NDB sustains sound pre-COVID-19 growth, profitability amidst multiple stresses

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National Development Bank PLC recorded sound financial results for the first quarter ended March 31, 2020, prior to the onset of the COVID-19 pandemic which has subsequently led to exponential economic stresses at home and the world over.

With the heightened responsive measure of an island wide lockdown that was imposed only towards the latter part of Q1, the impact of the COVID-19 pandemic was felt by the Sri Lanka economy since the beginning of the first quarter of 2020 due to cascading effects on global supply chains and local business operations.

Furthermore, the blow from the pandemic came in less than 12 months since the Sri Lankan economy plummeted due to Easter Sunday attacks in April 2019. The combined effects of all this has caused tremendous impact on every sector in the economy with distinct impact on the banking sector as well.

In such a backdrop the Bank increased its operating income to LKR 6.6 billion by 11%. Post-tax profitability was LKR 1.7 billion up by 27%, partly benefiting from tax removals introduced by the Government. The Bank’s Balance Sheet also expanded by 4% to LKR 553 billion, which translated to a quantum increase of LKR 24 billion.

Total operating income which consists of Net Interest Income (NII), Net Fee and Commission income, income from financial investments, Forex profits and other operating income increased by 11% YoY to LKR 6.6 billion. Net fee and commission income recorded an impressive increase of 19% to LKR 1 billion benefiting from the strong growth in the retail assets and liability base and uptake in digital financial services.

Net interest income [NII] was LKR 4.3 billion, a negative growth of 7%, partly due to the increase in interest expenses stemming from fresh quoted debentures issued in Q1 2019 and the reduction in margins in line with regulatory policies. A narrowing net interest margin of 3.22% [compared to 3.53% in 2019] also contributed towards this dip in NII, which is a wider reflection of the drop in benchmark market rates during the quarter.

The significant increase in other operating income to LKR 835 million attributed to exchange gains on the revaluation of the foreign currency reserves of the Bank. This was due to the depreciation of the Sri Lankan Rupee in early 2020 – due to COVID-19 pandemic related economic outcomes, in comparison to the appreciation of the Sri Lankan Rupee in the comparative period in 2019.

The impairment charges for loans and other losses for Q1 2020 was LKR 1.3 billion and was a 53% increase over the comparative period. The increase in the impairment charges was mainly due to the increase in the collective provision charge in line with the growth in the loan book.

The Bank also accounted for provisions at individual levels considering elevated risks due to stressed market conditions, which are being reassessed with COVID-19 related stresses. Other provisions under impairment charges included provisions made for permanent diminution in fair value of investments.

The Bank’s regulatory nonperforming loan [NPL] ratio was 4.78% and compares with 4.77% as 31 December 2019 and 5.2% of the industry for the period under review.

Total operating expenses for Q1 2020 was LKR 2.4 billion, an increase of 8% from Q1 2019. The cost to income ratio of the Bank was 36.5%, and compares well with 39.9% for 2019.

The total tax charge for Q1 2020 was LKR 1.2 billion, comprising LKR 556 million in VAT on financial services and LKR 631 million in Income Tax. The effective tax rate for Q1 2020 was41%, down from 53% in Q1 2019 due to the removal of Nation Building Tax [NBT] and Debt Repayment Levy [DRL], w.e.f 01 January 2020. The resultant profit attributable to shareholders at the Group level was LKR 1.2 billion, a YoY increase of 23%.

Whilst the total asset base at the Bank level stood at LKR 553 billion, same of the NDB Group reached LKR 559 billion. The Balance Sheet expansion was supported by a year-to-date [YTD] growth of 4% in the gross loan book to LKR 425 billion. The YoY growth of the loan book was 18%, which translated to an increase of LKR 63.7 billion. The focused and energetic business drive across all segments contributed towards the loan book expansion despite the effects of the pandemic.

Balance Sheet expansion was funded by multiple sources including customer deposits and repo borrowings. Customer deposits grew by 2% YTD to LKR 414 billion, whilst this was a YoY growth of 18% over Q1 2019 – a quantum growth of LKR 63 billion. Within deposits, the CASA ratio remained at the 20% mark with the CASA base recording a marginal increase of 2% YTD driven by granular CASA.

The Bank remained well capitalized by the end of the quarter, with the capital adequacy ratios well above the regulatory minimum requirement levels. Accordingly, Tier I and total capital ratios at the Bank level were 9.03% and 12.96% whilst the same at the Group level were 9.88% and 13.65% [minimum requirements of 8.5% and 12.5% respectively].

The Bank is also maintaining sound liquidity levels with Liquidity Coverage Ratios well above the statutory minimum requirements. The Bank’s Net Stable Funding Ratio was 105%, well above the regulator mandated minimum of 100%. These strong capital adequacy and liquidity levels are clear affirmation of the Bank’s stability in the face of the ongoing crisis and its readiness and ability to steer forward sustainably.