We continued to make substantial investments in technology with a view to transitioning every step of the customer journey to digital, elevating their experience and making every interaction rewarding on one hand and optimising business processes leading to enhanced operational efficiencies on the other.
Commercial Bank demonstrated its enduring strength and resilience with a stable performance in 2022 amid the unprecedented operating environment. With a sharpened focus on our strategy and on achieving an equitable balance between the expectations of all stakeholders, we navigated the perfect storm retaining our inherent strengths and stability, and delivering sustainable value to our stakeholders. Our performance under intense pressure is a tribute to the entire Commercial Bank team, who served with utmost dedication and resolve. I am proud of our people and grateful for the understanding and loyalty of our customers and other stakeholders during a very difficult year.
As a leading bank in Sri Lanka, we firmly stood by our customers, employees, and the community, lending a hand, easing their burden, and helping them navigate the challenges and uncertainties of the year. We continued to strengthen the foundations of our Bank through strategic investments in people, processes, technology, and products. We also continued to make substantial investments in technology with a view to transitioning every step of the customer journey to digital, elevating their experience and making every interaction rewarding on one hand while optimising business processes that lead to enhanced operational efficiencies on the other. We optimised the wide range of digital tools available for customers to manage this challenging period. By modernising and evolving our risk capabilities, we further strengthened our resilience and competitive edge. We also made significant progress against our climate commitments and contributed more than Rs. 170 Mn. on social and environmental engagements to make an impact on the community and the environment.
We continued to play our part in offering relief to customers and supporting the economy. To date, we have offered Rs. 668 Bn. in moratoria to over 54,467 customers across all segments, while still lending and providing liquidity to fuel economic activity. Our focus was on maintaining debt sustainability by collaborating closely with customers to rehabilitate, restructure and re-evaluate facilities. In an unprecedentedly challenging socio-economic environment, our teams discharged their duties with empathy to support our customers to overcome hardships. Our support extends beyond giving loans to providing necessary knowledge in business management, crisis management, trade opportunities, and enhancing financial literacy. We have also made considerable headway in closing the access-to-financing gap and driving financial inclusion by making banking more accessible to a larger cross-section of the population.
Despite the challenging circumstances, with the commitment and endurance of our winning team, the Bank strived to deliver a seamless and uninterrupted service to the customers and communities that we serve. Whilst nurturing a high-performing, engaged, supportive, and inclusive workplace, we maintained our attention on succession planning, agile and relevant structuring, talent retention and attraction. Continuous training, both in-house and outbound, has been established to ensure our talent sourcing process is fortified in the long run by elements of lifelong learning.
In recognition of our performance, strategic initiatives, innovations, upgraded services, and other noteworthy achievements in the banking field, we were named “The Bank of the Year” by the UK magazine “The Banker”, which marks the twelfth time the Bank has received this award. The Bank secured over 60 foreign and local awards and accolades, reaffirming the claim of being the most awarded bank in the country.
Despite the ongoing adverse effects of macro-economic variables, the Bank recorded a strong operational performance, demonstrating the resilience and the enduring strength of our long-term strategy. The Bank’s Bangladesh operation made a noteworthy contribution in this regard. We recorded a healthy topline growth, as reflected by the 71.20% increase in gross income, supported by the rise in market interest rates and income earned in foreign currency due to the sharp depreciation of the Rupee. The loan book recorded a growth of 13.07%, which, however, was mainly due to the impact of the sharp depreciation of the Rupee on FCY loans & advances. Deposits grew by 32.66%, partly due to the impact of Rupee depreciation on FCY deposits. Consequently, total assets grew by 24.45% as of December 31, 2022, compared to end 2021. After accounting for the highest ever impairment provision for a year of Rs. 71.462 Bn. in 2022 on account of both loans advances and investments in USD denominated Government securities and operating expenses of Rs. 34.936 Bn., we reported an operating profit before taxes on financial services of Rs. 26.491 Bn. compared to Rs. 37.810 Bn. in 2021, a 29.94% drop. Profit after tax for the year amounted to Rs. 22.970 Bn. compared to Rs. 23.606 Bn in 2021.
Our results reflect our risk appetite and risk tolerance which continue to be well-managed, especially in the context of the challenges faced by the economy as well as the banking sector. We have continued our focus on preserving the quality of the loan book, managing interest rate and liquidity risks prudently while improving compliance to minimise regulatory and reputational risk. Although the increase in the cost of funds is inevitable, all possible steps have been taken to reprice and rebalance the financial assets, maintain a healthy fee-based income and to manage non-interest costs at acceptable levels. The substantial provisioning for impairment, which was an unavoidable response to the prevailing economic environment, assures our stakeholders that the Bank is financially prepared for any future contingencies.
