The question constantly on our minds, animating every decision taken, was: when the pandemic finally subsides, how will our stakeholders judge the conduct of the Bank during this most challenging of periods?
The Bank began 2020 in a spirit of euphoria with celebrations to mark a century of operations in Sri Lanka, a period during which the Bank has become an integral part of the economic and social landscape of the country. A renewed sense of optimism for recovery from the difficulties of the previous year abounded, but soon we were confronted by an epochal event unlike any in memory. As we reach a year of living with the COVID-19 pandemic globally and locally, it is clear that we are in a world that is being transformed.
Unlike the global financial crisis of 2007-2008, however, the shocks to the financial sector brought about by the pandemic are exogenous. The hard-earned lessons of the last decade demonstrated the need for a more stringent regulatory regime, and the financial sector, both internationally and in Sri Lanka, was much better placed in terms of capital and liquidity at the outset of the present crisis. This time, the financial sector has a vital role to play in the recovery process, both through its own efforts and as a channel for government support to affected households and businesses.
Moments of crisis display true character, true identity. The question constantly on our minds, animating every decision taken, was: when the pandemic finally subsides, how will our stakeholders – our customers, our investors, our employees and business partners, the government, and the wider society – judge the conduct of the Bank during this most challenging of periods? As a domestic systemically important bank, we take our wider responsibilities seriously – and these responsibilities are entirely consistent with the Bank’s raison d’être as a creator of value in the short, medium, and long term. A myopic focus on immediate returns would threaten the future profitability and sustainability of the Bank. A long-term perspective, driven by faith in our relationships with our stakeholders and a commitment to our identity as a bank with integrity, was the order of the day.
While we pride ourselves on our preparedness and BCM processes, the full scale of the logistical operations necessitated by the pandemic could not have been anticipated or tested. As the first wave of COVID-19 infections surged in late March 2020 and lockdowns ensued, the Bank moved swiftly into action, implementing a range of operational measures, including: splitting teams and setting up protocols for working at alternate sites and from home; providing food, lodging, transport, and personal protective equipment to ensure the safety of all our staff; and outfitting our branches with partitions, sanitisers and instituting other best practices for social distancing and hygiene to safeguard our customers. These measures enabled the Bank to provide customers with urgently required services, from opening the majority of our branches during the curfew, to deploying our fleet of ‘Bank-on-Wheels’ Mobile Banking Units to provide access to cash, to keeping our Imports and Exports department operational throughout to play our part in facilitating the country’s trade, to fast-tracking digital products and services to allow customers to conduct transactions remotely.
As the urgency of the first wave ebbed, the focus of the financial sector turned from providing access to banking to offering relief and support for recovery. Many of our customers were in urgent and desperate need of financial assistance, and the Bank knew it was imperative to do everything within its capacity to aid them. The Bank consolidated its efforts under the umbrella of ‘Arunella’, a Financial Support Scheme that integrated multiple initiatives including debt moratoriums, flexible payment options, up to 20% rebates on accrued interest during the moratorium periods, reductions on credit card repayments and applicable interest rates, and debt consolidation plans. These initiatives were guided by CBSL directives, but went above and beyond them to cover as many struggling customers as possible. Our goal was not to exclude, but to include – not to narrowly interpret eligibility criteria to limit applications, but find ways to bring people into the fold. Instead of a single-minded focus on profitability targets, we as a team wanted to stand shoulder-to-shoulder with our respected customers and support them during these unprecedented times.
Instead of a single-minded focus on profitability targets, we as a team wanted to stand shoulder-to-shoulder with our respected customers and support them during these unprecedented times.
Furthermore, the Bank prioritised efforts to offer assistance to the SME and Micro enterprises sector, the engine of the national economy. This is reflected in the fact that as much as 24% of the applications for the Saubagya scheme were submitted by the Bank and 32% of the value of the total scheme was granted for customers of the Bank as of June 2020. By the year’s end, the Bank remained the leading lender for COVID-19 relief amongst the private sector banks. Beyond the CBSL schemes, the Bank initiated two major loan programmes for SMEs affected by the pandemic: an
Rs. 10 Bn. scheme funded through a loan of USD 50 Mn. from the International Finance Corporation (IFC), and a working capital scheme for Micro enterprises. This year, the Bank also placed an emphasis on SME acquisition, and will seek to play an even greater role in supporting this sector in the years to come.
