In an effort to minimize health risks, countries around the world have continued to implement containment measures by imposing strict lockdowns and other mobility restrictions.
While these measures have succeeded in reducing the spread of the virus, they have also had unprecedented consequences on advanced and emerging economies alike.
In an attempt to prevent the implications of the COVID-19 pandemic from affecting future economic stability, countries worldwide have invested heavily in immunization programs.
While the success of vaccination allowed most countries to gradually re-open their economies in 2021, the frequent mutation of the COVID-19 virus continues to pose a challenge to economies worldwide.
On a domestic level, the pandemic had a considerable impact on all key sectors of the Sri Lankan economy.
In particular, the Country's dependency on tourism continues to have a profound impact on the prospects of the local economy.
However, the Sri Lankan government has responded positively to the crisis by taking crucial steps to expedite the vaccination rollout to cover a large proportion of the population over a shorter period of time.
By accelerating the island-wide vaccination rollout, the government was able to re-open domestic commercial activities during the third quarter of the year.
Moreover, in a bid to enhance Sri Lanka's fiscal sustainability, the government has taken steps to reopen its border during the 4th quarter of 2021 to foreign tourism.
These measures have paved the way for the recovery of the economy in the short and medium term while establishing the foundations for long-term stability.
Sampath Bank extended its fullest co-operation towards government-led initiatives aimed at overcoming the challenges posed by the COVID-19 pandemic.
In addition to implementing all government-led moratorium schemes for eligible customer segments affected by the pandemic, the Bank took its own steps to assist all its customers and employees to cope with the disruptions resulting from pandemic related difficulties.
The Bank’s digitalization strategy has also continued to prove its worth during these trying times by securing a more accessible and safer banking experience for customers and enabling employees to switch seamlessly to a work from home environment during the periods of lockdown.
The Bank also continues to uplift society through several activities including the tanks restoration program ‘Wewata Jeewayak’.
As the pandemic raises its head from time to time, it is likely to continue to be a global challenge for the foreseeable future.
The Bank has restructured its disaster recovery plans, so as to address the sudden shocks of the pandemic and has also enhanced its core digital infrastructure to deliver uninterrupted services to its valuable customers.
The country experienced further challenges during 2021 due to the decline in foreign currency reserves stemming from multiple waves of the COVID-19 pandemic resulting in a challenging environment for both the national economy and businesses alike.
Amidst this backdrop, the government has taken necessary action to increase foreign currency inflows into the country through mechanisms including SWAP agreements with other countries, incentives to increase remittances from Sri Lankans working abroad, reopening of the country for tourism, and sound import management.
The Bank has contributed towards efforts to boost the economy by taking necessary measures to secure foreign currency inflows from its customers in export-oriented businesses as well as by encouraging inward remittances from Sri Lankans working overseas.
Financial results declared by Sampath Bank and the Group for the year 2021:
· Sampath Bank reported profit before tax (PBT) of Rs 16.8 Bn in FY 2021, up by 50.7% against Rs 11.2 Bn recorded in 2020. Profit after tax (PAT) for the year under review also grew by 55.2% to Rs 12.5 Bn from Rs 8.0 Bn recorded in the previous year.
· Sampath Bank's NIM reported a healthy increase of 31 bps over the previous year despite notable pressure on interest income
· The Bank recorded a sizable 35.7% increase in net fee and commission income during the period, primarily driven by cards, electronic channels, and trade-related operations.
· Despite the improvement reported in NPL and Stage 3 loans, additional impairment provisions were made as allowance for overlay to reflect potential credit losses due to the COVID -19 related uncertainties.
· The Sampath Group too posted significant growth for the current financial year, with Group PBT and PAT of Rs 18.8 Bn and Rs 13.9 Bn respectively. All four subsidiaries recorded remarkable performance compared to the previous year.
Fund based income
Interest income of the Bank fell by 3% to Rs 85.9 Bn in the year under review compared to the previous year.
The lower interest rate environment which prevailed for most part of the year and the weak credit demand resulting from the pandemic-induced economic downturn, were the main reasons for this contraction.
Notably however, the decline in interest income from loans and advances was partially offset by interest income from other financial instruments.
Meanwhile, interest expenses for FY 2021 declined by 19.1% compared to the previous year on the back of a strong improvement in CASA.
The Bank recorded 640 bps growth in its overall CASA portfolio, while recording a decline in relatively costly term deposits.
This change in the composition of the deposit portfolio coupled with the lower interest rate regime that prevailed for most part of the year contributed towards lowering interest expenses.
Moreover, with the decrease in interest expenses making up for the decline in interest income, NII recorded a growth of Rs 7.8 Bn and reached Rs 41.7 Bn at the end of 2021.
