GRI 2-22, 2-23, 2-24

Dear stakeholders,

As you read through our results this year, you will observe the tremendous impact the economic crisis had on the country with the cascading effects not leaving any part of the country unscathed. This has undeniably been the toughest year in our history.

Profit After Tax is reported at Rs. 1.6 Bn., a decline of 55% against the historically high profit we reported in the corresponding period last year. This fall is in the backdrop of the worst economic crisis Sri Lanka has ever experienced post-independence, where GDP contracted by 7.8%.

However, despite this catastrophic economic crisis and the extremely challenging environment we operated in, our key regulatory ratios strengthened with Tier I and Tier II capital ratios strong at 16.23% and 17.35% respectively, well above the required regulatory thresholds. CDB also remained within the well capitalised category under the Prompt Corrective Action (PCA) framework, while our liquidity ratio stood at 16.16%, once again well above the statutory diktat.

Operating environment

The one-year Treasury Bill rate increased to approximately 24% in April 2022, having been at single digit levels just three months prior. It was at this rate that TBs remained when last year’s Annual Report was published in June 2022. Since then, the rate has risen to above 30% and remained within that percentage until the rate began declining from January 2023. At the time of writing this report, the rate hovers at approximately 17%.

The permeating impact of the turbulent interest rates and market response resulted in changes in client behaviour which included requests for premature renewals. This led to our entire deposit base, which had a single digit weighted average rate of <9% at the beginning of April 2022, had to be repriced to about 16 percent plus in May. Since then, it gradually increased and peaked at 21% plus in February 2023, before starting to descend, following movement in market interest rates.

This trend was echoed in the Prime Lending Rate (PLR) too, which is linked to some of our debt funding. At the beginning of the reporting period, the rate was in single digits but increased rapidly to over 20% by May 2022. It peaked at over 29% in November 2022 before its descent. The repricing of the lending portfolio being at a much slower pace and magnitude resulted in a severe impact on our margins and profitability given our asset portfolio profile.

Facts and figures

Despite Sri Lanka’s GDP contracting during the period under review, our recoveries and asset quality remained strong, although the 120 Days Past Due (DPD) inclined from 7.48% to 10.98% given the operating milieu and conclusion of the moratorium period.

From the current year onwards, DPD will be moving to a 90-day regime and our target is to bring it down to single digits. In the backdrop of high interest rates, subdued credit demand coupled with extremely conservative lending sentiments resulted in lending disbursements (excluding gold backed lending) amounting to only Rs. 12 Bn. during the year, compared to Rs. 33 Bn. in the previous year. Thus, the loan book excluding gold backed lending, contracted by 10 percent which is by Rs. 7 Bn.

The gold backed lending portfolio recorded a net increase of Rs. 5 Bn., which is a growth of 47%, leading to the portfolio percentage increasing to 21% of the loan book from 14% at the beginning of the year.

Currency depreciation, utility price revisions and inflation pressures led to considerable increases in overheads. All possible avenues were explored to institute cost saving measures that would minimise the impact. When US dollar denominated invoicing was applicable, especially in the technology area, the impact was substantial.

These negativities impacted some of our ratios including ROE, ROA and cost to income. EPS recorded a figure of Rs. 23.29 and the net assets value (NAV) per share stood at Rs. 260.40 as at the balance sheet date.

Another evident consumer trend that emerged due to the high-interest scenario was a substantial reduction in premature settlement of contracts. This reduced to Rs. 5.8 Bn. during the period under review compared to Rs. 17 Bn. in last year. This caused a slowing down of the retiring low yield loan book.

CDB’s debt to deposits reflects a change of 25%:75%, in comparison to 37%:63% at the beginning of the financial year, although the funding base remained unchanged. The debt portfolio declined by Rs. 10 Bn., while the deposit portfolio saw an increase by Rs. 11 Bn. There is a high probability of this composition changing again due to our intense focus on debt funding including foreign funding.

Building on community, green and tech

While these shocks continued to bellow around us, we strengthened and augmented our business model and strategy, which are founded on the key pillars of sustainability and technology. We have also developed a new digital banking platform which will replace CDBiNet with a host of new features. This platform will go live in second half of the current financial year.

The RPA (Robotic Process Automation) and API (Application Programming Interface) ecosystems are now well established in every aspect of the business, continually evolving. The areas in focus include frontline business origination, credit approvals, operations, recoveries, analytics and compliance and assurance.

Concentrating heavily on expanding our digital presence which has worked very much in our favour judging by the fact that we doubled our capacity via virtual capabilities and worked on complementing our net zero aspirations, CDB has not opened a single brick and mortar outlet in the last five years. We are also ready to synergize a unique capability we possess under our crowd sourcing strategy, the patpat.lk platform with the emerging turnaround of the economy.