Due to severe domestic macroeconomic pressures, primarily emanating from a deteriorating external financing position, Sri Lanka went through one of the worst economic crises in its history during the year under review. Consequently, Sri Lankan Sovereign ratings were downgraded and the Government is currently negotiating a debt restructuring programme with the creditors to reach debt sustainability. In the customer loans segment, there was a remarkable deterioration in asset quality across the banking industry due to the prevailing adverse operating context. The industry Impaired Loans (Stage 3) ratio is projected to have reached double digits by end 2022. Taking the gradual deterioration in asset quality across and the unsustainable debt levels of the Government, we made substantial impairment provisioning both on account of loans and advances as well as investments in USD denominated Government Securities.
Implementing an effective EWS was a timely initiative to predict potential exposures showing signs of delinquency 9 – 12 months in advance. This provides the Lending Officers adequate lead time to attend to such warnings with appropriate and well-thought remedial measures, facilitating the Bank to maintain commendable portfolio quality. As a result, we have been able to maintain the Impaired Loans (Stage 3) ratio at 5.25%, which is one of the lowest in the banking industry.
Macro-economic pressures and substantial impairment provisioning exerted severe stresses on both the liquidity and the capital adequacy of banks. Liquid assets being the lifeblood of operations in the short term, we gave utmost priority to managing liquidity. Assets and Liabilities Committee (ALCO) meetings were held a lot more frequently – twice a day at times – and conscious decisions were made to maintain healthy liquidity positions. Lending efforts had to be prudently curtailed while the neediest sectors were prioritised, ensuring that there were continuous credit facilities for those hardest hit by the economic hardships. Specifically, we strived to support the pharmaceutical, agricultural, and export-oriented sectors, and especially assisted SMEs to sustain their operations in the interest of supporting daily life and faster recovery of economic activities.
The substantial impairment provisions made, the impact of the negative carry on some of our treasury assets following the sharp rise in market interest rates and the considerable growth in risk-weighted assets following the depreciation of the rupee had a significant impact on the profitability and the capital adequacy. Consequently, we had to draw down on the Capital Conservation Buffer during the year as permitted by the CBSL. However, through retained earnings and the Rs. 10 Bn. we successfully raised in Tier II capital in December as per the capital augmentation plan, we were successful in restoring capital adequacy ratios to above minimum requirements.
Against the above backdrop, we are determined to address issues relating to rebalancing the balance sheet, creating a culture of capital-based decision-making, divisional capital allocation, and aligning systems and processes to ensure a higher level of governance, and cost-effective growth on a priority basis.
Through ongoing investments in our digital offering, we have transformed the way that our customers interact and transact with us, leading to an improved customer experience. This included the launch of Sri Lanka’s first “wearable banking” product via the award-winning Flash Digital Account, thereby stimulating a new dimension of infinite possibilities for our customers. Several other enhancements were effected during the year under review including the introduction of digital customer verification, allowing customers to complete verification requirements and gain full access to all the functions of the activated app remotely. Furthermore, we augmented the teller experience, facilitated foreign remittances digitally, and enabled secure onboarding to payment portals. The upgrade of the Bank’s core banking system, which was completed in January 2023, has helped meet the increasing regulatory and business requirements and enhance overall performance. These technological and digital investments have prepared the Bank for the future, making it a safer and stronger bank across the board. Through these initiatives, we have grown our digitally enabled customer base by over 50% and increased digital transactions by over 30% YoY.
The automation of processes was another point of emphasis during the year. These included the centralised procurement system, the automation of inward remittances and nostro reconciliations, and the real time/near real time monitoring of branch operations by the Inspection Department, resulting in time and cost efficiencies. Going forward, we plan to introduce AI-based interfaces such as a trilingual AI-Smart chatbot to our website to assist in customer queries, while sustaining the call center operations as an additional channel to create customer convenience with a human touch. Digital Assistants deployed across the branch network have been useful for onboarding and supporting customers to engage with our digital platforms. Analytics of stakeholder engagement provides opportunities for the strategic leveraging of future-ready products and services.
We remained committed towards empowering women in the workplace and the community by providing unbiased access to capital and tailored solutions, specialised education, and advisory services to a large community of women across Sri Lanka. The inclusion of proportional allocation for female employees in functional teams and their succession to middle and higher management roles create an internal culture of inclusivity and empowerment.
Furthermore, we collaborated with the IFC under the IFC-DFAT Women in Work programme to increase access to finance for women, an important under-served segment of our population. Our first women-centered product, Anagi Women’s Savings Account, was launched in 2012, and has since grown to over 500,000 accounts as of December 31, 2022, with a balance of Rs. 28.779 Bn. This year, we introduced a new loan scheme that is designed to support the aspirations of women entrepreneurs. The scheme recorded a total portfolio of Rs. 3.3 Bn as of the end of 2022. As part of this scheme, we provided several ancillary capacity building services for over 1,000 women (including both customers and non-customers) around the island, including launching a certificate course for women entrepreneurs in partnership with the Postgraduate Institute of Management, University of Sri Jayewardenepura, which was one of our key non-financial service providing initiatives, among many.
