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Management Discussion and Analysis

Prudent Growth

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As the largest private sector commercial bank in Sri Lanka, which has engendered the trust of over 3.5 million customers, Commercial Bank is deeply aware of its fiduciary responsibility of governing the Bank’s affairs meticulously and ensuring it is adequately capitalised. The COVID-19 pandemic has reshaped the global economy and society, accelerating consumer behaviour shifts and causing significant earnings challenges and extensive risk of financial distress for both consumers and businesses. Such a context has highlighted the magnitude of the Bank’s role in aiding recovery by supporting its customers, forming mutually beneficial partnerships and mobilising its workforce and its resources at the service of society. Recognising that Prudent Growth represents value creation for all its stakeholders through different time frames – the short, medium, and long term, the Bank drives growth by focusing on agility of operations, innovation, evolution of the workforce, managing risks and exemplary governance. Prudent Growth provides the orientation for the Bank’s other three strategic imperatives covered in
this discussion – Customer Centricity, Leading Through Innovation, and Operational Excellence.

Prudent Growth is fundamentally about maximising current profitability without hindering the Bank’s future sustainability. The Bank remains steadfast in its determination to think and act with the long-term sustainability of future generations in mind. Prudent Growth includes balancing trade-offs between capitals, by giving equal focus to sound investments in institutional or human capital, as to immediate gains in financial capital, which elevates the Bank’s ability to adapt to changing financial landscape. Investments made without regard to social and environmental justice, could adversely impact the wider society causing a negative spillover effect to the Bank’s reputation. The Bank remains resolute in its efforts to ensure the decisions taken are prudent, framed by an astute and educated estimation of the future. Therefore, Prudent Growth signifies growth that is: healthy, sustainable, resilient, responsible, and ethical, ensuring transparency, accountability, governance and long-term sustainability in its operations. Thus Prudent Growth emphasises pure banking which comprises of a well-diversified asset and customer base; sound capital, optimum liquidity, and robust risk management framework; astute corporate governance; socially and environmentally responsible lending and operating practices; and conducting business with transparency, honesty and integrity.

Our commitment to prudent growth



  • Comfortable levels of capital adequacy
  • Optimum levels of liquidity
  • Social and Environmental Management System (SEMS)
  • Robust Risk Management Framework
  • Compliance with laws and regulations, both in letter and in spirit
  • Robust Corporate Governance Framework
  • Highest market capitalisation in the Banking sector in the Colombo Bourse
  • First private sector bank to venture overseas
  • First private sector bank to cross Rupees One Trillion in assets, deposits and loans
  • Included in the Top 1000 Banks consecutively for eleven years
  • Transparency in reporting and disclosures
  • Conservative risk profile
  • First Carbon Neutral Bank

Creating Long Term Value

Through Prudent Growth, the Bank has built a strong deposit and lending franchise with a wide national footprint and a regional presence. This has enabled the Bank to access resources unavailable to its competitors, and offer a unique value proposition to its stakeholders. The Bank’s moderate risk appetite has created a reputation for stability, earning the trust and confidence of the public, resulting in a high deposit growth. In 2021, the Bank’s deposit base grew by 13.99% YoY to Rs. 1.443 Tn. resulting in, the Bank’s CASA ratio improving to 47.83% in 2021 from 42.72% in 2020, the best in the Banking Sector.

Table – 07: Growth in deposit base and lending portfolio over the past decade

2021
(Rs. Bn.)
2011
(Rs. Bn.)
10-year
CAGR
Deposit base 1,443.093 323.755 16.12%
Gross Loans and advances 1,078.685 289.803 14.05%