The Bank’s growth and profitability for the year must be placed in this context. We view our efforts in supporting customers as an investment in relationship capital, and one that will hold the Bank in good stead in the future. Profit for the year of the Group was Rs. 17.087 Bn, a 1.91% drop compared to Rs. 17.420 Bn. in 2019. The Group’s profit is remarkable given two important factors. First, interest refunds, Day One losses and concessionary interest to be charged on EMI facilities as per the directions of the regulator coupled with the Bank’s own voluntary rebate scheme amounted to a loss of interest income of approximately Rs. 3.0 Bn. Second, the Bank made its highest ever single-year impairment provision of Rs. 21.484 Bn., which included COVID-19 overlays of Rs. 5.189 Bn. for reasons of prudence taking into account the potential for credit losses that existing impairment models may not be able to capture.
Deposits grew by 20.36% during the year to Rs. 1,286.616 Bn. as at December 31, 2020, recording the highest ever growth for any financial year todate. However, the lending portfolio recorded only a nominal growth of 1.78%, causing the excess liquidity to be diverted to the Treasury for productive deployment. Total assets reached Rs. 1,762.496 Bn. as at December 2020, recording a growth of 25.09% over Rs. 1,408.941 Bn. reported a year ago. It also deserves a special mention that our overseas operations and subsidiaries, in particular in Bangladesh and Maldives, made substantial contributions to the Bank/Group profits. A detailed analysis of our performance is given in the Financial Review.
Continuing on the trend in 2019, it should also be highlighted that the Treasury made a significant contribution to the bottom line of the Bank in 2020, too. Treasury accounted for 33.95% of the total assets of the Group as at December 31, 2020, funded through both the excess liquidity channeled to them from Corporate and Retail banking business units as well as its own borrowings. This performance was a key reason that the Bank was able to maintain the reported level of performance even after higher impairment provisioning, lower credit growth and shrinking net interest margins.
Despite the challenges of the year, the Bank received an unreserved vote of confidence: a private placement of shares with the IFC amounting to USD 50 Mn. (Rs. 9.216 Bn.). This investment is the first foreign equity placement by the Bank and collectively makes the IFC, the IFC Financial Institutions Growth Fund LP (FIG Fund), and the IFC Emerging Asia Fund LP (EA Fund) the largest shareholder of the Bank (and increases the Bank’s foreign shareholder composition to 23.66%). Importantly, this is the first post-pandemic equity placement by the IFC, and represents one of the largest foreign investments into Sri Lanka since the start of the pandemic – a clear indication of positive sentiment for the Bank’s future.
And indeed, there are promising signs for the future. The demand for digital products and services during the pandemic has acted as a catalyst, spurring on our digital transformation. During the year under review, the Bank integrated online and mobile banking channels on a single omni-channel platform with the launch of ‘ComBank Digital’, positioning the Bank as a market leader in the digital space. The app is highly functional and customisable, bringing the Bank closer to its digital vision of being able to create user experiences that are personal and tailored. In addition, we upgraded Flash, the Bank’s ground-breaking, trilingual digital wallet, with several features that are revolutionary in the local context, launched a new WhatsApp banking tool that is positioned as a low-barrier-to-entry digital solution, and made great strides in our QR and other cashless offerings.
But the pandemic has also exposed limitations and areas for improvement in the digital space – both within the Bank and throughout the sector. Here, it is important to always keep in mind that innovation and digitalisation is, ironically, not about technology as much as it is about people. The objective of digitalisation is to create superior customer experiences and deliver digital services that are faster, more agile, cost-effective, personalised, and secure. Front-end digital solutions are not enough, however. The pandemic has revealed, more than ever, that end-to-end digital processes are needed wherein the whole chain of events that occur in a transaction or service increasingly become digitalised and integrated. To that end, the Bank has adopted a Digital Strategy for 2025 that prioritises redesigning conventional banking processes as digital processes, integrating with other ecosystems, upgrading internal systems to be prepared to capitalise on changes in the regulatory environment, and developing talent and building partnerships.
