Value creation is a two-way process, as the ability of an organisation to create sustainable value for itself is also related to the value it creates for its stakeholders. It leads to capital formation.

Our Management Discussion and Analysis is thus structured likewise, based on value creation and capital formation, both on-balance sheet and off-balance sheet.

Financial Capital

Financial performance


DFCC Bank ended the year 2018 with mixed positives. The total asset base of the Bank grew by 13% year-on-year to LKR 374,908 Mn with loans and receivables of LKR 249,734 Mn as at the year end. The deposit base experienced a substantial growth of 25% recording an increase of LKR 48,930 Mn to end the year at LKR 242,238 Mn, while the CASA (Current Accounts and Savings Accounts) ratio slightly improved to 21.8% compared to last year.

As a result of the challenging business environment that prevailed during the year, DFCC Bank’s NPL ratio moved up to 3.28% as at 31 December 2018 from 2.77% in December 2017. The ratio was however managed at a level below the industry average of 3.4% as at December 2018.


DFCC Bank PLC, the largest entity within the Group, reported a profit before tax of LKR 4,233 Mn and a profit after tax of LKR 2,768 Mn for the year ended 31 December 2018. This compares with a profit before tax of LKR 5,792 Mn and a profit after tax of LKR 4,415 Mn in the previous year. The profit for 2018 however includes a one-off fair value loss on Commercial Bank shares transferred to the trading portfolio and the recently introduced debt repayment levy (DRL) imposed on the value addition on financial services, while the profit for 2017 includes a gain from the sale of Commercial Bank shares. When the loss and gain on account of the Commercial Bank shares and the DRL are eliminated for an equitable comparison, the resultant profit after tax reflects a growth of 10% over 2017 (as detailed in Table 1).

The Group recorded a profit before tax of LKR 4,676 Mn and profit after tax of LKR 3,070 Mn for the year ended 31 December 2018 as compared to LKR 5,891 Mn and LKR 4,434 Mn respectively in 2017. All members of the DFCC Group made positive and improved contributions to this performance.

Net interest income

The Bank’s total income for the year 2018 was LKR 39,154 Mn recording an increase of 9%. The interest income consists of 97% of the total income of the Bank. Following a judicious growth strategy which took into consideration the challenging environment faced by the country, DFCC Bank recorded a year-on-year growth of 17% in its net portfolio which when coupled with prudent management of asset and liability pricing, enabled the Bank to achieve this growth.

The Bank’s net interest income recorded a credible growth of 9% to LKR 12,415 Mn from LKR 11,343 Mn in 2017 in spite of adopting a policy of non-recognition of income on credit impaired loans during the year. The interest income grew by 16% to LKR 38,148 Mn while the total interest expenses increased by 19% to LKR 25,733 Mn due to the significant growth of LKR 48,930 Mn in fixed deposits during the year. As a result, the interest margin decreased marginally to 3.5% from 3.6% in 2017.

Fee and commission income

Growth in overall business segments, introduction of new products based on changing needs of customer profiles and expanding delivery through electronic channels and other means helped the Bank to record a 26% growth in net fee and commission income. Fees generated from loans and advances, and from services provided through customer accounts accounted for the majority of the increase. Fees collected from trade-related services, Remittances, issue of Guarantees and Bancassurance services grew during the year.

The Bank’s credit card income recorded a moderate growth. DFCC Bank created history by becoming the first bank in Sri Lanka to be certified for Visa’s QR Payment Solution. This move would add more value to the customer convenience and will open up considerable growth in earnings from this important business line.

Impairment charge on loans and other losses

With the adoption of SLFRS 9 which replaces the “incurred loss” model with the “expected credit loss” model, the Bank recognised LKR 3,700 Mn as the first day impact to its equity base at the beginning of the year. Even though the individual impairment increased to LKR 1,084 Mn from LKR 724 Mn in the year 2017, the overall impairment charge including the collective impairment for the year was LKR 1,056 Mn compared to LKR 1,176 Mn in 2017. Recovery processes are being rigorously pursued to minimise any actual losses that may arise from the specific exposures.

Operating expenses

As part of its growth strategy, DFCC Bank continuously invests in its infrastructure. During the year, the Bank increased its branch network, expanded its product base and created multiple channels for service delivery, which contributed towards an increase in revenue streams, deposit growth and the Bank’s customer base.

The incremental cost that was incurred as a result of this growth in business contributed to a 14% increase in operating expenses. However, careful monitoring and effective cost control measures adopted during the year helped to maintain the increase at a moderate level and resulted in a cost to income ratio of 49.7% for 2018.

Profit after tax (PAT)

The Bank reported a profit after tax of LKR 2,768 Mn, a decline of 37% from LKR 4,415 Mn in the year 2017. The Group profit after tax attributable to equity holders of the Bank decreased by 31% to LKR 3,011 Mn compared to LKR 4,362 Mn in the year 2017.

However, when the loss and gain on account of the Commercial Bank of Ceylon shares and the debt repayment levy are eliminated for an equitable comparison as indicated in Table 1 below, the resultant profit after tax of the Bank is LKR 3,851 Mn for 2018 and LKR 3,498 Mn for 2017, reflecting a growth of 10% over last year.

