ComBank’s 2Q performance neutralised by massive loan loss provisions

Commercia Bank of Ceylon PLC, the largest private lender in the country in terms of assets, recorded subdued performance for the quarter ended on June 30, 2022 (2Q22), amid a massive expansion in provisions against the possible bad loans and other losses that may stem from the bank’s holding of foreign currency-denominated government securities.  

The banking group reported a loss of Rs.2.21 per share or Rs.2.7 billion for the quarter under review, compared to earnings of Rs.4.61 per share or Rs.5.5 billion reported for the corresponding quarter in the previous year, despite significant gains made at operational level.

The banking group reported a net interest income of Rs.21.8 billion for the quarter under watch, up 40 percent year-on-year (YoY) largely due to repricing of assets amid the high interest rates environment.
The net fee and commission income of the bank, led by its card and digital banking operations, rose 78 percent YoY to Rs.4.7 billion.

For the quarter under review, the bank recorded a trading gain of Rs.8.5 billion, compared to Rs.2.6 billion a year ago. The bank in an earnings note said this was primarily from realised and unrealised gains from forward exchange contracts, spot and swap transactions.

However, the bank reported a net other operating expense of Rs.300 million for the quarter, compared to Rs.1.5 billion a year ago amid the revaluation of foreign currency assets and liabilities and the exchange impact on impairment charges on loans and advances and government securities denominated in foreign currency.
Such losses for the first half topped Rs.12.5 billion, compared to Rs.5.2 billion a year ago. 

Meanwhile, for the quarter under review, the banking group provided a whopping Rs.29.2 billion, compared to Rs.6.5 billion a year ago, and for the six months such provisions stood at Rs.35.2 billion, up from Rs.13.6 billion a year ago.

Elaborating on the increased impairment provisioning, MD and CEO Sanath Manatunge said the bank provided substantial impairment charges on loans and advances in respect of individually significant customers as well as collectively for other customers and those customers in the risk-elevated sectors, as necessitated by the most recent developments in macroeconomic indicators impacting the credit risk. 

“We also continue to recognise additional impairment provisions by way of management overlays on account of loans under moratoriums,” he said. 

“In the second quarter, the bank also recognised substantial impairment provisions on its foreign currency-denominated government securities owing to the recent downgrading by rating agencies of Sri Lanka’s sovereign and the announcement by the government that it is considering a consensual restructuring of the country’s external debt via an economic adjustment programme supported by the IMF. Accordingly, the bank has increased impairment provisions on account of foreign currency-denominated government securities during the second quarter,” he added.

Consequently, the growth in the net operating income fell by 63.5 percent YoY to Rs.5.7 billion for the quarter under review.    

The bank’s operating expenses increased 32.5 percent YoY for the second quarter to Rs.9.3 billion, “mainly due to increases in staff-related expenses and other operating expenses owing to inflation and the sharp depreciation of the rupee during the first half of 2022, which had a significant impact on expenses paid in foreign currency such as card-related payments, licence fees and annual maintenance charges,” ComBank said.    Meanwhile, the gross loans and advances of the group increased by Rs.205 billion or 18.71 percent at a monthly average of Rs.34 billion to Rs.1.3 trillion as at June 30, 2022, while the growth of the loan book of the group over the preceding year was Rs.266 billion or 25.7 percent.   The bank said its bad loans ration improved to 3.65 percent as at June 30, 2022, from 3.85 six months ago. 

The total deposits of the group recorded a growth of Rs.284 billion or 19.30 percent in the six months to Rs.1.7 trillion as at June 30, 2022, recording a monthly average of Rs.47 billion, while the YoY deposit growth was Rs.352 billion at a monthly average of Rs.29 billion. 

“Once again, the primary reason for the growth in both gross loans and advances and deposits was due to the sharp depreciation of the rupee against the US dollar during the period under review,” the bank said.  

The bank’s Tier 1 capital adequacy ratio (CAR) stood at 10.604 percent as at June 30, 2022 and its total capital ratio stood at 13.528 percent. The bank said it expects to maintain the minimum earnings retention ratio at 60 percent for which the capital conservation buffer (CCB) requirement as per Banking Act Direction No 04 of 2022 is between 1.250 percent and 1.875 percent. Accordingly, the minimum total capital ratio required to be maintained by the bank is between 12.750 percent and 13.375 percent. The bank has in place a capital augmentation plan towards rebuilding the CCB to 2.5 percent within three years as required by the said direction. 

The Employees’ Provident Fund, as the third single largest shareholder, has a 8.62 percent stake of the bank.