Management Discussion and Analysis
Financial Review
Commercial Bank won five major international awards as Sri Lanka's Best Bank and Best Trade Bank in 2012 and had the distinction of being the only Sri Lankan bank to be listed among the Top 1,000 Banks of the World for two consecutive years. Overall, the Bank has been adjudged 'Best Bank in Sri Lanka' for 14 consecutive years by 'Global Finance' Magazine as a result of years of hard work, passion and commitment to fundamentals and best practice by the entire team.
The financial acumen portrayed by the Bank has positioned it as the best performing indigenous private bank of the country today. Commercial Bank has recorded impressive results consistently over a long period of time and now possesses a fair market share in banking sector assets.
The convergence of SLAS to SLFRS impacted the banking industry with certain changes to financial reporting formats. This being the first financial review under SLFRS regime, explanations and analyses have been provided in comparison to the previous method (SLAS) where appropriate, for ease of comparison.
Profits
The Bank continued its growth momentum and further consolidated its position as the premier private bank in the country. The Bank's post tax profits exceeded Rs. 10.0 Bn., for the year ended December 31, 2012, making it the first private bank in the country to achieve this milestone.
The pre and post-tax profits for 2012 and 2011 are given below:
| For the Year Ended | YoY Growth | |||
| 2012 Rs. Mn. | 2011 Rs. Mn. | Rs. Mn. | % | |
| Pre-tax profits | 14,295.3 | 10,897.2 | 3,398.1 | 31.2 |
| Post-tax profits | 10,098.3 | 7,882.9 | 2,215.4 | 28.1 |
* Based on SLFRS
The Bank recorded a sustainable growth in its profits as reflected in the quarterly profits reported by the Bank in 2012.
| 2012 | ||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |
| Pre-tax profits (Rs. Mn.) | 4,145.0 | 3,563.2 | 3,230.1 | 3,373.3 |
| Post-tax profits (Rs. Mn.) | 2,843.3 | 2,477.9 | 2,324.9 | 2,425.6 |
* Based on LKAS
Both fund based and fee based income made significant contributions to profit growth during the year. Bank's ALCO continuously monitored market conditions and re-priced its product portfolio in a timely manner. Net interest income reached Rs. 22,855.0 Mn., recording an increase of Rs. 4,149.8 Mn. or 22.2% compared to Rs. 18,705.2 Mn. in 2011. This was largely due to the growth in interest income which rose by 37.4% Year on Year (YoY) to Rs. 52,685.4 Mn. Increase in interest earning assets and repricing of the asset portfolio in tandem with market interest rates facilitated this substantial growth.
Similarly, interest expenses recorded an increase of 51.8% or Rs. 10,180.1 Mn. and reached to Rs. 29,830.4 Mn. for the year under review. This increase is mainly due to the increased interest payments in line with the upward movement in interest rates in the country and the increase in interest bearing liabilities compared to 2011.
Growth in Volumes
The Bank recorded satisfactory growth in both deposits and advances during the year. The growth in advances was despite the controlled credit environment prevailed in the country. The details are given below:
| As at December 31 | Growth Over 2011 | |||
| 2012 Rs. Mn. | 2011 Rs. Mn. | Rs. Mn. | % | |
| Deposits | 390,611.5 | 323,754.7 | 66,856.8 | 20.6 |
| Gross loans and advances | 340,099.4 | 288,258.2 | 51,841.2 | 18.0 |
* Based on SLFRS
The Bank witnessed a substantial upward movement in interest rates specially during the early part of the year which resulted a shift in deposits specially from savings deposits to term deposits. This caused CASA ratio of the Bank to deteriorate, which was nevertheless one of the best ratios in the banking industry. Depreciation of the Rupee had a favourable impact on the foreign currency deposit growth during the year.
| As at 31 December | ||
| 2012 % |
2011 % |
|
| CASA Ratio | 44.5 | 51.6 |
* Based on SLFRS
The Bank raised US $ 65.0 Mn. by way of a DPR facility (Diversified Payment Rights) from IFC to supplement deposit growth during the year. Advances to deposits ratio stood at 87.1% as at end 2012 compared to 89.0% in 2011. Due to relaxation of the borrowing requirement by the CBSL, share of foreign borrowing by commercial banks recorded an increase during the year.
