Union Bank of Colombo c Pl
- Annual Report 2018 - Annual Report
Union Bank of Colombo PLC Annual Report Head office: 64, Galle Road, Colombo 03, Sri Lanka. +94 11 2374100 | www.unionb.com
Corporate Information You can view this Annual Report online on: www.unionb.com
NAME OF THE COMPANY AUDITORS Union Bank of Colombo PLC M/s. Ernst & Young, Chartered Accountants, LEGAL FORM No.201, De Saram Place, A Public Limited Liability Company Colombo 10. incorporated in Sri Lanka under the Companies Act No. 17 of 1982 and re-registered under BOARD OF DIRECTORS the Companies Act No. 7 of 2007. Listed as a Atul Malik - Chairman public quoted Company on the Colombo Stock Priyantha Fernando- Deputy Chairman/Senior Director Exchange. A Licensed Commercial Bank under Indrajit Wickramasinghe - Executive Director/ the Banking Act No. 30 of 1988. Chief Executive Officer Sabry Ghouse DATE OF INCORPORATION Ranvir Dewan 2nd February 1995 Gaurav Trehan Puneet Bhatia COMPANY REGISTRATION NUMBER Michael J O’ Hanlon PB 676 PQ Sow Lin Chiew Dilshani Wijayawardana REGISTERED OFFICE Trevine Fernandopulle No. 64, Galle Road, Colombo 03, ALTERNATE DIRECTORS Sri Lanka. Yoke Sun Woon Tel : +94 11 2374100 Keshav Thakkar Fax : +94 11 2370971 E-mail : [email protected] BOARD SECRETARY Website : www.unionb.com Inoka Jayawardhana
SWIFT CODE UBCL LK LC
VAT REGISTRATION NUMBER 134005610-7000 In a year where many challenges shaped the way we do business, we have remained resilient based on a strong foundation built on our partnerships.
At Union Bank, we believe that achieving sustainable growth in times like these calls for innovation, resourcefulness, and agility. During the year, we navigated towards achieving our goals by building stronger bonds and balancing boldness with prudence to deliver value to all our stakeholders.
In this endeavour, we remained committed to our national agenda and empowered and enriched lives, whilst adhering to regulatory laws. Our approach throughout the year has strengthened our position as one of Sri Lanka’s fastest growing banks and we are poised for greater things ahead. By being adaptable and prudent, we continue to be buoyant towards building a bank that is sustainable and strong.
1 In this year’s report
1-21 COMPANY AND REPORT OVERVIEW 24-105 MANAGEMENT REPORTS 106-167 STEWARDSHIP 169-315 Financial REPORTS 316-327 Supplementary Information COMPANY AND REPORT OVERVIEW Financial Reports Cover Story 1 Financial Calendar 169 Financial Highlights 4 Independent Auditors’ Report on Financial Statements 170 Corporate Profile 5 Statement of Profit or Loss 174 Report Profile 8 Statement of Comprehensive Income 175 Stakeholder Engagement 14 Statement of Financial Position 176 Key Performance Indicators 18 Statement of Changes in Equity 177 Sustainability Impacts, Risks and Opportunities 20 Statement of Cash Flows 178 Notes to the Financial Statements 180 Ten Years at a Glance 296 MANAGEMENT REPORTS Pillar III Market Disclosures 298 Chairman’s Message 24 Quarterly Performance of the Bank 309 Chief Executive Officer’s Message 26 2018 - Direct Economic Value Generated & Distributed 310 Management Discussion and Analysis 32 Compliance with Annual Report Disclosure Requirements Corporate Highlights 57 of Central Bank of Sri Lanka 311 Media Highlights 64 Social and Environment Report 68 Subsidiary Update 80 Supplementary Information Investor Relations 84 Glossary of Financial Terms 316 Risk Management 90 Branch Network 322 Notice of Meeting 324 Form of Proxy 325 STEWARDSHIP Stakeholder Feedback Form 327 Corporate Governance 106 Corporate Information Inner Back Cover Board Audit Committee Report 132 Integrated Risk Management Committee Report 135 Nomination Committee Report 137 Human Resources and Remuneration Committee Report 138 Related Party Transactions Review Committee Report 139 Annual Report of the Board of Directors on the Affairs of the Bank 140 Directors’ Statement on Internal Control over Financial Reporting 149 Assurance Report on Internal Control 151 GRI Content Index 152 Independent Assurance Report on Sustainability Reporting 154 Board of Directors 156 Profiles of the Board of Directors 158 Leadership Team 162 Assistant Vice Presidents 163 Chief Managers 164 Senior Managers 165 Union Bank | Annual Report 2018
Financial Highlights
Financial Highlights BANK GROUP 2018 2017 Change % 2018 2017 Change %
Results for the year (Rs.’000) Gross Income 13,910,425 11,937,763 17% 16,075,953 13,899,368 16% Total operating income 5,285,261 4,375,638 21% 6,257,985 5,261,280 19% Results from operating activities 1,213,504 781,837 55% 1,415,180 1,025,536 38% Profit for the year 472,548 460,618 3% 534,650 551,129 -3% Net profit attributable to equity holders of the bank 472,548 460,618 3% 517,750 514,776 1% Gross Dividend 109,141 109,141 0% 158,141 121,391 30%
Assets and Liabilities (Rs.’000) Gross loans and advances 75,787,035 71,493,285 6% 85,452,541 80,645,569 6% Customer deposits 79,251,073 70,325,594 13% 86,266,123 76,747,977 12% Total assets 125,920,154 119,007,408 6% 135,031,708 127,600,832 6% Total liabilities 109,292,806 101,149,711 8% 118,558,674 109,759,116 8%
Profitability (%) Gross non-performing loans ratio 3.68% 2.69% NA NA Return on average shareholders’ funds (%) 2.74% 2.64% 3.07% 3.02% Return on average assets after tax (%) 0.39% 0.43% 0.39% 0.45%
Information per ordinary share (Rs.) Earnings - Basic 0.43 0.42 Net asset value 15.23 16.36 Market value as at 31 December 11.00 13.20 Dividend 0.10 0.10 Dividend Yield (%) 0.91 0.76
Regulatory Ratios (%) Common Equity Tier 1 Capital Ratio (Minimum Requirement - 6.375%) 17.41% 18.85% Tier 1 Capital Ratio (Minimum Requirement - 7.875%) 17.41% 18.85% Total Capital Ratio (Minimum Requirement - 11.875%) 17.41% 18.85% Liquid Asset Ratio (%) Domestic Banking Unit 21.77% 21.27% Foreign Currency Banking Unit 21.14% 21.13%
Loans Rs. Mn Profit before all taxes 80,000
Rs. Mn 60,000 1,400 40,000
1,200 20,000
1,000 0 2014 2015 2016 2017 2018 800 CASA 600 Rs. Mn 20,000
400 15,000
200 10,000
0 5,000 2014 2015 2016 2017 2018 0 2014 2015 2016 2017 2018
4 Company and Report Overview Financial Highlights Union Bank | Annual Report 2018
Corporate Profile
Organisational Profile diversifications within the financial services sphere. Union Bank’s subsidiaries include National Established in 1995 as the eighth indigenous Asset Management Limited, Sri Lanka’s premier asset management company, and UB Finance bank, Union Bank is one of Sri Lankas fastest Company Limited. Delivering a unique value proposition and backed by the strength of TPG - the growing private commercial banks, offering US-based global private investment firm with over USD 79 Bn in capital under management and a wide range of products and services to an extensive global network; today, Union Bank continues to expand its horizons as a preferred Retail, SME and Corporate segments. Listed financial solutions provider. in the Colombo Stock Exchange, Union Bank is synonymous with progressiveness and About Tpg potential for growth and is an entity that has TPG is a leading global private investment firm founded in 1992 with over USD 79 Bn of assets attracted global and local investors. The global under management and offices in San Francisco, Fort Worth, Austin, Beijing, Hong Kong, investment company TPG’s investment of USD Houston, London, Luxembourg, Melbourne, Moscow, Mumbai, new York, São Paulo, Seoul and 117 Mn in Union Bank in 2014, acquiring 70% Singapore. TPG has been present in Asia since 1994 and is currently investing out of its seventh of the Bank’s equity through its affiliate Culture Asia-focused fund. Financial Holdings Ltd, marked a milestone in the financial services industry as one the TPG has extensive experience with global public and private investments executed through largest foreign direct investments to Sri Lanka. leveraged buyouts, recapitalisations, spinouts, growth investments, joint ventures and restructurings. The firm’s investments span a variety of industries including financial services, With a solid foundation etched with financial travel and entertainment, technology, energy, industrials, retail, consumer, real estate, media and stability and international know-how, communications, and healthcare. Union Bank is a full service bank offering a comprehensive range of products and services to financially empower individuals, entrepreneurs and corporates in Sri Lanka. Following the capital infusion the Bank Vision implemented a cohesive plan for accelerated To be the innovator of banking solutions to the wider Corporate, SME and growth with substantial innovations and Retail segments and to be their bank of choice, through professional and developments to its product offering, empowered people technological and delivery platforms with the view of providing a differentiated banking experience to its clientele. Mission To our customers we provide the means of economic upliftment through Union Bank’s growth is further augmented customised banking and financial services by the extensive investments made in To our shareholders we provide a return on their investment above industry norm network development initiatives. The Bank’s To our staff we are a learning and innovative organisation providing network stands at 67 branches at present, opportunities for faster career progression within a pleasant work provisioning unsurpassed service experiences environment to a diverse clientele across the island. The We adhere to the practice of good Corporate Governance in the eyes of the brick and mortar presence of the Bank is ably regulatory authorities supplemented by alternate channels that We are conscious of the need to be a responsible corporate citizen for the include, dedicated sales forces for Asset and betterment of our society Liability products, a 24 - hour call centre, a digital banking platform and a rapidly-growing island-wide ATM network of 117 bank-owned Values ATMs and access to over 4,500 ATMs across We value and believe in a high degree of integrity, honesty and ethical Sri Lanka through LankaPay, providing our behaviour in all our dealings customers with convenient access to financial We respect the dignity of people services. We are passionate about delivering the highest level of service quality to our external and internal customers Union Bank’s renewed positioning as a We encourage and respect diversity among our team while creating a feeling of fully-fledged commercial bank providing a belongingness across the organisation comprehensive range of financial products and We believe in leading by example services is further enhanced with its strategic
Company and Report Overview Corporate Profile 5
Resilient in challenging times In a year full of challenges, we stayed resilient and steered our course well and stood strong, delivering optimum returns to all our stakeholders. Union Bank | Annual Report 2018
Report Profile
Overview issued by the Institute of Charted Accountants Reporting Boundaries and Material GRI 102-4/102-50/102-51/102-52/102-54 of Sri Lanka. The Bank operates in compliance Topics The report reviews the operations of the Bank with the requirements of the Company’s Act GRI 102-48/102-10/102-46 and its respective subsidiaries during the No.07 of 2007, Banking Act and the listing rules This report is primarily about the performance financial year from 1st of January 2018 to 31st of the Colombo Stock Exchange. of Union Bank’s operations within the of December 2018, complying with all the due boundaries of Sri Lanka. Reporting is mainly financial and non-financial requirements. The focused on indicators that reflect on the report precisely exhibits the Bank’s strategy, Endorsement or Subscription to Bank’s performance against defined core operational performance and stakeholder externally developed Charters and sustainability focus areas such as economic, management processes which contributes Principles environmental and social impacts or that significantly to the Bank’s sustainable growth GRI 102-12 would influence the assessment and decisions trajectory to achieve its strategic objectives, In addition to all the relevant legal and of its stakeholders. The material assessment within identified boundaries. Currently, the regulatory frameworks and charters the attached here further reveals details on Bank functions only within the territory of Sri Bank also endorses and or subscribes to the the material topics and setting of aspect Lanka, and provides a comprehensive range following, boundaries with regard to each factor. There of financial solutions to its customer bases have been no restatements to the information within the respective boundaries. Union Bank aa Code of Best Practices on Corporate provided in previous reports or to the scope publishes its financial performance on an Governance issued jointly by the Institute and aspect boundaries. annual basis and the most recent previous of Chartered Accountants of Sri Lanka and report published was for the financial year the Securities and Exchange Commission There were no significant changes regarding 2017. of Sri Lanka. the Bank’s size, structure and ownership or aa The Global Reporting Initiatives for its supply chain, including changes in the This report complies with the Global Reporting Sustainability Reporting (GRI). location of or changes in operations, changes Initiative GRI guidelines for sustainability in the capital structure and other capital reporting and is presented “in accordance” formation, maintenance, and alteration Core. According to the GRI sustainability External Assurance operations and changes in the location of reporting guidelines, the Bank’s prioritisation GRI 102-56 suppliers, the structure of the supply chain, of GRI content aspects have been based on We have appointed M/s Ernst & Young or in relationships with suppliers, including the principle of materiality and stakeholder Chartered Accountants, an independent selection and termination. inclusiveness. The GRI content index is set out external auditor to provide an assurance on in pages 152-153 of this report. the Bank’s integrated sustainability initiatives and measures included in the report. The financial statements appearing in this The Board of Directors’ recommendation report have been prepared in accordance with is obtained in determining the external the Sri Lanka Accounting Standards (LKAS’s/ assurance provider and shareholders’ approval SLFRS’s) in effect as at 31st December 2018, has been obtained at the Annual General Meeting to appoint an independent external auditor.
8 Company and Report Overview Report Profile Union Bank | Annual Report 2018
Material Topics and Boundaries GRI 102-47/102-49/103-1/103-2/103-3 The materiality is defined by considering the significant impact, which the Bank’s operations impose on its internal and external stakeholders’ and the influences the Bank receives from externalities. The Bank’s operations have been reviewed considering both financial and non-financial aspects, in comparison with the previous year’s assessment and no significant changes have taken effect to the materialistic topics and topic boundaries which are being considered in this report. The significance of materiality topics discussed herein are detailed below.
