Financial Times

Debt trading boosts NDB Bank profits
NDB Bank has almost doubled its after tax profit in its second year of operation largely owing to what it called "exceptional capital gains" from trading government debt instruments.

The bank's net income grew by 47 percent to Rs. 876 million while profit after tax rose by 92 percent to Rs. 174.6 million at the year end in December 31, 2003 from Rs. 90.9 million in 2002. NDB Bank's Director/CEO, Eran Wickramaratne, attributed the performance to the clear strategic direction set in 2002, an optimisation of the investments made in developing the bank's infrastructure, and the interest rate environment that prevailed during the year.

Benchmark Treasury Bill repo rate cuts amounting to 275 basis points in the year resulted in increased pressure on the bank to reduce its lending rates, while at the same time providing customers with attractive deposit rates as a conscious strategy adopted by the bank to grow its consumer deposit base.

"This consequently caused a reduction in the interest margins," Wickramaratne said. "However, the downward movements in government security rates provided the bank with the opportunity to realise exceptional capital gains from debt trading operations, which contributed significantly to the bank's profit for the period."

During the year, the bank's limited capital base was increased significantly through the profits earned for the period, Wickramaratne said. However, Wickramaratne warned that the bank's growth on its own had almost reached its limits and it needed to merge with the parent, National Development Bank.

The bank's profits represent a return on average equity of 21.4 percent and return on average assets of 1.2 percent. While growth in the bank's credit portfolio was curtailed due to the constraints of its own relatively small capital base, there was an improvement in the bank's commission-based income from trade-related finance and services, and from its cash management services.

Non-performing loans, as a percentage of loans and advances, remained low at 5.4 percent and the bank has continued with its aggressive provisioning policies. "The NPL-related ratios are probably the best in the country's banking industry," Wickramaratne said. During the year, the bank wrote off the entire outstanding goodwill of Rs. 164 million in the bank's balance sheet arising on the acquisition of ABN Amro Bank's Colombo operations, which was originally to be amortised over a five-year period.

This has effectively removed the limitation on the declaration of dividends, posed by the Banking Act No. 30 of 1988, allowing the bank to declare dividends to its shareholders.

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