| For the Year Ended | Growth Over 2011 | |||
| 2012
Rs. Bn. |
2011
Rs. Bn. |
Rs. Bn. |
% |
|
| Interest-earning assets | 458.1 | 396.7 | 61.4 | 15.5 |
| Interest-bearing liabilities | 408.7 | 354.0 | 54.7 | 15.5 |
* Based on SLFRS
Consequent to factors stated above, total assets of the Bank increased to Rs. 511.7 Bn. as at end 2012 compared to Rs. 441.3 Bn. in 2011, reflecting a growth of Rs. 70.4 Bn. or 15.9%. In the process, Commercial Bank became the first private bank to surpass Rs. 500.0 Bn. in total assets.
Fee-Based Operations
Commission income recorded a net growth of Rs. 272.6 Mn. or 8.2% YoY. Each category of commission income contributed towards this growth.
| For the Year Ended | Growth Over 2011 | |||
| 2012
Rs. Mn. |
2011
Rs. Mn. |
Rs. Mn. |
% |
|
| Fees and commission income | 4,146.5 | 3,765.2 | 381.3 | 10.1 |
| Less - Fees and commission expenses | 548.6 | 439.8 | 108.8 | 24.7 |
| Net fees and commission income | 3,597.9 | 3,325.3 | 272.6 | 8.2 |
* Based on SLFRS
Fees and Commission Income comprises the various sources of commission income mainly derived from fund-based operations of the Bank. Fees and Commission expenses which hither to reported under other expenses, represents the expenses incurred to earn various commission income.
The Bank recorded a substantial growth in its foreign exchange trading profits compared to the last year mainly due to the arbitrage opportunities prevailed in the market as a result of the volatilities experienced in the rupee exchange rate and the increase in volumes of foreign currency transactions during the year.
Bank's other operating income mainly consists of recovery of non-performing loans; other foreign exchange income and revaluation gain on retained profit of the Off-Shore Banking Centre. Recoveries o/a past due loans and advances recorded a growth of Rs. 207.1 Mn. or 16.3% YoY, partly assisted by the recovery of few large past due loans and advances during the year. Revaluation profits recorded a significant growth due to the depreciation of the rupee by Rs. 14.00 or 12.3% against the US dollar during the year.
Total operating income of the Bank reached Rs. 33,016.1 Mn., an increase of Rs. 7,247.0 Mn. or 28.1% YoY.
Impairment Charges on Loans and Advances
The adoption of SLFRS affected the provisioning policy of the Bank with the time based provisioning policy being replaced by the individual and collective impairment methodology. A threshold limit was decided by the Bank to conduct impairment on significant loans which adequately represented the total loan portfolio of the Bank.
These loans were tested against predetermined individual impairment indicators decided by a steering committee set up by the Bank based on the input received from credit officers and recovery officers, approved by the Bank's Board Audit Committee.
The Bank divided its loan portfolio into several buckets based on the homogeneous risk characteristics attached to different products. The collective impairment provision was formulated based on the historical loss experience of these buckets expressed in terms of Loss Given Default (LGD) and Probability of Default (PD).
The details of the Bank's impairment provision are given below:
| For the Year Ended | Growth Over 2011 | ||
| 2012 Rs. Mn. |
2011 Rs. Mn. |
Rs. Mn. | |
| Individual impairment | 1,296.7 | 2,592.8 | (1,296.1) |
| Collective impairment | 1,856.7 | (869.6) | 2,726.3 |
| Direct write-off | 4.9 | 23.5 | (18.6) |
| Total impairment charge | 3,158.3 | 1,746.7 | 1,411.6 |
* Based on SLFRS
Comparison of impairment provision (under SLFRS) for 2012 and loan loss provision calculated under previous provisioning policy (under SLAS) of the Bank is as follows:
| For the Year Ended | Growth Over 2011 | ||
| 2012 Rs. Mn. |
2011 Rs. Mn. |
Rs. Mn. | |
| Total impairment charge | 3,158.3 | 1,746.7 | 1,411.6 |
| Total loan loss provision | 3,183.5 | 1,503.3 | 1,680.2 |
| Variance | 25.2 | 243.4 | |
The Bank's previous loan loss provisioning policy is more stringent than the minimum amounts prescribed under the guidelines issued by the CBSL. Based on the previous policy, the Bank made substantial additional loan loss provisions compared to 2011.