Economic Performance
Reasons for Materiality Economic performance entails the organisation’s considerations towards its stakeholders in terms of strategic decision making, which in turn enable the stakeholders to make long term employment decisions, investment decisions and partnering decisions with the organisation. This would generate impacts on both internal and external stakeholders and hence, the significance and relevance of economic performance being materialistic to the Bank. Management Strategy Measurement of the performance would be through evaluation of annual goals and objectives set based on the budgeted performance for the year reviewed. Quantitative measures of this aspect are presented through the Key Performance Indicators, illustrated in pages 18-19. The Bank continues to place high significance to this aspect as it impacts the Bank’s long term sustainable growth, and the performance is reported in line with the Sri Lanka Accounting Standards. Evaluation Mechanism Annual internal and external audits would provide in-depth analysis on the performance of the Bank, and the assurance provided following the audit proceedings would ensure that the Bank stands in accordance with the statutory and regulatory compliance requirements and facilitates a space to recognise the Bank’s achievement against the comparative to the competitor performance during the reporting year.
Energy GRI 302-1
Reasons for Materiality Energy is recognised as an essential requirement to maintain uninterrupted, efficient organisational performance at pre-determined levels. The significance is high from both internal and external stakeholder perspectives, as the absence of energy would disrupt banking operations while limiting its customers from carrying out their daily banking requirements in a timely manner. Management Strategy The Bank currently maintains a process to monitor energy consumption at selected locations and plans to extend this mechanism across its entire branch network, considering the significant impact in this aspect. Evaluation Mechanism With the implementation of the aforementioned management strategy for monitoring the energy consumption of the Bank, suitable evaluation mechanisms are being rolled out progressively.
Company and Report Overview Report Profile 9 Union Bank | Annual Report 2018
Report Profile
Employment/ Anti-Competitive Behaviour
Reasons for Materiality The Bank values its employees as important assets, as the experience and skills to provide required services to customers is of paramount importance to the Bank’s performance. The Bank believes in selecting the right person for the right job, be it through internal or external resources. Competition would be the drive which elevates the corporate unit to the next level hence every business unit should ensure to maintain fair and competitive conditions. Management Strategy The annual head count planning exercise, which is aligned to the Bank’s strategy provided direction regarding the roles that need to be resourced either internally or externally. The Bank follows a meticulous recruitment process to ensure that it provides career development opportunities to internal candidates through transfers and promotions. Further, the recruitment process is geared to select the suited candidates with the required knowledge, skills and abilities. The management has established sound processes and policies to ensure that employment is provided to the most suited candidates whilst constant efforts are made to ensure that all employees are rewarded and compensated in par with industry standards. The Bank’s HR policy guides the direction in respect to this aspect and the HR department stands responsible for successful implementation of specific HR activities of the Bank. The Bank maintains sound compliance policies and negative competitive attempts, the same would be evaluated through periodical audits take up by the Compliance Department and the Internal Audit unit. Evaluation Mechanism The policies relevant to the selection of employees and anti-competitive activities are periodically reviewed by the audit and compliance teams and recommendations are provided to address gaps, if any. The Bank also conducts an employee engagement survey and remuneration surveys periodically, to gauge employee sentiment and evaluate the positioning of the bank against the market.
Occupational Health and Safety
Reasons for Materiality Providing a safe and healthy environment for employees to work is of utmost importance to the Bank. The Bank has thus established systems and processes across all locations to ensure employees are confident of the security provided, so that they are able to perform at their best in their respective roles. Management Strategy The bank established security personnel and security devices such as CCTV cameras and access control across all locations, including the entire branch network. The bank conducts regular fire- drills, whilst selected employees are trained as fire wardens and on basic first aid skills periodically. In addition, all employees on the permanent cadre are covered by a personal accident, critical illness and life covers along with surgical and hospitalisation insurance as well as reimbursements of OPD bills. The HR department stands responsible to ensure the full implementation of employee well-being by aligning the grievance mechanism and the HR policy are in line with the industry norms. Evaluation Mechanism The effectiveness of fire drills is periodically assessed to ensure the Bank’s readiness to safeguard employees during an emergency situation. All security equipments are checked and maintained frequently. In addition, an annual review of the surgical and hospitalisation insurance service provider is conducted to ensure that the best facilities are extended to employees.
10 Company and Report Overview Report Profile Union Bank | Annual Report 2018
Training and Education / Labour Management Relations
Reasons for Materiality The Bank believes in equipping its employees with the skills and tools necessary to perform in their respective job roles at an optimum, in a bid to gear them towards delivering a remarkable service experience to its customers. Hence, the Bank invests significantly in providing opportunities for employees to learn and grow within the organisation. The Bank further ensures that employees receive sufficient training and upgraded knowledge on product information, operational procedures and regulatory compliance, so that the Bank’s interests with regard to good governance are preserved at all times. Further communication could be known as a prominent factor which facilitate the flow of information across various levels of the organisation. Management Strategy The scope for learning and development initiatives are reviewed annually and aligned to the Bank’s strategy as well as regulatory requirements. The annual training budget is optimised to provide specific staff development interventions throughout the year. These interventions include internal training and external forums as well as selected overseas exposures. Further any changes to the operations or the existing designation changes of the Bank will be informed to the staff through a global email and town hall meetings. Town hall meetings are held on bi-annual basis where all employees get an update relevant to financial and non-financial aspects of the Bank. Evaluation Mechanism The effectiveness of internal training interventions is assessed by obtaining spot feedback from employees subsequent to each training programme. The annual employee performance review exercise also allows the employee and line manager to highlight any particular training requirements needed during the year. This information is considered at the time of deciding on nominating employees for programs or when designing learning interventions. Overall sentiments of employees regarding learning and development are also obtained through the feedback of the employee engagement survey. All employee updates with respective to operations will be given by the HR department on a timely basis.
Customer Privacy /Marketing and Labeling and Socio Economic Compliance
Reasons for Materiality As one of the fastest growing commercial banks in Sri Lanka with a growing network of 67 branches, the Bank serves a significant number of customers each day – thus the significance of materiality of this aspect. All banks have a legal duty to protect the confidentiality of existing and former customers under the Banking Act and the bank’s responsibility for protecting customer data is continuing to grow in importance. External stakeholders would get adversely affected in the event customer information gets exposed to an unauthorised party, leading in to breach of trust and confidence among customers, which would bear a negative influence on the corporate image of the organisation. Communicating the exact nature of the service to the customer becomes vital and essential in order to maintain the transparency and develop the strength of customer relationships in the long run. Further, steps against the customer privacy breach attempts would enable to enhance the customers trust towards the bank. Management Strategy All Bank staff are responsible to ensure the Bank’s operations remain within the scope of the Banking Act and Directions issued by the Central Bank. Further, the Bank has implemented processes and systems to ensure that customer confidentiality is safeguarded to the maximum form potential internal and external threats imposed. Evaluation Mechanism Reviews carried out by Internal Audit, Compliance Department and Operational Risk Management teams ensure continuous evaluation of the Bank’s processes and systems add value to the evaluation mechanism.
Company and Report Overview Report Profile 11 Union Bank | Annual Report 2018
Report Profile
Diversity and Equal Opportunity
Reasons for Materiality The Bank is committed to providing equal opportunities throughout an employee’s career and encourages diversity in the workplace at all times. This enables a healthy work environment where diverse individuals bring in different skill sets and experiences. Management Strategy The Bank consistently encourages equal opportunity and diversity throughout the employee life- cycle. The Bank has also ensured that appropriate policies and processes are in place to provide employees with an environment where they are comfortable. The Whistle-Blowing Policy and the process for handling disciplinary issues and grievances ensure that the employees’ best interest is maintained and respected at all times. Evaluation Mechanism Regular audits are conducted to ensure the aforementioned policies and processes are in place. Internal investigations are attentively conducted in to any incidents which are reported. The management of the Bank has zero tolerance towards any form of discrimination and has ensured appropriate action is taken with due diligence, at all times.
Non-discrimination/ Child Labour and Forced or Compulsory Labour
Reasons for Materiality The Bank does not tolerate discrimination of any form. Being an organisation that fosters diversity and equality, the Bank believes in encouraging employees to accept and value each other’s differences. Being a service oriented organisation, it is of importance that employees themselves foster an environment of non-discrimination as it has a direct bearing on how we treat our customers. The Bank is strictly against the child labour, forced labour and compulsory labour utilisation with any cost, which further directs the Bank towards creating a discrimination free corporate platform. Management Strategy As mentioned in the previous section, the Bank has policies and processes to handle grievances and disciplinary issues. Evaluation Mechanism All issues reported are investigated by the audit teams and all policies are reviewed periodically to ensure they are current and are supportive of the Bank’s approach to prevent any form of discrimination.
Other GRI Prospects GRI 102-11/102-16/402-1 According to the nature of services being facilitated, in order to establish a sustainable corporate entity, the Bank should ensure the social and environmental well-being through its direct and indirect commercial endeavours. The indirect phase may be applied through initiatives such as including the social and environmental criteria to the initial customer screening process and establishing a clear process for determining sustainable feasibility prior to launching new products and services in the forthcoming years.
Employees who step in to the Bank as trainee banking assistants would receive a comprehensive induction conducted by the Head of Learning and Development, prior to confirmation to the permanent cadre, where prominence is given to inculcate the unique values, principles and norms of the Bank in employees’ behaviour. Employees for other grades are recruited considering their prior experience in the industry, hence would get used to Bank norms and values through experience that they gain over time. All heads of departments and branch managers are responsible to overlook sustainability practices and ensure that the Bank’s operations are aligned with industry accepted sustainability norms and practices.
All the operational changes and the significant designation variations are informed to the employees on a timely basis through a global mail. All significant operational changes are initially executed under a User Acceptance Testing (UAT) environment, and are implemented in a live environment subsequent to obtaining approval from authorities. The minimum notice period with regard to operational changes varies according to the nature of the change and the impact it would have on the ongoing operations. Further, employment contracts of the Bank precisely disclose the terminating mechanism and notice periods have been imposed in a due cause, enabling employees to make informed decisions with regard to their profession.
12 Company and Report Overview Report Profile Union Bank | Annual Report 2018
GRI 102-46
1,15,18, Issues indicated in this area are of high significance and H 22,23 31,32 impact on both the stakeholders and the organisation. All indicators shown in this are fully discussed in the Annual Report.
8,16,19, M 20,33 Issues indicated in this area have a relatively moderate impact on our business. They too were addressed during 2,3,4,5,7,9,10,11, the reporting period and are fully or partially reported in 12,13,14,21,24, the Annual Report. L 6 17 25,26,27,28, 29,30 Issues found in this area of the grid have only minor impact thus may only be reported in the Annual Report. L M H Significance to the External Stakeholders Significance
Significance to the Internal Stakeholders
1. Economic Performance 12. Effluents & Waste 23. Forced and Compulsory Labour 2. Market Presence 13. Environmental Compliance 24. Security Practices 3. Indirect Economic Impacts 14. Supplier Environmental Assessment 25. Rights of Indigenous People 4. Procurement Practices 15. Employment 26. Human Rights Assessment 5. Anti-corruption 16. Labour/ Management Practices 27. Local Communities 6. Anti-competitive Behaviour 17. Occupational Health and Safety 28. Supplier Social Assessment 7. Materials 18. Training and Education 29. Public Policy 8. Energy 19. Diversity and Equal Opportunity 30. Customer Health Safety 9. Water 20. Non-discrimination 31. Marketing & Labelling 10. Bio-diversity 21. Freedom of Association and Collective 32. Customer Privacy Bargaining 11. Emissions 22. Child Labour 33. Socio Economic Compliance
Contact GRI 102-53
With regard to concerns and clarifications on this integrated Annual Report, please contact: The Chief Financial Officer Union Bank of Colombo PLC No. 64, Galle Road, Colombo 03, Sri Lanka. Tel: 0112374100 E-mail:[email protected]
To facilitate better engagement and formal feedback, an investor/ stakeholder can communicate through the feedback form attached on Page 327 in this report.
