“CDB showcased inherent strengths and fortitude in an entire year battling the pandemic.”
We have continued to reinvent ourselves to add value through generations of services, products and stakeholders.
It’s been 25 years and what a journey it’s been. In fact, celebrating this milestone during the FY 2020/21 is truly a reason for us to celebrate because it showcases the true persona of CDB. As you read my message, you will truly understand the mettle, hunger, drive and passion that embraces CDB and how these cascade to everyone in our orbit, where we have continued to reinvent ourselves to add value through generations of services, products and stakeholders.
Our incorporation was on the 7 September 1995 but it was not an auspicious beginning as five years down the road in 2001/02, CDB was in dire straits, showing financial results that were saddled with losses and a negative net assets position. It was then that CDB launched into leasing, hoping to turn our fortunes around. By 2004, a three year strategic plan was in place and the bottom line began showing promise. For the first time we posted a profit of Rs. 10 Mn. in 2004, albeit small but these were positive signs. In 2005, net assets crossed the line into positivity too, showcased with just Rs. 175,000 but nevertheless an indication that the path we were traversing upon, was the right one. That strategic plan had the drive and vision of a young team, dedicated passionate individuals who rallied around a common purpose with an enormous hunger to do better. It was this unwavering belief in themselves that became the core to CDB producing extraordinary results through ordinary people. CDB was now being built brick by brick. However, the good times were not to be a smooth ride. The Ceylinco financial debacle in 2008/09 was a blow to our growing balance sheet which at the time was Rs. 6.8 Bn. generating annual profits of Rs. 65 Mn. But our team must never be underestimated. They rallied and came together, re-strategized and worked on a plan to weather the storm. And thus, we came back even stronger.
The country was also in a metamorphosis. Sri Lanka was ending a nearly three decade war and ushering an era of peace. The economy was gaining a renaissance, industry was looking buoyant and fast tracked development was aggressively planned. Observing the enormous opportunity, CDB aligned itself with the growing momentum and inked itself a growth of close to ten times in size and over ten times in profits in the decade 2011-2020, with the overarching promise that the sincerity of our action will have a positive impact on people and businesses across social and geographic boundaries.
This is our story in a capsule in the last 25 years.
Now, we focus on our current year and our envisioned future. Our theme of transcending generations in everything we do is fitting, as we transition from this 25 year journey into the future, amid a rapidly changing disruptive era of innovation to a future which is totally digitally driven. As we enter the new decade of 2021-2030 embracing tech disruption on the one hand and a sustainability agenda on the other, we see a more enlightened world emerging. Global warming and climate change has gained more emphasis with the pandemic pushing the need for healthier living into the fore. The fact that Sri Lanka is among the ten worst affected countries due to climate change is very much in focus in our sustainability agenda, while adding inclusive economic development and financial inclusion of the most vulnerable communities within the social structure adding depth and breadth to that consciousness agenda.
And into this equation comes our team – that winning team we have nurtured over 25 years, encompassing a generation of experience with a generation of new blood, prompting enlightened thinking and visionary agendas with a common need to empower aspirations. And we will soon arrive at a point for the baton to be passed from our first generation leaders to the multi-skilled forward thinking second generation leaders. This transition will begin in this decade and I am very encouraged with the bench of promising candidates that we have.
It has truly been a period of challenge these last two years specifically but also one of response post the Easter Sunday attacks and then the pandemic. However, since the beginning of the year under review, the entire world has been on a roller-coaster. From March 2020, the world began going into lockdown and Sri Lanka did too, moving into unchartered waters with the future looking very uncertain. However, with normalcy returning and gradual return to daily life, business began gaining momentum from June 2020. Again, the upward curve was not to last. The second wave of the pandemic erupted in October but subsided sufficiently to see a recovery in the last quarter. By the time of writing this report in June 2021, the pandemic had hit in its third wave with daily infections and fatalities reported being higher. However, we have hope that the rapid vaccination programme rolled out by the government and health authorities coupled with a pragmatic safety plan will reduce the impact in the second quarter of 2021/22.
Our voyage through the pandemic has seen us navigating a rollercoaster right from the beginning of this financial year, to date. In March 2020, we were steering through heavy storms with the horizon being almost invisible. CDB decided to revert to our Business Continuity Plan. However, the magnitude of the consequences the pandemic would bring was not captured in this BCP. With the end goal of continuing our operations with minimum disruption to our customers being the focus, our IT teams worked around the clock, implementing remote work capabilities for our team. With this, we fast tracked the procurement of additional resources and almost overnight, had a Work From Home (WFH) plan in place for our team members to engage our customers without any disruption. Our call center continued its operations 24x7 providing access and information to our clients, while our technology platform which CDB had been augmenting constantly to push boundaries, ensured that customers had access amid lockdowns and curfew. The CDB VISA debit card enabled our clients to access their accounts through the island wide ATM network, a collaboration we inked some years ago and for online transactions. CDB’s digital financial platform, CDB iNet was promoted as a platform to perform transactions on an anywhere anytime and we continually engaged with our stakeholders via social media and text messaging with continuous updates.
