Commercial Bank of Ceylon PLC | Annual Report 2019

Key regulatory ratios – Capital and liquidity

	GROUP		Bank
As at December 31,	2019	2018	2019	2018
Regulatory capital
Common equity (Rs. ’000)	123,239,984	109,879,697	119,622,141	107,110,518
Tier 1 capital (Rs. ’000)	123,239,984	109,879,697	119,622,141	107,110,518
Total capital (Rs. ’000)	160,842,808	150,167,520	157,045,547	147,398,341
Regulatory capital ratios
Common equity Tier 1 capital ratio (minimum requirement – 7.00%+HLA*=8.50%) (w. e. f. January 1, 2019) (%)	12.399	11.431	12.298	11.338
Tier 1 capital ratio (minimum requirement – 8.50%+HLA=10.00%) (w. e. f. January 1, 2019) (%)	12.399	11.431	12.298	11.338
Total capital ratio (minimum requirement – 12.50%+HLA=14.00%) (w. e. f. January 1, 2019) (%)	16.182	15.623	16.146	15.603
Regulatory liquidity
Statutory liquid assets (Rs. ’000)			330,684,193	257,020,724
Statutory liquid assets ratio (minimum requirement – 20% )
Domestic Banking Unit (%)			30.42	24.47
Offshore Banking Unit (%)			25.25	30.20
Liquidity coverage ratio (%) – Rupee (minimum requirement – 100%) (w. e. f. January 1, 2019 )			158.79	204.48
Liquidity coverage ratio (%) – All currency (minimum requirement – 100%) (w. e. f. January 1, 2019 )			224.74	215.62

*HLA – Higher Loss Absorbency (Requirement applicable to the Bank is 1.500%.)

Basel III computation of capital ratios

	GROUP		Bank
As at December 31,	2019	2018	2019	2018
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000

Common equity Tier 1 (CET1) capital after adjustments	123,239,984	109,879,697	119,622,141	107,110,518
Total common equity Tier 1 (CET1) capital	125,003,216	111,316,894	123,941,618	110,822,797
Equity capital (stated capital)	40,916,957	39,147,882	40,916,957	39,147,882
Reserve fund	8,387,701	7,444,403	8,205,391	7,354,143
Published retained earnings	4,688,718	5,499,654	4,714,691	5,726,294
Published accumulated other comprehensive Income (OCI)	2,691,325	522,284	2,516,082	352,491
General and other disclosed reserves	67,588,497	58,241,987	67,588,497	58,241,987
Unpublished current year’s profit/(losses) and gains reflected in OCI	–	–	–	–
Ordinary shares issued by consolidated banking and financial subsidiaries of the Bank and held by third parties	730,018	460,684	–	–
Total adjustment to CET1 capital	1,763,232	1,437,197	4,319,477	3,712,279
Goodwill (net)	445,147	400,045	–	–
Intangible assets (net)	1,200,565	1,033,339	1,080,011	906,114
Revaluation losses of property, plant and equipment	3,813	3,813	3,813	3,813
Significant investments in the capital of financial institutions where the Bank owns more than 10% of the issued ordinary share capital of the entity	–	–	2,941,594	2,802,352
Deferred tax assets (net)	113,707	–	294,059	–
Additional Tier 1 (AT1) capital after adjustments	–	–	–	–
Total additional Tier 1 (AT1) capital	–	–	–	–
Qualifying additional Tier I capital instruments	–	–	–	–
Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties	–	–	–	–
Total adjustments to AT1 capital	–	–	–	–
Investment in own shares	–	–	–	–
Reciprocal cross holdings in AT1 capital instruments	–	–	–	–
Investments in the capital of banking and financial institutions where the Bank does not own more than 10% of the issued ordinary share capital of the entity	–	–	–	–
Significant investments in the capital of banking and financial institutions where the bank own more than 10% of the issued ordinary share capital of the entity	–	–	–	–
Regulatory adjustments applied to AT1 due to insufficient Tier 2 capital to cover adjustments	–	–	–	–
Tier 2 capital after adjustments	37,602,824	40,287,823	37,423,406	40,287,823
Total Tier 2 capital	37,602,824	40,287,823	37,423,406	40,287,823
Qualifying Tier 2 capital instruments	26,704,378	33,103,574	26,704,378	33,103,574
Revaluation gains	3,087,658	3,087,658	3,087,658	3,087,658
General provision/eligible impairment	7,810,788	4,096,591	7,631,370	4,096,591
Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties	–	–	–	–
Total adjustments to Tier 2 capital	–	–	–	–
Investment in own shares	–	–	–	–
Others	–	–	–	–
CET 1 capital	123,239,984	109,879,697	119,622,141	107,110,518
Total Tier 1 capital	123,239,984	109,879,697	119,622,141	107,110,518
Total capital	160,842,808	150,167,520	157,045,547	147,398,341
Total risk weighted amount (RWA)	993,941,563	961,218,800	972,679,405	944,682,441
Risk weighted amount for credit risk	925,876,884	906,681,121	905,525,098	890,440,654
Risk weighted amount for market risk	26,506,850	15,786,211	26,032,471	15,707,609
Risk weighted amount for operational risk	41,557,829	38,751,468	41,121,836	38,534,178
CET1 capital ratio (including capital conservation buffer, countercyclical capital buffer and surcharge on D-SIBs) (%)	12.399	11.431	12.298	11.338
Of which: capital conservation buffer (%)	2.500	1.875	2.500	1.875
Of which: countercyclical buffer (%)
Of which: capital surcharge on D-SIBs (%)	1.500	1.000	1.500	1.000
Total Tier 1 capital ratio (%)	12.399	11.431	12.298	11.338
Total capital ratio (including capital conservation buffer,countercyclical capital buffer and surcharge on D-SIBs) (%)	16.182	15.623	16.146	15.603
Of which: capital conservation buffer (%)	2.500	1.875	2.500	1.875
Of which: countercyclical buffer (%)	–	–	–	–
Of which: capital surcharge on D-SIBs (%)	1.500	1.000	1.500	1.000