Consequently, the Bank's NIM too reported a healthy increase of 31 bps over the previous year despite notable pressure on interest income.
Non-Fund based income
Net fee and commission income, comprising fees related to loans and advances, credit cards, trade, and electronic channels, increased to Rs 11.5 Bn in 2021 from Rs 8.5 Bn reported in 2020.
This significant year-on-year growth was driven by a strong increase in fee-based revenues generated from trade related transactions, the sizable improvement in credit card business volumes and higher volumes of online transactions made through Sampath Bank's digital products in 2021 compared to last year.
Fee and commission income received a further boost following the government decision to gradually ease restrictions on the collection of commissions during the year.
Sampath Bank's net other operating income also recorded a significant growth of 37.5% in 2021, on the back of the depreciation of the Rupee against the US Dollar.
With the Rupee depreciating by 8.2% against the US Dollar during the year, the Bank's Net gain from trading increased to Rs 399 Mn from Rs 24.8 Mn recorded in the last year.
The net gain on the derecognition of financial assets meanwhile decreased to Rs 150.4 Mn from Rs 423.8 Mn recorded in the previous financial year.
Impairment charge
The Bank recognized total impairment charge of Rs 17.1 Bn for 2021 compared to Rs 11.8 Bn in 2020, pointing to a 45% increase, year-on-year.
In the current year, the Bank recognized Rs 12.7 Bn against loans and advances and Rs 3.8 Bn against other financial instruments.
Impairment charge on loans and advances:
Over the course of the year, the Bank made a substantial provision after reviewing the prevailing challenging macroeconomic conditions at the global and local levels.
Individually Significant Customers were carefully evaluated, and appropriate provisioning made considering the severity of the pandemic’s impact on each customer’s business.
As a means of factoring the long-term impact of COVID-19 on the client's ability to repay loans, the Bank reassessed the risk profiles of its customers to determine if they should be moved to lifetime expected credit losses (Stage 2) from the 12-month expected credit losses (Stage 1) under collective impairment.
Based on this assessment, customers were transferred to Stage 2 in circumstances where their business models appeared to be affected by the prolonged economic consequences brought on by the pandemic.
Meanwhile, the Bank continued to recognize customers operating in risk elevated industries as Stage 2 during 2021 as well.
This prudent categorization resulted in the Bank’s stage 2 balance increased by Rs 87 Bn during the year.
In addition, the Bank increased the loan loss provision for moratorium loans classified under Stage 1 and Stage 2 as an allowance for overlay in order to capture potential non- payment of loans upon the expiry of moratoriums.
The Bank has also assessed the impact of macroeconomic variables that could elevate the credit risk of the loan portfolio and considered the potential impact of these variables in the calculation of provision for impairment.
As a result of all the above factors, the Bank’s Stage 1 and Stage 2 total provision increased by 23.5% and 91.2% respectively in 2021 from the figures reported in 2020.
Meanwhile, the total impairment provision of Stage 3 loan balances increased marginally by Rs 1.2 Bn in 2021 despite an overall Rs 3.9 Bn decline in Stage 3 loan balances.
The annual review of the loss rates and the remeasurement of impairment provision for some stage 3 customers were the main reasons for the overall increase in impairment provision against Stage 3 customers.
These increases together contributed towards higher impairment provision under the expected credit loss model.
Impairment charge on other financial instruments:
In 2021, the Bank further increased the impairment provisions against other financial instruments to reflect current market trends and other applicable macroeconomic conditions.
As such, the impairment charge of Rs 3.8 Bn recognized on account of other financial instruments including government securities denominated in foreign currency.
The Bank also provided Rs 574 Mn against the credit related commitments and contingencies, during the year compared to Rs 269 Mn reported in last year.
Operating Expenses
The Bank’s operating expenses increased to Rs 20.7 Bn in 2021 from the Rs 20.1 Bn reported in 2020, denoting a marginal 2.8% increase.
General price hikes and the increase in deposit insurance premium during the year contributed to the afore-mentioned increase.
Notably however, personnel expenses reported a decline of 6.7% compared to the previous year, primarily due to the amendments to the Bank’s own pension fund.
The Bank reassessed the pension fund liability taking into consideration the revision of the ‘Minimum Retirement Age under the Workers Act No. 28 of 2021’.
This reassessment resulted in a net reversal of liability which was immediately reversed to the Statement of profit or loss as it is considered as a change to the plan in compliance with the Sri Lanka Accounting Standard ‘LKAS 19 - Employee Benefits’.
The cost to income ratio (excluding the special adjustment described above) dropped significantly by 480 bps and stood at 38.7% for FY 2021 compared to 43.5% in the previous year, led by effective cost saving measures to curb expenses.
It should be noted that the cost to income ratio declined by a further 340 bps to 35.3% after adjusting the pension fund reversal referred above.
