Management Discussion and Analysis

Financial Capital

Financial performance


DFCC Bank continues with growth strategy despite the turbulent environment. The total asset base of the Bank grew by 8% year-on-year to LKR 404,897 Mn with loans and receivables of LKR 272,818 Mn as at the year end. The deposit base experienced a growth of 2% recording an increase of LKR 5,549 Mn to end the year at LKR 247,787 Mn, while the CASA (Current Accounts and Savings Accounts) ratio slightly improved to 22.7% compared to last year.

Reflecting the challenging business environment that prevailed during the year, DFCC Bank’s NPL ratio moved up to 4.85% as at 31 December 2019 from 3.28% in December 2018. The Banking industry NPL also recorded an increasing trend from 3.4% in 2018 to 4.7% as at 31 December 2019.


DFCC Bank PLC, the largest entity within the Group, reported a profit before tax (PBT) of LKR 2,989 Mn and a profit after tax (PAT) of LKR 2,074 Mn for the year ended 31 December 2019. This compares with a PBT of LKR 4,233 Mn and a PAT of LKR 2,768 Mn in the previous year. PAT of the Bank excluding the fair value loss on Commercial Bank of Ceylon PLC (CBC) for the year ended 31 December 2019 was LKR 2,828 Mn in comparison to PAT of LKR 3,646 Mn recorded in the comparative year (as detailed in table 1). The decline in profit after tax is mainly due to the increase in impairment and taxes on financial services. Taxes on financial services increased to LKR 1,548 Mn due to debt repayment levy introduced on 1 October 2018.

The Group recorded a PBT of LKR 3,308 Mn and PAT of LKR 2,300 Mn for the year ended 31 December 2019 as compared to LKR 4,676 Mn and LKR 3,070 Mn respectively in 2018. All members of the DFCC Group made positive contributions to this performance.

Net interest income

The Bank’s total income for the year 2019 was LKR 43,297 Mn recording an increase of 11%. The interest income consists of 97% of the total income of the Bank. Following a continues growth strategy despite the turbulence in the macro environment, DFCC Bank recorded a year-on-year growth of 9% 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 growth of 2% to LKR 12,662 Mn from LKR 12,415 Mn in 2019 in spite of adopting a policy of non-recognition of income on credit impaired loans. The interest income grew by 10% to LKR 42,060 Mn while the total interest expenses increased by 14% to LKR 29,398 Mn due to the growth of LKR 5,549 Mn in deposits during the year. As a result, the interest margin decreased marginally to 3.2% from 3.5% in 2019.

Fee and commission income

The Bank recorded a 5% growth in net fee and commission income as a result of the concentrated effort to increase non-funded business. Fees generated from loans and advances, and from trade and remittances accounted for the majority of the increase. Further, fees collected from credit cards and bancassurance services grew during the year.

The Bank’s credit card income recorded a commendable 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

The overall impairment charge including other impairment losses for the year was LKR 1,669 Mn compared to LKR 1,056 Mn in 2018 due to adverse business environment faced by most industries. 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, deposits and the Bank’s customer base.

The incremental cost that was incurred as a result of this growth in business contributed to a 15% 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 54.96% for 2019.

Profit After Tax (PAT)

The Bank recorded a Profit After Tax (PAT) of LKR 2,828 Mn for the year ended 31 December 2019 excluding the fair value loss on Commercial Bank of Ceylon PLC (CBC) in comparison to PAT of LKR 3,646 Mn recorded in the comparative year. The Bank’s PAT with the fair value loss on CBC shares amounted to LKR 2,074 Mn for the current year against LKR 2,768 Mn in the comparative year.

Table 1

For the year ended 31 December 2019
LKR 000
LKR 000
Profit for the year – reported 2,073,868 2,768,179 (25)
Marked to market loss on CBC shares, net of taxes (Note a) 753,931 877,699
Adjusted profit for the year 2,827,799 3,645,878 (22)
(a) Marked-to-market loss on CBC shares, net of taxes
Net marked-to-market loss on equities (Note 13) 939,191 1,018,554
Less: VAT, NBT and DRL on financial services 185,260 140,855
753,931 877,699

CBC – Commercial Bank of Ceylon PLC

Financial position analysis


The Bank’s total asset base as at 31 December 2019 grew by 8% to LKR 404,897 Mn from LKR 374,907 Mn as at 31 December 2018. This constitutes a loan portfolio growth of LKR 23,085 Mn to LKR 272,818 Mn compared to LKR 249,734 Mn as at 31 December 2018 recording an increase of 9%.

The term loans recorded the highest growth of LKR 21,139 Mn out of the total growth in loans to and receivables from other customers, followed by lease receivable with a growth of LKR 3,861 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 8% over the previous year to LKR 357,418 Mn as at the year end. The main increase was due to the substantial growth in amount due to banks of LKR 15,148 Mn and LKR 5,549 Mn in customer deposits.

With the 2% increase in deposits, DFCC Bank was able to report loan to deposit ratio of 110%. The Bank’s CASA ratio, which represents the proportion of low cost deposits in the total deposits of the Bank, was 22.7% as at 31 December 2019. 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 considered, the ratio improved to 28.96% as at 31 December 2019.

DFCC Bank continued its approach to tap local and foreign currency related, long to medium-term borrowing opportunities. This has led to an increase of amounts due to banks by LKR 15,148 Mn and amount due to debt securities in issue by LKR 5,250 Mn during the year under review.

Equity and compliance with capital requirements

DFCC Bank’s total equity increased to LKR 47,480 Mn as at 31 December 2019 from LKR 43,846 in December 2018. The main contributor to the increase was the shareholders’ participation to right issue materialised in May 2019.

The basic earnings per ordinary share of the Bank decreased to LKR 7.14 in 2019 from LKR 10.44 in 2018. The Bank’s return on equity (ROE) reduced to 4.5% in 2019 from 6% in 2018. The Bank’s return on assets (ROA) before tax was 0.8% compared to 1.2% in the previous year. Furthermore, the Bank’s net asset value per share was down by 6% to LKR 156.09 from LKR 165.40 in 2018.

DFCC Bank has consistently maintained a capital ratio above the Basel III minimum capital requirements. As at 31 December 2019, the Group’s Tier 1 capital adequacy ratio stood at 11.33% while the total capital adequacy ratio was 15.78%. On a solo basis, as at 31 December 2019, DFCC Bank recorded Tier 1 and total capital adequacy ratios of 11.34% and 15.81% respectively. These ratios are well above the minimum regulatory requirements of 8.5% and 12.5% effective in January 2020.

Credit quality

During the year, DFCC Bank had a moderate growth in 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 3.00 per share for the year ended 31 December 2019.