|
|
 |
| |
|
|
The past year was one of the most challenging years of my banking career. Local and global events came together to create for me personally, and for the Bank as an institution, a range of unique challenges that we have never encountered previously. |
At the international level the global recession reared its head in the first quarter of the year and then burst into an unprecedented global financial crisis by the third quarter. At the local level unstable economic conditions, high inflation and volatile interest rates continued to stretch our every sinew.
2007 was an exceptional year for the Bank. We posted a strong performance in that year despite the unfavourable economic and political climate. Trying to carry this same performance into 2008 and to push
the bar even higher was a tough task.
We had to change course many times during 2008 to confront volatile interest rates, a liquidity crunch and a drop in customer confidence.
In 2007 while there was a sharp increase in interest rates, there was also a time lag that allowed us to adjust our rates. In 2008 however, the scenario was different and the Bank was forced to quickly re–price all its deposit products with the result that margins were squeezed. New business volumes were much lower than the previous year and growth was relatively slower.
The Bank had to grapple with shrinking liquidity lines in the foreign currency market where long-term liquidity sources were almost non-existent for the most part of 2008. The Bank was fortunate that it could fall back onto its foreign reserves at this hour of need. We had also paid off a medium-term syndicated loan the Bank had taken and this helped us tide over this period.
Despite global and local volatilities, including an inflation rate that hovered around 20% for most part of the year, we are satisfied that the Bank ended 2008 on a high. Profit before tax was a comfortable Rs. 7.520 Bn and profit after tax was Rs. 4.268 Bn.
Higher provisioning for debt, a slower growth in advances and a significant increase in Financial VAT slowed our growth rate, despite a solid performance in some other areas. The Bank also made a payment of Rs. 692.162 Mn on account of the oil hedging contracts which is yet to be paid to the Bank.
During the year the effective Financial VAT rate increased from 16.67% to 20% resulting in an adverse impact of approximately Rs. 348.000 Mn to our revenue. Banks in Sri Lanka are subject to a high incidence of tax, much higher than most other countries and contrary to international best practices.
Once again Corporate Banking, Personal Banking and the Treasury played important roles in swelling
the Bank’s bottom line. Corporate Banking contributed 20.31% to the Bank’s profits; Personal Banking 40.56% and the Treasury 15.76%.
The Treasury operations of the Bank did well and exchange income showed a substantial increase of 70.46%.
The deteriorating economic situation had other consequences. The Bank was forced to increase provision for possible loan losses to Rs. 4.954 Bn, a net increase
of Rs. 1.397 Bn compared to 2007.
Non-performing loans ratio increased from 2.96% to 5.19% but is still considered to be lower than the industry average.
During the year the Bank disposed of its stake in Commercial Leasing and realised a capital gain of Rs. 405.531 Mn which helped swell the bottom line.
Remittances
The Bank did well with regard to promoting the flow of remittances into the country, again responding to a national priority. We established a remittance house in the European Region and expanded our activities in Qatar, Oman, Jordan and the Far East. Inward remittances grew by 44.82% in 2008. While in 2007 the Bank’s share of the remittance market was 9%, in 2008 it had grown to 13%. This and other
non-fee based products will drive the future growth of the Bank.
Bangladesh
The Bank’s operations in Bangladesh had another good year despite the adverse political and economic climate. Although business volumes were down the Bank expanded its activities opening 2 new SME centres last year. We were also ranked as one of the best banks in that country.
Although it was the Bank’s intention to establish a presence in the Far East, we have put these plans on hold in view of the global uncertainties. We will continue however, to grow our operations in Bangladesh.
SME
The Bank has earmarked the SME sector and the micro sector a priority area. The Bank will give increased focus and attention to SMEs over the coming years and seek to attract new capital lines in this regard.
Pawning
The Bank moved into the pawning business in 2008. Part of this is motivated by an attempt to engage in better capital management since pawning is zero rated for capital adequacy purposes whilst it is an attempt to give pawning a socially acceptable face and to become a leader in this market segment.
Risk Management
During the past year we took measures to put in place an integrated risk management system. Deutsche Bank in Singapore and Ernst & Young in Mumbai helped us in this regard. The Bank has employed an external risk management consultant so that we can have a fully integrated risk management process by the end of 2009.
‘Best Bank’
For the seventh year running the Bank won the Best Bank Award among
Sri Lankan banks. It also became the first Sri Lankan Bank to enter the list of top 1,000 best global banks of the ‘Banker Magazine’ published by the London based Financial Times group. In addition, the acclaimed US based ‘Global Finance Magazine’ chose Commercial Bank as ‘The Best Bank in Sri Lanka’ for the
10th consecutive year.
CSR
We did not lose sight of our social responsibilities and continued with our many activities in this area. One of our priority projects was to restore the access pathways to Sri Pada (Adam’s Peak), sacred to many Sri Lankans. We are also contributing to the efforts to have it declared as a World Heritage site.
Employee Relations
We continued to maintain good relations with the employee unions. The Collective Agreement which we concluded with them in 2006 will lapse in 2009 and we will soon commence negotiations on a fresh agreement.
Disaster Recovery
We are also proud that we managed to test our Disaster Recovery Process. A fire at the Bank’s Panadura branch last year forced us to put the plan into operation and I am happy to record that we were able to re-establish branch operations within 10 days.
Legal Framework
The legal infrastructure in the country
is still wanting despite recent initiatives. This is especially the case with regard to recovery actions where the process is time consuming and inefficient. It is important that the legal system facilitate recovery actions that are smooth and timely.
Thank You
My warm thanks to our customers for continuing to place faith in the institution and to the employees for delivering such a superb performance when lots of others around us were crumbling under pressure.
Condolences
My condolences to the family of
Mr. Raja Samantilaka, a member of our IT team who died as a result of a fire in his hotel room while in Bangladesh. He was an important member of our Sri Lankan team and I would like to record here the strong contribution he made to the Bank’s operations.
Resilient
The current year is likely to be a challenging one. The full impact of the financial crisis and the recession will be felt only this year.
While the Bank hopes to participate in the reconstruction of the North and East since it is likely that the war, in its current form, will soon end, there are local and global uncertainties it will have to overcome.
The current moment is a trying time for all financial institutions. There is a general lack of confidence and this has had a ‘knock on’ effect on all financial institutions. The climate is now right for the regulators to consider banking consolidation so that the strengths and resources of institutions can be harnessed and channeled in a common direction. This is the global trend and Sri Lanka should also give it serious consideration.
At the Bank we believe that the way forward is to have a strong capital base and a critical share of the market. This will generate resilience and enable the Bank to take the blows that the current crisis may throw.
A.L Gooneratne
Managing Director
Colombo
February 18, 2009 |
|