Company and Report Overview Report Profile 13 Union Bank | Annual Report 2018
Stakeholder Engagement
GRI 102-40
Creating Sustainable Corporate Values
MISSION GOALS
aa Provide favourable returns on aa Growth in share price Shareholders their investment aa Increase in ROE
aa Provide means of economic aa Reduce customer service upliftment through customised complaints Customers financial products and services aa Improve customer satisfaction and retention
Maintain high staff retention ratio aa Provide opportunities for faster career aa aa Strengthen the performance based Employees progression with a pleasant working environment culture aa Maintain higher staff engagement rate
aa Provide financial solutions towards developing aa Be conscious of the need to be a the SMEs in rural areas responsible corporate citizen for the aa Financial inclusion through channel / market Society betterment of our society development aa Focus on philanthropic / social development activities that resonate with the Bank’s strategic CSR intent
aa Adhere to the practice of good corporate aa Conduct business in accordance governance in the eyes of the regulatory with the guidelines set by regulators Regulatory authorities Due compliance and reporting of Authorities aa requested information
aa Be environmentally responsible to reduce aa Reduce wastage and energy consumption both direct and indirect impacts by our aa Adopt responsible lending practices Environment operations
14 Company and Report Overview Stakeholder Engagement Union Bank | Annual Report 2018
The table below illustrates how we engage with our important stakeholder groups GRI 102-43/102-44
Stakeholder Engagement Method Key topics / Issues raised Responses / Action Plan Frequency Shareholders aa Annual General Meetings aa Financial Results aa Implementation of aa Quarterly / aa Investor Feedback Form aa Strategy and goals planned business Annually aa Publications and announcements aa Enhancing shareholder strategy through CSE wealth aa Access via email/telephone to aa Return on equity and Share contact point Price Customers aa One to one interviews and feed- aa Relationship Management aa Customer Charter aa Ongoing back from customers who visit the aa Products and Services aa Seasonal offers Bank aa Accessibility and reach aa Investment in ATM’s aa Customer surveys aa Return on investments and across the Sri Lanka aa SMS alerts and Call Centre cost of borrowing aa Customer suggestions aa Internet Banking and recommendations aa Social Media Interaction approach aa Official Web Site Employees aa Town Hall meetings aa Career path and aa Adhering to the HR aa Ongoing aa Open door Policy development opportunities policy of the Bank aa Circulars, email notifications aa Work life balance aa Employee survey by third party aa Ethical employee practices aa Employee Intranet aa Talent management aa Exit Interview upon Resignation approach aa Promotions and salary increment Society & aa Feedback forms aa SME development aa Focused SME lending aa Ongoing Environment aa Call centre aa Community development practices aa Employee involvement in local aa Employment opportunities aa Green procurement community projects practices aa CSR projects aa Funding towards aa Registration of suppliers relevant causes through CSR/ sponsorships aa Reduce wastage and energy consumption Regulators aa Industry forums / aa Compliance with the aa Strengthening aa Monthly/ aa Meetings with Central Bank regulatory requirements relationships with Quarterly/ aa Reporting to the Central Bank and aa Mergers and acquisitions public and professional and whenever CSE to ensure compliance aa Compliance with the Code of institutions required Best Practices aa Monitoring and responding on time
Company and Report Overview Stakeholder Engagement 15 Union Bank | Annual Report 2018
Stakeholder Engagement
Stakeholder Identification and Engagement Process GRI 102-42 As a financial service provider we regard stakeholder management as a strategic focus in the process of building a sustainable business and promoting good governance. All our stakeholders are considered as key partners that contribute to and witness the successive growth achieved over the years. In its stakeholder identification process, the Bank outlines its stakeholders along two main categories as described below; aa Primary stakeholders – direct beneficiaries and users of banking services. (shareholders, customers and employees) aa Secondary stakeholders – intermediary and external authorities that bear influence over the banking activities. (regulators, society and environment)
Both of the above segments relate to the stakeholder engagement process as follows;
Step 1 Step 2 Step 3 Step 4 Step 5
Stakeholder Establish mission, Define performance criteria Evaluate Performance identification and goals and and resource deficiencies and measure and initial outreach objectives requirement develop alternative plan feedback
Feedback We value your suggestions to enhance our processes, for your suggestions we attached the Stakeholder Feedback form in the page 327 in this report.
16 Company and Report Overview Stakeholder Engagement Union Bank | Annual Report 2018
17 Union Bank | Annual Report 2018
Key Performance Indicators
Environment
17 4,000 2.3 No. of trees saved KWH of electricity Cubic meters of land fill
1,438 26,497 Oil litres Water litres
Employees
46% (Growth) 1:1.5 (Female : Male) 1,266 Per employee contribution Employee composition ratio Work force to PBT
Network
67 117 No. of branches On-site/Off-site ATMs
Shareholders
Dividend ROE 2.74% Yield 0.91%
18 Company and Report Overview Key Performance Indicators Union Bank | Annual Report 2018
Regulators
776 Mn 365 Mn Total Taxes Taxes collected on behalf of the Government
Financial
1,214 Mn 55% (Growth) 777 Mn 46% (Growth) Result from Operating Activities Profit Before Tax
126 Bn 6% (Growth) 17.41% Assets Tier 1 & Total Capital Ratio
74 Bn 4% (Growth) 3.68% Loans Gross NPA Ratio
79 Bn 13% (Growth) 19 Bn 15% (Growth) Deposits CASA
Company and Report Overview Key Performance Indicators 19 Union Bank | Annual Report 2018
Sustainability Impacts, Risks and Opportunities
GRI 102-15/201-2
aa Supporting sustainable economic development through nurturing and encouraging entrepreneurship. aa Actively support SMEs and empower self employment by offering a comprehensive Economic portfolio of products (Micro Finance, Project Finance and Working Capital solutions). Impact aa Enhancing skills and knowledge to empower entrepreneurs. aa Instilling the habit of savings by offering a range of savings and deposit products across all customer segments. aa Meeting the financial needs of the commercial and corporate sectors.
aa Directing the Bank’s operations and offering financial solutions that enable enhanced Social living standards of the society. Impact aa Empowering the employees through facilitating financial, healthcare and education support.
aa Initiatives related to minimising impact on the environment are addressed within the Bank’s business operations. Environmental a Achieving optimum consumption through energy efficient processes and effective Impact a waste management. aa Encouraging environmental responsibility with suppliers.
20 Company and Report Overview Sustainability Impacts, Risks and Opportunities Union Bank | Annual Report 2018
aa Opportunities for business growth in terms of increased deposits and lending due to enhanced network. aa Limitations in reaching the preferred target Economic segments due to higher poverty levels and Risks/ low literacy levels which obstruct these Opportunities segments from appreciating the benefits of financial schemes.
aa Ensuring the repayment of facilities granted Responsive Business is a challenge for which the Bank has put in Processes place stringent credit screening processes.
aa Implementation of KYC (Know Your Customer) and effective Anti-Money Laundering policies. aa Stringent follow up process for loan recovery. aa With an enhanced network and a aa Risk and Compliance. Social comprehensive product portfolio we aa Encourage responsible lending Risks/ reach out to a wider segment of society practices. Opportunities thereby strengthening our links with the community. aa Implementation of an environmentally friendly business model. aa Enhancing the effectiveness of Supplier screening process to ensure the selection of most appropriate suppliers. aa Encouraging equal opportunity aa The nature of our business doesn’t directly and gender equality in HR have an impact on climate change and practices. it is also not directly impacted by climate change. However, in case the Bank’s Environmental customers are affected by climate change, Risks/ the Bank’s performance would be indirectly Opportunities impacted. aa We act as a change agent to minimise impact on the environment through effective screening and communication processes with our stakeholders.
Company and Report Overview Sustainability Impacts, Risks and Opportunities 21
Forging stronger partnerships Our customers are at the heart of everything we do. By building strong partnerships, we understand that our successes go hand-in-hand with those of our customers. Union Bank | Annual Report 2018
Chairman’s Message
Operating in challenging times Looking into 2019, the future economic Rs. 1.2 Bn 2018 was a challenging year for the banking direction of Sri Lanka is largely dependent Bank Profit Before all Taxes industry due to both economic and political on the much needed political stability volatility. This resulted in moderate asset and progress which is expected to restore growth and deterioration in credit quality economic stability and restore both domestic leading to pressures on profitability. Increase and foreign investor confidence which will in taxes led to a slowdown in capital accretion. once again create a backdrop conducive for doing business in Sri Lanka. With a I’m pleased to state that amidst these healthy capital base, your Bank is geared challenges, your Bank delivered noteworthy to take advantage of the macro-economic returns and value to stakeholders during opportunities. the year under review. We successfully managed these tough times due to our strong We believe that our strategic intent of partnerships with our customers. Clear focus, delivering sustainable growth, best in class strategic realignment and commitment return on equity, prudent risk management enabled the Bank to record an impressive and providing a superior customer experience performance. The Retail, SME and Corporate will stand us in good stead in this environment. Banking segments collectively outperformed We will continue to be a responsible corporate to deliver consistent and strong growth in citizen focused on delivering value to all our core banking activities, paving the way for the stakeholders, which includes shareholders, Group to surpass the Rs. 1 Bn in Profit Before employees, customers, regulators and the Taxes (PBT) milestone. This is an affirmation environment we operate in. of the success of the Bank’s midterm strategic initiatives for accelerated growth.
24 Management Reports Chairman’s Message Union Bank | Annual Report 2018
“Beginning 2019 and beyond we will continue to further strengthen our partnerships with all our customers and stakeholders. We believe that our success lies in the success of our customers and to this end, we will endeavor to deliver enhanced value and convenience to all our customer segments.”
Building a full service bank Appreciation Beginning in 2019 and beyond we will The Bank has received support from multiple continue to further strengthen our stakeholders through the year 2018. The partnerships with all our customers and Central Bank, particularly the Governor and stakeholders. We believe that our success lies the Deputy Governors, has provided astute in the success of our customers and to this counsel which has been greatly beneficial. end, we will endeavour to deliver enhanced Customers, whose successes go hand in value and convenience to all our customer hand with our success have continued to segments. We will leverage our strengths of a place their trust in the Bank to build stronger sound capital base, our people and the ability relationships. Within the Bank, members of for exemplary execution of strategies to drive the Board of Directors and the Chairpersons the Bank towards its ambitious objectives. and members of Board Committees have provided able guidance which has charted the Our key focus will be placed on business successful direction of the Bank’s growth. To segments that are scalable and profitable all these institutions and individuals, and many whilst supporting the national agendas. other counter-parties and well-wishers, I would We will continue to invest in technology to like to record the Bank’s deep appreciation improve efficiency, foster innovation and of the support provided. In addition I would drive growth. We will further build on our like to thank our shareholders, both retail and people agenda to nurture and grow our team institutional, for continuing to place their trust to be the best in class. The Bank will add in the Bank. Finally, a big thank you to the further vigour to its growth momentum by Union Bank employees at all levels for their harnessing and leveraging group synergies. unstinted support and hard work in extremely Our growth strategies will be aptly supported trying circumstances. by operational and cost efficiencies along with prudent risk management and corporate governance practices, all of which will create a solid foundation that will underpin our vision of becoming the preferred Retail/SME and Atul Malik Transactional Bank. Chairman
Management Reports Chairman’s Message 25 Union Bank | Annual Report 2018
Chief Executive Officer’s Message
Dear valued stakeholders, These results reflect the Bank’s robust 49% Growth performance and progress made in achieving Bank Profit Before all Taxes FY18 business performance round up its growth objectives that were set for the year. Your Bank remained resilient against the macroeconomic changes of the year 2018, Corporate Banking showcased a high level of showcasing impressive progress and excellent resilience in its performance during the year financial results. despite external drawbacks and moderate private sector credit growth. Minimising the During the period under review, Union Bank impact, the Bank enhanced its penetration to reported very strong and consistent growth the emerging large corporates and realigned in core banking operations; amidst challenges its processes to harness growth opportunities posted by extreme volatility in global and from the sector by providing end to end capital markets, currency fluctuations that client solutions, supported by value-based resulted in the Rupee depreciation and the pricing, a state of the art digital transactional political instability that transpired at the banking platform and superior relationship latter part of the year. However, I am pleased management services. to report that in this backdrop, your Bank reached a milestone of surpassing Rs. 1 Bn Market limitations that prevailed throughout in group profits before all taxes by the third the year posted adverse impacts on the SME quarter of the year, whilst the Bank recorded segment. The Bank supported the sector an impressive profit before all taxes of Rs. with customised strategies for key industries 1,248 Mn by end 2018 recording a 49% growth to prudently manage such challenges. YoY. The significant increase in taxes by 106% Highlighted improvements were noted in impacted the profit after tax which was Rs. income and margins in the SME banking 473 Mn a growth of 3% YoY for the period business in comparison to previous years due ended 31st December 2018. to the implementation of a focused approach based on portfolio rationalisation and
26 Management Reports Chief Executive Officer’s Message Union Bank | Annual Report 2018