Table 1

For the year ended 31 December 2018
LKR 000
LKR 000
Profit for the year – reported 2,768,179 4,414,964 (37)
Marked to market loss on CBC shares, net of taxes (Note a) 870,559
Gain on sale of CBC shares, net of taxes (Note b) (917,120)
Debt repayment levy – effective from 1 October 2018 212,549
Adjusted profit for the year 3,851,287 3,497,844 10
(a) Marked-to-market loss on CBC shares, net of taxes
Net marked-to-market loss on equities (Note 12) 1,018,554
Less: VAT and NBT on financial services 145,995
(b) Gain on sale of equity securities, net of taxes
Gain on sale of equity securities (Note 15) 1,073,030
Less: VAT and NBT on financial services 155,910

CBC – Commercial Bank of Ceylon PLC

Financial position analysis


The Bank’s total asset base as at 31 December 2018 grew by 13% to LKR 374,907 Mn from LKR 333,107 Mn as at 31 December 2017. The growth of the asset base was mainly as a result of the growth of LKR 36,058 Mn in loans to and receivables from other customers.

The term loans recorded the highest growth of LKR 26,064 Mn out of the total growth in loans to and receivables from other customers, followed by trade finance with a growth of LKR 10,164 Mn.

DFCC Bank was the major contributor to the asset base and the Group’s total asset base increase was the same as that of the Bank.


The liabilities increased by 16% over the previous year to LKR 331,061 Mn as at the year end. The main increase was due to the substantial growth of LKR 48,930 Mn in customer deposits and the increase in subordinated term debt of LKR 7,653 Mn. In October 2018. The Bank was also able to successfully repay the International Bond of USD 100 Mn.

With the increased deposit growth, DFCC Bank was able to report an improved loan to deposit ratio of 103% from 110% in December 2017. The Bank’s CASA ratio, which represents the proportion of low cost deposits in the total deposits of the Bank, was 21.8% as at 31 December 2018. Funding costs for DFCC Bank were also contained due to access to medium to long-term concessionary credit lines. When these concessionary term borrowings are added to deposits, the ratio improved to 28.6% as at 31 December 2018.

DFCC Bank continued its approach to tap local and foreign currency related, long to medium-term borrowing opportunities. This has increased other borrowings by LKR 6,094 Mn during the year under review.

Equity and compliance with capital requirements

DFCC Bank’s total equity decreased to LKR 43,846 Mn as at 31 December 2018 from LKR 47,877 in December 2017. The main contributor to the decrease was the drop in fair value of equity securities and fixed income securities.

The basic earnings per ordinary share of the Bank decreased to LKR 10.44 in 2018 from LKR 16.65 in 2017. The Bank’s return on equity (ROE) reduced to 6% in 2018 from 9.4% in 2017. The Bank's return on assets (ROA) before tax was 1.2% compared to 1.9% in the previous year. Furthermore, the Bank’s net asset value per share was down by 13% to LKR 165.40 from LKR 180.60 in 2017.

DFCC Bank has consistently maintained a capital ratio above the Basel III minimum capital requirements. As at 31 December 2018, the Group’s Tier 1 capital adequacy ratio stood at 10.88% while the total capital adequacy ratio was 16.17%. On a solo basis, as at 31 December 2018, DFCC Bank recorded Tier 1 and total capital adequacy ratios of 10.77% and 16.07% respectively. These ratios are well above the minimum regulatory requirements of 8.5% and 12.5% effective January 2019.

Credit quality

During the year, DFCC Bank was successful in growing its loan book covering corporate, retail and small and medium-term business segments. The expansion into new geographical areas and new customer segments increased the challenge to maintain a sustainable risk profile. The Bank continued to improve its pre and post credit monitoring mechanisms through changes to internal processes and timely actions. This has brought positive results in maintaining credit quality.

Dividend policy

The Banking industry faced many challenges during the year; both from business and regulatory fronts. The adverse weather conditions and political upheaval that prevailed during the year became constraints for the growth of returns on equity. The minimum capital requirements became more stringent with the adoption of BASEL III. Other factors which affected were impact on the adoption of the new accounting standards and the introduction of the new tax laws. Based on the medium term projected growth plan, the Bank has projected an asset base of over LKR 500 Bn and above to be achieved by year 2021, with the intention of becoming a systematically important domestic Bank. This will result in the need to maintain an increased Tier 1 ratio of 10% by 2021. The Board of Directors after considering all of the above has approved a dividend of LKR 3.50 per share for the year ended 31 December 2018.

Group performance

The DFCC Group consists of DFCC Bank PLC and its subsidiaries; DFCC Consulting (Pvt) Limited, Lanka Industrial Estates Limited (LINDEL), Synapsys Limited, its joint venture company Acuity Partners (Pvt) Limited (Acuity) and its associate company National Asset Management Limited (NAMAL). LINDEL is a 31 March reporting entity whilst the others are 31 December reporting entities. For the purpose of consolidated financials, 12 months results from 1 January to 31 December 2018 were accounted for in all Group entities. Financials of the 31 March entity was subject to a review by its External Auditor covering the period reported.

The Group made a profit after tax of LKR 3,070 Mn during the year ended 31 December 2018. This is compared to LKR 4,434 Mn made in the year 2017. DFCC Bank accounted for majority of the Group profit with profit after tax of LKR 2,768 Mn while LINDEL (LKR 121.2 Mn), Acuity (LKR 304.7 Mn), Synapsys (LKR 9.5 Mn) and DFCC Consulting (LKR 24.8 Mn) contributed positively by way of profit after tax to the Group. In the previous year, Acuity, DFCC Consulting and LINDEL reported profit after tax of LKR 175.6 Mn, LKR 1.7 Mn and LKR 146.1 Mn respectively. Synapsys reported a loss of LKR 10.2 Mn. The associate company, NAMAL contributed LKR 2.4 Mn to the Group down from LKR 9.4 Mn in the year 2017. An Inter-company dividend of LKR 132 Mn was paid to DFCC Bank by LINDEL (LKR 70.3 Mn), DFCC Consulting (LKR 1.5 Mn) NAMAL (LKR 27 Mn) and Acuity (LKR 33.2 Mn) during the year.

DFCC Bank’s business unit performance