We granted maximum relief to impacted businesses and customers, extending about 90,000 moratoriums within baskets of two, three and six months in compliance with regulatory circulars, during the first wave of the pandemic. The moratorium announced during the second wave attracted less interest, although we did grant about 10,000 moratoriums. However, we did not confine ourselves to regulatory directives but instead went beyond compliance by working closely with our customers to restructure and regain their business on a case by case basis, reflecting our levels of service excellence and brand promise.
The health and safety of our team remained paramount during this time. Our team was provided with Personal Protective Equipment (PPEs) added to with related health and safety precautions, which not only assured their personal safety but also of their families.
Our financial performance has been consistent but, this is nothing new with CDB. Challenges have always been opportunities for us and setbacks considered formulas for success. The period under review therefore, despite being fraught with challenges, is a good example of that continuance of our financial performance.
CDB showcased inherent strengths and fortitude in an entire year battling the pandemic, reporting a Profit Before Taxes of Rs. 4.1 Bn. to reflect a growth of 50% and Profit After Tax of Rs. 2.56 Bn. indicating a growth of 39%. Revenue fell by 4% amidst historically low interest rates. However, net interest income grew by 14% recording a figure of Rs. 7.6 Bn. Bottom-line growth was driven primarily by some key factors. Managing overheads in the backdrop of the pandemic, growth in net interest income as a result of interest expenses declining at a faster pace than the decline in interest income which stemmed from assets and liability maturity profile, managing asset quality which was helped by CDB’s quality credit underwriting culture and a solid foundation and strong strategy to manage challenges embedded in a strong risk management culture were some of these dynamics.
CDB’s balance sheet recorded marginal growth of 1% standing at Rs. 94.33 Bn., while the loan book recorded a growth of 4% reaching Rs. 75.06 Bn. Growth in the loan portfolio was mainly driven by the gold loan book, which made up 9% of loan book. CDB prudently managed the gross non-performing loan ratio at 7% and 2.21% on net basis. Cost to income ratio further improved to 41% from 48.79% one year ago. Return on Equity (ROE) recorded 19.97%, Return on Assets (ROA) 2.73%, Earnings Per Share (EPS) was Rs. 36.64 and Net Asset Value Per Share stood at Rs. 201.34, 90% of CDB’s balance sheet assets, representing regular income and cash flow generating assets including a strong asset backed loan book. Core capital and total capital ratios recorded 12.10% and 15.34% respectively, while the liquidity ratio was recorded at 14.19%. All ratios are well above the applicable regulatory thresholds. Strengthening capital ratios further, CDB raised EUR 5 Mn. in subordinate debt (approximately Rs. 1.17 Bn.) Tier II qualifying capital from Triodos IM of the Netherlands during the financial year.
Our commendable financial results have been in the context of the macro economic outlook, extraordinary fiscal and monetary measures, and customer behavioral changes specifically in the backdrop of the pandemic and our own balance sheet profile and composition coupled with organization specific measures. Due to the rapid decline in interest rates to historically low levels, repricing of our liabilities took place at a faster pace than assets, due to the maturity profile of our balance sheet assets and liabilities. The restriction of non-essential imports resulted in curbing of vehicle imports, which impacted CDB from different dimensions, as over 80% of our loan book at present is backed by vehicles. Obviously, this impacted new business volumes negatively with reconditioned and brand new vehicle stocks being sold out. This also resulted in used vehicles changing hands at substantially higher prices, posing an advantage on collections, as vehicle owners preferred to retain vehicles in hand in the absence of opportunities to purchase new vehicles or pay higher prices. If repayment challenges arose, vehicle owners opted to dispose the vehicle at a reasonable price and settle the liability. While the increase in vehicle prices positively impacted the existing collection portfolios, it also created a higher risks for new facilities being underwritten, and these risks have been factored in to credit evaluation framework. Historically, low interest rates had positive impact on profitability. At the same time, the credit being underwritten is at lower rates and predominantly on fixed rate contracts. If interest rates are on an upward cycle, the impact will be reversed. This risk factor therefore is factored into pricing and margins of the new credit we underwrite. Another unexpected trend observed was the substantial uptick, an almost doubling of pre-closure facilities. There are several reasons for these early settlements. Taking advantage of re-pricing assets which were relatively at higher rates compared to current rates, cashing in by disposing vehicles or repayment difficulties prompting the exiting of liabilities, considered a more prudent option induced by higher vehicle prices would have contributed for this increase. These trends correlate in the current context but may reverse if any changes are prompted.