Net operating income after deducting impairment charges amounted to Rs. 29,819.3 Mn., an increase of Rs. 5,858.1 Mn. or 24.4% compared to Rs. 23,961.2 Mn. in 2011.
Total overhead expenses consisting of staff emoluments and other expenses increased by Rs. 1,995.7 Mn. or 17.3% YoY. Salary revisions of executive officers, increments under the collective agreement signed with the Ceylon Bank Employees Union (CEBU) and the salaries of additional staff recruited resulted in an increase of staff emoluments during the year.
Other expenses increased by Rs. 515.6 Mn. or 9.8% in tandem with domestic inflation. Expenses incurred in expanding the delivery points and provision of additional depreciation charge consequent to the accelerated depreciation on computer equipment also contributed in increasing the other expenses during the year.
Growth in operating income exceeded the growth in overheads, resulting in an impressive growth in pre and post VAT profits of the Bank.
| For the Year Ended | Growth Over 2011 | |||
| 2012 Rs. Mn. |
2011
Rs. Mn. |
Rs. Mn. | % | |
| Pre VAT profit | 16,282.6 | 12,420.2 | 3,862.4 | 31.1 |
| Post VAT profit | 14,295.3 | 10,897.2 | 3,398.1 | 31.2 |
* Based on SLFRS
The financial VAT on profit and income tax recorded an increase due to the increase in operating profit of the Bank. Income tax liability also increased partly due to tax on profits repatriated by the Bank's Bangladesh operation during the year.
Ratios
Credit Quality Ratios
Non-Performing Advances (NPA) Ratio
NPA ratio of the Bank recorded an improvement largely due to significant recoveries made and growth in the loan portfolio during the year.
| As at December 31 | ||
| 2012 (%) |
2011 (%) |
|
| Gross NPA ratio | 3.37 | 3.43 |
* Based on SLAS
As detailed earlier, both specific and general loan loss provisions were replaced with individual and collective impairment, while part of the non-performing advances were identified as individually impaired loans and advances. The Balance non-performing advances which were below the threshold limit decided by the Bank, were assessed under the collective impairment methodology.
| For the Year Ended | Variance Over 2011 |
||
| 2012
Rs. Mn. |
2011 Rs. Mn. |
Rs. Mn. |
|
| Total non-performing loans and advances - based on SLAS | 17,885.1 | 15,828.6 | 2,056.5 |
| For the Year Ended | Variance Over 2011 |
||
| 2012 Rs. Mn. |
2011 Rs. Mn. |
Rs. Mn. | |
| Total individually impaired loans and advances based on SLFRS | 5,971.3 | 5,781.9 | 189.4 |
Based on SLFRS, the individually impaired loans and advances as a % of total loans and advances is given below:
| As at December 31 | ||
| 2012 | 2011 | |
| Individually Impaired loans and advances as a % of loans and advances | 1.8 | 2.0 |
Provision Cover
The provision cover of the Bank recorded a substantial improvement mainly due to additional provisions made during the year.
| 2012 (%) |
2011 (%) |
Improvement (%) |
|
| As per SLAS | 45.5 | 39.5 | 6.0 |
The Bank is gradually improving its provision cover in tandem with reputed international banks. Provision cover has improved to 45.5% in 2012 from 28.5% at the end of 2009, an improvement of 17.0% over the last four years.
Efficiency Ratios
Return on Assets (ROA) and Return on Equity (ROE)
Both ROA and ROE ratios of the Bank recorded improvements when compared to the previous year.
| 2012 (%) |
2011 (%) |
|
| ROA | 2.1 | 1.9 |
| ROE | 21.0 | 20.3 |
* Based on SLFRS
Cost to Income Ratio
Commercial Bank is one of the best managed banks in the country today. The operational excellence is primarily achieved through optimal and lean cost structures adopted by the Bank. Despite the increase in operational expenses as discussed under overhead charges, the Cost to Income Ratio of the Bank recorded a substantial improvement compared to the previous year.
| 2012 (%) |
2011 (%) |
|
| Cost to income ratio | 47.5 | 51.7 |
* Based on SLAS
Commercial Bank reports one of the best Cost to income ratio in the banking industry.