Leverage ratio

As at December 31,	GROUP		Bank
	2019	2018	2019	2018
	Rs. ‘000	Rs. ‘000	Rs. ‘000	Rs. ‘000
Tier 1 capital	123,239,984	109,879,697	119,622,141	107,110,518
Total exposures	1,880,168,663	1,857,698,877	1,855,954,448	1,841,358,688
On-balance sheet items (excluding derivatives and securities financing transactions, but including collateral)	1,390,884,732	1,307,181,461	1,366,732,527	1,290,856,264
Derivative exposures	349,780,784	398,880,824	349,780,784	398,880,824
Securities financing transaction exposures	49,182,189	52,188,205	49,182,189	52,188,205
Other off-balance sheet exposures	90,320,958	99,448,387	90,258,948	99,433,395
Basel III leverage ratio (%) (minimum requirement 3%) (w. e. f. January 1, 2019)	6.55	5.91	6.45	5.82

Liquidity coverage ratio (LCR)

As at December 31,	2019		2018
	Total unweighted value	Total weighted value	Total unweighted value	Total weighted value
	Rs. '000	Rs. '000	Rs. '000	Rs. '000
Total stock of High Quality Liquid Assets (HQLA)	199,777,341	193,108,535	160,707,217	153,018,792
Total adjusted level 1 assets	119,969,825	119,969,825	110,660,676	110,660,676
Level 1 assets	119,797,458	119,797,458	110,448,524	110,448,524
Total adjusted level 2A assets	86,000,609	73,100,518	49,831,202	42,356,522
Level 2A assets	86,000,609	73,100,518	49,831,202	42,356,522
Total adjusted level 2B assets	421,118	210,559	427,491	213,746
Level 2B assets	421,118	210,559	427,491	213,746
Total cash outflows	1,359,817,438	221,042,723	1,304,126,474	219,126,881
Deposits	829,166,765	82,916,676	767,129,947	76,712,994
Unsecured wholesale funding	235,893,678	100,802,482	233,365,717	106,526,815
Secured funding transaction	–	–	–	–
Undrawn portion of committed (irrevocable) facilities and other contingent funding obligations	294,756,995	37,323,565	303,630,810	35,887,072
Additional requirements	–	–	–	–
Total cash inflows	228,350,709	135,116,096	246,589,006	148,161,577
Maturing secured lending transactions backed by collateral	66,627,280	55,004,733	61,274,814	54,621,691
Committed facilities	–	–	–	–
Other inflows by counterparty which are maturing within 30 calender days	102,126,336	57,827,782	109,687,516	64,171,184
Operational deposits	17,102,782	–	24,920,222	–
Other cash inflows	42,494,311	22,283,581	50,706,454	29,368,702
Liquidity coverage ratio (%) (stock of high quality liquid assets/ total net cash outflows over the next 30 calendar days) *100		224.74		215.62

Net stable funding ratio (NSFR)

As at December 31,	Bank
	2019	2018
	Rs. ‘000	Rs. ‘000
Total available stable funding (ASF)	1,088,884,310	N/A
Required stable funding – On balance sheet assets	788,401,681	N/A
Required stable funding – Off balance sheet items	6,134,840	N/A
Total required stable funding (RSF)	794,536,521	N/A
NSFR (%) (minimum requirement – 100%) (w. e. f. July 1, 2019)	137.05	N/A

