. 1.31 Bn. or 7.17% as against 2010. This increase was mainly due to increased interest payments on Savings Deposits, Money Market Accounts and NRFC Accounts as a result of the substantial volume growths recorded in 2011.

The Bank’s interest margin experienced a drop in 2011 in view of the intensified competition and in the midst of the low interest rate scenario of the country especially during the early part of the year. Consequently, the Bank’s interest margin reached 4.44% after recording 30 bps decline from interest margin of 4.74% in 2010.

Income from Fee-Based Operations

The Bank earned foreign exchange income of Rs. 2.32 Bn., a 33.35% improvement over the Rs. 1.74 Bn. total in 2010. The main growth factors were higher volume of forward/spot exchange transactions and the higher margins achieved during the year. The Sri Lankan rupee depreciated 2.52% against the US dollar, in contrast to the 2.79% appreciation recorded in 2010. This was mainly due to the 3.0% devaluation of the rupee against the US Dollar put forward in the Government Budget proposals in November 2011. This move had a favourable impact on the year-end revaluation of retained profit of the Off-Shore Banking Centre.

The Bank’s other income, comprised mainly of fees and commissions, increased by Rs. 481.89 Mn. or 9.56% over the 2010 total. The main contributory factors to this improvement were gains in the Bank’s card-based business, as well as higher income from investments, Letters of Credit and Letters of Guarantee.

The Bank’s total operating income reached Rs. 25.84 Bn. in 2011, an increase of Rs. 2.65 Bn. or 11.41% over the total of Rs. 23.19 Bn. achieved in the previous year.

Operating Expenses

Operating expenses, comprised mainly of staff costs, maintenance of premises & equipment, establishment expenses and the Financial VAT on profit, excluding loan losses and provisions, totalled to Rs. 13.35 Bn., an increase of 5.25% over the 2010 total of Rs. 12.68 Bn. The increase in operating expenses excluding financial VAT on profit amounted to Rs. 1.85 Bn. or 18.57% over the previous year. This increase is partially attributable to costs incurred on the deposit insurance scheme introduced by the Central Bank of Sri Lanka during the third quarter of 2010, the full impact of which was felt in 2011.

Personnel costs rose approximately 9% for the year. The Bank recorded a substantial increase in other overhead charges mainly due to the aggressive expansion of the Bank’s delivery channels, which saw 26 new customer service points opened and 100 new ATMs installed during the year. However, the Bank recorded a drop of 7.19% on other overhead expenses mainly due to the reduction of rate on financial VAT on profit during the year. The Bank continued its disciplined approach to expense management while diligently evaluating costs versus benefits.