cards, commission on guarantees and CASA related fees. Net trading and other income “Our aim is to further strengthen our also grew significantly during the year. The position as one of Sri Lanka’s fastest Treasury made notable contributions to the Bank’s bottom line during the period under growing Banks and become the preferred review by generating higher foreign exchange revenues and satisfactory capital gains despite Retail/ SME and transactional Bank by the financial markets experiencing extreme 2021, a virtue that will be built on trust volatility. and partnerships” Enhancing the customer experience has been pivotal for the Bank’s growth and during the year the Bank continued its investments in building and leveraging its existing network in order to provide greater convenience to customers. Whilst selected branches were re-modeled and selected ATMs relocated strategically, concerted efforts were placed on automation, enhancing the Bank’s systems and processes to cater to the growing business volumes as well as enhance reach and support customer segmentation aptly supported by harness opportunities for low cost funding for the much-needed digital transformation. prudent risk management initiatives. objectives. Our omni-channel digital platforms now facilitate a gamut of banking services to Concerted and continued efforts to position The Bank’s loans and receivables performance customers and our state of the art cash the Bank as a full service entity saw the Bank’s was impacted by slow credit growth that management solution has enabled the Bank Retail business recording steady growth in all prevailed throughout the year and stood at Rs. to aggressively compete across the Corporate key areas during the year. The enhanced and 73,749 Mn and the average growth YoY was and SME banking segments. Automation, customised product portfolio now equipped 14.2%. The Bank continued to focus on asset process realignment and maximisation of with credit cards, channel flexibility and a quality with prudent practices supported resources enhanced the productivity and distinctive customer experience enabled the by portfolio realignment, risk management, efficiency levels whilst focused and aggressive Bank to reach an even wider audience whilst strengthened credit underwriting and timely cost management efforts across all functions contributing significantly to core banking recovery initiatives. The net NPL ratio of the supported the Bank to improve its cost to growth. Bank was 2.51% while the Bank’s Loan to income ratio. Deposit ratio significantly improved during The launch of the credit cards were a the year. Further affirming its continued commitment to significant milestone in 2018 for the Bank. ensure Information Technology infrastructure The Net Interest Income (NII) of the Bank security, the Bank has placed significant The drive for low-cost funding continued with recorded an impressive growth of 20% with importance in maintaining and upgrading its concerted efforts to maintain growth in the improved margins due to focused revenue systems and processes to ensure the highest Bank’s liability portfolio. The Bank’s deposit management and portfolio realignment within level of security. Union Bank was the first base stood at Rs. 79,251 Mn. The average and across the business units. It is notable bank in Sri Lanka to receive the international portfolio growth YoY was 16.0%. Key priority that, this growth was recorded despite the Payment Card Industry Data Security Standard was given to maintaining a healthy CASA withdrawal of the notional tax credit which (PCI DSS) by the Security Standards Council. inflow which reflected a growth of 15% YoY, bears a direct impact on the interest income In line with CBSL mandatory requirements, supported by focused acquisition strategies earned. the Bank has also implemented and complied driven through business units. Focus was with EMV chip-technology. With the need for placed on segmented product offerings The Bank recorded a growth of 24% in fee Information Technology infrastructure security coupled with relationship management for and commission income resultant from the becoming critical, the Bank will continue to the Retail segment whilst the extension of key enablers articulated in the business invest and monitor this area as an integral part transaction banking services enabled SME strategy. Growth was mainly attributable to of the Bank’s agenda. and Corporate banking segments to further processing fees on an expanding loan book,
Management Reports Chief Executive Officer’s Message 27 Union Bank | Annual Report 2018
Chief Executive Officer’s Message
During the year the Bank also realigned its customer links. We will continue to empower and shareholders, we will strive to deliver subsidiaries National Asset Management the SMEs with customised strategies for key optimum returns and to all our stakeholders Ltd. and UB Finance Company Limited for industries and grow our Corporate business and wider community, we will act as a catalyst enhanced group synergies in order to support by focusing on end to end client solutions. creating partnerships that provide win-win the overall growth momentum. Treasury operations will continue to play an situations. integral role and focus on enhanced foreign Finally, I am happy to inform you that our exchange revenue whilst acting as a catalyst The path is now set for the next phase of capital ratios remain well above statutory for trading and service led-offerings. Strategic growth and looking ahead we see a myriad of requirements, providing a strong foundation investments will be made to enhance brand opportunities that will support our strategic and further impetus to continue our presence with a key focus on digital platforms. intent and I invite you to join hands and build aggressive growth trajectory in the coming stronger bonds to take advantage of this years. The Bank continued to maintain healthy As we resonate our values across the group, growth prospects that lies ahead of us for even Core Capital Ratios whilst also complying with we will take advantage of the strengths of the greater successes. IFRS 9 requirements during the year. group companies with a focus on leveraging the expertise of the finance company for Appreciation Business plans and strategy – 2019 and financial inclusion and focus on segments not Our growth and successes in 2018 would not beyond covered by the Bank and of the leading asset have been possible without the support of The Bank’s performance in 2018 is an management company to offer integrated our stakeholders, especially our shareholders affirmation of its growth trajectory and wealth management and advisory services, who have entrusted capital with us and our transformation resultant from its cohesive thus creating for the Bank a strong value customers that have continued to place trust strategic plan put in place for accelerated proposition that caters to a diverse clientele. in us. I am grateful to our growing base of growth. Our aim is to further strengthen our In our journey of transformation, we will also valued customers whose loyalty continues position as one of Sri Lanka’s fastest growing continue to place significant importance to to strengthen and inspire us to continuously banks and become the preferred Retail / SME digital transformation which is fundamental in enhance banking services to meet their and transactional Bank by 2021, a virtue that leading us to the forefront in our endeavour to changing lifestyle needs. Our success has will be built on trust and partnerships. excel as a full service bank. always pivoted on our team and my heartfelt thanks to the members of the leadership team, In 2019, we will continue to build on With the guidance of a learned and highly- management and staff at all levels for their this growth plan by carving ourselves a experienced Board of Directors and the invaluable contributions towards meeting the differentiated market positioning that will support of a dynamic management team, Bank’s strategic objectives. My grateful thanks provide a platform for diversity of income much focus has been placed in developing this to our Chairman Mr. Atul Malik for the wisdom streams which will deliver sustainable market growth strategy which I am happy to mention and guidance provided to the Board and to growth, ensuring the creation of optimum has been embraced across the organisation. me personally to deliver on the set objectives. value to our customers, stakeholders and Our employees remain our greatest asset and I would like to record my sincere thanks to the employees. To this end, we will embed our we will continue to develop and grow their members of the Board of Directors for their expertise to prudently manage and grow our careers reaffirming our status as a preferred unstinted support and guidance throughout business. Our business growth will stem from employer by building a performance-based the year. segmented plans and customised product organisation in which high performers are offerings for Retail, SME and Corporate recognised and aptly rewarded. sectors, supported by channel optimisation, economies of scale, inorganic growth Building strong bonds opportunities and by leveraging group As we continue our journey, we will base our synergies, whilst contributing to the fruition of fundamentals on building strong partnerships Indrajit Wickramasinghe national development agendas. with all our stakeholders. Our customers are Director/ Chief Executive Officer at the heart of everything we do. By building We will build our Retail banking business strong partnerships we understand that our by reaching larger audiences for personal successes go hand in hand with those of our banking needs by focusing on delivering customers. To this end we will endeavour to relationship oriented product offerings and provide products and services that enhance cross selling, whilst credit cards that were their lives. To our employees, we will build a introduced during the latter part of 2018, work place that nurtures their success and will be a key enabler to create the desired fosters their trust and growth. To our investors
28 Management Reports Chief Executive Officer’s Message Union Bank | Annual Report 2018
29
Resourceful and Responsible Commitment and responsibility are our driving forces, and we ensure that we remain a trusted and accountable partner to all our stakeholders. Union Bank | Annual Report 2018
Management Discussion and Analysis
Our business model GRI 102-2 / 102-6
Corporate Philosophy
Vision Mission values
Board of Directors
Board Sub Committees
BAC BCC RPTRC IRMC NC HRRC
Management Committees
ALCO ITSC ERMC ECC OMC ORMC
Inputs
Financial Human Social Intellectual Capital Capital Capital Capital
Governance
Portfolio and Risk and Regulatory Business Product and Customer Data and Talent and Capital Management Management Unit Strategy Service Solutions Relationships Technology Culture
Business Segments
Corporate Retail SME Treasury Elite Circle aaTrade Finance aa aaProject Finance aaFCY Spot and Forward aaSavings and Current Accounts aaWorking Capital Finance aaFactoring Contracts aaTime Deposits aaTerm Finance aaWorking Capital aaRe-purchase and Reverse aaDebit Cards/Credit Cards Foreign Exchange Services Solutions Re-purchase agreement aa aaLoans-Personal & Mortgage a Trade Finance a Treasury Bills & Treasury aaTransaction Banking and Loans a a aaBancassurance Bonds Cash Management Services aaForeign Currency Accounts Transactional Banking and Sri Lanka Development aaRemittances aa aa aaBancassurance Cash Management Bonds aaPawning Services aaATMs-Branch/Off-site aaInternet Banking & Mobile Banking
Outputs
Customers Shareholders Employees Local Regulatory Community Bodies
32 Management Reports Management Discussion and Analysis Union Bank | Annual Report 2018
Sri Lanka’s Macro Economic Review “The year 2018 showcased a resilient Union Bank with an outstanding growth in its core Sri Lanka enjoyed relatively stable economic progress during the first nine months of the income amidst the macroeconomic year, with reserves being on track to meet foreign debt obligations and the impacts challenges that dominated the year. ” of progressive reforms, particularly on fiscal consolidation, being underway. Meanwhile, favourable weather conditions throughout the year led to food inflation declining to its Overall, inflation is expected to be maintained in 2017 over the same period. Tourist arrivals lowest levels recorded in the recent past. With in the targeted range of 4% – 6% during during 2018 grew at 10.3% from 2017. Worker the Government asserting its commitment 2019 and thereafter with appropriate policy remittances to Sri Lanka have moderated to economic reforms, the country was on adjustments as per the Central Bank directives. since Gulf countries curtailed their quotas track with the Extended Fund Facility (EFF) Core Inflation, measured as per the CCPI for foreign employees due to the economic programme offered by the International and NCPI, both remained at subdued levels impact of lower oil prices. Accordingly, Monetary Fund (IMF) in 2016. However, due to throughout the year. workers’ remittance inflows recorded a decline the political turmoil experienced after October of 2.1% in the year. Gross official reserves 26th and ad-hoc changes made to fiscal policy, Since maintaining a tightened monetary policy were estimated at USD 6.9 Bn as at the end the stable economic progress was derailed from end-2014, the Central Bank signalled its of 2018, ending lower from USD 8.0 Bn at in the final three months of the year and end with a cut in policy rates effected in April end-2017, after seeing interim rises up to USD disbursement of the remaining tranches was 2018. This was enabled by easing inflation and 10 Bn during the year. Reserves were mainly put on hold by the IMF. credit demand. However, due to a persisting supported by international sovereign bond liquidity deficit during the latter part of the issues of new USD 1.25 Bn 5-year and USD While the CBSL began on an optimistic note year, the CBSL decided to reduce the Statutory 1.25 Bn 10-year Senior Unsecured Fixed Rate on Sri Lanka’s growth forecasts, expecting Reserve Ratio (SRR) applicable on all Rupee Notes along with inflows from the IMF EFF 4.5%-5.0% growth in 2018, this has since been deposit liabilities of commercial banks by 1.50 agreement. subject to downward revision; to 4.0%-4.5% percentage points to 6.00% in November. In in May 2018 and to 4% in August 2018. The order to neutralise the impact of this reduction Most recent data also indicated that the latest available data indicated that during and maintain its neutral monetary policy deficit in the trade account expanded by the first nine months of the year, economic stance, the Monetary Board also decided to 12.2% YoY during the first eleven months of growth improved marginally to 3.3% from the increase the Standing Deposit Facility Rate 2018 as growth in import expenditure of 8.3% 3.2% growth seen during the same period in (SDFR) of the Central Bank by 75 basis points to overshadowed modest export growth of 5.0% 2017. This was mainly due to the growth seen 8.00% and the Standing Lending Facility Rate YoY. Earnings from industrial exports, which in the Agricultural sector which expanded by (SLFR) of the Central Bank by 50 basis points account for 77% of the total export earnings, 4.3% owing to favourable weather conditions. to 9.00%. While credit to the private sector grew by 9.0% YoY in the eleven months Stable growth of 4.4% was seen in the Services remained largely managed throughout the to November 2018, while earnings from sector largely due to the contribution from year, the third quarter saw a pick up with YOY agricultural exports fell by 7.3% YoY, reflecting Financial Services and Telecommunication growth rising to 16.2% in November (latest the poor performance in almost all categories sub categories. The Industrial sector slowed available data), compared to the 14.7% growth except seafood. Textiles and garments exports down during the period, recording a 1.7% rise at the end of 2017. were the driving force behind industrial compared to the 4.8% growth seen during the exports, owing to high demand from the same period in 2017. This was largely led by a Sri Lanka’s Balance of Payments (BOP) came US, Canada, India and Japan. Earnings from contraction in the Construction sub-segment. under considerable pressure in 2018, owing to petroleum products increased substantially in a widening trade deficit and the strengthening September 2018 due to higher export prices Headline inflation, based on both the Colombo of the USD which adversely affected portfolio of bunker and aviation fuel, despite low export Consumer Price Index (CCPI) and the National investments. Based on the latest available volumes. Increased expenditure on fuel and Consumer Price Index (NCPI), decelerated data, this saw the overall Balance of Payments vehicle imports caused the rapid growth in below the desired mid-single digit levels, record a deficit of USD 807 million in the first import expenditure. However, the imposition recording 2.8% Year-on-Year (YoY) and 0.4% eleven months of 2018 as opposed to the of customs duty on gold in April 2018 and YoY growth respectively in December, largely significant surplus of USD 2,005 Mn recorded other import restrictions on a number items driven by the decline in volatile food prices.