Main features of regulatory capital instruments

Description of the capital Instrument	Stated capital	2016-2021 listed rated unsecured subordinated redeemable debentures	2016-2026 listed rated unsecured subordinated redeemable debentures	2016-2021 listed rated unsecured subordinated redeemable debentures	2016-2026 Listed rated unsecured subordinated redeemable debentures	2018-2023 Basel III compliant – Tier 2 listed rated unsecured subordinated redeemable debentures with a non-viability conversion	2018-2028 Basel III Compliant – Tier 2 listed rated unsecured subordinated redeemable debentures with a non-viability Conversion	2013-2023 Floating rate subordinated loans – Tier 2 IFC borrowing
Issuer	Commercial Bank	Commercial Bank	Commercial Bank	Commercial Bank	Commercial Bank	Commercial Bank	Commercial Bank	International Finance Corporation
Unique Identifier
Governing law(s) of the instrument	Sri Lanka	Sri Lanka	Sri Lanka	Sri Lanka	Sri Lanka	Sri Lanka	Sri Lanka	United States
Original date of issuance	Not Applicable	March 9, 2016	March 9, 2016	October 28, 2016	October 28, 2016	July 23, 2018	July 23, 2018	March 13, 2013
Par value of instrument		Rs. 100/-	Rs. 100/-	Rs. 100/-	Rs. 100/-	Rs. 100/-	Rs. 100/-
Perpetual or dated	Perpetual	Dated	Dated	Dated	Dated	Dated	Dated	Dated
Original maturity date, if applicable	Not Applicable	March 8, 2021	March 8, 2026	October 27, 2021	October 27, 2026	July 22, 2023	July 22, 2028	March 14, 2023
Amount recognised in regulatory capital (in Rs. ‘000 as at the reporting date)	40,916,957	1,772,136	1,749,090	2,028,720	1,928,200	6,715,072	1,606,160	10,905,000
Accounting classification (equity/liability)	Equity	Liability	Liability	Liability	Liability	Liability	Liability	Liability
Issuer call subject to prior supervisory approval
Optional call date, contingent call dates and redemption amount (Rs. ‘000)	Not Applicable	Not Applicable	Not Applicable	Not Applicable	Not Applicable	Not Applicable	Not Applicable	Not Applicable
Subsequent call dates, if applicable	Not Applicable	Not Applicable	Not Applicable	Not Applicable	Not Applicable	Not Applicable	Not Applicable	Not Applicable
Coupons/dividends:
Fixed or floating dividend/coupon	Not Applicable	Fixed	Fixed	Fixed	Fixed	Fixed	Fixed	Floating
Coupon rate and any related index		10.75% p.a.	11.25% p.a.	12.00% p.a.	12.25% p.a.	12.00% p.a.	12.50% p.a.	6 Months LIBOR + 5.75%
Non-cumulative or cumulative	Non-cumulative	Cumulative	Cumulative	Cumulative	Cumulative	Cumulative	Cumulative	Cumulative
Convertible or non-convertible
If convertible, conversion trigger (s)	Not Applicable	Not Convertible	Not Convertible	Not Convertible	Not Convertible	A “Trigger Event” is determined by and at the sole discretion of the Monetary Board of the Central Bank of Sri Lanka (i.e., conversion of the said Debentures upon occurrence of the Trigger Event will be affected by the Bank solely upon being instructed by the Monetary Board of the Central Bank of Sri Lanka), and is defined in the Banking Act Direction No. 1 of 2016 of Web-Based Return Code 20.2.3.1.1.1.(10) (iii) (a&b) as a point/event being the earlier of – (a) “A decision that a write-down, without which the Bank would become non-viable, is necessary, as determined by the Monetary Board, OR (b) The decision to make a public sector injection of capital, or equivalent support,without which the Bank would have become non-viable, as determined by the Monetary Board.”	A “Trigger Event” is determined by and at the sole discretion of the Monetary Board of the Central Bank of Sri Lanka (i.e., conversion of the said Debentures upon occurrence of the Trigger Event will be effected by the Bank solely upon being instructed by the Monetary Board of the Central Bank of Sri Lanka), and is defined in the Banking Act Directions No. 1 of 2016 of Web Based Return Code 20.2.3.1.1.1.(10) (iii) (a&b) as a point/event being the earlier of – (a) “A decision that a write-down, without which the Bank would become non-viable, is necessary, as determined by the Monetary Board, OR (b) The decision to make a public sector injection of capital, or equivalent support, without which the Bank would have become non-viable, as determined by the Monetary Board.”	Not Convertible
If convertible, fully or partially	Not Applicable	Not Applicable	Not Applicable	Not Applicable	Not Applicable	Fully	Fully	Not Applicable
If convertible, mandatory or optional	Not Applicable	Not Applicable	Not Applicable	Not Applicable	Not Applicable	Optional. At the discretion of the monetary board of the Central Bank of Sri Lanka upon occurance of trigger points as detailed above.	Optional. At the discretion of the monetary board of the Central Bank of Sri Lanka upon occurance of trigger points as detailed above.	Not Applicable
If convertible, conversion rate	Not Applicable	Not Applicable	Not Applicable	Not Applicable	Not Applicable	The price based on the simple average of the daily volume of weighted average price (VWAP) of an ordinary voting share of the Bank during the three (03) months period, immediately preceding the date of the Trigger Event.	The price based on the simple average of the daily volume of weighted average price (VWAP) of an ordinary voting share of the Bank during the three (03) months period, immediately preceding the date of the Trigger Event.	Not Applicable

Summary discussion on adequacy/meeting current and future capital requirements

The Bank prepares the Corporate Plan and Budget for a period of 5 years which is rolled over every year and contains the forecast for certain ratios mentioned under Basel III accord including the Capital Adequacy ratios (CARs).

As part of the budgeting process the CARs are analysed against increases in risk-weighted assets underlying the budgeted expansion of assets including business volumes. The Bank has set up an internal threshold on minimum CARs and ensures that appropriate measures are employed to maintain the CARs above the said threshold when preparing the Budget.