Equity
The shareholders' funds of the Bank improved by Rs. 8,812.3 Mn. or 20.1% during the year mainly due to retention of profits after the payment of dividend. Furthermore, funds transferred to Investment Fund Account, being the income tax and VAT saved as proposed in the Government Budget also helped in swelling the shareholders' funds of the Bank. Total Shareholders' funds stood at Rs. 52,577.0 Mn. as at December 31, 2012.
The above developments in turn increased the free capital of the Bank, which amounted to Rs. 39.7 Bn. as at end 2012 compared to Rs. 31.0 Bn. in 2011. Further, these developments resulted in increasing the single borrower limit of the Bank; which is one of the highest in the banking industry.
Capital Adequacy Ratio (CAR)
The Bank's CAR improved despite substantial increase in loans and advances and remained well above the minimum ratio prescribed by the CBSL. Retention of profits and the scrip dividend contributed to this improvement.
| CAR | As at December 31 | Minimum Ratio | |
| 2012 (%) |
2011 (%) |
(%) | |
| Tier I | 12.6 | 12.1 | 5 |
| Tier I & II | 13.8 | 13.0 | 10 |
Statutory Liquid Assets Ratio (SLAR)
The Bank's liquid assets ratio stood above 25% during most part of the year. Deposit mobilisation efforts as well as prudent fund management enabled the Bank to maintain a satisfactory SLAR. The SLAR of 25.8% as at December 31, 2012 was well above the 20% minimum, stipulated by the CBSL.
Dividends
The Bank's dividend policy focuses on maximising shareholder wealth, market capitalisation, business expansion and maintaining a consistent stream of dividends.
The Bank paid two interim dividends of Rs. 1.50 and Rs. 1.00 per share for ordinary shareholders and recommended Rs 4.00 as the final dividend for 2012, of which Rs. 2.00 was in the form of cash and Rs. 2.00 in the form of a scrip dividend, making the total dividend of Rs. 6.50 per share for the year 2012 (Rs. 6.00 per share in 2011). Total dividend for the year amounted to Rs. 5,418.2 Mn. (Rs. 4,905.8 Mn. in 2011) - Rs. 3,751 Mn. in cash (Rs. 3,270.3 Mn. in 2011) and Rs. 1,667.2 Mn. in the form shares (Rs. 1,635.5 Mn. in 2011).
| Per Share | ||
| Dividends | 2012
Rs. |
2011 Rs. |
| Interim dividends - Cash | 2.50 | 2.50 |
| Final dividend - Cash | 2.00 | 1.50 |
| scrip | 2.00 | 2.00 |
| Total | 6.50 | 6.00 |
Total dividend payout ratio of the Bank amounted to 53.7% compared to 62.3% in 2011. Similarly, the cash dividend payout ratio amounted to 37.1% compared to 41.5% in 2011. The total dividend payout ratio was well above the minimum level prescribed by the deemed dividend rules of the Department of Inland Revenue.
Market Capitalisation
Commercial Bank reports the highest market capitalisation among all financial institutions in the country and ranks number 5 among all listed companies in the Colombo Stock Exchange (CSE).
| As at December 31 | ||
| 2012 | 2011 | |
| Market capitalisation (Rs. Bn.) | 80.3 | 76.5 |
| Market price per share - Voting (Rs.) | 103.00 | 100.00 |
| - Non-voting (Rs.) | 91.10 | 74.50 |
Summary of Bank's Performance
| 2012 | 2011 | ||
| Actual Rs. Mn. |
Budget Rs. Mn. |
Actual Rs. Mn. |
|
| Total Revenue | 63,167.6 | 59,121.1 | 45,483.4 |
| Profit before Tax | 14,311.6 | 13,467.5 | 10,987.3 |
| Profit after Tax | 10,071.7 | 9,123.7 | 8,047.7 |
| Deposits | 382,723.6 | 382,811.6 | 318,461.4 |
| Net Loans & Advances | 325,366.6 | 345,974.9 | 276,394.4 |
| ROA (before tax) % | 3.0 | 2.8 | 2.7 |
| ROE % | 20.8 | 19.3 | 20.8 |
| Cost/Income % | 47.5 | 51.0 | 51.7 |
| Net NPA % | 1.8 | 2.0 | 2.1 |
| Tier I % | 12.6 | 11.5 | 12.1 |
| Tier II % | 13.8 | 14.3 | 13.0 |
* Based on SLAS
The data and information presented in the table above have been extracted from the Management Accounts prepared by the Bank which are based on SLAS balances generated by the Bank's computer system.
