BOC Profit Before Tax: Rs. 43.2 billion

Financial commentary for the Year 2021

 Profit Before Tax: Rs. 43.2 billion

• Revenue growth of 17%
• Net Interest income of Rs. 111.3 billion with 49 % growth
• Total Assets; achieved another milestone during the year: Rs. 3.8 trillion
• Over Rs. 2 trillion Deposits and Advances base

Overview of the operating environment

The, year 2021 was another challenging year for the entire world due to wider and much longer impacts turned out by the Covid-19 pandemic. However, Sri Lanka being one of the few countries to initiate a successful vaccination drive in early 2021 was able to lift long lasted lockdowns creating conducive environment for the economic revival. The timely execution of the gradual shift between accommodative and tight monetary policy position and through many other policy instruments and further extension on extraordinary measures, the Central Bank of Sri Lanka were actively managing the tight headwinds created by the supply side inflation experienced in essential commodities coupled with a stressed external position due to the devastating setbacks experienced by major foreign earning industries. A Notable increase in credit to private sector was experienced while accommodative monetary policy was in place, creating a conducive environment for post Covid-19 recovery.

As the largest bank in the country the contribution of Bank of Ceylon in functionalizing the initiatives taken by the Central Bank of Sri Lanka in stabilizing the macroeconomic fundamentals of the country is praise worthy.

Bank of Ceylon’s role

Throughout this difficult period the Bank of Ceylon continued to play the role of being Bankers to the Nation and supported the Nation to deliver its mandate of uplifting the COVID 19 hit economy. Availability of banking services was ensured even in lockdown times without compromising on the customer needs. The digital delivery channels were enhanced to cater to the emerged demand with the situation while the customer adoption rate to digital services platforms increased than expected.

All concessions given under the way of moratorium announced by CBSL were granted to customers and going further the Bank’s own concession schemes were also offered. More focus was given on boosting the SME sector and without just merely assisting in financing, the Bank

assisted them in providing related business knowhow. As the largest Bank in the country the Bank took the lead in providing necessary funding needs for importing the oil, vaccine, food and other essential goods too.

Financial Performance

The Bank reiterated its position as the undisputed market leader in Sri Lanka’s banking sector, demonstrating its unparalleled ability to truly support its customers and the overall economy in trying times. Demonstrating its strength, agility and strategic approach in facing the challenges caused by the fluctuations of market interest rates and stressed credit quality due to the COVID hit economy and operational restrictions, the Bank was able to increase both its fund-based and fee- based income during the year and recorded Rs. 43.2 billion Profit Before Tax. This is a remarkable achievement for the Bank as it denotes the Bank’s strength of converting the challenges to opportunities. Also the Bank reported another milestone by surpassing Rs. 3.0 trillion in its assets base during the year.

Fund Based Income

Mostly, owing to loan growth and continuous credit monitoring efforts taken during 2021, the Bank reported Rs. 260.5 billion interest income which is a 15% increase over the year 2020. The remarkable loan growth achieved during the previous year materialized during this year and the interest income generated through loans and advances stood at Rs. 193.1 billion contributing 74% to the total interest income. The main contributive portfolios were overdraft, term loan and personal loan. Out of the interest income earned from the investment portfolio the debt instruments which mainly comprises Government Treasury Bills, Bonds and other Foreign Currency Sovereign Bonds brought the major portion which stood at Rs. 65.7 billion.

In the meantime, interest expenses declined by 2% to Rs. 149.3 billion in line with the increase in the CASA ratio to 36% from 35% (2020) and repricing the deposits at lower rates. The two-way movement in interest income and interest expense positively contributed to Net Interest Income (NII) of the Bank and NII has increased by 49% to Rs. 111.3 billion YoY.

Non- Fund Based Income

Non-fund-based income of the Bank grew by 42% YoY basis and the main contributors were fee and commission income and exchange income. Fee and Commission income received a boost with the operationalizing of business activities under new normal scenario. The key component of the fee and commission income is the transactional banking related fee and commission income which contributed to 69% of the fee and commission income. During the period under review, an exchange gain of Rs. 9.2 billion was reported.

Impairment Charges for Loans and Advances and Other Financial Instruments

Impairment charges for loans and advances for the period amounted to Rs. 35.4 billion bringing the loan to impairment provision reserve ratio to 6%. NPA ratio stood at 4.5% against 4.8% reported by end 2020. However, when calculating the impairment charge, the Bank always follows a very prudent approach; given the high degree of uncertainty and extraordinary circumstances in the short-term economic conditions mainly caused by the continuous disruptions to businesses the Bank made an additional expected loss provision using management overlays on identified risk elevated industries.

Individually Significant Customers were thoroughly assessed for their repayment ability irrespective of the moratorium or concessions they enjoyed due to the COVID 19 situation and necessary provisions were made along with the independent review carried out by the Risk Department. Accordingly the provision made for stage III customers escalated to by Rs.19.7 billion (19%) and provision for Stage II customers increased by Rs.3.7 billion (32%).