The promise of digitalisation also opens new avenues for our sustainability initiatives. During the year under review, the Bank issued a Position Statement on Climate Change, affirming its commitment to combating Climate change at the highest level of the Bank. The Bank is also proud to announce that it met its goal of carbon neutrality by the end of 2020. While the Bank has a relatively small environmental footprint of its own, in its capacity as a major corporate and financial intermediary, it can act as an influencer. Beyond implementing a Social and Environmental Management System (SEMS) to assess and manage social and environmental risks and building a robust Green Financing portfolio, the Bank also seeks to give its customers the tools to play a part in addressing climate change. During 2020, the Bank’s Flash app was upgraded with a new module that analyses user data to estimate the carbon footprint of each transaction made through Card payments, QR code scanning, the Flash app, and other sources, revealing the hidden environmental and social costs of the user’s consumption habits. The Bank is the first company in the region and the fourth bank in the world to introduce a customer-centric tool integrated with the UN-approved Environment Impact Index (Aland Index) for financial transactions, and is the first step in our journey of raising collective awareness about climate change.
Special mention should also be made of our Galle Fort Branch, which was restored as part of the 100th anniversary celebrations of the Bank. The building was constructed in the 19th century, and the restoration sought to preserve the unique architectural and cultural elements of the space and was carried out in consultation with the relevant authorities. The restoration process used only locally sourced, environmentally preferable building materials and specifications, and the Branch was designed to be extremely energy efficient and use renewable energy sources. The Branch received a Platinum Award, the highest achievable rating, from the Green Building Council of Sri Lanka (GBCSL), and is now a popular tourist attraction as an eco-friendly heritage site. In a sense, the Branch stands as a symbol of the Bank itself; an institution that combines a rich history and tradition with an ability to adapt to the demands of a new era.
The Board has been a source of support throughout this testing year. The outgoing Chairman, Mr Dharma Dheerasinghe, has provided sound stewardship and guidance over the past 9 years, a period during which the Bank has weathered major storms and gone from strength to strength. I extend my profound thanks to him, and to the Deputy Chairman, Mr Preethi Jayawardena and Mr S Swarnajothi, Director, who also retired from the Board during the year, for their invaluable service to the Bank. I would like to welcome our new Chairman, Justice K Sripavan and the Deputy Chairman, Prof Ananda Jayawardane, together with our new Board members, Ms Judy Lee and Mr Raja Senanayake. Their leadership will be much needed as the country commences its recovery from the pandemic.
I also wish to thank the Country Head of IFC for Sri Lanka and the Maldives, Ms Amena Arif for her spontaneous and unstinted support to our call for assistance when we were faced with pandemic challenges and for the historic equity infusion through a private placement.
I want to reserve my last word of tribute to our staff – across Sri Lanka, as well as Bangladesh, Italy, Maldives, Myanmar and other overseas locations. Our success during the year under review is a testament to their resilience, dedication, and tirelessness. Our staff does not operate in a vacuum – they too were gripped by the sense of anxiety and uncertainty that pervaded the country and the globe through waves of COVID-19 infections, and their work and life rhythms were disrupted in unprecedented ways. Yet, they continued to represent the Bank with care and integrity. Despite the financial challenges, the Bank paid all scheduled increments and bonuses, affirming its commitment to its staff in a time of crisis. Also noteworthy was the successful negotiation of the Bank’s collective bargaining agreement with the Bank branch of the Ceylon Bank Employees’ Union (CBEU) and the introduction of a new pension fund – all indications that the Bank’s relationship with its internal customers has never been stronger.
Viewed with honesty and clarity, the year ahead will be demanding, both for the Bank and the country. Continued downgrades to lending rates, implementation of special loan schemes, and rising investor sentiment is expected to drive credit growth in all sectors of the economy in 2021. But, for the financial services sector, the full force of the true NPL position will only be felt in 2021. A prolonged low-rate environment will mean anemic NIMs, and business models will need to shift to maintain profitability.
But if the pandemic has taught us anything, it is that all of us – our stakeholders, our country, our planet – are connected and our fates are intertwined. Driving the Bank’s profitability will always be our central concern, but no longer can success or value creation be defined in a narrow, short-term frame. The world after COVID-19 will be different in so many ways, some of which we cannot completely anticipate, offering both risks and opportunities. Whatever challenges lie ahead, however, the Bank is confident that it has the experience, agility, and resourcefulness to rise to the occasion, as it has always done throughout its 101-year history.
Managing Director/Chief Executive Officer
February 24, 2021