Remaining Well Capitalised

A strong base of capital is essential for a bank’s sustainability. A crucial aspect of its success is the base of confident shareholders whom the Bank can rely on for more capital whenever the need for a capital infusion arises. The capital acts as a cushion or a shock absorber against unexpected losses and as a regulatory restraint on unjustified asset expansion. Capital is needed for a bank to acquire the required fixed assets to establish, perpetuate, and expand business. Though necessary and justifiable, new impediments have been created to the growth of the banking industry through tightened regulatory requirements and more stringent reporting standards – all in the interest of various stakeholders, depositors in particular. Banks are being more conservative in their approach and are bearing the brunt of higher costs and lower returns. This is due to more restrictive capital definitions, difficulty in raising fresh capital due to lackluster market conditions, comparatively higher risk-weighted assets, additional capital buffers and higher capital adequacy ratios (CARs) required under Basel III regulations, higher impairment provisioning under SLFRS 9, and higher taxes. In such a landscape, Banks consider it a priority to proactively manage the capital at its disposal to remain solvent. The capital requirements are assessed through the Internal Capital Adequacy Assessment Process (ICAAP) and the annual strategic planning and budgeting exercise. The Bank uses tools such as Risk Adjusted Return on Capital (RAROC), prudent capital allocation, controlled growth in risk-weighted assets, expansion of fee-based services, timely pricing/re-pricing of its assets and liabilities, prudent dividend policy, well-diversified products and services portfolio and capital instruments to manage its capital requirements. The Bank consistently maintains capital adequacy ratios, well in excess of minimum requirements.

Capital management objectives

Given below are the objectives of the Bank’s Capital Management efforts:

  • Remaining compliant with regulatory requirements by maintaining internal capital targets that are more stringent than the regulatory requirements
  • Maximum profitability through optimum capital usage
  • Supporting future business expansion
  • Supporting desired credit rating

In 2020, the Bank received a strong affirmation by completing a USD 50 Mn. private placement of shares with International Finance Corporation (IFC), which was the first foreign equity placement of shares by the Bank. This was also the first post-pandemic equity placement by the IFC, and one of the largest foreign investments into Sri Lanka since the start of the pandemic.

For more information on Bank’s Capital Management, please refer Risk Governance and Management Section, Note 67.5 and Annex: 2, Disclosure 7 on Summary discussion on adequacy/meeting current and future capital requirements.

Managing Funding and Liquidity

Funding and liquidity are critical factors for the financial services industry, especially considering the circumstances that led to the financial crisis in 2007 and the events that followed. Having sufficient liquidity available to meet its commitments is essential to the Bank. Since there were no internationally agreed-upon standards for funding and liquidity, Basel III regulations introduced measures to strengthen the funding and risk management of banks, to promote resilience in a bank’s short-term and long-term liquidity risk profile through the introduction of the Liquidity Coverage Ratio (LCR, 2015) and the Net Stable Funding Ratio (NSFR, 2019) respectively. These measures are designed to prevent banks from relying excessively on short-term wholesale funding to support long-term assets.

Just as much importance is given to capital, the Bank accords importance to ensuring that it has sustainable sources of funding and that it maintains adequate levels of liquidity at all times. The fact that the Bank does not compromise on liquidity in its drive to generate returns for investors, has greatly contributed towards public confidence in the Bank. The Assets and Liabilities Committee (ALCO) of the Bank meets fortnightly to actively monitor the funding, liquidity requirements and pricing of assets and liabilities. It extensively deliberates on developments that affect funding and liquidity, such as market liquidity, managing foreign currency funding position of the Bank, current and perceived interest rates and exchange rates, changes in policy rates, credit growth and facilities in the pipeline, alternative investment options for its excess funds given the low growth in the loans and advances owing to the pandemic and adverse economic conditions prevailing in the country, capital market developments, projected capital expenditure and alternative funding options etc. The Bank has further strengthened its funding and liquidity over the past several years by encouraging the use of electronic cash and cards to reduce cash holdings by offering an array of digital products and establishing credit lines with strong overseas counterparties enabling it to access foreign currency funds at attractive rates.

The Bank faced immense challenges in managing the foreign currency liquidity during the year, due to the macro-economic impacts faced by Sri Lanka. Sharp drop in the foreign currency reserves of the country, and the successive sovereign downgrades created a challenging environment for the Bank to access foreign currency funding, while the reduction in the foreign exchange flows from both tourism and worker remittances created a trade imbalance in the economy leading to a shortage in foreign exchange. The Bank proactively responded to the issues by adopting new strategies in managing foreign currency liquidity and trade flows, working closely with its corresponding banks and its trade finance customers to manage and address the concerns and requirements.