The Bank has considerable exposure to investments in foreign currency denominated sovereign exposures by way of Sri Lanka Development Bonds and International Sovereign Bonds. As per the regulatory and Accounting Standards requirements a significant amount of provision, i.e Rs. 8.3 billion was made for investments in aforesaid instruments by capturing the impact of downgrade in the country

Operating Expenses

The operating expenses of Rs. 41.7 billion consists of personnel costs, assets maintenance, deposit insurance and other overhead expenses. The increment of 26% by Rs. 8.6 billion reported in operating expenses in line with the increase in personnel expenses due to revision of salary scales according to the collective agreement and absorption of Trainee Staff Assistants to the permanent

cadre and provision for post-retirement benefit plans. Other expenses settled at Rs. 12.6 billion for the year with a 18% upside backed by an increase in deposit insurance premium due to the growth in deposit base and upturn in office administration and establishment expenses due to special transport arrangements for staff and implementing special safety measures for COVID 19 at the Bank’s premises. However, the Bank’s cost to income ratio of 32% shows the prudent and effective cost management mechanisms adopted by the management by maintaining the cost escalation in line with the revenue growth.

Tax Expenses

VAT on financial services which is charged based on the value addition made by the financial services has direct relation to the growth in PBT and in line with the growth of 80% reported in operating profit, the VAT on financial services also increased to Rs.9.0 billion with the 65% YoY growth.

Although the income tax expense shown in the Income statements after the deferred tax adjustments for the year is Rs. 5.6 billion. However, the actual full income tax payment paid for the year 2021 will be Rs. 10.3 billion.

Financial Position – Loans and Advances

During the period the Bank’s total assets grew by 27% and reached the Rs. 3.8 trillion level preserving its industry leadership. The key contributive factor is growth in loans and the investment book which denotes about 93% of the assets of the Bank. The Bank’s gross loan book surpassed the Rs. 2.0 trillion mark during the year 2020 and now stands at Rs. 2.6 trillion reporting a 22% growth during the period under concern mainly backed by growth in overdrafts, term loans and personal loans. The lending to private sector grew by 9% during the year and the Bank continued to extend its support towards to regain the effected businesses. The Bank focused more on maintaining the quality of the loan portfolio and with a view to address non performing facilities getting to hardcore position, the Bank setup a Business Revival unit. The Bank Maintains adequate coverage for the expected losses and the provision reserve built so far covers the 6% of the total loan book for expected losses.

Deposit Base

The Bank’s deposit base during the year has increased to Rs. 2.9 trillion with a 16% YoY growth and 77% of the Deposit base comprises with local currency deposits. The Balance 21% which denotes foreign currency deposits stood at Rs. 613.2 billion as of end 2021. BoC is the market leader in foreign currency remittances and during this year the foreign currency deposit base grew by 10%. Current and Saving deposit (CASA) base which generates funds at low cost represents 36%.

Key Performance Indicators

Return on Assets (ROA) ratio of the Bank stood at 1.3% while reporting a 21.0% Return on Equity ratio. Both these ratios improved from the previous year attributable to increase in profit.

The key regulatory ratio of the Banking industry; Capital Adequacy Ratio (CAR) was maintained well above the regulatory norms and the Bank always strives to maintain adequate buffers on all its regulatory norms to absorb unforeseen risk factors. The Tier I Capital and Total Capital ratio stood at 13.1% and 16.8% respectively as of end December 2021, both which were above the regulatory norms. Despite of cash flow deferments in loan installments, the Bank was able to maintain better trade -off between the liquid assets and its liabilities. All liquid level monitoring ratios were maintained on safe zone.

Recognitions earned amidst challenges

Though having to operate in the face of many headwinds the Bank of Ceylon continues to be recognized locally and internationally and is the highest ranked local bank and is among the Top 1000 Banks listed by the Banker Magazine UK for the year 2021. Beyond that, the Bank was adjudged as the Banker of the year in Sri Lanka by the renowned global scale magazine; “The Banker”

Bank of Ceylon also continued to be ranked as the most valuable Banking Brand for many consecutive years by the Brand Finance Lanka, increasing its Brand Value by 13% over the previous year. Locally also the Bank was recognized on the imminent stages for its untiring efforts to do the best; at CA Sri Lanka Annual Report Completion for the year 2020, BOC won the winner award for the State Sector, three awards were won at the CMA Excellence in Integrated Reporting Awards 2021 for Best Disclosures on Value Creation Model, Best Integrated Report – State owned Enterprises and one of the 10 Best Integrated Reports of 2020.

During the year Fitch Ratings (SL) has assigned the credit rating of AA- (lka) to Bank of Ceylon and reaffirmed the same in the month of July 2021. The rating assigned by the ICRA Lanka also reaffirmed at SL (AAA) with negative outlook.

Continues to thrive with determined effort

BoC network consists of 646 branches (including limited service branches) and 1,400 ATMs, CRMs and CDMs across the country. During the period our CRM network has expanded by 104 more machines facilitating the growing demand for digital channels.

As the adopting to the “new normalcy” is fixed at BoC by now the Bank will be focusing more on expanding the digital and virtual delivery services and will continue to provide all the banking services with more strength and efficiency. The Bank is optimistic and is looking for further economic revival and stability to come in future with the proactive measures adopted to overcome the obstacles caused by the pandemic and related pressures to the economy.

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