Reviewing the performance for 2012, it is satisfying to report the strong performance of the Bank despite many challenges faced during the year. To place the Bank's performance in context, a brief overview of the global and local economies would be pertinent.
World economic growth continued to be largely stagnant. Global GDP growth reduced marginally in 2012 over 2011 but is expected to improve in 2013.
What is clearly revealed through a study of the performance of regional economies is the significant shift in economic power away from the advanced economies such as the USA, the Euro Zone and Japan to emerging and developing economies such as countries within developing Asia, Russia and Brazil.
Global impacts and policy measures to curb demand were key considerations during the year and led to a downward revision of GDP growth. Sri Lanka's GDP is reported to have grown 6.5% in 2012.
All three major contributory sectors of the economy - Agriculture, Industry and Services - have grown in 2012 and are expected to show continued growth in 2013.
The Agriculture sector is emerging from a drought affected Yala season in 2012; better times are expected to lie ahead in 2013. Both, Industry and Service sectors are expected to grow on the back of a recovery in the global economy.
The year 2012 was not without several areas of challenge - these the Bank faced with optimism to post a successful performance.
Whilst strong liquidity was maintained during the past year, it came at a price. The gap between interest rates on savings and FD's grew wider. With the growth in FDs, the deposit mix witnessed an unfavourable shift, thereby increasing the cost of funds and leading to interest margins coming under pressure.
Another challenge lay in the volatility of Sri Lanka's exchange rate. With the Central Bank leaving the determination of the exchange rates purely to market forces, the SL Rupee/US$ exchange rate witnessed a depreciation of 12% in 2012 as against the rate that prevailed at the end of 2011. By the latter part of the year, signs of stability began to emerge allowing the rate to remain at approximately Rs. 128 to the US$.
The economic turmoil in the developed world also led to reduced turnover and loan servicing capabilities of some of the borrowers.
Through it all, our aim has always been to focus on our fundamentals - strengthening the Balance Sheet, ensuring stability and maintaining a strong current and savings account (CASA) base, which at current levels is probably the best in the industry.
The Bank's performance reached an all time high in 2012 - our profit after tax crossed Rs. 10 Bn. for the first time ever and the total assets crossed the Rs. 500 Bn. mark. The Compounded Annual Growth Rate (CAGR) of deposits and loans & advances has been maintained above 20% over the past decade.
Bank reported a profit before tax of Rs. 14.295 Bn. and a profit after tax of Rs. 10.098 Bn., for the year 2012, a 31% and a 28% growth over 2011, respectively.
This translates to a growth of 24% in net operating income. Growth of net interest income from fund-based operations by 22% and income from fee based operations by 44% contributed to the strong growth in net operating income. Despite the increased cost in expanding the network and the increased staff cost, the Bank managed to contain the increase in operating expenses to 17%.
Total assets of the Bank reached Rs. 512 Bn., recording a growth of 16%. Both, deposits and advances recorded impressive growth. Signifying further improvements in asset quality, non-performing ratio was brought down to 3.37% from 3.43% a year ago.
Profitability too improved, with Return on Assets and Return on Equity increasing to 2.12% and 20.96% for the year as against 1.94% and 20.28% for 2011.
From the national perspective, Commercial Bank continues to play an integral role in Sri Lanka's development drive. We also arranged sizeable funding for a raft of projects connected with national infrastructure development whilst providing funding for SMEs and the Micro sector, alongside the corporate sector and trade finance. We intend to take these initiatives forward in 2013.
We have been prudent in our lending by choosing more productive areas of the economy to support whilst reducing exposure to high risk areas. Thus, we have successfully maintained a quality lending portfolio and a correspondingly high rate of recovery.
The Bank's Cost to Income Ratio continues to be one of the best in the industry. Productivity ratios improved due to several factors such as rationalisation of staff deployment, new developments in automation, centralisation of key business processes and cost containment initiatives among others, all leading to improved net profits.