Management Reports Management Discussion and Analysis 33 Union Bank | Annual Report 2018
Management Discussion and Analysis
including motor vehicles and electrical 3.5% and 3.6% in 2019 and 2020, respectively. financial flows. Overall the year saw a total appliances led to a slowdown in import Furthermore, the IMF has continued to non-resident capital inflow of about USD expenditure growth towards the end of the highlight increased downside risks for global 195.5bn, which is a reduction to almost half year. Meanwhile, the Government securities growth, citing the negative effects of the the inflows in 2017. market and the CSE witnessed cumulative ongoing US-China trade war, and a weaker outflows of USD 802 million and USD 30 outlook for some key emerging market and Emerging currencies endured significant million respectively, within the first eleven developing economies arising from country- depreciation in 2018, with currencies of months of the year. specific factors, tighter financial conditions many developing countries pressured by a and geopolitical tensions. combination of adverse global factors. The The LKR faced severe depreciatory pressure Turkish Lira and the Argentine Peso were the during the year owing to rate hikes by the US Growth in advanced economies is projected worst hit, while the Indian Rupee was one of Federal Reserve, US Dollar strength and foreign to slow from an estimated 2.3% in 2018 to Asia’s worst performing currencies. However, fund outflows from emerging and frontier 2.0% in 2019 and 1.7% in 2020, as the Euro many currencies have recovered some of these markets. Adding to this, political instability and area and the US are expected to slow down. losses, following a reversal of earlier bearish eroding foreign investor sentiment led the LKR Meanwhile, growth forecasts for 2019 have factors, namely falling oil prices and a possible to depreciate by 19.6% against the USD during been revised downwards for many emerging slowdown in the pace of Federal Reserve rate the year. and developing economies – such as Turkey, hikes in 2019. Argentina, Brazil and Iran, amongst others While most peer currencies have now – owing to tighter financial conditions, The US Federal Reserve continued on its stabilised following the long spell of currency geopolitical tensions and other country- gradual monetary tightening path this year, depreciation which took place during the first specific factors. China and other Asian carrying out four quarter-point rate hikes nine months of the year, Sri Lanka has however economies are expected to record somewhat during the year. The rate hikes reflected the failed to realise these gains owing to the weaker growth in 2019, down to 6.3% from Federal Reserve’s upbeat assessment of the impacts of political instability. The effects of 6.5% in 2018, as a result of the slowdown in US economy, which has seen strong growth this can be seen in the subdued performance the Chinese economy despite a continued and job gains, amid rising inflation. A further in the stock market as well; the ASPI fell 5% pick-up in India. three rate hikes were expected in 2019, but the over the year. Federal Reserve has taken on a more dovish Following robust growth in 2017, the Chinese view since its last rate hike causing analysts Looking ahead, the future economic direction economy is in the midst of an economic to expect a slow down in the pace of rate of Sri Lanka is largely dependent on the slowdown, with growth in the third quarter hikes. The Bank of England (BOE) also raised policies and political stability following the slowing to 6.5%, down from the 6.7% recorded interest rates in August, whilst signalling a resolution of the political crisis that began in the previous year. The slowdown is largely potential rate hike in 2019. However, given the on the 26th of October. The downgrading of attributed to the recent introduction of credit mounting evidence of a slowdown in the UK Sri Lanka’s credit rating by Standard & Poor’s, controls, with the aim of realigning China’s economy and the increased threat of a no-deal Moody’s and Fitch and the need to restart debt. The controls have restricted lending and Brexit, further tightening is in doubt. the IMF programme have caused further investment, while also affecting housing sales uncertainty on how the country will handle the and consumer spending. Oil prices saw significant volatility in 2018, challenges of the coming year. Budget 2019, initially rising to four-year highs of USD 86/ which has been postponed to March 2019, is This year has also been largely negative in barrel in October, before subsequently likely to be more exposed to political events terms of foreign capital flows to Emerging slumping to a low of USD 50.47/barrel by and objectives rather than macroeconomic Markets (EMs), with EMs feeling substantial 24th December. The surge in prices earlier stability. However, some sense of economic pressure from US Federal Reserve monetary in the year was largely triggered by US stability alongside domestic and foreign tightening, amongst other adverse global sanctions on Iranian oil exports, with market investor confidence can be restored if Budget factors like rising oil prices and continued participants expecting a shortage in the oil 2019 is sensible and there is some certainty strength in the US Dollar. However, capital market. Production outages affecting key oil over the schedule of the upcoming elections. flows have recently rebounded, following producers like Venezuela, Libya and Canada an easing of these adverse global factors. also lent support to prices. However, prices Global Economic Overview Accordingly, latest available data revealed subsequently plunged on concerns of an over- In its World Economic Outlook, released in that inflows to emerging markets rose to supply in the market. These concerns were January, the IMF expects global growth in 2018 USD 33.9 billion in November – the highest fuelled by rising output by Saudi Arabia and to remain similar to 2017 levels at 3.7%, with since January, according to the Institute Russia, alongside a steady build-up of US crude growth projected at slowdown afterwards to of International Finance (IIF), which tracks inventories.
34 Management Reports Management Discussion and Analysis Union Bank | Annual Report 2018
Banking Sector Overview Expansion of the banking sector assets was The banking sector, which includes both Licensed Commercial Banks and Licensed Specialised primarily supported by the deposit base, Banks, operated in an environment in which the Central Bank introduced several regulations which accounted for 73% of total assets as at pertaining to the sector aimed at controlling imports amidst the rupee depreciation and end September 2018. Despite an increase in tightening monetary policy stance. The Standing Lending Facility Rate (SLFR), which was reduced demand and savings deposit growth during by 25 bps to 8.5% in April 2018 was subsequently increased by 50 bps in November 2018 along the first nine months of the year, CASA ratio with an increase in the Standing Deposit Facility Rate by 75 bps, thereby narrowing the policy declined to 32.1% from the 33.7% recorded rate corridor to 100 bps. The Statutory Reserve Ratio (SRR) was however reduced by 150 bps. during the corresponding period of 2017. Despite a decline in borrowings of 4.6% Moderate asset growth driven by deposits during the first half of the year, borrowings The moderation in credit growth witnessed in 2017 continued into 2018 as well partially for the year had risen by 2.4% by the end reflecting the continued effects of monetary policy tightening measures carried out by the of September 2018 amidst capital raising Central Bank in early 2017. The most recent data revealed that total growth in assets of the sector activities undertaken by banks to meet Basel III moderated to 9.5% during the first nine months of 2018, to reach Rs. 11 trillion, compared to the requirements. 11.0% growth recorded during the corresponding period of 2017. This slowdown was witnessed amidst the slow economic growth of below 4% recorded for the first three quarters of the year. Consumption and construction-based lending Sector net loans expanded by Rs. 809 Bn Total assets of the banking sector during the first three quarters of 2018, Rs. Bn recording an YoY growth of 17.1%. As 12,000 per the latest available data on sectoral composition, lending was driven by credit to 10,000 the consumption, wholesale and retail trade 8,000 and construction sectors, which collectively accounted for almost 50% of total loans as at 6,000 August 2018. Data available up to August 2018 also suggests that the growth in overdrafts 4,000 picked up during the first eight months of
2,000 the year relative to the corresponding period of the previous year whilst term loan growth 0 waned. Following the constrained growth seen 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2018 2018 during the previous year, the leasing portfolio Q1 Q2 Q3 saw a significant expansion of 9.4% up to end [Source: CBSL] August 2018, ahead of regulatory action by CBSL to curb motor vehicle imports, directed Net Loans and Advances to be implemented by October 2018.
Rs. Bn 8,000 35% Sluggish growth in profits 7,000 30% Sector profits (after tax) stood at Rs. 96 Bn for the first nine months of 2018, a decline of Rs. 6,000 25% 2.4 Bn compared to the same period in 2017. 5,000 20% Net Interest Income was the primary revenue 4,000 15% driver (sector net interest margins improved by 15 basis points during the period), while gains 3,000 10% in foreign exchange income also supported 2,000 5% revenue growth on the back of rupee 1,000 0% depreciation. However, a notable increase in 0 -5% loan loss provisions by Rs. 7.8 Bn and increased taxes weighed down on the bottom-line. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2018 2018 Q1 Q2 Q3 Shareholder returns deteriorated during the Net Loans and Advances* (Left axis) YOY growth (Right axis) period with both ROA and ROE dropping to *Loans and Advances net of interest in suspense and total provisions [Source: CBSL]
Management Reports Management Discussion and Analysis 35 Union Bank | Annual Report 2018
Management Discussion and Analysis
1.2% and 14.1% respectively as at end September 2018, compared to 1.4% and 17.5% reported The expansion of the branch network for the same period in 2017. continued during the first 9 months of 2018 with the addition of 23 new branches to the banking network. Return on Equity and Return on Assets after Tax New developments in the sector % % 25.0 2.0 Most private banks have been successful in carrying out capital raising activities during 1.8 20.0 the year to comply with the minimum capital requirements set out by the Basell III 1.6 15.0 regulations, which were set to be fully effective 1.4 as at 1st January 2019. The maintenance of adequate capital buffers will however remain 10.0 1.2 a key issue for banks during 2019, especially with the challenging conditions in the financial 5.0 1.0 markets. The incorporation of SLFRS 9 which requires higher provisioning on loans will also 0.0 0.8 impose an added burden to maintaining stable 2008 2009 2010 2011 2012 2013 2014 2015 2016* 2017* 2018* 2018* 2018* Q1 Q2 Q3 capital ratios. However, the implementation of the new accounting standard is expected Return on Equity (ROE) - Left Axis Return on Assets (ROA) After Tax - Right Axis *provisional data to move the sector towards adopting [Source: CBSL] more prudent lending policies thereby strengthening the quality of the loan book in Weakening assets quality the long run. Asset quality weakened notably with the gross NPL ratio increasing from 2.5% as at end 2017 to 3.6% at end September 2018. Tourism; manufacturing; information technology and The Debt Repayment Levy (DRL) introduced communication services; wholesale and retail trade and agriculture, forestry and fishing sectors initially through the 2018 budget as a 0.02% recorded NPL ratios above 4% as per latest available data. levy to be charged on total transactions was revised with effect from 1st October 2018 to a 7% tax calculated according to the finance Act Gross Non-performing Advances No. 35 of 2018. The levy, which is to be borne Rs. Bn solely by the bank and financial institutions 300 will effectively increase the taxes significantly and thereby exert pressure on sector 250 profitability. 200 Increased digitisation and new opportunities 150 to be explored in the fin-tech space are viewed as a major positive factors for the 100 banking sector with several banks and telcos 50 increasing their presence in this arena during the year. Further investments in technology 0 and cooperation with telcos, which have 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2018 2018 competitive advantage in the sphere, will be Q1 Q2 Q3 instrumental in driving the sustainability of the [Source: CBSL] banking sector in the long term.
36 Management Reports Management Discussion and Analysis Union Bank | Annual Report 2018
Financial Performance Review
Bank aa Net Interest Income up by 19.9% YoY to Rs. 3,652 Mn 55.2% Growth aa Net Fee and Commission Income up by 23.7% YoY to Rs. 833 Mn aa Total Operating Income grew by 20.8% YoY to Rs. 5,285 Mn Results from Operating aa Results from Operating Activities grew by 55.2% YoY to Rs.1,214 Mn Activities aa Total Assets grew by 5.8% YTD to Rs. 125,920 Mn aa Strong Balance Sheet with Total Capital Adequacy Ratio at 17.4%
17.4% Strong total Capital Adequacy Ratio Group aa Net Interest Income up by 20.6% YoY to Rs. 4,466 Mn aa Net Fee and Commission Income up by 15.8% YoY to Rs. 958 Mn 135,031Mn aa Total Operating Income grew by 18.9% YoY to Rs. 6,258 Mn aa Results from Operating Activities grew by 38% YoY to Rs.1,415 Mn Total Assets of the Group aa Total Assets grew by 5.8% YTD to Rs. 135,032 Mn
In the year 2018 Union Bank showcased an Despite the macro challenges, the Bank The PAT of the Bank was Rs.472 Mn and was impressive performance aided by its robust recorded an impressive profit before tax and only a 2.6% growth YoY. Total assets of the strategic plan, particularly excelling in core VAT of Rs. 1,248 Mn, reporting a 49% growth Bank grew by 5.8% to Rs. 125,920 Mn. banking operations despite a challenging year on year (YoY). More importantly, the core- macroeconomic framework. income of the Bank, excluding the capital gains The financial performance of the Group which and also excluding the negative impact due to comprises of National Asset Management The year commenced with amendments to the investments on the newly launched credit Limited and UB Finance Limited were affected tax law with the new income tax act coming cards, reflected a 124% growth YoY. This was due to market volatilities that prevailed during into effect in April 2018. The gradual national despite the withdrawal of notional tax credit most parts of the year. PAT of the group economic recovery witnessed through the on the interest on government securities. reduced by 3% to report Rs. 535 Mn. Total first nine months of the year was impacted by assets of the Group grew by 5.8% to Rs.135,032 political instability which occurred in October However, profit after tax (PAT) was affected by Mn in comparison to Rs.127,600 Mn in 2017. 2018, thus resulting subdued economic the significant changes in the tax regulations activity of the country. GDP was in low single subsequent to the new Inland Revenue The Bank continued to maintain its robust digit, the LKR further depreciating against Act enforcement. The Bank was holding capital adequacy ratio which was well above the USD specially towards the end of the year significant amounts of investments in Sri Lanka the limits even after adoption of SLFRS 9. whilst 3 months and 1 year treasury bill rates Development Bonds, Debentures and Unit The Bank adopted modified retrospective increased by more than 200 basis points. The Trusts and the removal of the tax exemption on method in implementing SLFRS 9. The asset quality weakened industry-wide, giving profits derived out of these instruments had a modified retrospective method does not rise to the non-performing loans (NPL) ratios. significant impact on the effective tax rate. require a re-statement of prior period Irrational behavior of interest rates continued numbers, but will require the standard to during the year while a disparity between Introduction of the DRL during the last quarter be applied to the period starting 1 January AWPLR and the true cost of raising deposits of the year under assessment further amplified 2018. Any differences between the previous resulted a significant impact on margins. the negative impact on the effective tax rate. accounting method and the new standards will result in an adjustment to the opening
Management Reports Management Discussion and Analysis 37 Union Bank | Annual Report 2018
Management Discussion and Analysis
balance of retained earnings at 1 January 2018. Hence, the comparatives are stated based on the previous standard. Where there is a reclassification, comparatives may be stated under a different header according to the previous standard.
Financial Indicator Performance Net Interest Income (NII) The net interest income of the Bank reached Rs.3,652 Mn in 2018. This is a significant improvement of Rs.606 Mn which translates to an increase of 19.9% Rs. Mn 4,000 Net interest margins (NIM) increased to 3% compared to 2.9% recorded in 2017. NIM for the 3,500 current period would have been 3.2% if the return from investment in units were considered. 3,000 Cost of funding of investments in units is accounted under interest expense of the Bank. 2,500 2,000 Return from investment in units was Rs. 246 Mn and was recorded under capital gains under 1,500 net fair value gains/ (losses) from financial instruments at fair value through profit or loss. 1,000 Withdrawal of notional tax credit of the government securities portfolio had a significant 500 negative impact on the NII of the current year. 0 2014 2015 2016 2017 2018 Retail and SME contributed to 50% of the NII.
L oans & Advances The Bank’s loans and advances stood at Rs. 73,749 Mn. The increase of Rs. 3,171 Mn was a 4.5% growth in comparison to the previous year. Rs. Mn 80,000 During the year under review, key focus was placed mainly on portfolio realignment. The new growth in the portfolio was subdued as a result of conscious decisions made with regard to 60,000 exiting from selected segments. Proactive steps taken towards realignment further assisted the prudent management of the overall portfolio quality of the Bank. 40,000 As at the end of the year, loans and advances mix stood as follows: 20,000 L oan Mix 2017 L oan Mix 2018
0 17% 19% 2014 2015 2016 2017 2018
46% 48%
37% 33%
Corporate Corporate SME SME
Retail Retail
38 Management Reports Management Discussion and Analysis Union Bank | Annual Report 2018
Financial Indicator Performance Deposit Base The deposit base stood at Rs. 79,251 Mn by the year end. This increase of Rs. 8,925 Mn was a 12.7% growth in comparison to 2017.