The Bank also reached out to new funding partners and established new funding lines under challenging circumstances. The Bank’s Bangladesh Treasury was highly supportive in facilitating access to several funding sources which were previously untapped to obtain required liquidity. Furthermore, the Bank’s presence in Myanmar enabled to source Foreign Currency funds from Myanmar as well.

The Bank’s funding sources for onward lending, in order of their assessed stability include:

  • Retail deposits mobilised through the branch network
  • Low-cost foreign currency borrowing (provided the interest and swap cost attached to such borrowing is cheaper as compared to the cost of wholesale deposits)
  • Selected long-term wholesale deposits
  • Re-purchase agreements
  • Subordinated debentures

Funding and Liquidity Management Objectives

The objectives of the Bank’s funding and liquidity management efforts include:

  • Honouring customer deposit maturities/withdrawals and other cash commitments efficiently under both normal as well as challenging operating conditions
  • Remaining compliant by maintaining internal funding and liquidity targets which are more stringent than regulatory requirements
  • Maximising profitability by optimal usage of liquid assets
  • Funding future business expansion at optimum cost
  • Supporting desired credit rating
  • Ensuring compliance with Basel III funding and liquidity requirements (Refer Annex: 2, Basel III – Disclosures under Pillar 3 as per the Banking Act Direction No. 01 of 2016 on pages 361 to 374)

The Bank monitors and manages its funding and liquidity ratios on a daily basis to ensure adequate funding is available to maintain liquidity at the desired levels.

Being a Truly Diversified Entity

Commitment to diversification is another important dimension of the Bank’s Prudent Growth strategic imperative. Diversification, which is a risk management tool, helps the Bank to avert excessive concentration, reduce performance volatility and ensure stable and sustainable value creation by remaining more agile in weathering and responding to changing market conditions. The Bank has successfully achieved a high level of diversification in its operations across many parameters, including:

  • Geographically (Sri Lanka, Bangladesh, The Maldives, Myanmar and BPOs in several other countries)
  • Customer profile ( Refer customer segmentation – Table 08 on page 46)
  • Multiple banking channels ( Refer channel mix – Table 09 on page 46)
  • Currency wise product mix ( Refer Note 34.1 (b) and Note 46.1(b))
  • Products and services portfolio (A comprehensive suite catering to the requirements of all segments of customers from infants to senior citizens) – (Please refer Note 34.1 (a) and Note 46.1 (a) )
  • Multiple funding channels(Refer the figure 08 below for details) and funding diversification by product (Refer page 173)
  • Maturity profile (No serious mismatches in maturity profile, particularly given the growing core component of CASA balances – Refer Note 61 to the Financial Statements)
  • Economic sector (A well-spread sector diversification of assets by economic sector with no excessive concentration to any particular sector – Please refer Note 34.1 (c) to the Financial Statements)
  • Sources of revenue (An acceptable mix of fund-based and fee-based revenue with significant market share in country’s imports and exports as well as a market maker in Treasury operations – Please refer Note 13.1 and Note 14.1 to the Financial Statements)

Socially and Environmentally Sustainable Lending

In comparison to many other industries, banking has a minimal environmental footprint of its own as it consumes few natural resources and creates minimal emissions and waste. This is evidenced by the fact that there are no mandatory requirements for environmental certifications that banks have to obtain. Nevertheless, the Bank makes a conscientious effort to reducing Green House Gas (GHG) emissions in its operations continuously.

The Bank recognises that it has a vital role to play as an advocate and driver of sustainability in Sri Lanka, in its capacity as a Domestic Systemically Important Bank, and a financial intermediary with a wide national reach and influence. In partnership with the members of the Sri Lanka Banks’ Association, the Bank was involved in one of the core groups that formulated the Sustainable Banking Initiative (SBI) in Sri Lanka, which addresses the integration of social and environmental concerns into the Banks’ core business activities. Since 2002, the Bank has been a member of the UN Global Compact, which specifies value systems and principles for operating businesses sustainably.

