While risk exposures shown above are to a great degree controllable by the Bank, there are external factors, the outcomes of which, the Bank is unable to influence. Given the environment in which a bank operates, economic conditions in the country, government policy, regulatory changes and climate change are some of those aspects which can
have an effect on the Bank’s profitability and ability to comply with laws and regulations.
During the year under review, the following external drivers had an impact on the Bank’s overall risk profile.
- While the economy recovered slowly in the first half of the year due to more favourable weather conditions, the political uncertainties in the latter half resulted in a subdued performance overall. The inactivity of the Government sector in the second half of the year brought hardship to many of the Bank’s customers who either suffered from a lack of government contracts or were not able to receive payment for jobs that were already completed. This in turn, had a negative effect on the Bank’s performance.
- The Government’s intent is to spread the economy throughout the country and disperse the concentration of economic activity in the Western Province. This feeds well into SDB Bank’s market strategy of concentrating their energies on the rural and SME sectors. The realisation of this intent is yet to be seen and the question remains as to whether the Government will be allowed to pursue this agenda without political interference.
The introduction of more stringent provisioning requirements on non-performing loans and advances as specified by the accounting standard SLFRS 9, imposes greater pressure on the profitability of the Bank.
- Basel III is a set of international banking regulations developed by the “Bank for International Settlements” in order to promote stability in the international financial system. The purpose of Basel III is to reduce the ability of banks to damage the economy by taking on excess risk.
- Basel III introduced a set of reforms designed to improve the regulation, supervision and risk management within the banking sector. Banks are required to maintain proper leverage ratios and meet certain minimum capital requirements.
- Under Basel III, the minimum capital adequacy ratio that banks must maintain is 11.88%. The capital adequacy ratio measures a bank’s capital in relation to its risk-weighted assets. The capital-to-risk-weighted-assets ratio promotes financial stability and efficiency in economic systems throughout the world.
- The Liquidity Coverage Ratio (LCR) requirements are designed to ensure banks maintain an adequate level of readily available, high-quality liquid assets (HQLA), that can quickly and easily be converted into cash to meet any liquidity needs that might arise during a 30-day period of liquidity.
The Basel III guidelines to prudent banking practices come into full effect from January 2019.
Its gradual implementation has enabled the Bank to progressively improve its capital ratios which are now comfortably above the minimum standards set. This of course means that there is less capital that can be used to generate a return and it creates its own challenges to the Bank in raising additional capital to service the needs of
- The new Income Tax Act was introduced and resulted in higher tax contributions from SDB Bank to the Government. In addition to the increased doubtful debt provisions, these tax payments were another impost on the Bank that contributed to a curtailment of the profit for the year. There is conjecture that further taxes may be introduced and the Bank will need to be in a position to meet those obligations and yet generate a satisfactory return to the shareholders.
- Political instability in the last quarter of 2018 which brought the country to almost a standstill, had a profound effect on the business climate in the country. The subsequent breakdown in relationship between the President and the Prime Minister, brings on further uncertainty to the effective functioning of Government. The
flow-on result is the ambiguity that pervades economic activity, which in turn poses more difficult questions for the Bank to deal with in running a profitable operation.
- The slowdown in Government activity has prevailed past the political events of the last quarter of 2018, into the new year. The Bank has to find ways to circumvent this situation and find ways to generate a sufficient quantum of business.
- Drought and floods have become regular occurrences over the recent past. Since these unfortunate events generally take place in rural areas, the Bank is aware of the need to take adequate precautions to prevent losses.
The Bank’s relationships within the banking industry, particularly in Sri Lanka, must be nurtured and matured to gain an increasingly influential voice. The closer the Bank is to the regulators, other major banks and to the political environment, the more likely it will be able to influence and/or be prepared to respond to future challenges.
SDB Bank continues to grow its voice in the banking industry by being a niche player catering almost exclusively to the rural sector in a developmental role.