Amidst the challenging external environment, we prudently revisited our SME portfolio growth prospects and prioritised the portfolio quality to manage the pressure on profitability and capital. We have been actively participating in Government-sponsored special credit lines introduced by funding agencies and the CBSL to support SMEs. Under the agriculture and micro-finance segment, we enhanced our outreach towards rural and semi-urban areas with the prime intention of strengthening the rural economy and extended financial assistance to overcome potential food scarcity, in particular targeting livestock, vegetable, and paddy produce.
During the year, we adopted a Sustainability Framework as given in the section on the Business model for sustainable value creation with the purpose of “being a responsible financial services provider by enabling and empowering people, enterprises and communities towards environmentally-responsible, socially-inclusive and economically-enriching growth.” Our approach to sustainability will be guided by its three pillars: sustainable banking, responsible organisation and community sustainability, based on which the Management Discussion and Analysis of this Annual Report has been structured. We have aligned the KPIs of our Sustainability Framework with those of the CBSL’s Road Map for Sustainable Finance in Sri Lanka and continue to monitor progress on a quarterly basis.
Over the year, we contributed to community investment through the Bank’s CSR Trust with a particular focus on education, healthcare, community, arts & crafts, and the environment. We established 27 IT labs in underprivileged schools, set up 43 STEM classrooms and donated critical care equipment to 8 Government hospitals. We are collaborating with the World Food Programme to improve the nutrition needs of 76,500 households in the lowest strata of society.
Our efforts to achieve Carbon Neutral Status are driven by our broad-based Carbon Neutral Strategy with the ultimate aim of lowering our carbon footprint. In 2022, we disbursed 261 green financing facilities to support customers to transition to a low carbon economy and our Green Financing portfolio contributed towards reducing approximately 229,752 metric tonnes of carbon dioxide equivalent (tCO2e) emissions to the atmosphere. We are also migrating towards an increasingly paperless culture to reduce our front-end and back-end paper consumption by 30% by 2024. The culmination of years of effort to grow our Bank sustainably led to Commercial Bank being awarded the “Best Sustainable Bank in Sri Lanka” at FinanceAsia’s Country Awards 2022 and the “Best Bank for Environmental and Social Governance (ESG)” at the latest international awards ceremony of the respected Asiamoney magazine. Furthermore, Sri Lanka was placed on the global map at the UN Climate Change Conference as one of 25 banks around the globe that are working to promote environmental consciousness among their customers. We were one of the first five banks worldwide to integrate the Doconomy Åland Index into the Carbon Footprint Calculator feature on the Bank’s Flash Digital Bank Account App. Commercial Bank also emerged as one of the top banks, and the only Sri Lankan bank to win two Climate Assessment for Financial institutions (CAFI) awards from the IFC.
Recognising that the country will continue to face economic hardships on its path to recovery in the ensuing years, our plans and road maps emphasise both resilience and future-readiness. We will continue to transform our existing systems to build comprehensive digital customer journeys, rather than isolated experiences, eliminating the need for customers to visit the Bank. As a capital management effort, we will engage in capital-light activities and capital-raising exercises in 2023 and beyond to be well-capitalised for stakeholder value creation. We will continue to strengthen our focus on exporters, a national priority and the SME sector, smaller industrial players, to ensure that they are adequately capitalised and operational for the long-term. We have also created a rich digital ecosystem for business customers as a ground breaking project. Furthermore, we will continue to focus on our Bangladeshi operations which is a competitive advantage for us.
As the recipient of the National Quality Award from the Sri Lanka Standards Institution in 2022, we will sustain and enhance the quality parameters while precluding any compromises in the services and the values the Bank has built on over the past 103 years.
Our fundamental resilience, reinforced by our talented and dedicated employees and the steadfast support of our customers, gives me great confidence in the future. We are moving forward with optimism as we continue to build our high-performing, digitally enabled, future-ready Bank – all powered by a winning culture.
In closing, I express my immense gratitude to our customers and to you, our shareholders, for your support and engagement over these many years. My sincere thanks are extended to the members of the Corporate Management, Senior Management and all our staff members across Sri Lanka, Bangladesh, the Maldives, other overseas locations and the Sri Lankan subsidiaries for their tremendous efforts and unwavering commitment to delivering for our customers and our shareholders. My gratitude is extended to our former Chairman, Justice K Sripavan for his leadership and foresight which has been a great strength. My sincere appreciation goes to my predecessor, Mr S Renganathan, who retired from the Bank in May 2022; under whose visionary leadership, the Bank scaled greater heights. I am also grateful to the Chairman and other members of the Board of Directors for their invaluable guidance in navigating the unprecedented challenges. I also wish to extend my thanks to the officials of the CBSL for their valuable counsel. I extend my appreciation to the External Auditors, Messrs Ernst & Young for their professionalism and timely completion of the audit.
I would like to end my review with reference to a beautiful quote by poet Maya Angelou on hope that reads “Nothing can dim the light that shines from within”. Let us, as a Nation, keep the attic lights bright and the collective dream sustainable.
S C U Manatunge
Managing Director/Chief Executive Officer
February 24, 2023