Positive financial performance reports from banks can be a strong indicator of economic resilience, especially during a downturn when banks often face challenges as the demand for new loans decreases from both individuals and companies leading to reduced revenues for banks.
However, several factors can contribute to banks still reporting healthy profits in these times. Firstly, during a downturn, banks often experience higher loan losses as borrowers struggle to repay their loans. To manage this,
banks allocate substantial funds toward loan loss reserves, preparing for potential defaults. Secondly, some banks may benefit from economic uncertainty due to their excellent asset quality and proven track records of stable performance across various economic conditions.
These banks are often better equipped to handle the fluctuations of prolonged downturns.Thirdly, banks can earn higher returns on loans extended to households and businesses during these times. Additionally, increased
savings account deposits can also contribute to their profits, as people tend to save more in uncertain economic periods.
So, when banks report healthy profits during a recession, it’s generally a positive sign. It indicates their capability to withstand the adverse effects of an economic downturn and continue offering essential financial services to their customers. This financial stability is crucial for the overall health and recovery of the economy.
Two of Sri Lanka’s major banking institutions, Commercial Bank of Ceylon Plc (COMB) and Sampath Bank Plc (SAMP) have reported significant financial performances for the third quarter of 2023. First Capital Research reports reveal key insights into their operational strategies and financial health.
The contrasting yet positive performances of COMB and SAMP in the third quarter of 2023 highlight the dynamic nature of Sri Lanka’s banking sector. COMB’s growth was driven by an increase in net interest income and trading
gains, while SAMP’s success was largely due to a reduction in impairment charges and increased fee income.
Both banks showed resilience in maintaining robust capital adequacy ratios, ensuring their stability and capacity to navigate through economic uncertainties. The varied strategies and operational focuses of COMB and SAMP reflect their unique positions in the market, showcasing the diverse approaches within the Sri Lankan banking sector to overcome economic challenges. We also look at two other banks, NDB and Seylan, to show the diverse yet similar nature of the industry.
Expanding Net Interest Margins
COMB’s third-quarter performance marked a substantial turnaround with a 66.2% quarter-over-quarter increase in earnings, amounting to Rs6.2 billion. This growth was primarily fueled by a significant expansion in net interest income, which soared by 26.8% to Rs23.4 billion. Additionally, the bank successfully reversed its losses in government securities trading, reporting a gain of Rs3.4 billion.
Despite a declining interest rate environment, COMB managed to expand its net interest margins from 3.01% to 3.21%. However, the bank faced challenges with impairment charges nearly doubling to Rs12.6 billion, raising concerns about future profitability.
On the positive side, COMB’s loan book expanded by 4.3% to Rs1.1 trillion, and its deposit base grew by 4.1% to Rs2 trillion. The bank also maintained strong capital adequacy, with Tier 1 capital at 11.569% and a total capital ratio of 14.446%.
Declining Impairments
SAMP’s earnings witnessed an extraordinary year-over-year surge of 1509.7%, reaching Rs5.1 billion in the third quarter. A significant factor contributing to this growth was the steep 64.6% year-over-year decline in impairment charges, a result of proactive provisioning in the previous year.
Despite a decline in net interest income by 11.1% in the low-interest-rate environment, the bank’s net fee and
commission income marginally grew by 3.9%. This was attributed to increased business volumes in credit, trade, and electronic trade channel-related fees.
SAMP’s deposit base increased notably by Rs110.0 billion yearto-date. However, its loan book saw a degrowth of 7.3%. The bank’s Tier I and Total Capital Adequacy Ratios stood at 14.74% and 17.97%, respectively, well above the regulatory requirements.
Defying the Tax Impact
Amid rising tax expenses, NDB Bank’s bottom line soared by 385.2% year-over-year, fueled by a 20.9% increase in core income to Rs36.8 billion. This surge was primarily driven by a 29.7% rise in Net Interest Income to Rs9.5 billion, due to higher interest income and strategic deposit book repricing, achieving a 4.03% Net Interest Margin.
The bank’s non-fund-based income categories saw a 527.8% increase, driven by favourable rate fluctuations. Facing potential Net Interest Margin (NIM) contractions and credit quality challenges, indicated by a 26.9% fall in impairment charges and a high Non-Performing Loan (NPL) ratio, NDB is cautiously navigating the financial landscape. It’s maintaining provisions for foreign currency investments in anticipation of future restructuring. Loan growth dipped by 11.2%, affected by economic headwinds, but is showing signs of recovery with lower interest rates and an improving economic outlook.
Strong Balance Sheet
Seylan Bank’s (SEYB) net earnings surged by 89.8% year-over-year to Rs.2 billion in 3Q2023, mainly due to a 7.4% increase in net fee and commission income from higher card transactions and trade commissions. This was complemented by a significant 48.0% drop in impairment charges, reflecting decreased provisioning for foreign
currency bonds and personal loans, amid positive future economic projections.
While Net Interest Income fell by 9.1% due to faster growth in interest expenses, net operating income rose by 46.9% year-overyear, driven by a 91.6% increase in net trading income and higher interest and fee income. Despite this, operating expenses climbed by 25.2% year-over-year, largely due to higher personnel costs and cross-currency payments.
SEYB’s balance sheet shows a 7% reduction in loans but a 10% increase in shareholders’ equity. With a Tier 1 and Tier 2 capital adequacy ratio well above regulatory requirements, the bank is poised for positive loan book growth, particularly in the SME, Tourism, and Manufacturing sectors, First Capital notes.