Taxation
Total tax expenses for the year under review was Rs 8.3 Bn against the Rs 6.3 Bn recorded for the previous year, reflecting a YoY increase of 31.2%.
The increase in VAT on financial services and income tax expense are directly correlated to the increase in profitability for the year.
Meanwhile, the reduction in corporate income tax rate by 4% from 28% to 24% had a positive impact on the income tax charge of the year.
In 2020, income tax and deferred tax were calculated at 28%, as the legislation was not substantively enacted at the time of publication of the financial statements in 2020.
The rate reduction was subsequently introduced from the year of assessment 2020/21, which led, the Bank to reverse Rs 817 Mn worth of income tax during the current financial year, on account of the previous year rate differential.
This was partly offset by the additional deferred tax charge of Rs 725 Mn recognized due to the reversal of deferred tax asset reported as of 31st December 2020.
In the Budget Proposals 2022, the Government has proposed to impose a surcharge tax at the rate of 25%, on individuals or companies with a taxable income over Rs 2,000 Mn for the year of assessment 2020/2021.
However, this proposal has not yet been substantively enacted. As such, Sampath Bank and Sampath Group have not recognized any provision in 2021 financial statements against the proposed surcharge tax.
Key Ratios
As a result of the growth recorded in PAT, the Return on Average Shareholders’ Equity (after tax) increased by 347 bps to 11.05% as of 31st December 2021 compared to 7.58% reported at the end of the year 2020.
Return on Average Assets (before tax) also increased to 1.44% as of 31st December 2021 against the 1.09% reported for 2020.
Capital Ratios
Sampath Bank maintained all its capital ratios well above the regulatory requirements throughout 2021.
As of 31st December 2021, the Bank’s CET 1, Tier 1, and total capital ratios were at 13.95%, 13.95% and 17.02% compared to 13.44%, 13.44% and 16.41% respectively at the end of 2020.
The change in the total capital ratio during 2021 was due to the inclusion of the audited profit for 2021 in the capital calculation and the tier 2 capital infusion by way of the Debenture issue in April 2021.
This increase was partly offset by an increase in total Risk-Weighted Assets and dividend payout for 2020.
Assets and Liabilities
The Sampath Bank's total assets reached almost Rs 1.2 Tn at the end of 31st December 2021, up from Rs 1.1 Tn at the end of the preceding year, an increase of Rs 90 Bn (8.1%).
As in the previous year, weak economic conditions stemming from the pandemic led to low demand for loans and advances throughout 2021.
In the midst of these challenges, the Bank adopted a prudent approach towards granting new loans and reported a growth of Rs 54 Bn for the twelve months ended 31st December 2021, a 7.1% increase over the previous financial year.
The Bank's deposit book reported Rs 978 Bn as of 31st December 2021 with a year-on-year growth of 10.3%, driven mainly by current and savings accounts (CASA).
Sampath Bank's CASA portfolio experienced a significant growth of 640 bps during the year to reach 45.7% at the end of the year.
At the same time, low-interest rates experienced currently reduced the attractiveness of term deposits, leading to a 2.2% decline compared to the previous year.
Overall, the total deposit portfolio of the Bank grew by Rs 91 Bn to reach Rs 978 Bn at the end of 31st December 2021 compared Rs 887 Bn reported at the end of 31st December 2020.
Dividend
The Board of Directors has recommended a final cash dividend of Rs 4.25 per share for the financial year ended 31st December 2021 subject to the approval of the shareholders at the Annual General Meeting to be held on 30th March 2022.
The Dividend Payout Ratio for the year ended 31st December 2021 stood over 39%.
Group Performance
The Sampath Group consists of four fully owned subsidiaries; Sampath Centre Limited, SC Securities (Private) Limited, Siyapatha Finance PLC and Sampath Information Technology Solutions Limited.
All four entities reported a resilient performance and posted solid financial results in 2021 notwithstanding pandemic related challenges, enabling the Sampath Group to post strong consolidated results for the year under review.
The Group reported PBT of Rs 18.8 Bn and PAT of Rs 13.9 Bn for the FY 2021 compared to Rs 11.9 Bn and Rs 8.4 Bn respectively in the previous year.
The total assets of the Group reached Rs 1.24 Tn at the end of the year compared to Rs 1.15 Tn recoded in 2020, showing a growth of 8.1%.
Meanwhile, it is noteworthy to mention that the Group took proactive measures to manage the credit risk at each subsidiary level.
Consequently, Siyapatha Finance PLC also made a sizable provision as an allowance for overlay against potential losses.
Image Caption Harsha Amarasekera, Chairman, Sampath Bank PLC (left) and Nanda Fernando, Managing Director, Sampath Bank PLC.