Budgeting process of the Bank encapsulates all future capital requirements including the estimated capital expenditure and the business growth, while ensuring that the Bank remains solvent. Based on these requirements, the Budget captures the capital augmentation plan covering both internal and external capital sources. The Bank has a well established process to monitor the level of achievement against the pre-determined targets and corrective action is taken for any deviations.

Additionally, the Bank has a dynamic ICAAP process with rigorous stress testing embodied in addition to taking into consideration the qualitative aspects such as reputational and strategic risks. The ICAAP process also computes the concentration risk ensuring that the Bank has a well-diversified assets portfolio which is not overly exposed to any counterparty or any individual sector. This process also proactively identifies the possible gaps in CARs in advance, allowing the Bank to take informed decisions to optimise utilisation of capital.

Methods of improving the CARs are being evaluated on an ongoing basis and in extreme situations, the Bank will deliberate on strategically curtailing the expansion of risk weighted assets. Prior to taking such decisions, the Bank will assess the impact on the internally developed thresholds of minimum CARs resulting from the short-term asset expansion plans.

The dividend policy of the Bank is formulated to achieve the twin objectives of satisfying the shareholder expectation of a stable dividend payout while retaining part of the profit for future business expansion. Capital generated through retained profits over the years is one of the primary sources of internal capital to the Bank, which is also augmented by the scrip dividend paid to shareholders.

A comprehensive analysis of “Managing Funding and Liquidity” given in the section on Strategic Imperatives.

Credit risk under standardised approach

Credit risk exposures and credit risk mitigation (CRM) effects

As at December 31, 2019	GROUP
	Exposures before credit conversion factor (CCF) and CRM		Exposures post CCF and CRM		RWA and RWA density (%)
	On-balance sheet amount (a)	Off-balance sheet amount (b)	On-balance sheet amount (c)	Off-balance sheet amount (d)	RWA (e)	RWA density {e/(c+d)}
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	(%)
Claims on Central Government and Central Bank of Sri Lanka	327,498,652	25,445,000	327,498,652	508,900	29,420,135	8.97
Claims on foreign sovereigns and their central banks	35,112,468	–	35,112,468	–	35,112,468	100.00
Claims on public sector entities (PSEs)	5,243	–	5,243	–	5,243	100.00
Claims on Official Entities and Multilateral Development Banks (MDBs)	1,377,858	–	1,377,858	–	–	–
Claims on Banks exposures	52,075,455	214,449,923	52,075,455	14,404,770	29,035,741	43.68
Claims on financial institutions	19,801,538	–	19,801,538	–	10,737,613	54.23
Claims on corporates	476,440,105	304,078,948	429,307,750	59,144,829	468,044,369	95.82
Retail claims	313,459,583	30,976,995	268,486,114	13,210,141	239,451,562	85.00
Claims secured by residential property	70,009,098	–	70,009,098	–	50,172,041	71.67
Non-performing assets (NPAs)	30,562,373	–	30,562,373	–	36,380,754	119.04
Cash items and other assets	58,118,971	–	58,118,971	–	27,516,958	47.35
Total	1,384,461,344	574,950,866	1,292,355,520	87,268,640	925,876,884	67.11

Credit risk exposures and credit risk mitigation (CRM) effects (Contd.)

As at December 31, 2019	BANK
	Exposures before credit conversion factor (CCF) and CRM		Exposures post CCF and CRM		RWA and RWA density (%)
	On-balance sheet amount (a)	Off-balance sheet amount (b)	On-balance sheet amount (c)	Off-balance sheet amount (d)	RWA (e)	RWA density {e/(c+d)}
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	(%)
Claims on Central Government and Central Bank of Sri Lanka	327,242,088	25,445,000	327,242,088	508,900	29,420,135	8.98
Claims on foreign sovereigns and their central banks	22,558,160	–	22,558,160	–	22,558,160	100.00
Claims on public sector entities (PSEs)	5,243	–	5,243	–	5,243	100.00
Claims on Official Entities and Multilateral Development Banks (MDBs)	1,377,858	–	1,377,858	–	–	–
Claims on Banks exposures	51,050,904	214,449,918	51,050,904	14,404,770	28,011,190	42.79
Claims on financial institutions	19,801,538	–	19,801,538	–	10,737,613	54.23
Claims on corporates	469,712,386	303,941,616	422,580,031	59,082,819	461,254,640	95.76
Retail claims	313,459,583	30,976,995	268,486,114	13,210,141	239,451,562	85.00
Claims secured by residential property	70,009,098	–	70,009,098	–	50,172,041	71.67
Non-performing assets (NPAs)	29,687,629	–	29,687,629	–	35,518,937	119.64
Higher-risk Categories	1,225,637	–	1,225,637	–	3,064,093	250.00
Cash items and other assets	55,435,091	–	55,435,091	–	25,331,484	45.70
Total	1,361,565,215	574,813,529	1,269,459,391	87,206,630	905,525,098	66.75

Credit risk under standardised approach

Exposures by asset classes and risk weights (Post CCF and CRM)