Rs. Mn 80,000 The growth was primarily supported by the Retail Banking segment which pursued a focused strategy with enhanced relationship management driven through identified key 60,000 segments during the year under review.
40,000 CASA recorded Rs. 2,410 Mn growth which translated to an increase of 14.8% over the previous year. Maintaining a healthy CASA ratio was supported through focused acquisition
20,000 strategies driven by Retail and SME banking segments.
0 CASA Mix improved to 24% 2014 2015 2016 2017 2018 Loans to deposits ratio improved to 93% from 100% in 2017.
Deposit Mix 2017 Deposit Mix 2018
18% 21%
65% 67% 15% 14%
Corporate Corporate SME SME
Retail Retail
Fees & Commission Income The Bank continued to make significant efforts to improve its fees and commission income using the key enablers articulated in the strategy. Rs. Mn 1,200 Fees and commission income which mainly comprised of deposit related fees, trade and 1,000 remittances, loans, cards and other fees stood at Rs. 968 Mn recording an impressive growth 800 of Rs. 185 Mn which translated to a 23.6% growth YoY. Responding to slow economic growth, trade & remittances fees and guarantee income showed a comparatively lower 600 growth in 2018. 400 Fee income from the newly launched credit cards operation also had a fair contribution 200 during the year. 0 2014 2015 2016 2017 2018 Retail and SME contribution to fees and commission was 74%.
Management Reports Management Discussion and Analysis 39 Union Bank | Annual Report 2018
Management Discussion and Analysis
Financial Indicator Performance Net Trading & Other Income The Bank reported a net trading and other income of Rs. 800 Mn, which was a 21.9% growth over the previous year. This comprised of capital gains from government securities and Rs. Mn investments in units as well as exchange gains. 900 800 Despite the weakening of currency towards the end of the year, the Bank’s exchange income 700 showed a noteworthy growth of 73.6% YoY. Income from investments in units were 23.5% 600 lower YoY, as a result of lower investments made in units during the year. Removal of the tax 500 exemption on profits earned was the reason for the reduction in investment in units. 400 300 Reflecting the overall improvement in core-banking operations of the Bank, capital gains on 200 government securities as a percentage of profit before all taxes declined to 18.9% from prior 100 period’s 29.6%. This is a significant reduction of dependency on income of one-off nature on 0 2014 2015 2016 2017 2018 profitability. The total capital gains of Rs. 236 Mn was marginally lower by 4.9% YoY.
The Bank had no trading equities and has not invested in any equity funds as at Balance Sheet Date.
Total Operating Income The overall growth in core banking activities and consistent performance across all areas resulted in a 20.8% growth in total operating income of the Bank which was reported at Rs. Rs. Mn 6,000 5,285 Mn.
5,000 Retail and SME banking segments contributed to 48% of total operating income.
4,000
3,000
2,000
1,000
0 2014 2015 2016 2017 2018
Non-performing loans ratio (NPL) Despite macroeconomic challenges, the Bank managed to maintain its gross NPL ratio at 3.7%. Net NPL ratio was 2.5%. Gross and net NPL ratios of the comparative period was 2.7% % 10 and 1.8% respectively.
8 Stemming from the negative impact of the macroeconomic challenges faced by the sector, SME Banking segment of the bank showed the highest deterioration in NPL ratio during 6 the year. However, the Bank’s prudent risk management in credit assessment, proactive and focused monitoring of the portfolio and regionally driven remedial strategies have been 4 instrumental in preserving the asset quality and preventing potential loan losses.
2
0 2014 2015 2016 2017 2018
40 Management Reports Management Discussion and Analysis Union Bank | Annual Report 2018
Financial Indicator Performance Impairment and Credit Quality The Bank adopted SLFRS 9 with effect from 1st January 2018. The comparative impairment numbers been calculated based on the previous standard LKAS 39. Rs. Mn 600 Impairment charge for the year was Rs. 342 Mn, an increase of 37.5%. In addition to impairment 500 for loans and receivables, the total impairment of the year under review, comprised of the impairment on treasury instruments as well. Impairment charge for loans and receivables was 400 22.7% higher YoY. 300 Individual impairment charge of the Bank was Rs. 252 Mn and 18.9% higher YoY. Collective 200 impairment calculated based on new standard reflected 44.6% increase over the prior year. 100 The impact of the first time adoption of SLFRS 9 was Rs. 727 Mn. Notes relating to the first time adoption are provided in the notes to the Financial Statements number 24. 0 2014 2015 2016 2017 2018 The Bank assesses approximately 75% of the portfolio under individual impairment. The individual threshold should remain similar to last year. Loans meeting the criteria were analysed on a case by case basis for actions on recovery.
Operating Expenses Operating expenses of the Bank was Rs. 3,729 Mn which was a YoY increase of 11.5% only. The operating expenses were prudently managed during the year. Current period expenses Rs. Mn include the expenses incurred on credit cards, which was the latest initiative of the Bank 4,000 launched during the second half of 2018. 3,500
3,000 Staff costs of the Bank was Rs.1,822 Mn which was a 14% increase YoY. Other expenses of Rs. 2,500 1,525 Mn was a 13.2% increase YoY. 2,000 Total headcount of the Bank was 1,266. There were no increases in number of ATMs and 1,500 branches during the year. 1,000 500 Cost to income ratio improved to 71% from 76% in 2017. 0 2014 2015 2016 2017 2018 Results from operating activities Results from operating activities showed a very strong growth of 55.2% and recorded Rs. 1,214 Mn for the year.
Year on year business as usual (BAU) growth of core banking operation was approximately 124%. BAU excludes capital gains derived out of trading/selling of government securities and operation loss due to launch of the credit card business.
Share of profit of equity accounted investees, net Share of profit of equity accounted investees was Rs. 35 Mn which was a 38% decrease of tax over the previous reporting period. Operations of both subsidiaries were affected due to the challenging macro environment that prevailed and was further impacted by the amendments to the IRD act which came into effect in April 2018.
Management Reports Management Discussion and Analysis 41 Union Bank | Annual Report 2018
Management Discussion and Analysis
Financial Indicator Performance Financial Services VAT, NBT and Corporate Tax The Bank has accounted Rs. 776 Mn as VAT, NBT, DRL on financial services and corporate taxes during the year under review. This was a 105.7% increase YoY.
Effective tax rate (all taxes and DRL as a percentage of net operating income) in 2018 increased to 62% compared to 45% in 2017. As changes to taxes occurred over the year, full year impact of tax changes are yet to be reflected in the P&L.
Increase in effective tax rate was mainly due to withdrawal of tax exemptions on profits made out of investment in units, Sri Lanka Development Bond (SLDB) and corporate debt instruments invested prior to the tax changes together with newly introduced DRL.
Profit for the year & Other Comprehensive Income Profit after tax for the year was Rs. 473 Mn compared to Rs. 461 Mn recorded in 2017. Other comprehensive income for the year was negative and was reported as Rs. 480 Mn,as a result of the impact on the valuation of the government securities portfolio investments classified under financial investments at fair value through other comprehensive income. This was due to the market interest rate increase towards the last quarter of the year.
Liquidity The Bank maintained a healthy liquid assets ratio throughout the year
Liquid Asset Ratio (%) 2018 2017 2016 Year End 21.7 21.3 22.2 Maximum 23.3 23.0 22.7 Minimum 20.5 20.7 20.8 Average 21.4 21.5 21.8
Capital Adequacy Ratio The Bank maintained a robust capital adequacy ratio throughout the year reporting 17.4% core capital ratio as at the year end.
Capital Adequacy Ratio (%) 2018 2017 Common Equity Tier 1 Capital Ratio 17.4 18.9 (Minimum Requirement - 2018- 6.375% & 2017 - 5.75%) Tier 1 Capital Ratio 17.4 18.9 (Minimum Requirement - 2018 - 7.875% & 2017 - 7.25%) Total Capital Ratio 17.4 18.9 (Minimum Requirement - 2018 - 11.875% & 2017 - 11.25%)
ROA, ROE & NAVPS 2018 2017 ROA (before all taxes) 1.02% 0.79% ROA (post tax) 0.39% 0.43% ROE (before all taxes) 7.24% 4.79% ROE (post tax) 2.74% 2.64% NAVPS 15.23 16.36
Group Performance (GRI 102-45) The Group, consists of the Bank and its two subsidiaries - UB Finance Company Limited, National Assets Management Limited and the special purpose entity Serendib Capital (Pvt) Limited. The operations of these companies are briefly described in the section on ‘Subsidiary Update’, on page 80.
The Bank accounts for 93.3% of the balance sheet size of the Group and hence the Group performance are mainly driven by the Bank.
Results from operating activities of the Group showed a 38% growth to record Rs. 1,415 Mn. PAT of the Group was Rs. 535 Mn which was a 3% reduction. However, parent’s share of the Group profit resulted a marginal YoY growth to reflect 0.6% . Group’s total assets stood at Rs. 135,031 Mn.
42 Management Reports Management Discussion and Analysis Union Bank | Annual Report 2018
The corporate banking operations of the banking platform will cater to the complex REPORT ON BUSINESS PERFORMANCE Bank was also successful in enhancing and sophisticated requirements of corporates. deepening its relationships with foreign Revamping of the entire transaction banking Financial Institutions. Transactional Banking platform, ‘Union Bank Biz Direct,’ with a totally The year 2018 showcased a resilient Union platform too continued to be a facilitator for customised user friendly graphical interface Bank with an outstanding growth in its core deepening of relationships and was an enabler is expected to provide an enhanced end user income amidst the macroeconomic challenges for new corporate business. Provision of a experience. Further, the said revamping will that dominated the year. fully-automated, digital debenture / dividend provide biometric and push authentication for issuance through ‘Union Bank Biz Direct’ and transaction approvals which will be another As explained in the macroeconomic review multiple client site cheque printing facilities first in the market by ‘Union Bank Biz Direct’. the impact of the volatility in global markets to several clients were some of the first in the and currency fluctuations together with market innovations done by the team. Our growth strategy will focus on key growth implications from higher Government taxes sectors of the economy both in the domestic and credit costs resulted in the Banking sector The growth in assets in the year under banking and foreign currency banking units. to facing multiple headwinds which tested review was moderate primarily due to the Concerted focus on total customer solution the resilience of banks. However, realignment concerted focus on profitable balance sheet designed to deepen wallet share and efforts to growth. The resultant increase in NIMs despite of strategies, building strong partnerships, increase penetration in the middle market will pressure on funding costs and significant prudent risk management and decision play a pivotal role in 2019. We believe that the contribution from non-fund based income making enabled Union Bank to forge ahead proposed revamping of the digital platform, sources enabled corporate banking to and record a healthy business performance. deepening our relationships with overseas record a significant increase in its revenue financial institutions and capturing a larger The Bank’s business performance and support growth despite a challenging economic and wallet share of the trade business will enable functions performance is discussed in the competitive environment. CASA ratio of 22% us to realise our goals whilst being mindful report herein. too was maintained which enabled the unit to maintain a healthy funding mix. The success to ensure sustainability of portfolio quality amidst systemic challenges. Corporate Banking of the strategies and processes put in place is Resilience of the Bank’s corporate banking depicted in the commendable performance of SME Banking operation was yet again proven with its the unit in the year under review. Union Bank remained focused and committed performance in the year under review despite to supporting the Small and Medium subdued economic activity, political and policy Portfolio credit quality was maintained Enterprise (SME) sector through development instability, a weakened rupee, and moderate with the NPL ratio standing at 0.6% despite of a customised portfolio of products to best private sector credit growth. portfolio stress arising from an adverse economic climate. This was a result of strict suit the varying needs of the sector. The SME The key focus of corporate banking during the adherence to stringent risk management Banking portfolio stood at Rs. 24,232 Mn as at year under review was the provision of end-to- procedures that was implemented. end of 2018 amidst a moderate credit growth. end client solutions supported by value-based The Bank continued to focus on growth pricing, state-of-the-art digital transactional Overall, the commitment towards digital segments in the SME sector supported by a banking platform and a superior relationship transformation, placement of efficient customised strategy for key market segments. management team. processes with stringent adherence to risk management techniques and the commitment During the period under review highlighted In order to broad base its target market and of a superior team of relationship managers improvements were noted in income and enhance its penetration to capture greater ensuring excellent customer experience margins in the SME banking business in wallet share of emerging large corporates, the enabled the realisation of yet another comparison to previous years. This can be unit streamlined its lending processes. milestone for corporate banking. attributed to the overall liability growth based on a self-funding mix and the healthy CASA ratio Ongoing efforts to leverage the Bank’s cash Prospects 2019 maintained. In addition, the focused approach in management solution Union Bank Biz Direct 2019 will focus on fostering cutting-edge pricing and prudent risk management initiatives aptly supported portfolio expansion through financial solutions with product and channel of all asset relationships and the growth in fee CASA and fee income growth, whilst end- solutions to cater to evolving requirements of income also contributed positively towards this to-end relationship management enhanced corporate clients. As a result we believe that improvement. strengthening customer portfolios during the digital transformation is critical and hence, period under review. the proposed revamping of the transaction
Management Reports Management Discussion and Analysis 43 Union Bank | Annual Report 2018
Management Discussion and Analysis