As given above, most of the targets set at the beginning of the year were achieved by the respective divisions during the year. The Bank's actual profit was well above the budgeted profits during the year. The Bank achieved this impressive growth in profits despite additional provisions made during the year. In line with the growth in profits, all profitability and efficiency ratios of the Bank recorded improvements compared to the Budget.
More information on the Bank's income, profits, assets, business volumes, debt and equity together with ratios connected to key performance areas of the Bank is tabulated in the Section on 'Decade at a Glance' under Investor Relations.
A comparison of the Bank's performance in 2012 with that of 2011 is given in the Section on 'Financial Highlights'.
Group Performance
The Commercial Bank Group which consists of Commercial Bank, the two subsidiaries of the Bank, namely Commercial Development Company (CDC) and OneZero Company and the two associates, namely Commercial Insurance Brokers (Pvt) Ltd. and Equity Investments Lanka Ltd., recorded satisfactory results during the year. Commex Sri Lanka SRL is yet to commence commercial operations as the application for re-registration to operate as a 'Payment Institution' was declined by Bank of Italy due to laws relating to money transfer business in European Union being changed. The operations of these companies are not discussed in detail as their contribution to the results and the financial position of the Group is not material in relative terms. Nevertheless, the Group recorded pre and post-tax profits of Rs. 14,312.9 Mn. and Rs. 10,081.2 Mn. respectively, compared to Rs. 10,980.2 Mn. and Rs. 7,932.3 Mn. recorded in 2011 indicating growths of 30.4% and 27.1% respectively.
Generation and Distribution of Economic Value
The Bank believes that data presented below truly reflect its performance in terms of contribution to the economy. The data provided covers a five-year period to facilitate performance comparison and assessment.
Sources and Distribution of Income
The following table portrays the value generated through principal sources of income and distribution amongst stakeholders:
| For the year ended December 31, | 2012 | 2011 | 2010 | 2009 | 2008 |
| Rs. Mn. | Rs. Mn. | Rs. Mn. | Rs. Mn. | Rs. Mn. | |
Source of Income |
|||||
| Interest income | 52,685 | 38,356 | 34,740 | 35,925 | 37,188 |
| Foreign exchange profit | 4,694 | 2,321 | 1,741 | 2,962 | 2,633 |
| Commission income | 3,598 | 3,325 | 3,220 | 2,530 | 2,715 |
| Investment income | 119 | 81 | 207 | 219 | 359 |
| Other | 2,299 | 1,776 | 1,614 | 2,105 | 1,220 |
| Total | 63,395 | 45,859 | 41,522 | 43,741 | 44,115 |
Distribution of Income |
|||||
| To depositors and debentureholders as interest | 29,830 | 19,650 | 18,328 | 23,515 | 24,336 |
| To employees as emoluments | 7,770 | 6,290 | 5,588 | 5,081 | 3,926 |
| Depreciation | 1,035 | 748 | 539 | 506 | 421 |
| Provision for possible loan losses/impairment | 3,197 | 1,808 | 1,192 | 1,534 | 2,278 |
| To providers of supplies and services | 5,229 | 4,828 | 3,779 | 3,619 | 3,511 |
| To Government as taxation (including deferred tax) | 6,184 | 4,542 | 6,515 | 5,159 | 5,352 |
| - Income tax | 4,197 | 3,014 | 3,794 | 2,887 | 3,252 |
| - Value added tax on financial services | 1,987 | 1,523 | 2,709 | 2,264 | 2,091 |
| - Debits tax | - | 5 | 12 | 8 | 9 |
| To Shareholders as dividends | 5,418 | 4,905 | 2,642 | 1,749 | 1,786 |
| To Community | 52 | 110 | 58 | 22 | 23 |
| To Reserves | 4,680 | 2,978 | 2,881 | 2,556 | 2,482 |
| Total | 63,395 | 45,859 | 41,522 | 43,741 | 44,115 |
Note:
The results reported above for 2011 and 2012 have been extracted from the audited Financial Statements of the Bank prepared based on Sri Lanka Accounting Standards (SLFRS) that came into effect from January 1, 2012. The results reported for 2008-2010 have been extracted from the audited Financial Statements of the Bank prepared based on previous Sri Lanka Accounting Standards (SLAS) that were in force up to December 31, 2011. [The Bank has duly restated its financial statements for 2011 in accordance with requirements of SLFRS].
