Financial Times

NDB merger delayed by dissolution
The dissolution of parliament and the snap general election has further delayed plans by NDB Group, which posted a 17 percent increase in profits after tax last year, to merge with NDB Bank. NDB Group is planning a broad re-organisation ahead of its proposed merger with NDB Bank in order to improve efficiencies and synergies between the two entities.

"The merger is very important for both banks," declared NDB Group chief financial officer Ranjith Gunasekara. "The earlier the merger, the greater the acceleration in our performance. The merger would release the full potential of the two banks which can't get released on a stand-alone basis."

The bank had expected the parliamentary process for the merger to have finished in February for the shareholders to approve the merger around July, but these plans have now been delayed by the dissolution of parliament. Parliamentary approval has been sought to enable NDB to get incorporated under the Companies Act, which is required for the Central Bank. To issue it a commercial banking license. NDB was set up as a wholly state-owned institution by Act of Parliament in January 1979. Following a change of ownership structure in 1993, 61 percent of the share capital of the Bank was transferred to private ownership.

The bank continues to function under its original statute and subsequent amendments. The first reading of the latest amendment was held last year and the second and third readings had been scheduled for mid-February when parliament was dissolved.

"If there's no change in government it might be relatively easy to put it back on the agenda and get through the second and third readings but if there is a new government it might take more time," Gunasekara said. The Finance Ministry last week gave approval for NDB Bank to increase its ownership of NDB Bank to 51 percent from 22.7 percent now.

Gunasekara said the Finance Ministry approval was sought as a precaution if the merger gets further delayed so that they could have more equity control of NDB Bank. "Even now both banks interact closely but having a bigger stake would be nice," he said.

"We now have the opportunity to increase our stake if we wish to." An NDB Group statement on its annual results said the merger with NDB Bank would be preceded by a "broader reorganization within the group to enable it to operate in a more seamless manner, thereby improving efficiencies and customer service."

Gunasekara said the merger would allow a perfect match between the different strengths and weaknesses of the two entities. "We have a huge capital base but we don't have the full range of commercial banking products which they have. They (NDB Bank) don't have the big capital base which is needed to expand."

NDB Group reported profits after tax of Rs 1,221 million for the year ended 31 December 2003 and a return on shareholders' funds of 15 percent compared with 14 percent for 2002.

"This growth has been driven partly by the bank's own profit growth of eight percent and also by significant changes in the Group structure," a bank statement said.

In April, the bank sold its controlling interest in Mercantile Leasing at a profit and soon after acquired a controlling interest in Eagle Insurance Company in July. Eagle's full profits have been included in the second half of the year.

It also reported a big rise in loans - to Rs 10.6 billion from Rs 3 billion in the previous year - which it attributed to increased investor confidence since project lending is highly sensitive to political and economic events.

The average size of the facilities approved also increased due to several large-scale projects in the power, telecommunications, food and beverage sectors. Among these were a Rs 500 loan to Serendib Flour Mills for its plant in Colombo port, Rs 700 million to Mobitel and two power plant projects by Lanka Transformers and the Hemas group, along with securitisation of Ceylon Electricity Board receivables.

Disbursements also improved during the year to Rs 10.3 billion from Rs 4.4 billion the previous year but lagged behind approvals due to the longer gestation period of large-scale projects.

The bank said it continued to be actively involved in the SME sector on a number of development-orientated fronts and plays an important apex role in refinancing credit lines to other participating banks.

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