The digital wave has taken over especially since the pandemic. Having focused many years ago on creating a digitally empowering environment for our team and customers, CDB was well prepared for the influx of digital demand that stemmed since that time and has continued unabated since. While over-the-counter transactions have reduced, the use of digital and online channels have increased exponentially. We intend to further augment these trends which will enable us to release capacity so we can aggressively follow up on some of the non-conventional business verticals including money remittances under CDB Fast Cash and Authorised Money Dealer businesses.

A groundbreaking project in sustainable mobility solutions was initiated under the net-zero vertical which is a focus area in our sustainability pillar. We commenced the construction of a Concept Center to convert three wheeler vehicles into Electric Vehicles (EVs) in partnership with an expert company in this field.

The socially conscious pillar under community initiatives gained impetus on the launch of construction of an Autism Intervention Center at the Karapitiya Teaching Hospital, which will cover the entirety of the Southern region. This project is under the umbrella of The Autism Trust, making it the third project in this focus area. Our first was the very first sensory garden in Sri Lanka at the Ampara Base Hospital and the Autism Intervention Center at the Anuradhapura Teaching Hospital.

While our regular community initiatives continued during the year, staff engagement activities had to be halted due to the pandemic, were reactivated with much fervour. Bike to Work (Ninja Cruisers) and the Green Ninja Club were two that gained speed during the year.

The focus on conservation and biodiversity initiatives including reforestation, clean beaches and mangrove preservation in collaboration with Biodiversity Sri Lanka (BSL) and the University of Sri Jayewardenepura’s Department of Forestry & Environmental Science also gained added fillip.

The commitment to our mission of being a socially and environmentally conscious and responsible corporate citizen is gathering force. On our journey of becoming a quarter trillion asset base company within the 2021-2030 decade and moving toward a net zero company remain high on our priorities. Under this wide focus, we are expanding our portfolios of green assets, women-based lending and support for the agri and fisheries sectors.

We remain very cognizant of the need to ensure the well-being of our team members and have added multiple initiatives that create a learning, constantly developing and empowering environment for each to thrive and be the best of themselves.

In retrospect

As the country was yet grappling with the fallout of the economic crisis, our “look, feel and tone” when engaging with our staff in October 2022 was about remaining extremely conservative and cautious. In January 2023, as we embarked on a new year, we focused on our outlook as being cautiously optimistic, while when we ceremonially launched the new financial year 2023/24, it was with a sense of optimism and positivity.

At the time, Sri Lanka was slowly and gradually on a path to recovery, although the hurdles were many. However, the IMF’s Extended Fund Facility to Sri Lanka, the confidence extended by The Paris Club and the country’s main creditors, the concerted efforts to restructure debt, the turnaround in tourism and remittances, the rupee showing signs of appreciation and inflation decreasing pointed to better times. The funding agencies and the IMF remain cautious but confident of Sri Lanka’s recovery process, with the IMF expecting GDP to contract by 3% in 2023 but gain upward momentum in 2024.

The key remaining challenge of debt restructuring and overcoming uncertainty surrounding Domestic Debt Optimization (DDO) is expected to be finalized within a few days.

Stepping into the next year All the signs point towards Sri Lanka regaining some of her past glory. In one year since the onset of the unprecedented upheavals on the political stage, Sri Lanka has once again proven beyond doubt of her resilience. As the country navigates the next chapter of change, CDB intends to augment the strong foundations we have already laid with well-informed decisions, a strong business model and astute judgment of external forces which impact the country and business. We have a clear visionary stance on the future journey of the country and know that this foundation we have laid, will foster a better future for the people of this nation to grow and prosper.

The country itself has traveled a checkered path in the last year but that path has been a source of many lessons learned. CDB remains unwaveringly committed to leverage on the synergies we are now seeing, emerging stronger from the crisis, building on our foundation of stability and strength and creating strong pillars within a sustainability and tech-driven business model and strategy which will fuel our exceptional team to optimize on their passion and spirit to make a difference.

Appreciations

It has certainly not been an easy year. While we navigated a stormy course, I sincerely appreciate the words of wisdom which have been shared with me by the Chairman and Board of Directors. Their leadership and astute focus have paved a sure and stable path for CDB to travel on, even in the most turbulent times. And in giving wings to that vision and ensure we navigate these times with courage, tenacity and alacrity, our team has excelled. Challenges are not unique to us but what is unique is how each challenge is tackled by our team with amazing mettle and an eagerness to overcome it, while exploiting opportunities along the way. My heartfelt thanks to our winning team.

To our customers and valued business partners, I am thankful to have your loyalty and confidence on our side because those ingredients are what adds clarity to our formula for the future.

As we step into a new financial year and an era that promises to be better than the catastrophic period we endured in the last financial year, CDB sees signs of a better future for the nation and her people. It is this future that CDB is well positioned to move forward into, adding a foundation of strong fundamentals, a transformational optimistic outlook and a vision for a greener future for the country and the planet.

Sincerely,

Mahesh Nanayakkara
Managing Director/Chief Executive Officer

28 June 2023
Colombo