Value Addition and Distribution
The following table indicates wealth generated from banking and non-banking activities and its distribution among the key stakeholders of the Bank:
| For the year ended December 31, | 2012 | 2011 | 2010 | 2009 | 2008 | |||||
| Rs. Mn. | % | Rs. Mn. | % | Rs. Mn. | % | Rs. Mn. | % | Rs. Mn. | % | |
Value Added |
||||||||||
| Income from banking services | 64,614 | 48,015 | 40,809 | 42,736 | 43,236 | |||||
| Cost of services | (36,546) | (26,343) | (21,648) | (26,436) | (26,805) | |||||
| Value added by banking services | 28,068 | 111.06 | 21,672 | 108.29 | 19,161 | 102.56 | 16,300 | 103.35 | 16,431 | 109.30 |
| Non-banking income | 400 | 1.59 | 148 | 0.74 | 713 | 3.82 | 1,005 | 6.37 | 879 | 5.85 |
| Loan losses and provisions/ impairment | (3,197) | (12.65) | (1,807) | (9.03) | (1,192) | (6.38) | (1,534) | (9.72) | (2,278) | (15.15) |
| Total | 25,271 | 100.00 | 20,013 | 100.00 | 18,682 | 100.00 | 15,771 | 100.00 | 15,032 | 100.00 |
Distribution of Value Added |
||||||||||
| To Employees | ||||||||||
| Salaries and other benefits | 7,770 | 30.75 | 6,290 | 31.43 | 5,588 | 29.90 | 5,081 | 32.22 | 3,926 | 26.12 |
| To providers of capital | ||||||||||
| Dividends to shareholders | 4,584 | 4,905 | 2,642 | 1,749 | 1,786 | |||||
| Interest to debentureholders | 133 | 229 | 374 | 626 | 978 | |||||
| Total to providers of capital | 4,717 | 18.67 | 5,133 | 25.65 | 3,016 | 16.15 | 2,375 | 15.06 | 2,764 | 18.39 |
| To Government | ||||||||||
| Income tax | 4,056 | 3,014 | 3,865 | 2,796 | 3,261 | |||||
| Financial VAT | 1,987 | 1,523 | 2,709 | 2,264 | 2,091 | |||||
| Debits tax | - | 5 | 12 | 8 | 9 | |||||
| Total to government | 6,043 | 23.91 | 4,542 | 22.70 | 6,586 | 35.26 | 5,068 | 32.14 | 5,361 | 35.67 |
| For Expansion and growth | ||||||||||
| Retained profit | 5,514 | 2,978 | 2,881 | 2,556 | 2,482 | |||||
| Depreciation | 1,035 | 748 | 623 | 577 | 483 | |||||
| Deferred taxation | 141 | 211 | (71) | 91 | (9) | |||||
| Total for expansion and growth | 6,690 | 26.47 | 3,937 | 19.67 | 3,433 | 18.38 | 3,224 | 20.44 | 2,956 | 19.67 |
| To Community Investments | ||||||||||
| Donations | 51 | 110 | 59 | 23 | 25 | |||||
| Total to community | 51 | 0.20 | 110 | 0.55 | 59 | 0.31 | 23 | 0.14 | 25 | 0.15 |
| Total distributed | 25,271 | 100.00 | 20,013 | 100.00 | 18,682 | 100.00 | 15,771 | 100.00 | 15,032 | 100.00 |
Note:
(a) Donations shown under 'Community Investments' include the contribution made by the Bank for its Corporate Social Responsibility Trust Fund (CSR Trust Fund), amounting to Rs. 50 Mn. (Rs. 80 Mn. in 2011)
* A summary of the activities of the Bank's CSR Trust Fund is given in the Operations Review.