Recognised as the most progressive banking institution in Sri Lanka and its commitment to preserving the environment through responsible lending protocols, Commercial Bank was one of the Banks that pioneered a mandatory social and environmental screening process for its project lending activities. It was also the first bank in Sri Lanka to have identified Green Financing to be of a wider scope and ventured into Green Financing in a more focused manner. It further revolutionised digital banking by introducing features in its “Flash” mobile application to measure and offset customer impact on the environment.

From financing renewable energy projects, including the first commercially viable wind power project and the first commercial scale solar power project in Sri Lanka, the Bank has diversified its Green Financing portfolio with the support of special credit lines and development of a Green Financing strategy and internal taxonomy. The Green Financing portfolio supports projects that focus on climate mitigation, climate adaptation and other environment related green objectives. Therefore, it contributes towards the fight against climate change in alignment with the UN Sustainable Development Goals 7 (Affordable and Clean Energy) and 12 (Responsible Consumption and Production).

Figure – 08 Diversification



Figure – 09

Composition of the green financing portfolio – 2021


41%

Renewable Energy Projects (Solar, Hydro, Wind, Biomass)

as at December 31, 2020 - 38%

 

11%

Resource efficiency and recycling projects - Energy, Water, and Material

as at December 31, 2020 - 19%

 

10%

Environmentally friendly transportation and related services

as at December 31, 2020 - 17%

 

6%

Water saving - consultancy and related service providers

as at December 31, 2020 - 10%

 

17%

Climate Smart Agriculture

as at December 31, 2020 - 7%

 

15%

Others

as at December 31, 2020 - 8%

The Bank’s Green Financing Vision:

"To grow the Green Financing portfolio to 3% of the loan book by 2025"

In 2020, the Bank issued a Position Statement on Climate Change, affirming its commitment to combating climate change at the highest level of the Bank. This Statement is an articulation and an unification of a multitude of actions the Bank has been implementing continuously, and underscores its added resolve to this challenge.

In 2021, the Bank disbursed 1,208 green financing loans and leasing facilities to support customers to transition to a low carbon economy. The Bank has adopted the Climate Assessment for Financial Institutions (CAFI) tool, developed by IFC for monitoring and reporting the climate impact data of the Green portfolio.

The Bank’s Green Financing portfolio as at December 31, 2021, has contributed in reducing 225,847.33 tonnes of CO2 (equivalent) emissions to the atmosphere. The composition of the Green Financing portfolio is delineated in the Figure 09.

Positioning the Bank as a predominant institution in climate financing and its environmental consciousness in the South Asia region, the IFC conferred two awards to Commercial Bank in 2021 for the performance under the CAFI tool.

This was in acknowledgement of the Bank’s estimated GHG reduction from its Green Financing portfolio and for completing the highest number of climate finance transactions in 2020 among the IFC’s partnering Banks operating in South Asia.

The Bank utilises SEMS to assess and manage its social and environmental risks in its lending in a strategic and systematic manner. In its aim of becoming a leader in building partnerships across sustainable business networks, the Bank makes every attempt to assist customers and suppliers to become compliant with relevant regulations and industry best practices. In this context, the Bank adopts an approach of partnership with its stakeholders in its implementation of SEMS, with the objective of encouraging positive changes. Instead of merely rejecting proposals that do not meet the Bank’s social and environmental standards, the Bank proposes corrective actions to ensure that the Bank’s lending to projects or activities is environmentally sustainable, socially acceptable and economically viable.

The Bank also conducts capacity building programs to enhance the knowledge of Bank’s lending officers on social and environmental risk assessment and Green Financing sphere to achieve a socially and environmentally sustainable lending portfolio.

