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(Reproduced from the Daily Mirror of November 16, 2001) DFCC Bank yesterday announced a healthy 15% growth in consolidated net profit to Rs. 445 million in the first half of 2001/2 financial year compared with Rs. 388 million posted in the corresponding period of last year. The impressive performance comes despite the 20% surcharge on income and the general provision, a disallowed expense for computation of taxable profits. However the impact was mitigated by a 30% increase in dividend income which was not taxable. The pre-tax operating profit before associate and subsidiary companies' profit was Rs. 550 million, up 71% from Rs. 322 million in the previous year. Net interest income was enhanced by the money market and treasury activities where the Bank was able to benefit from the high interest rate environment, which prevailed. A higher interest margin arising from re-pricing a part of the portfolio in April 2001 also benefited the bank temporarily and these enabled the Bank to improve the net interest income by 50%. The DFCC Bank said that it accounts for its investments in associate and subsidiary companies under the equity method of accounting. Since this is a partial consolidation, under this method the profit after tax of the Bank equals the profit attributable to the Group after deducting minority interest, and the Bank's balance sheet includes post acquisition reserves of associate an subsidiary companies. Its net loan, lease and bills of exchange portfolio recorded a growth of 10% to Rs. 19 billion. However, there was no growth in the quantum of gross loans and leases during the first half of the financial year. The high interest rates that prevailed coupled with the volatile political situation in the country and the world economic downturn dampened demand for new project finance, it said. Other income included dividend income and profit on sale of shares. Although the dividend income which includes dividend from subsidiaries amounting to Rs. 21 million (Rs. 14 million in the first half of 2000/01 financial year) and dividends received from preference share investments improved by 30%, this was offset by reduced profit on sale of shares compared to the corresponding period in the previous year. Operating expenses rose 16% compared with the previous year and this was well below the increase in operating income. The main increase was in personnel cost arising from normal and recurrent market and merit based annual increments. The gross specific provision for bad and doubtful debts was Rs. 142 million, 30% lower than the Rs. 203 million during the six months to 30 September 2000. The gross specific provision however has been reduced by recoveries in respect of loans previously covered by specific provisions. As reported earlier, the Bank uses a method to accelerate the provisions for loans identified as bad or doubtful of recovery. The acceleration is by increase in the quantum required by Central Bank and/or applying discounts to the forced sale value of security taking into consideration circumstances and delays in disposal of secured properties. The same methodology was used in the previous financial year. Apart from specific provision, a general provision was created for the first time, during the quarter ended 31 March 2001. A new general provision of Rs 46 million had also been made for exposure to the tourist hotel and poultry farm sectors, which are affected by terrorist attacks here and in the US. The cumulative provision for temporary diminution in value of investments was Rs. 199 million on 30 September 2001, a reduction of Rs. 58 million from the cumulative provision on 31 March 2001. The pre-tax profit of associate and subsidiary companies proportionate to the ownership of the Bank in these companies was Rs. 218 million, a 42% increase from Rs. 153 million during the six months to 30 September 2000. This included the pre-tax undistributed profit of Rs 207 million (Rs. 132 Million in the corresponding previous period) of Commercial Bank of Ceylon Limited (CBC), an associate company. The interest rate margin on advances and money market activities of the Bank will be lower in the second half of the year than in the first half. The Bank will also review the need for general provisions for other sectors based on its assessment of the portfolio quality during the second half of the financial year. DFCC said that the impact of the drought, power cuts and the slow down in economic growth due to global and country specific factors may have an adverse effect on the quality of the portfolio and collection performance. However, the Bank's strong capital base and liquidity will enable it to overcome any short term difficulties that may arise. BoxJoint proposal for a Holding company DFCC-Commercial gets “No” from Central Bank; to explore other options Ending nearly one year of speculation over its position, the Central Bank has decided that it is inappropriate for both the Commercial Bank of Ceylon (CBC) and the DFCC Bank to be largely owned and controlled by a Bank Holding Company. The Central Bank move was after having regard to the legal, policy and financial implications of the joint proposal. The Central Bank decision was announced jointly by CBC and DFCC Bank yesterday. However, the two financial institutions said: “The two banks remain committed to developing a closer relationship and will therefore explore other alternatives to achieve this goal in a manner which is beneficial to stakeholders and at the same time will also be acceptable to the Monetary Board of the Central Bank.” The joint proposal was submitted to Central Bank way back in December 2000, and in March this year among other things it wanted them to submit the proposed Memorandum and Articles of Association (M&A) of the holding company as well as the proposed amendments required to be made to the DFCC Act, primarily to facilitate the acquisition of a majority stake by the holding company to consider the proposal. These documents were forwarded to the CBSL on 11 August 2001. Prior to that and later on too there were reports of objections to the proposal from certain sections of the Commercial Bank employees on the grounds that it may be unhealthy as several leading commercial banks are shareholders of DFCC Bank as well. Adding more muscle to these objections was the bitter HNB-Sampath dispute, which remains unresolved for nearly two years. Subsequently, the DFCC and Commercial made a public announcement that the holding company will not have directors who may have interests in other commercial banks. HNB, which owns 10% in DFCC, though welcoming the proposal objected to a subsequent move. The Bank of Ceylon also owns 15% in DFCC. Banking industry analysts last night claimed the Central Bank decision appeared to be signalling that it was against consolidation within the sector. They are also disturbed that the Central Bank had to take almost a year to give its opinion. The disappointment is because the DFCC and Commercial may have explored all practical options at present before submitting the proposal while in the interim period the Central Bank also made the two to work extra by requiring documents connected to the holding company. However, others said that the Central Bank had only ruled out the proposal in its current form after giving due consideration of its implications but would have a fresh look at alternate recommendations. There was thinking that the two should have sorted issues (such as employee opposition and shareholder approval) within before making the proposal to the Central Bank. But on the other hand as the law stands, formal regulatory approval was necessary before any financial institution could make any dramatic moves. “It is a classic chicken and egg example,” but since it’s a unique proposal everyone is learning,” the analysts added. They also said that due to the different nature of the two institutions (one is a commercial bank and the other specialises in development finance; DFCC owns 30% of Commercial and Commercial owns 8% of DFCC; Commercial is more profitable than DFCC etc.) trying to work together a full-scale merger is not feasible in the short-term hence a holding company was the best option in the interim. The two were to evolve for a full-scale merger subsequently. Despite the disappointing news the industry analysts were happy that the two have stressed that they are committed to developing a closer relationship and explore other alternatives beneficial to all stakeholders. In a joint announcement mid this year, the two said they were ideally positioned to bring together their complementary strengths, skills and resources to create a stronger and vibrant financial services group, having the size and skills to withstand the competitive pressures of the future business environment.
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