The National Development Bank PLC (NDB) group, a leading project lender in the country, saw its performance being negatively affected by the rising interest rates as the loan growth slowed significantly while the margins remained stubbornly lower as the low-cost fund base narrowed.
According to the interim results filed with the Colombo Stock Exchange, the banking group reported earnings of Rs.726.1 million or Rs.4.40 a share, down 42 percent on year.
The rise in net interest income (NII) was only 10.5 percent year-on-year (YoY) to Rs.2.3 billion as the interest expense rose much faster than its corresponding income as the bank responded late to the rising interest rates and waited before it re-priced its Rs.234 billion loan book, last year.
The net fee and commission income also slid by 15 percent YoY to Rs.803.4 million, which the bank attributed to the “lesser than anticipated capital market activities during the year”.
NDB’s capital market cluster contributes a sizable share to the group. The segmental analysis showed the group’s capital market operations suffering a massive set back as its operating profits fell 45 percent to Rs.402.3 million.
Meanwhile, for the financial year ended December 31, 2016, the banking group reported earnings of Rs.16.29 a share or Rs.2.7 billion, a decline of 24 percent YoY. The bank on a standalone basis expanded its loans and receivables by a modest 8.7 percent or Rs.18.7 billion, bulk of which were driven by the infrastructure-related project lending, the bank said in an earnings release.
This makes difficult for the bank to fetch higher margins as such lending generally is disbursed at low interest rates.
The deposits grew by 10.2 percent or Rs.19 billion to Rs.203.9 billion but the low-cost deposits, current and savings account (CASA) ratio declined to 22 percent. Falling CASA is a common issue faced by the entire banking sector as the savings deposits shifted to time deposits seeking higher returns when the interest rates started to rise. The net interest margin stood at 2.64 percent, little changed from 2.63 percent a YoY, about 80 basis points less than the industry average. NDB now has a new Chief Executive Dimantha Seneviratne, who took the reins just under two months ago. Seneviratne is largely credited for turning around Pan Asia Bank, a mid-sized listed bank, before he joined NDB. Meanwhile, during the year, specific provisions on bad loans rose sharply by 96 percent to Rs.1.1 billion due to one off provisions for few customers.
Also, NDB said infusing fresh capital is a key strategic priority during 2017 to prepare for higher capital requirements under BASEL III accord and also to support growth. The bank’s Tier I and Tier II capital adequacy ratios stood at 9.31 percent and 12.95 percent, respectively. In December 2016, Standard and Poor’s downgraded NDB to ‘B’ from ‘B+’ with a Stable outlook, based on weaker capital.
The controversial primary dealer, Perpetual Treasuries, has increased the stake in NDB during 4Q16 to 7,352,180 shares or 4.45 percent of bank from 6,153,686 shares as at September 30, 2016 being the seventh largest shareholder. The government held slightly above 30 percent stake in NDB through Bank of Ceylon, the Employees’ Provident Fund and Sri Lanka Insurance Corporation.