As at December 31, 2019	GROUP
	0%	20%	50%	60%	75%	100%	150%	>150%	Total credit exposures amount
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Claims on Central Government and Central Bank of Sri Lanka	180,906,876	147,100,676	–	–	–	–	–	–	328,007,552
Claims on foreign sovereigns and their central banks	–	–	–	–	–	35,112,468	–	–	35,112,468
Claims on public sector entities (PSEs)	–	–	–	–	–	5,243	–	–	5,243
Claims on official entities and multilateral development banks (MDBs)	1,377,858	–	–	–	–	–	–	–	1,377,858
Claims on Banks exposures	–	36,325,810	16,767,673	–	–	13,386,742	–	–	66,480,225
Claims on financial institutions	–	–	18,127,851	–	–	1,673,687	–	–	19,801,538
Claims on corporates	–	17,823,214	12,299,278	–	–	458,330,087	–	–	488,452,579
Retail claims	838,247	1,974,057	–	7,491,815	147,321,896	124,070,240	–	–	281,696,255
Claims secured by residential property	–	–	39,674,114	–	–	30,334,984	–	–	70,009,098
Non-performing assets (NPAs)	–	–	610,133	–	–	17,705,347	12,246,893	–	30,562,373
Cash items and other assets	26,592,518	5,011,869	–	–	–	26,514,584	–	–	58,118,971
Total	209,715,499	208,235,626	87,479,049	7,491,815	147,321,896	707,133,382	12,246,893	–	1,379,624,160

Exposures by asset classes and risk weights (post CCF and CRM) (Contd.)

As at December 31, 2019	Bank
	0%	20%	50%	60%	75%	100%	150%	>150%	Total credit exposures amount
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Claims on Central Government and Central Bank of Sri Lanka	180,650,312	147,100,676	–	–	–	–	–	–	327,750,988
Claims on foreign sovereigns and their central banks	–	–	–	–	–	22,558,160	–	–	22,558,160
Claims on Public Sector Entities (PSEs)	–	–	–	–	–	5,243	–	–	5,243
Claims on official entities and Multilateral Development Banks (MDBs)	1,377,858	–	–	–	–	–	–	–	1,377,858
Claims on Banks exposures	–	36,325,810	16,767,673	–	–	12,362,191	–	–	65,455,674
Claims on financial institutions	–	–	18,127,851	–	–	1,673,687	–	–	19,801,538
Claims on corporates	–	17,823,214	12,299,278	–	–	451,540,358	–	–	481,662,850
Retail claims	838,247	1,974,057	–	7,491,815	147,321,896	124,070,240	–	–	281,696,255
Claims secured by residential property	–	–	39,674,114	–	–	30,334,984	–	–	70,009,098
Non-performing assets (NPAs)	–	–	584,279	–	–	16,856,457	12,246,893	–	29,687,629
Higher-risk categories	–	–	–	–	–	–	–	1,225,637	1,225,637
Cash items and other assets	26,094,112	5,011,869	–	–	–	24,329,110	–	–	55,435,091
Total	208,960,529	208,235,626	87,453,195	7,491,815	147,321,896	683,730,430	12,246,893	1,225,637	1,356,666,021

Market risk under standardised measurement method

	GROUP		Bank
As at December 31,	2019	2018	2019	2018
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
(a) Capital charge for interest rate risk	2,461,836	339,612	2,461,836	339,612
General interest rate risk	460,969	72,544	460,969	72,544
(i) Net long or short position	460,969	72,544	460,969	72,544
(ii) Horizontal disallowance	–	–	–	–
(iii) Vertical disallowance	–	–	–	–
(iv) Options	–	–	–	–
Specific interest rate risk	2,000,867	267,068	2,000,867	267,068
(b) Capital charge for equity	271,988	73,975	271,988	73,975
(i) General equity risk	137,639	38,601	137,639	38,601
(ii) Specific equity risk	134,349	35,374	134,349	35,374
(c) Capital charge for foreign exchange and gold	977,135	1,618,888	910,722	1,608,768
(d) Capital charge for market risk [(a) + (b) + (c)]	3,710,959	2,032,475	3,644,546	2,022,355
*Total RWA for market risk [(d) 100/14]**	26,506,850	15,786,211	26,032,471	15,707,609

Operational risk under the Alternative Standardised Approach (ASA) – Group

As at December 31,			2019			2018
			Gross income			Gross income
	Capital charge factor	Fixed factor	1st year	2nd year	3rd year	1st year	2nd year	3rd year
	%		Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Corporate finance	18		273,038	210,049	167,464	402,396	273,037	210,049
Trading and sales	18		844,325	3,956,306	3,852,135	880,078	844,325	3,956,308
Payment and settlement	18		591,811	651,440	690,845	511,789	591,811	651,440
Agency services	15		–	–	–	–	–	–
Asset management	12		–	–	–	–	–	–
Retail brokerage	12		–	–	–	–	–	–
Total (a)			1,709,174	4,817,795	4,710,444	1,794,263	1,709,173	4,817,797
Retail banking (Loans and advances)	12	0.035	382,107,206	452,610,049	487,202,436	322,099,624	382,107,206	452,610,049
Commercial banking (Loans and advances)	15	0.035	556,018,749	606,642,106	719,146,950	477,587,106	556,018,749	606,642,106
Total (b)			938,125,955	1,059,252,155	1,206,349,386	799,686,730	938,125,955	1,059,252,155
Total (a) + (b)			939,835,129	1,064,069,950	1,211,059,830	801,480,993	939,835,128	1,064,069,952
Capital charge for operational risk			4,831,600	5,953,036	6,669,652	4,183,118	4,831,600	5,953,036
Average capital charge (c)					5,818,096			4,989,252
*RWA for operational risk [(c)100/14]**					41,557,829			38,751,468