Productivity enhancement measures are continuously pursued.
In terms of the Bank's financial well-being, it has always been our endeavour to maintain sound liquidity and a strong capital base. In order to strengthen liquidity, the Bank obtained US $ 65 Mn. from the IFC as a seven year senior debt mainly to fund lending to the SME sector. Taking this forward, we signed up another agreement with IFC in February 2013 to borrow US $ 75 Mn. as a ten year subordinated debt, which will strengthen the Tier II capital of the Bank. All this will help us to gear ourselves for a vibrant growth in lending backed by strong liquidity and capital.
The Bank's enterprise is driven by key business areas, namely, Personal Banking, Corporate Banking, Treasury and Trade Finance & International Operations. These are ably supported by other functions such as HR, Operations, IT, Marketing, Logistics, Procurement, Risk, Compliance, Internal Audit and Finance.
High on our list of strengths are our growing customer base, our highly trained and motivated staff, our superior technological platform, IT driven processes and our highly developed work ethic and culture.
Commercial Bank has always been a very customer centric Bank maintaining the highest levels of engagement with its customers. This is reinforced by the highly visible initiatives taken to make our services more accessible and convenient.
Our channel expansion and subsequent presence within top tier supermarket chains has significantly enhanced accessibility and convenience in respect of the customer. Likewise, our upgraded Internet banking platform is extremely user friendly, a factor that will aid in our efforts to promote its usage amongst more of our customers. Both of these initiatives have made transacting business with Commercial Bank much easier.
We are also reinforcing the 'personal touch' through more optimal staff management and deployment whilst centralisation and automation frees up time at our branches to better serve customers.
Our footprint in Sri Lanka too has widened considerably this year with 14 delivery points taking the number of branches to 227 and 55 ATMs coming on line making a total of 555 by end of 2012. We are proud of our continued presence in the Northern and the Eastern Provinces even during the conflict years, where we now operate with 24 branches. In the case of Bangladesh which we entered in 2003, we now operate 17 delivery points and 17 ATMs. The Bank has also strengthened infrastructure and enhanced productivity by maximising our IT capabilities and upgrading our risk management regime. We are now in the process of migrating to an advanced treasury software system.
The Bank is now compliant with the new Sri Lanka Accounting Standards (SLFRS/LKAS) and with that becomes IFRS compliant as well - the Report in your hands has been formulated and produced in accordance with the first time adoption requirement of these Accounting Standards.
We have also presented this first integrated annual report to you demonstrating our passion for focus and transparency in our reporting.
Commercial Bank features in the list of the world's Top 1000 Banks for the second year in succession.
Looking back over the year, our performance would not have been possible without a great effort, complemented by effective planning, management and oversight. Each and every employee is a proud contributor to the final results. They can all be extremely proud of their enterprise. I would like to thank all our staff without reservation.
Looking to the future, we will continue to expand our branch network both in Sri Lanka and in Bangladesh. In fact, we continue to explore the region to identify similar opportunities as is the case with our Bangladeshi operations.
I offer grateful thanks to the Chairman and to the Board of Directors for their diligent oversight and wise guidance, which helped us to move beyond the challenges of the year with an unwavering focus on achievement and progress. I wish to place on record the Bank's appreciation and gratitude to my predecessor, Mr. Amitha Gooneratne, who retired in early 2012. In like vein, I thank Messrs Sanath Bandaranayake, Deputy General Manager - Operations and Delip Fernando, Deputy General Manager - Inspection and all other staff members who retired in 2012 after rendering long years of yeoman service to the Bank. I would also like to extend my gratitude to officers at all levels of the Central Bank of Sri Lanka for their regulatory guidance and the External Auditors, Messrs KPMG for their professional advice and the timely completion of the audit.
The Bank has more achievements and progress firmly in its sight; the journey before us would be an interesting, challenging and a productive one.
Ravi Dias
Managing Director/CEO
February 27, 2013