The pandemic had a high negative impact on some dominant traditional business lines. CDB began aggressively pursuing alternative business opportunities. We have observed renewed potential and seen these new opportunities emerge, all of which were added into our portfolio and accelerated into implementation. We reactivated the CDB cash lease product which was a sale and lease back facility, a quick way to raise funds to start a new business or expand an existing one. This facility could also be used to invest in any productive asset or for any urgent cash requirement, while continuing to have the vehicle in hand. CDB also added a top up cash lease as a product extension targeting mature existing facilities. CDB Aspire Lease was reactivated to promote upgrading of an existing vehicle, enabling affordable cash flow with financial engineering using specific cash flow structured leases. Aligned with our green conscious agenda, green financing is being aggressively promoted with a rooftop solar package and an expansion of our hybrid portfolio, which represents 25% of our current vehicle lending portfolio. We are committed in our mission of expanding our green agenda contributing towards a greener economy, having identified multiple potential areas post-COVID. Currently, there are some business verticals that have gained our renewed focus including agriculture, women entrepreneurs (at present women borrowers represent 33% of the loan book portfolio), pensioners, new business areas and start-ups. Client onboarding via our tech based virtual operation capabilities and client onboarding focused products which include savings accounts and credit cards have led to enhancing our team’s competencies dramatically, leading us to continue re-skilling their market approach to take advantage of arising opportunities and meet market demands with minimum mobility and physical interaction. One key initiative which we didn’t have ready to our time bound delivery target was our eWallet project. This is now being worked on with some readiness changes and a new date plan.
We also reactivated two construction projects that were scheduled for launch prior to the pandemic. The ceremony to lay the foundation stone for the proposed Kurunegala branch building located in the heart of the city which would facilitate operations of the regional branches was held, while, we are in the process of obtaining the final approval for the proposed building at Green Path.
The pandemic proved that the aggressive tech-driven approach we had emphasized repeatedly was the strong foundation that helped us navigate the pandemic induced challenges. Further, the regulatory framework and other enabling factors also fast-tracked support for our tech-driven solutions. A combination of digital KYC, online NIC verifications, connectivity via APIs like CRIB access coupled with other tech capabilities of BOTS, AI and machine learning based solutions and OCR/ICR technology could trigger immense convenience, speed and connectivity real time, anywhere. This is the digital eco-system we are building to continue our growth trajectory.
The regulatory framework is continuing to strengthen the Non-Bank Financial Institution (NBFI) sector. The Consolidation Master Plan for the NBFI Sector aims at reducing the number of NBFIs to 25 by mid-2026. CDB already has successfully acquired and completed the amalgamation of a company we acquired in 2014 under the financial sector consolidation programme of the Central Bank. The Central Bank also introduced a 1% capital conservation buffer in addition to the applicable minimum capital adequacy threshold, as one of the expected outcomes of the proposed medium term consolidation plan. Under the Prompt Corrective Action (PCA) framework expected to come into effect in July 2022, NBFIs will be classified under five categories. With our strong tenet on responsible governance and going beyond compliance, we remain committed to the CBSL objective of strengthening the NBFI sector.
Having perused the above, I’m sure you realize that the year has not been short of challenges but CDB’s inherent optimistic persona carried us through to notch benchmarks and post yet another successful year. This would not have been possible without the vision engineered by the Chairman and Board of Directors whose confidence in our team, enabled us to navigate impossibly stormy waters. My deepest appreciation to each of you, especially to outgoing Chairman and Non-Executive Director Mr Ranga Abeynayake, whose tenure of nine years on the Board gave me the support to move ahead with confidence. Non-Executive Director Mr Joe Jayawardena and Non-Executive Independent Directors Mr Razik Mohamed and Professor Ajantha Dharmasiri, we thank you for adding the support we needed during your nine year tenure, to steer this company towards unwavering success. Our team, who have shown repeatedly that for you, challenges are an opportunity, thank you for not seeing the clouds over the horizon but instead seeing a sunrise every
day to make us feel optimistic about the future. The amazing tenacity of our customers has shown us that everything we do, every single day is truly worth it. Thank you for the support, loyalty and most of all the friendship. We have built a rock solid foundation that will always be there for you to stand strong upon. Our valued business partners and stakeholders – you’ve been the trusses we have built our business upon. Thank you for making us who we are.
As I look back on a year that has been very different to anything we have experienced in our lifetime, I can’t help but feel proud that, despite battling numerous storms, we grew close to 10 times in size and over ten times in profits over the past decade. But the decade ahead will be one that will rapidly change history and thus our journey too. While we have set specific aspirations in the current decade, we also know that our focused key pillars will be the formula for our success. We will strongly embrace both our tech disruption and sustainability agendas encompassing both social and environmental dimensions. Dependence on brick and mortar will be reduced and a more resource efficient organization will emerge to prompt a more carbon conscious entity. Similarly, our tech capabilities will be the conduit to absolute financial inclusion, reaching out to markets across social and geographic boundaries. Embracing a tech disruptive agenda with a David vs. Goliath mindset will be the enabler in competing with incumbents positioning ourselves as a disruptor. Empowering aspirations is our purpose and we intend journeying through the next decade with an unwavering focus on being an entity that makes a difference to the entirety of the citizens of this country.
10 June 2021