Several key initiatives were implemented operative collection accounts canvassed and portfolio quality. Thus the Bank focused during the year to strengthen relationships through this proposition. on individual customer profitability, with and enhance technology-driven tailor-made optimisation of the Central SME Asset propositions to the sector. In addition, the Bank continued to participate Centre to improve turnaround times and in credit schemes rolled out by the Central enhanced service levels. Centralisation of In line with its commitment to empower and Bank and other Government agencies, offering loans processing resulted in continuous deliver enhanced value to this vital sector, specialised credit lines to fulfil the varied improvement of efficiency levels and made the Bank introduced a range of value added funding needs of this sector. way for more proficient loan evaluation products and services under the proposition that contributed to enhanced portfolio ‘Union Bank Biz Partner’. This proposition is The Bank was compelled to consciously slow quality supplemented by speedy delivery for linked to the business savings and current down credit growth in 2018 to avert the increased client satisfaction. account relationship of a customer and is effects of sluggish macroeconomic conditions offered in three distinctive tiers based on the that prevailed in the market. Thus the Bank Consolidation of the Bank’s regional presence balance maintained in the respective savings implemented prudent risk management was continued in 2018 with ‘Regional or current account. measures whilst focusing on improved margins Managers’ playing a more pivotal role in on the lending portfolio. As a result of the identifying uncharted niches which the Bank The three tiers namely, Gold, Platinum and enhanced low cost fund base, and favourable could penetrate into with its wide-ranging Signature offers unique and customised margins on lending products, the Bank was and customisable SME Banking solutions. benefits such as preferential tariffs, special able to improve its overall margins despite Placing continued emphasis on nurturing client interest rates on fixed/savings deposits and the adverse macroeconomic conditions that relationships, during the year dedicated SME tailor-made banking solutions to meet specific prevailed in the market. In addition cross Relationship Managers were appointed within business requirements. In addition it also selling efforts were pursued more aggressively selected geographic zones in order to identify, offers special fee waivers on business banking to compensate the impacted credit growth. coordinate and deepen the already established services such as telegraphic transfers, letters relationships as well as explore new business of credit, import collection bills and foreign opportunities in these strategically important exchange transactions. Dedicated Account localities. Relationship Manager (ARM) services are also available to customers along with access to In line with the Bank’s focused efforts to Union Bank’s exclusive transaction banking further enhance expertise of employees, technology. While creating value and giving several initiatives were implemented to due recognition to the SME customers of augment service delivery, skill enhancement the Bank, this enhanced range of services and proficiency building of the SME are expected to enable better relationship team. Several training and development management with this nationally significant programmes were carried out throughout client segment. the year across all key roles and customer touch points including training of SME credit Focus on transactional banking services Despite the numerous challenges the sector personnel involved in SME Credit within continued to support CASA and deposits faced during the year, non-performing loans identified geographic zones. sourcing for the sector. The Bank’s cash of the SME banking portfolio was contained to management solution continued to stand at 9.09%. This can be largely attributed Prospects for 2019 strengthen the Bank’s SME banking product to the prudent risk management measures Looking ahead to 2019, the Bank will continue proposition and supported the CASA and fee adopted and improved recovery and collection to be committed to the National Agenda of income growth, whilst earning the trust and efforts implemented at branches and zones. empowering the SME sector. confidence of SMEs across the country through Further, the Bank’s strategic lending focus on a customised cash management solutions. more schematised lending model enabled it to Focus would be based on achieving aggressive further minimise any potential losses. growth of the SME loan book by building a The services facilitated through the above strong and secured portfolio. Emphasis would new and enhanced products complemented Strategic initiatives implemented during the be placed to enhance business levels through the existing array of SME Banking services in period under review focused on continuous increase penetration of transaction banking providing holistic and convenient solutions growth of both asset and liability portfolios services to SMEs with key focus on liabilities. to SME customers. As a result, the Bank was whilst optimising income through customer The Bank will continue to implement a prudent able to improve its low cost fund base through profitability, enhancing process efficiencies and differentiated risk framework in building
44 Management Reports Management Discussion and Analysis Union Bank | Annual Report 2018
a strong SME base to cushion against possible successfully concluding the seasonal gift The Bank pro-actively expanded its macro economic challenges. scheme ‘Kalin Avurudu’ savings campaign relationship based personalised financial and localised promotions across the branch services for the High Net Worth customers, With the completion of its centralisation network for savings products targeting retail outside the Western Province. The Bank is process, the SME Banking unit of Union Bank customers. proud to have decentralised its privilege is aptly poised to meet the challenges of 2019 banking service Elite Circle across a wider with a well-coordinated line of authority and Institutional CASA was also a key contributor geographical domain, fulfilling a void felt in enhanced efficiencies. The Bank will continue for mobilising savings deposits. The channel other parts of the country. Several focused to leverage on technology to deliver an focuses on the institutions that require a initiatives were carried out to strengthen the enhanced customer experience in order to flexible, personalised and speedy service as relationship, increase customer engagement differentiate its service delivery amidst intense well as financial advisory services to improve and interaction whilst actively supporting the competition. the overall cash flows and cash management. Bank’s savings drive. To this sector the Bank offered customised In tune with the Bank’s commitment to build solutions with special pricing options for Focus was placed on reducing the volume on existing relationships while fostering new, an array of specialised services to suit each of high-cost term deposits, which was a lucrative client relationships, Union Bank will customer. challenging task for the Bank. However, with continue to invest in sharpening the skills of the initiatives put in place, the Bank’s Term its SME Banking team with a strong belief that deposits stood at Rs. 60,532 Mn and was in a rapidly changing business environment, a RETAIL DEPOSIT MIX 2018 managed at a YoY growth of 12% for 2018. skilled workforce which is adaptable to change will provide a distinctive edge in developing 21% Retail Assets this segment. 79% Retail loan portfolio stood at Rs. 13,715 Mn with a YoY growth of 18%, as a result of enhanced focus placed on mortgaged backed RETAI L BANKING lending.
The Bank strategically shifted its business Retail Liabilities focus more to the equity backed Loan Against The Retail deposits base continued its growth Property proposition, having identified the in 2018 supported by a focused strategy personal financial requirements of individuals. based on identified segments of higher The product offering supported the Bank to CASA average balance accounts and relationship penetrate the mature home equity market TD management initiatives. The retail deposits successfully and record a significant growth of base grew to Rs. 52,079 Mn which is a 16% YoY 130% YoY and a portfolio of Rs. 4,591 Mn by growth. In a backdrop where rising interest end 2018 which also showcased the highest rates prevailed, the Bank managed its deposit Retail CASA Mix growth amongst the asset portfolios. portfolio mix prudently to mitigate impact on 15% margins and continued to support the Bank’s 17% Union Bank Home loans facilitate the overall funding plans. 1% customers financing desires for living spaces 3% covering both home and property. During the 3% Despite the rising interest rates, the Bank year the proposition was enhanced to include maintained its CASA ratio with a YoY CASA the financing needs of first time home owners growth of 15% as a result of the proactive focus and second home investors going beyond the 19% on key segments and relationship management. 42% basic home loan product which is available Targeted product marketing aptly supported in the market. Home loans recorded a 72% the savings drive of the Bank, whilst product growth YoY and a portfolio of Rs. 2,288 Mn offerings to the upper middle class segments Current Accounts Minor Savings at the end of 2018. Union Bank gained the and professionals continued to contribute to General Savings Salaried Savings confidence of the market for its home loan sourcing of new customers and deposits. product through its distinctive service, speed Ultra Saver FCY savings of processing and personalised expert advisory Promotions were carried out to support Investment Savings service coupled with efficient follow-up and the Bank’s sourcing strategy with the Bank customer service by a highly experienced sales team.
Management Reports Management Discussion and Analysis 45 Union Bank | Annual Report 2018
Management Discussion and Analysis
Union Bank launched its comprehensive portfolio of Credit Cards, powered with the VISA Pay Wave feature, adding further versatility and vibrancy to its Retail Banking product offering.
Credit Cards will support Retail Banking to enhance its sphere as a full-fledged one-stop shop for retail financial solutions. The Credit Cards are issued in three variants of Platinum, Signature and Gold and are designed based on the specific needs of different customer segments. The Bank will focus on cross-selling the Credit Cards proposition to its base of existing customers, while also carrying out segmented acquisition programmes built on a wide range of offers, benefits and unique features.
The Bank continued its efforts to grow the Credit and Debit Cards Inbuilt with ‘VISA Pay Wave’ feature the cards personal loans portfolio which at the end of are placed amongst the most sophisticated the year was a noteworthy 49% of the retail plastics in the industry, and are well adoptable assets portfolio. Its differentiated positioning to the ongoing digital transformation. VISA supported the Bank to maintain healthy credit Pay Wave facilitates greater convenience to costs during the period under review. The cardholders with faster checkout at Visa Pay Bank’s personal loans portfolio consists of a Wave enabled points of sale outlets. superior customer base that supports towards notable fee line contributions whilst enabling The range of Credit Cards are also offered to build a strong savings base. at competitive range of interest rates, along with attractive benefits and privileges. Having The retail asset portfolio is monitored identified the significant lifestyle needs of the and managed pro-actively to ensure that diverse customer segments cards also include collections and recoveries are timely. These year-around offers providing enhanced savings initiatives have helped the Bank maintain its to users in their daily essential needs, fashion, NPL ratio well below the industry levels. retail, leisure and more for an extended experience. Cash back benefits are offered for Success in attracting new customers was selected spend categories for greater savings. attributed to the superior service offered by Union Bank Credit Cards also offers 0% interest the dedicated sales team and to delivering payment plans, loan on card, travel insurance excellent turnaround times in granting and rewards points to all card holders. facilities to customers making it a one stop shop for Retail Loans. A cohesive strategy was put in place for the sourcing of cards via a multitude of channels which includes a dedicated sales team, the branch network supported by cross selling programmes across all channels including digital. As the first bank in Sri Lanka to obtain PCIDSS (Payment Card Industry Data Security Standard) certification the Credit Card systems and the Bank’s processes are compliant and certified to facilitate optimum levels of security. All service channels of the Bank have
46 Management Reports Management Discussion and Analysis Union Bank | Annual Report 2018
been upgraded and are geared to provide by end 2018. The Bancassuarance operations During the year, focus was placed on customers with the highest level of service. are centralised to provide greater operational enhancing reach and customer experience efficiencies and cost advantages to the Bank, through the existing network by adding value The number of Union Bank Debit Cards grew whilst maintaining a faster turn-around for the to its infrastructure, technology, service levels in line with the Bank’s savings and current clients. and brand image. Under these elements account base growth. Debit Card users have refurbishment initiatives were carried out at convenient access to their accounts through Remittances several branches across the branch network an enhanced ATM network of over 4500 ATMs The Bank facilitates inward remittances providing a new outlook for enhanced locally and over 1.5 million VISA ATMs globally through Western Union and Instant Cash customer service levels. and a wide network of merchants for point of global money transfer service gateways. The sale transactions through chip based and Visa services are offered to the public through the Showcasing the Bank’s continued commitment Pay Wave options. In addition, debit cards also Bank’s branch network and agent outlets. to enhance customer convenience, selected provide easy access to accounts and facilitate The Bank’s inward remittance volumes were branches offer extended banking hours along several banking services through online affected by the decline in national inward with the introduction of Saturday banking. and mobile banking. A range of attractive remittance volumes due to the impact from merchant offers was also available for all debit geopolitical instability in the Middle East. The Bank’s branch network is categorised in card users during the year. The impact of the currency fluctuation and to five zonal demarcations with one new zone depreciation of the Rupee during the second added during the year in order to facilitate The Bank provides a superior level of service half also affected the inflows. The Bank focused effective and efficient operations that enables on all operational and customer service on localised campaigns in selected areas to speedier delivery of services required for aspects on its payment platforms, clearing efficiently manage the remittance business. business growth. Further, the zonal structure functions and digital banking services. This facilitates effective management of regulatory was further affirmed with the Bank being Branch Network compliance, checks and controls throughout awarded ‘ The Best Bank for seamless back-end Union Bank reaches its target audiences the network. The branches strengthened its Operations’ at the Lankapay Technovation through a multitude of channels and the reach and portfolios by implementing various awards 2018. Bank’s branch network of 67 branches promotions including seasonal and cultural is spread across all provinces for greater events targeted at the local community. coverage and reach. It plays a vital role in VALUE ADDED SERVICES creating links between the Bank and its During the year, the inaugural Union Bank preferred target audiences in providing Retail and SME Awards Ceremony was the much needed sphere for nurturing of held and provided a platform to recognise Bancassuarance customer relationships whilst aptly supporting performances of teams and individuals and The Bank’s Bancassurance service facilitates brand presence. The branch network acts foster team work and motivation whilst convenience to customers in obtaining merely not as a distribution channel but supporting the business objectives. Based insurance covers along with professional also an important touch point for fostering on a comprehensive criteria put in place for consultancy at no additional cost under one connections with existing and potential performance excellence, the Head Office roof. The service offers multi-channel general customers to offer a distinctive customer branch emerged as the overall winner and insurance partnerships enabling customers experience through customised products and the winner of Zone 1, whilst Chilaw, Galle and to select from a range of insurance partners services. Mannar were placed as winners of Zone 2, 3 for their needs on Motor insurance, Marine and 4 respectively. insurance, Fire & Theft policies, Hospitalisation covers and a wide range of other insurance The Bank celebrated the International covers that cater to individuals and businesses. Customer Service Week with the branch network taking many initiatives to improve The Bank renewed its exclusive partnership their service and convenience for customers. with Union Assurance PLC to facilitate life A competition was also organised by the insurance requirements of customers and has Service Quality Management Unit of the Bank recorded noteworthy results with 79% YoY where Kegalle Branch emerged as the overall growth in gross written premiums and 61% winner in customer service initiatives and growth in annualised new business premiums achievements.
