A large construction sector loan, which fell into the non-performing category, has plunged Cargills Bank into red during the quarter ended March 31, 2019 (1Q19), as the small lender is scrambling to recover from the weakest asset quality in the industry.
The private lender with assets of little over Rs.40 billion reported a net loss of Rs.196.5 million for the January-March quarter, compared to the Rs.18.3 million net profit reported a year earlier on a net interest income of Rs.429.4 million, down 7 percent over the same period in 2018.
Cargills Bank, a unit of the diversified Cargills group, reported Rs.990.8 million in interest income for the period under review, which rose by 13 percent year-on-year (YoY), while the corresponding interest expense surged at 35 percent YoY to Rs.561.4 million.
Meanwhile, the bank’s gross NPA ratio spiked to 9.65 percent, from 6.04 percent in end-December 2018, the highest among licensed commercial banks.
“During the quarter in review, the bank recorded NPAs on a few large ticket loans. A large facility in the construction sector was classified as NPA, impacting the bottom line of the bank,” Cargills Bank in a press release said.
“Provision for this group has been made according to the classification directed by the Central Bank in a general directive (issued) to all banks,” the release added.
When a loan facility falls into the non-performing category, the interest incomes thus far recognised from it is derecognised from the income and put into a suspense account until the facility returns to performing status.
While Cargills Bank remained less specific about the construction group it was referring to, the Central Bank had issued a directive to all the banks on the facilities granted to MTD Walkers PLC to be recognised as non-performing loans and provisions be made against the outstanding values of those loans.
The bank’s provisions against the possible bad loans rose to Rs.298.9 million, from Rs.79.2 million a year ago, registering a mammoth increase.
Meanwhile, Cargills Bank recorded an anaemic growth in new loans and deposits during the quarter under watch, which is not atypical from its peers, thanks to the sluggish economic growth.
The bank gave little over Rs.2 billion in new loans during the three months while the deposit growth was at Rs.1.8 billion. Cargills Bank’s net interest margins weakened from 5.88 percent to 4.81 percent during the three months under review, as the bank had to lure deposits at higher rates. In May, Fitch Ratings gave a multi-notch rating upgrade to Cargills Bank to ‘A-’, from ‘BB’, on the premise that the capital support is forthcoming to the bank when and if needed from its promoters – Cargills (Ceylon) PLC and CT Holdings PLC, who together own 65 percent of the bank, albeit their voting rights are capped at 30 percent.
Meanwhile, the Employees’ Provident Fund has a 4.98 percent stake in the bank being the lender’s third largest shareholder after the promoters.