DFCC Group posts robust 1H performance

■Portfolio YoY growth +19%; PAT up 70% to Rs. 2.07 b; first single digit coupon debenture issue
The DFCC Group announced yesterday it has recorded a robust first half performance with consolidated profit after tax of Rs. 2,071 m for the six months ended 30 September 2014 compared with Rs. 1,222 m during the previous
period.
This growth of 70% was underpinned by the strong performance of the Group’s banking business (a composite of DFCC Bank, a specialised bank, and its 99% owned subsidiary, DFCC Vardhana Bank, a commercial bank).
The standalone operating profit before taxes of the Group’s banking business was Rs. 2,996 m and profit after tax was Rs. 2,002 m, against Rs. 1,962 m and Rs. 1,180 m respectively in the previous period. This represents impressive growth of 53% and 70% respectively.
The other members of the DFCC Group, which includes the joint venture investment bank, Acuity Partners Ltd., collectively contributed Rs. 126 m to PAT compared with Rs. 104 in the previous period – a growth of 21%.
The Group’s banking business recorded a portfolio growth of 19% year-on-year. This was a notable achievement given the weak demand for credit that persisted throughout most of the period. In fact, this growth rate far exceeded that achieved by the banking industry.
The period was also marked by drop in benchmark interest rates leading to a steep decline in lending rates. While borrowing costs also declined, the lag effect had an impact on net interest income, which decreased by 18% from Rs. 4,092 m to Rs. 3,364 m. However, fee and commission income in the period increased by 21% to Rs. 453 m compared to Rs. 373 m in the previous period.
A notable feature is that this income not only included fees generated by the commercial banking subsidiary from trade finance and commercial banking services, but also consultancy fees earned from overseas assignments undertaken by DFCC Bank.
Cost control remains a critical focus area and during the period, stringent cost management enabled the Group’s Banking Business to contain operating cost increases to 8% over that of the comparable period. Of these increases, 3% was on account of a charge for Nation Building Tax, while the balance included the expenses incurred for the addition of 10 new branches in the year to date.
DFCC Bank’s performance also benefited from the performance of the Colombo stock market. The impact of the stock market on the value of the listed shares in DFCC Bank’s equity portfolio is recognised by the fair value changes representing unrealised gains or losses in other comprehensive income.
During the period ended 30 September 2014, due to the share market appreciation there was a fair value gain of Rs. 4,679 m compared to the fair value gain of Rs. 569 m in the previous comparable period. At the same time, capitalising on the upward momentum in the Colombo stock market, DFCC Bank divested some of its mature equity holdings and realised a capital gain of Rs. 300 m.
The period was also noteworthy for DFCC Bank’s funding activities. In August, the bank trail-blazed the way when it undertook its second issue of listed debentures at a single digit coupon rate – the first such issue to hit the market. The initial offer was for Rs. 3,000 m with an option to raise a further Rs. 2,000 m. Due to the overwhelming response, where the issue was oversubscribed three times over during the first day itself, DFCC exercised its option to increase the issue to the total value of Rs. 5,000 m.
Commenting on DFCC Group’s performance, CEO Arjun Fernando said: “The strong performance of the Group’s banking business should be viewed in the context of weak credit demand and excess liquidity. While the combined business represents a mix of development banking and commercial banking, the bulk of the portfolio comprises project loans. These are amortising facilities in that they are continuously repaid over a period of time. This means that achieving absolute growth is that much more difficult. In fact, our project loan book grew by almost 16% from January to September this year and if you factor in the repayments the growth is close to 37%, which is a remarkable achievement.”
He further commented that the reduction in interest rates have benefitted DFCC’s banking business clientele, as these low rates have been passed on to them. “Given the circumstances, maintaining interest margins is going to be a challenge and the bank recognises that relying only on lending activities is no longer tenable. We have taken steps to grow other income to ensure shareholders continue to realise good returns on their investment. I am happy that an Organisational Efficiency Improvement Program, which was introduced last year, is bearing fruit in eliminating unnecessary costs and achieving efficiency gains. In fact the business banking group’s cost to income ratio is one of the lowest in the industry and that of DFCC itself is the lowest.”
Commenting on the future, he said: “It is business as usual for the DFCC Business Banking Group. As you know the DFCC Bank (Repeal and Consequential Provisions) Act No. 39 of 2014, which provides for the registration of DFCC Bank as a public limited company incorporated under the Companies Act with the name DFCC Bank PLC was certified by the Speaker on 1 November. The proposed law will enable the bank to come into being as DFCC Bank PLC from a date specified by the Minister and continue to carry on its business as a licensed specialised bank without any interruption. As regards the proposed merger with NDB, discussions between the institutions are well underway with facilitation from the Boston Consulting Group.”
He concluded: “We are in for very challenging but exciting times and all of us at DFCC Group are looking forward to a new era.”

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