Operational risk under the Alternative Standardised Approach (ASA) – Bank

As at December 31,			2019			2018
			Gross income			Gross income
	Capital charge factor	Fixed factor	1st year	2nd year	3rd year	1st year	2nd year	3rd year
	%		Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Corporate finance	18		273,038	210,049	167,464	402,396	273,037	210,049
Trading and sales	18		766,079	3,911,019	3,661,995	897,167	766,080	3,911,019
Payment and settlement	18		591,811	651,440	690,845	511,789	591,811	651,440
Agency services	15		–	–	–	–	–	–
Asset management	12		–	–	–	–	–	–
Retail brokerage	12		–	–	–	–	–	–
Total (a)			1,630,928	4,772,508	4,520,304	1,811,352	1,630,928	4,772,508
Retail banking (Loans and advances)	12	0.035	378,807,792	448,200,815	481,442,015	318,400,031	378,807,792	448,200,815
Commercial banking (Loans and advances)	15	0.035	555,303,148	604,168,024	708,987,024	477,566,554	555,303,148	604,168,024
Total (b)			934,110,940	1,052,368,839	1,190,429,039	795,966,585	934,110,940	1,052,368,839
Total (a) + (b)			935,741,868	1,057,141,347	1,194,949,343	797,777,937	935,741,868	1,057,141,347
Capital charge for operational risk			4,799,901	5,913,377	6,557,893	4,170,548	4,799,901	5,913,377
Average capital charge (c)					5,757,057			4,961,275
*RWA for operational risk [(c)100/14]**					41,121,836			38,534,178

Differences between accounting and regulatory scopes and mapping of financial statement categories with regulatory risk categories – Bank

As at December 31, 2019	a	b	c	d	e
	Carrying values as reported in published financial statements	Carrying values under scope of regulatory reporting	Subject to credit risk framework	Subject to market risk framework	Not subject to capital requirements or subject to deduction from capital
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Assets	1,387,345,406	1,385,669,389	1,361,565,215	21,468,033	4,315,663
Cash and cash equivalents	52,534,730	52,144,064	52,144,064	–	–
Balances with Central Banks	39,461,127	39,461,127	39,461,127	–	–
Placements with banks	24,527,241	24,241,559	24,241,559	–	–
Securities purchased under re-sale agreements	13,147,534	13,147,534	13,147,534	–	–
Derivative financial assets	1,830,927	–	–	–	–
Financial assets recognised through profit or loss – Measured at fair value	21,468,033	21,468,033	–	21,468,033	–
Financial assets at amortised cost – Loans and advances to banks	757,787	757,898	757,898	–	–
Financial assets at amortised cost – Loans and advances to other customers	884,645,744	887,451,489	888,836,952	–	–
Financial assets at amortised cost – Debt and other financial instruments	101,144,819	100,163,480	100,163,480	–	–
Financial assets measured at fair value through other comprehensive income	197,568,330	195,925,649	195,925,649	–	–
Investments in subsidiaries	5,011,284	5,011,284	2,069,690	–	2,941,594
Investments in associates	44,331	44,331	44,331	–	–
Property, plant and equipment and right-of-use assets	20,436,493	15,184,731	15,184,731	–	–
Intangible assets	1,080,010	1,080,010	–	–	1,080,010
Leasehold property	70,710	70,710	70,710	–	–
Deferred tax assets	294,059	–	–	–	294,059
Other assets	23,322,247	29,517,490	29,517,490	–	–
Liabilities	1,254,183,021	1,249,998,411	–	–	–
Due to banks	51,505,694	51,148,065	–	–	–
Derivative financial liabilities	1,495,317	–	–	–	–
Securities sold under repurchase agreements	51,220,023	51,225,771	–	–	–
Financial liabilities at amortised cost – Due to depositors	1,053,307,660	1,030,276,182	–	–	–
Financial liabilities at amortised cost – Other borrowings	23,248,893	23,224,888	–	–	–
Current tax liabilities	4,967,644	4,782,140	–	–	–
Deferred tax liabilities	–	2,823,769	–	–	–
Other liabilities	30,496,709	49,691,798	–	–	–
Due to subsidiaries	54,292	54,292	–	–	–
Subordinated liabilities	37,886,789	36,771,506	–	–	–
Off-balance sheet liabilities	579,999,273	579,999,273	574,813,529	–	–
Guarantees	58,463,720	58,463,720	55,164,778	–	–
Performance bonds	38,606,887	38,606,887	38,606,887	–	–
Letter of credit	52,317,807	52,317,807	52,317,807	–	–
Other contingent items	321,236,270	321,236,270	319,677,536	–	–
Undrawn loan commitments	109,046,521	109,046,521	109,046,521	–	–
Other commitments	328,068	328,068	–	–	–
Shareholders’ equity	133,162,385	135,670,978	–	–	–
Equity capital (stated capital)/assigned capital:
Of which amount eligible for CET1	40,916,958	40,916,958	–	–	–
Of which amount eligible for AT1	–	–	–	–	–
Retained earnings	5,144,433	9,438,466	–	–	–
Accumulated other comprehensive income	1,747,068	(38,372)	–	–	–
Other reserves	85,353,926	85,353,926	–	–	–