Economic Value Added (EVA)
This is a measure of profitability based on the cost of total invested equity and provides an accurate indication of true economic value generated by the Bank as opposed to accounting profits. Commercial Bank is deeply committed to delivering optimal and consistent value to its shareholders. The Bank's economic value creation during 2012 amounted to Rs. 4.033 Bn., while cumulative over the past five years amounted to Rs. 12.719 Bn.
| For the year ended December 31, | 2012 | 2011 | 2010 | 2009 | 2008 |
| Rs. Mn. | Rs. Mn. | Rs. Mn. | Rs. Mn. | Rs. Mn. | |
| Invested equity | |||||
| Shareholders' funds | 52,770 | 43,765 | 33,302 | 28,499 | 25,891 |
| Add: Cumulative loan loss provision/provision for impairment | 13,501 | 11,601 | 4,900 | 5,015 | 4,955 |
| Total | 66,271 | 55,366 | 38,202 | 33,514 | 30,846 |
| Earnings | |||||
| Profit after tax and dividends on preference shares | 10,098 | 7,883 | 5,523 | 4,305 | 4,228 |
| Add: Loan losses and provisions/impairment provision | 3,197 | 1,807 | 1,192 | 1,534 | 2,278 |
| Less: Loan losses written-off | (4) | (23) | (6) | (23) | (5) |
| Total | 13,291 | 9,667 | 6,709 | 5,816 | 6,501 |
| Cost of equity (based on 12 months weighted average Treasury Bill rate plus 2% for the risk premium) | 13.97% | 9.53% | 10.49% | 15.45% | 20.92% |
| Cost of average equity | 9,258 | 5,276 | 3,761 | 4,972 | 5,998 |
| Economic value added | 4,033 | 4,391 | 2,948 | 844 | 503 |
Impact on Climate Change on Bank's Performance
Generally financial institutions are not directly exposed to risks arising from climate change. However, operations of banks could be directly impacted by the effects of climate change such as floods, tsunamis, cyclones, etc. Further, the operations of banks can be indirectly affected through financial exposure to sectors vulnerable to climate change such as agriculture, fisheries and exports. In order to mitigate the impact of losses that could arise from such lending, the Bank has set up internal limits for various industries. A summary of significant concentrations of credit risk by industry groups appears in Note 26.1(c) to theFinancial Statements. The Bank's Integrated Risk Management Department has identified and documented all possible operational risks that could arise and kept the Board of Directors fully informed of these challenges.
Despite its limited exposure, Commercial Bank has formulated its own climate change strategy which includes the following commitments:
- Developing products and services that support GHG emission reductions and helping customers to closely monitor those activities with environmental impact. Further, the Bank has continued to provide financial assistance to its customers operating in areas such as wind power generation and energy saving. The cumulative value of such financial accommodation granted as at end 2012 stood at Rs. 2.117 Bn. (Rs. 1.425 Bn. by end 2011). Going forwards, the Bank intends to support such industries as part of its sustainability efforts.
- Bank's Development Credit Department continuously encourages its customers to benefit from energy saving initiatives which makes their operations more efficient while reducing carbon footprints. This often involves financial support for green initiatives of various kinds.
- Updating the knowledge base of the Bank on climate change and disseminating knowledge to staff and customers through a designated Social and Environmental Co-ordinator.
Coverage of the Bank's Defined Benefit Plan Obligations
The Bank has liability towards three Defined Benefit Plans funded by the Bank for the benefit of its employees as follows:
- An unfunded pension scheme for employees who retired before January 1, 1992 and for those employees whose future service period as at that date was less than ten years.
- A funded pension scheme for employees who did not accept the restructured pension scheme in 2006.
- A retirement gratuity scheme as required by statute.