Figure – 10: Bank’s Sustainability Journey

First Sri Lankan Bank to become wholly Carbon Neutral

First Bank in Sri Lanka to implement a Social & Environmental Management System (SEMS) in 2010, at a time when it was not a mandatory requirement

First Sri Lankan Bank to become signatory to the 10 Principles of the UN Global Compact (UNGC) and still the only Bank on the Steering Committee

First Bank in Sri Lanka to venture into Green Financing

One of the first banks to receive a Green House Gas (GHG) Emissions certificate

Adoption of IFC Performance Standards

First Bank in the region and the 4th Bank in the world to introduce a tool (approved by the UNEP) for its retail customers to measure the environmental impact of their spending, via its Flash Digital Bank Account App

Core Group Member of the SLBA’s Sustainable Banking Initiative

Founder Member of the Business & Biodiversity Platform, Sri Lanka

Ethics and Conduct

The Bank remains committed to highest ethical standards and integrity in all activities with direct support from the Board of Directors. Renowned for its compliance to both the letter and spirit of the law, the Bank places a premium on the trust and confidence of its customers and stakeholders – a strength it has carefully cultivated for over a century. Taking a zero-tolerance approach towards bribery, corruption, and fraud, the Bank, its Board of Directors and all of the employees are dedicated to act professionally, ethically and with integrity in all business dealings and relationships with all stakeholders. The provisions of the Code of Ethics is reinforced by the Internal Audit Department of the Bank through its on-site audits and online surveillance. For customers to continue to benefit from the highest levels of integrity, the Bank determines the scope and frequency of audits using a risk-based model. Furthermore, to safeguard the interest of the Bank and all its stakeholders, a Whistleblower Charter is in place to allow employees to report unethical or any known or suspected frauds or misappropriations by staff members to the Group Chief Compliance Officer. All employees and the members of the Board of Directors are trained on Anti Money Laundering (AML), Combating the Financing of Terrorism (CFT), Compliance and Anti-Bribery and Anti-Corruption from time to time. During the year, the Bank continued to further strengthen the related systems, processes, and controls.

Anti-Money Laundering

The Bank conducts Money Laundering and Terrorist Financing (ML/ TF) Risk assessments according to the established ML/TF Risk Assessment Policy. Considering the risk exposures arising from its customers, delivery channels, products and services and geographical locations in which it operates its business, the Bank conducts risk reviews and reports to the Board of Directors on a quarterly basis.

Anti-Bribery and Anti-Corruption

The Bank’s reputation can be damaged by bribery and corruption, which is illegal and dishonest. Therefore, the Bank remains committed to countering bribery and corruption in all forms, and promotes a culture of compliance and genuine engagement with anti-bribery and anti-corruption standards. The Bank also seeks to identify and manage risks arising from different jurisdictions, sectors, transactions, business opportunities, and business partnerships. To operate within its risk appetite at all times, the Bank has in place rigorous policies, procedures and controls, and expects all its employees to refrain from giving or accepting bribes, kickbacks or commissions or taking part in any form of corruption. The Anti-Bribery and Anti-Corruption Policy was approved by the Board during the year under review and is made available at the Bank’s website. Furthermore, the Bank has instituted a Whistleblowers Charter and guidelines on accepting and offering gifts or other illegal gratification, collection and borrowing of funds,obtaining undue favours from customers and suppliers, and holding a Directorship,being a Partner,Shareholder in private companies enumerated in the Code of Ethics and Administrative Circulars.

In affirming its commitment to the 10th Principle of the UN Global Compact and implementing the Code of Ethics, the Bank expects all employees not only to fight corruption, but also to demonstrate that they do not abuse the power of their position as employees for personal financial or non-financial gain, solicit or accept gifts, compromise employees or the Bank. The Bank also aims to encourage and influence all of its non-controlled interests to have and implement anti-bribery and anti-corruption policies and procedures to an equivalent standard of the proposed Policy of the Bank. These include the Bank’s interests in non-controlled joint ventures, partners, contractors, sub-contractors, vendors, suppliers, service providers, consultants, representatives and others performing work or services for or on behalf of the Bank or any other person associated with the subsidiaries and the associate of the Bank.

Figure – 11: Values that Support the Bank’s Brand