Explanations of Differences between Accounting and Regulatory Exposure Amounts

		Reasons for differences
As at December 31, 2019	Differences observed between accounting carrying value and amounts considered for regulatory purposes	Net impact arising from Impairment (Stage 1,2 and 3)	Fair Value Adjustment	Effective Interest Rate (EIR) Adjustment	Re-classification of Interest Receivable/ Payable and others	Unamortised cost on staff loans (Day 1 difference)	Other SLFRS Adjustments	Tax Impact on SLFRS Adjustments
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Assets
Cash and cash equivalents	390,666	(5,707)	–	–	396,373	–	–	–
Placements with banks	285,682	(8,597)	–	–	294,279	–	–	–
Derivative financial assets	1,830,927	–	–	–	1,830,927	–	–	–
Financial assets at amortised cost – Loans and advances to banks	(111)	(111)	–	–	–	–	–	–
Financial assets at amortised cost – Loans and advances to other customers	(2,805,745)	(6,604,237)	–	–	8,685,433	(4,886,941)	–	–
Financial assets at amortised cost – Debt and other financial instruments	981,339	360,980	–	–	620,359	–	–	–
Financial assets measured at fair value through other comprehensive income	1,642,681	1,638,115	–	–	4,566	–	–	–
Property, plant and equipment and right-of-use of assets	5,251,762	–	–	–	–	–	5,251,762	–
Deferred tax assets	294,059	–	–	–	–	–	–	294,059
Other assets	(6,195,243)	–	–	–	(10,390,336)	4,886,941	(691,848)	–
Liabilities
Due to banks	357,629	–	–	–	357,629	–	–	–
Derivative financial liabilities	1,495,317	–	–	–	1,495,317	–	–	–
Securities sold under repurchase agreements	(5,748)	–	–	(5,748)	–	–	–	–
Financial liabilities at amortised cost – due to depositors	23,031,478	–	–	(602,660)	23,634,138	–	–	–
Financial liabilities at amortised cost – other borrowings	24,005	–	–	–	24,005	–	–	–
Current tax liabilities	185,504	–	–	–	–	–	–	185,504
Deferred tax liabilities	(2,823,769)	–	–	–	–	–	–	(2,823,769)
Other liabilities	(19,195,089)	5,996,516	–	–	(25,191,605)	–	–
Subordinated liabilities	1,115,283	–	–	(6,833)	1,122,116	–	–	–
Shareholders‘ equity
Retained earnings	(4,294,033)	(7,341,019)	–	1,250,414	–	–	(1,024,467)	2,821,039
Accumulated other comprehensive income	1,785,440	–	1,785,440	–	–	–	–	–

Explanations of Differences between Accounting and Regulatory Exposure Amounts

Under SLFRS 9: “Financial Instruments: Recognition & Measurement”, the Bank assess the impairment of loans and advances individually or collectively based on the principles of “expected credit loss” (Refer Note 18 for details) model which is expected to capture future trends in the economy. However, the regulatory provisions are made on loans and advances under the Direction No. 03 of 2008 on “Classification of loans and advances, Income Recognition and Provisioning” (and subsequent amendments thereof) issued by the CBSL are “time/delinquency base”. Further, under SLFRS 9, other debt financial assets not held at FVTPL, together with loan commitments and other off balance sheet exposures such as financial guarantees and letter of credits, are subjected to impairment provision, whereas no such regulatory provision is required for those financial assets as per the CBSL Direction. As a result, SLFRS 9 recognises higher impairment provisions compared to CBSL guidelines.

Financial investments and financial liabilities (other than FVTPL) are carried at “cost” for regulatory reporting purposes while they areclassified as “Financial assets measured at fair value through other comprehensive income” carried at fair value or Financial assets/liabilities at amortised cost under SLFRS 9. The “Fair value” is defined as the best estimate of the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date. A variety of valuation techniquescombined with the range of plausible market parameters as at a given point in time may still generate unexpected uncertainty beyond fair value. An “amortised cost” of a financial asset or financial liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the EIR method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. Hence, the amortised cost of financial investments and financial liabilities under SLFRS 9 is different to the carrying value for regulatory reporting which is the “cost”.

As per SLFRS 9, a “Day 1 difference” is recognised, when the transaction price differs from the fair value of other observable current market transactions in the same instrument. Eg: Employee below market loans. Refer Note 7.1.2.1 for details. However, the carrying valueof such transactions for regulatory reporting purposes is equal to cost/transaction price.

As per SLFRS 16, the Bank recognises a lease liability for leases previously classified as operating leases. Accordingly, the Bank measures the lease liability at the present value of the remaining lease payments, discounted using the Incremental Borrowing Rate (IBR). In addition, the Bank recognises right-of-use asset at an amount equal to the lease liability, on a lease by lease basis, adjusted by the amount of any period or accrued lease payments relating to that lease. However as per regulatory reporting, the Bank charges the operating lease rentals as expense to profit or loss on an accrual basis.