An actuarial valuation was duly carried out by the Bank on these retirement benefit obligations as at year end by a qualified actuary using the Projected Unit Credit Method as prescribed by Sri Lanka Accounting Standard - LKAS 19 on 'Employee Benefits'. Arrangements were made to fully provide any shortfall in the respective funds in the Bank's Financial Statements for 2012. More details are given in Note 3.13.1 to the Financial Statements under Accounting Policies on Defined Benefit Plans.
Additionally, the Bank has three other Defined Contribution Plans in place.
- A funded Pension Scheme for employees who accepted the restructured pension scheme in 2006.
- Employees' Provident Fund (EPF) to which the Bank and all employees contribute a statutory minimum of the basic salary.
- Employees' Trust Fund (ETF) to which the Bank contributes 3% of the basic salary of each employee.
More details are found in Note 3.13.2 to the Financial Statements under the Accounting Policies on Defined Contribution Plans. The assets of all funded schemes are adequate to cover their respective liabilities. All employees who joined the Bank on or after January 1, 2002 and who are in the permanent cadre of the Bank are eligible to participate in the gratuity, EPF and ETF plans.
Financial Assistance from Government
The Bank in the ordinary course of business granted several loans and advances to its customers and made several investments which are exempt from income tax under the Inland Revenue Act No. 10 of 2006 as detailed below:
- Interest income on loans granted through the Investment Fund Account created by the Bank - Section 13 (xxxxxx)
- Interest income on loans granted to those companies which met the specified criteria - Section 13 (xi) (i) and (ii), 13 (xx)
- Interest income and capital gains earned on investments in Sri Lanka Development Bonds and Sri Lanka Sovereign Bonds (SLDBs & SLSBs) issued by the Central Bank of Sri Lanka - Sections 13 (xxx), 13 (xxxx) and 13 (xxxxx) (i) & (ii)
- Interest income from investments made outside Sri Lanka where such interest is remitted to Sri Lanka through a bank - Section 9 (m)
- Capital gain on sale of shares - Section 13 (t)
- Fee and commission income earned in foreign currency - Section 13 (dddd)
The above measures enabled the Bank to earn a total tax saving of Rs. 686.6 Mn., Rs. 422.5 Mn. and Rs. 574.3 Mn. during 2010, 2011 and 2012, respectively.
Further, the Bank was able to claim a notional tax credit of 10% amounting to Rs. 329.9 Mn. (Rs. 350.0 Mn. in 2011 and Rs. 572.9 Mn. in 2010, respectively) on interest income earned on investments made in Government Treasury Bills and Bonds.
Spending on Locally-Based Suppliers
The preparation of the Corporate Plan and the Budget encompasses a rigorous process in forecasting both capital and revenue expenditure for the ensuing year. These projections are based on the requirements of individual profit centres and units providing support services. In addition, the Bank maintains a list of suppliers who are subjected to a stringent evaluation process prior to their registration as a preferred supplier. The selection is made after evaluating business critical criteria such as quality, cost, service level, delivery performance and environmental standards. Once the business need is communicated to the Central Procurement Division by the respective business units, the procurements are done following the purchasing process as per the approved procurement policy of the Bank. Wherever possible, the Bank has supported local business partners to develop their businesses further and establish themselves in the local industry. The Bank is aware that some of the local suppliers consider that doing business with the Bank will enable them to enhance their marketability in the industry.
Funding Infrastructure Investments
Upgrading and expanding the road network of a country significantly improve connectivity and conveyance. Such a network narrows the geographic distances and brings markets and networks closer to people. Access and mobility could reduce social isolation and bring communities closer and thus, promoting pluralism and harmony by way of sharing and appreciating each other's culture, values, beliefs and interests. As per the Central Bank Annual Report 2011, road transportation caters to over 90% of the country's total passenger and freight transportation. In this regard, it is noteworthy to mention that Commercial Bank in its endeavours towards the economic wellbeing of the country took a major initiative to fund a trunk road development project at the request of the Road Development Authority and was the first bank to provide such funding in the country.
This initiative can be considered as a turning point in the conventional infrastructure funding as it was the past practice of the country to finance larger infrastructure development projects such as these through foreign funds.
So far the Bank has funded Rs. 1.5 Bn. of which Rs. 1.0 Bn. was funded in 2012, towards the above project and has already committed for a further sum of Rs. 2.8 Bn to be disbursed in the near future.
Graphical Review