Bank Risk Management Approach

Effective risk management is at the core of the Bank’s value creation model as we accept risk in the normal course of business. Significant resources are devoted to this critical function to ensure that it is well articulated, communicated and understood by all employees of the Bank as it is a shared responsibility. It is a dynamic and disciplined function increasing in sophistication and subject to stringent oversight by regulators and other stakeholders. The overarching objectives are to ensure that risks accepted are in line with the Bank’s risk appetite and strategic priorities and that there is an appropriate trade-off between risk and reward enabling delivery of value to key stakeholders.“ The risk governance structure,responsibilities attributed throughout the bank, risk management framework, objectives, strategies, policy framework, risk appetite and tolerance limits for key risk types, and the overall risk management approach of the Bank are discussed in the section on “Risk Governance and Management”.

Risk management related to key risk exposures

The quantitative disclosures relating to key risk areas such as credit, market, liquidity, operational, and interest rate risk in the banking book are presented and discussed in the Section on “Risk Governance and Management” and in Note 69 of the Financial Statements on Financial Risk Review.

D-SIB Assessment Exercise – 2019 (As per the CBSL Direction w. e. f. 2019)

		GROUP
		Rs. ’000

Size Indicator
Section 1 – Total Exposures
Total exposures measure		1,880,168,663

Interconnectedness Indicators
Section 2 – Intra-Financial System Assets
a. Funds deposited with or lent to other financial institutions (including unused portion of committed lines extended) ( i + ii )		75,054,977
(i) Funds deposited		54,228,026
(ii) Lending		20,826,951
b. Holdings of securities issued by other financial institutions		1,985,584
c. Net positive current exposure of securities financing transactions (SFTs) with other financial institutions		1,126,958
d. Over-the-counter (OTC) derivatives with other financial institutions that have a net positive mark to market value		132,348,801
Intra-financial system assets (a + b + c + d)		210,516,320

Section 3 – Intra-Financial System Liabilities
a. Funds deposited by or borrowed from other financial institutions (including unused portion of committed lines obtained) ( i + ii )		82,321,479
(i) Funds deposited		8,626,228
(ii) Borrowings		73,695,251
b. Net negative current exposure of securities financing transactions with other financial institutions		1,917,412
c. Over-the-counter derivatives with other financial institutions that have a net negative mark to market value		84,365,490
Intra-financial system liabilities (a + b + c)		168,604,381

Section 4 – Securities Outstanding
Securities outstanding		23,179,430
Substitutability/Financial Institution Infrastructure Indicators
Section 5 – Payments made in the reporting year (excluding intragroup payments)
Payments activity		8,629,722,562

Section 6 – Assets Under Custody
Assets under custody		5,231,877

Section 7 – Underwritten Transactions in Debt and Equity Markets
Underwriting activity		–

Section 8 – Trading Volume
a. number of shares or securities		470
b. value of the transactions		19,031

Complexity indicators
Section 9 – Notional Amount of Over-the-Counter (OTC) Derivatives
OTC derivatives		246,399,959

Section 10 – Level 2 Assets
Level 2 assets		86,421,727

Section 11 – Trading and available for sale (AFS) securities
a. debt instruments		198,465,987
b. equity instruments		220,723
c. derivatives		1,830,927

Section 12 – Cross-Jurisdictional Liabilities
Cross-jurisdictional liabilities (excluding derivatives and intragroup liabilities)		150,058,988

Section 13 – Cross-Jurisdictional Claims
Cross-jurisdictional claims (excluding derivatives and intragroup claims)		58,471,275

Supplementary Information

Annex 3: Basel III – Disclosures under Pillar 3 as per the Banking Act Direction No. 01 of 2016

Disclosure 1

Key regulatory ratios – Capital and liquidity

Disclosure 2

Basel III computation of capital ratios

Disclosure 3

Leverage ratio

Disclosure 4

Liquidity coverage ratio (LCR)

Disclosure 5

Net stable funding ratio (NSFR)

Disclosure 6

Main features of regulatory capital instruments

Disclosure 7

Summary discussion on adequacy/meeting current and future capital requirements

Disclosure 8

Credit risk under standardised approach

Credit risk exposures and credit risk mitigation (CRM) effects

Credit risk exposures and credit risk mitigation (CRM) effects (Contd.)

Disclosure 9

Credit risk under standardised approach

Exposures by asset classes and risk weights (Post CCF and CRM)

Exposures by asset classes and risk weights (post CCF and CRM) (Contd.)

Disclosure 10

Market risk under standardised measurement method

Disclosure 11

Operational risk under the Alternative Standardised Approach (ASA) – Group

Operational risk under the Alternative Standardised Approach (ASA) – Bank

Disclosure 12

Differences between accounting and regulatory scopes and mapping of financial statement categories with regulatory risk categories – Bank

Disclosure 13

Explanations of Differences between Accounting and Regulatory Exposure Amounts

Explanations of Differences between Accounting and Regulatory Exposure Amounts

Disclosure 14

Bank Risk Management Approach

Disclosure 15

Risk management related to key risk exposures

D-SIB Assessment Exercise – 2019 (As per the CBSL Direction w. e. f. 2019)