Management Reports Management Discussion and Analysis 47 Union Bank | Annual Report 2018
Management Discussion and Analysis
Extensive efforts were also taken to enhance the efforts of selecting strategic locations to facilitate and service the Bank’s rapidly- the knowledge and skill levels of new recruits supported the Bank to increase its ATM usage expanding customer segments with key focus and a cohesive training plan was implemented across all customer segments. The Bank on personal banking customers. across all key operational and service areas to facilitates withdrawals at no extra charge. facilitate increased levels of customer service Several enhancements were done during at branches. Customer Experience the year to facilitate increased levels of customer service. Service level agreements Alternate Channels Contact Centre and turnaround times across the retail product The Bank’s focus to increase customer The contact centre of the Bank plays an portfolio and services and operations were convenience through technological integral role in providing enhanced service revamped. The account opening process tool enhancements was aptly supported with levels and convenience to customers. During kit is a first in the market facilitating customers several initiatives implemented through the period under review a fully automated to open accounts faster. In addition faster the alternate channels which included the Interactive Voice Response (IVR) system was turnaround times are facilitated through Bank’s ATM network and the digital banking implemented to provide greater convenience. SQM for balance confirmation and processing platforms. These initiatives also provided The new IVR facilitates a series of self-banking of credit cards and loans. Service level improved uptime on all channels whilst services and is trilingual and accessible 24 agreements were also put in place between facilitating seamless back-end operations hours a day from anywhere in the world. The branches and operational areas covering all for enhanced service levels. The Bank was new IVR provides the highest level of security, centralised back office processes. recognised and awarded as the winner for ‘Best simplicity and customers can avail themselves Bank with Seamless back-end Operations’ at to a host of services on their own, simply by Managing customer complaints is a key focus the Lanka Pay Technovation Awards of 2018. creating a telephone identification number area for SQM which maintains a close rapport (TIN). with both internal and external stakeholders Online and Mobile Banking to provide speedy and faster service levels. Greater emphasis was placed on developing The contact centre enhancements enables All customer complaints and suggestions the Bank’s digital channel as a key customer the Bank to focus on differentiated customer are attended to, in a timely manner. A fully- interaction point in line with the Bank’s segments and needs. As such, the IVR automated complaint management system strategic intent. The Bank’s mobile app and facilitates skill-based call routing facilities is in place and all customer complaints the online banking platform are omni-channel including the provision of a premium service are recorded, attended to and evaluated based and provide the required sphere for to the Bank’s ‘Elite Circle’ high net-worth for improving the service quality in the digital transformation. customer segment. In addition the new long term. The new system is capable of autodialing system supports the ongoing cross effective complaint categorisation, root The secure accessibility for a host of sell activities through the outbound call centre cause identification and auto escalation of convenient financial services coupled with making all new products accessible to the complaints. the latest security aspects have supported existing customers. The inbound agents also the Bank to increase its transaction volumes act as the first level of help desk and support Steps were also taken to simplify customer during the short period since its launch. customers to perform a host of activities feedback channels and materials. SQM also The overall transaction volumes grew by an conveniently and efficiently. facilitates conducting of customer satisfactions impressive 118% YoY. surveys thereby minimising service level gaps The contact centre was also restructured and and mandating required training for up- ATM Network strengthened with the services of highly- scaling of service levels. A series of activities The Bank’s total ATM network which includes experienced customer service specialists to were carried out to enhance staff awareness Branch and Offsite ATMs stood at 117 as at deliver the highest level of service needed to on service excellence including celebrating of end of 2018. Linked to the Lanka Pay common facilitate the growing retail banking business. customer service week, training programmes ATM switch, the number of ATM transactions and internal communications. and value both recorded notable increases Service Quality Management (SQM) during the year. ATM transactions grew by 7% Service quality management (SQM) plays a Prospects 2019 YoY. ‘The transactions and volumes from non- vital role in supporting and disseminating Retail banking continued to support the core Union Bank customers recorded an increase satisfactory service levels across all customer banking growth of the Bank during 2018 and over previous year and contributed 65% of touch points and channels. Continuous further established its commitment to the the overall volume. The higher up-times and enhancements have been implemented market and retail business with the successful introduction of the Credit Cards proposition.
48 Management Reports Management Discussion and Analysis Union Bank | Annual Report 2018
Retail Banking business will continue to lead and further reaffirm its contribution towards building the Bank’s CASA and overall liability “A series of growth in 2019.The Bank will continue to activities were maximise its asset base, to which Retail Banking will be a significant contributor and carried out to a key enabler. The credit cards proposition enhance staff launched in 2018, will continue to further fuel the rapid expansion of the Bank’s retail awareness on business along with focused penetration service excellence into mortgage loans. The Bank will further focus and harness identified segments to including profitably grow its savings base as well as celebrating of actively enhance contributions from fee based revenues as a result of the growing retail customer service business. week, training In strengthening the retail business to be a programmes key contributor to the Bank’s balance sheet, and internal overall focus will be placed on building the retail business on customer segments that communications.” are profitable and scalable. This sustainable growth is envisaged largely from building strong customer relationships and continued investment in people development which has since become the Bank’s key USP. The Bank will continue to increase its reach with the preferred customer segments. Rationalisation will be done on the Bank’s branch and ATM network to provide increased throughput and productivity. Focus will be placed on reaching customers and enhancing convenience through the digital platforms which will support the planned digital transformation of the Bank.
The Bank will continue to forge strong links with stakeholders, enhance reach and customer convenience and in this endeavour, the Bank’s retail banking business will be at the forefront in further establishing its position as one of Sri Lanka’s fastest growing full service banks.
Management Reports Management Discussion and Analysis 49 Union Bank | Annual Report 2018
Management Discussion and Analysis
Branch and ATM Network GRI 102-6
Northern Province
Branches 05 with ATMs
North Central Province
Branches 05 with ATMs
North Western Eastern Province Province
Branches Branches 07 02 with ATMs with ATMs
Off-site 01 ATMs Central Province
Branches 06 with ATMs
Off-site 02 ATMs UVA Province Western Province Branches 03 with ATMs Branches Branches 05 67 27 with ATMs with ATMs Off-site Branches with Off-site 02 41 ATMs ATMs ATMs Sabaragamuwa Province
Southern 49 Province
Off-site Atms Branches Off-site 07 with ATMs 03 ATMs
50 Management Reports Management Discussion and Analysis Union Bank | Annual Report 2018
Branches Off-site ATMs
Northern Province Southern Province North Western Province 33. Walana, Panadura 01. Atchuvely 40. Akuressa 01. Colombo Road, Kurunegala 34. Modarawila Road, Panadura 02. Chunnakam 41. Ambalangoda 35. Batakettara, Piliyandala 03. Jaffna 42. Ambalantota Western Province 36. Colombo Road, Pokunuwita 04. Mannar 43. Angunakolapelessa 02. Mahabuthgamuwa, Angoda 37. Maradana Road, 05. Vavuniya 44. Elpitiya 03. “Pora” Athurugiriya Punchi Borella 45. Galle 04. Thalangama North, 38. Belekkade Junction, Ratmalana Battaramulla North Western Province 46. Matara 39. Madiwala Road, 06. Chilaw 05. Divulapitiya, Boralesgamuwa Thalawathugoda 07. Ibbagamuwa North Central Province 06. Ambalama Junction, 40. Hendala, Wattala Boralesgamuwa 08. Kuliyapitiya 47. Anuradhapura 41. Mabola, Wattala 07. Egaloya, Bulathsinhala 09. Kurunegala 48. Horowpothana 42. Mahabage Road, Ragama 08. Cotta Road, Colombo 08. 10. Marawila 49. Kebithigollewa 09. Elvitigala Mawatha, Southern Province 11. Narammala 50. Kekirawa Colombo 08 12. Wennappuwa 51. Medawachchiya 43. Kurundugahahethekma, 10. Maradana, Colombo 10 Elpitiya Western Province Central Province 11. Marine Drive, 10th Lane, 44. Church Street, Galle Fort, Galle Colombo 3 45. Matara Road, Unawatuna 13. Attidiya 52. Dambulla 12. Marine Drive Wellawatte, 14. Borella 53. Gampola Colombo 06 Central Province 15. Gampaha 54. Kandy 13. Prince of Wales Avenue, 46. Peradeniya Road, Kandy 16. Ganemulla 55. Nawalapitiya Colombo 14 47. Karaliedha, Theldeniya 17. Head Office 56. Pilimathalawa 14. R A De Mel Mawatha, Colombo 05 18. Horana 57. Peradeniya Sabaragamuwa Province 19. Ja-Ela 15. Karagampitiya, Dehiwala 48. Sannasgama, Lellopitiya Eastern Province 20. Kadawatha 16. Kandeliedhapaluwa, 49. New Town, Ratnapura 21. Kohuwala 58. Batticaloa Ganemulla 22. Kollupitiya 59. Trincomalee 17. Hospital Road, Kalubowila 23. Kotahena 18. Kandy Road, Kelaniya 24. Maharagama U va Province 19. Jinadasa Nandasena Mw, Kiribathgoda 25. Matugama 60. Badulla 20. Bogahawila Road, Kottawa 26. Minuwangoda 61. Bandarawela 27. Moratuwa 62. Monaragala 21. Pamunuwa, Maharagama 28. Nawala 22. Makola South, Makola 29. Negombo Sabaragamuwa Province 23. Pittugala, Malabe 30. Nugegoda 63. Balangoda 24. Angulana, Moratuwa 31. Old Moor Street 64. Embilipitiya 25. Gorakana, Moratuwa 32. Panadura 65. Kegalle 26. Ethukala, Negombo 33. Pelawatte 66. Ratnapura 27. Colombo Road, Negombo 34. Pettah 67. Warakapola 28. Gangodawila, Nugegoda 35. Piliyandala 29. Mirihana, Nugegoda 36. Rajagiriya 30. Highlevel Road, Pannipiitya 37. Ratmalana 31. Rukmalgama Road, Kottawa, Pannipitiya 38. Wattala 32. Makumbura, Pannipitiya 39. Wellawatte
Branch and ATM Network as at 31st December 2018
Management Reports Management Discussion and Analysis 51 Union Bank | Annual Report 2018
Management Discussion and Analysis
its clients and the Bank’s profitability. The Desk Prospects 2019 Treasury performed well and above the expectations The Bank’s Treasury Department will continue of the Bank and has contributed significantly to place strategic emphasis on strengthening to the bottom-line. Foreign Exchange income contributions from its core businesses, namely The Treasury witnessed one of the most reported a very healthy YoY growth of 73.6% foreign exchange and corporate sales, Bank challenging years with both the interest rates as against Rs. 185 Mn of 2017. notes repatriation, investments and trading in and the exchange rates witnessing rapid the year 2019. Further, the Treasury will also movements of fluctuation that took place due The Fixed Income desk which constitutes the focus on low cost funding opportunities and to global and local market volatilities. Primary dealer unit of the Bank, continued new business relationships. In order to achieve to provide bidding for the Primary auctions this challenging task, Treasury will continue to The Treasury department which consists of by the Central Bank of Sri Lanka. In April exploit and enter into strategic partnerships Interbank, Fixed income and Corporate Sales 2018 Central Bank relaxed the key policy rate with both local and foreign funding agencies divisions has contributed largely by way of corridor by reducing 25bps on the SLF rate to and Banks. profitability, funding and overall monitoring of 8.5% and tightened the same in November key regulatory ratios such as Liquid Asset Ratio 2018 by increasing 50bps on the SLF rate to 9% (LAR), Statutory Reserve Requirement (SRR) and increased the SDF by 75bps to 8%. Further, alongside with the Bank’s cash flows both in OPERATIONS Central Bank also reduced the SRR by 150bps rupees and foreign currency also entering in to from 7.5% to 6% mainly to release liquidity currency swaps which are used as short term to financial markets which currently have a Operations plays a vital role within the Bank in funding strategies in a Rupee deficit financial staggering Rs. 200 Bn overall deficit. During providing the required support for the smooth system. the challenging year 2018, the Bank’s FIS operation and functionality of business units portfolio was increased from Rs. 20.2 Bn to Rs. and projects. Operations continues to align The Corporate desk functioned with greater 26.8 Bn which is a 33% increase YOY. Further its functions to accommodate and cater to focus on serving the requirements for the Repo Portfolio witnessed an increase of the rapidly growing business volumes by institutional, corporate and individual clients 69% from Rs. 10.4 Bn to Rs. 17.5 Bn during year automating, centralising and outsourcing with Foreign Exchange Forward Contracts, 2018. Trading Gains on G-Sec stood at Rs. 236 operational activities to deliver greater import/export related transactions, Bank Mn for the year. convenience. During the period under review notes repatriation and advising clients and key focus was placed on improving efficiency, continued to deliver an exceptional service to productivity and sustainability to ensure
Operations
Process Central Trade Treasury Card Control Premises Administration Security Operations Operations Operations Operations Operations
Credit Exports and Branch Reconciliations Procurement Operations Imports Development
Clearing Bank Regulatory Operations Guarantees Reporting
Transaction Operational Processing Excellence Operations
Customer System On-boarding Administration Operations
Branch Operations
52 Management Reports Management Discussion and Analysis Union Bank | Annual Report 2018
delivery of benchmarked service levels to Trade Operations The Administration Department reviewed and customers and all stakeholders. Adding to the The Bank’s guarantee business recorded renewed all supplier service agreements to be Bank’s prudent cost management initiatives, steady growth with a marked increase in the in compliance with the Bank’s procurement Operations maximised on existing resources counter guarantees received from banks with policy. In addition, the Bank’s procurement to effectively manage the growing business an increased number of correspondent banks policy was also reviewed and revised to volumes whilst enhancing technological preferring to work with Union Bank. Several provide enhanced cost efficiencies to the Bank support for greater efficiencies. Staff across steps were taken to simplify the processes whilst maintaining required standards. The all operational roles was provided training to within Trade operations. Transaction related procurement process of the Bank, brought further develop their expertise and skills in- applications and other forms were introduced in significant cost savings in the purchase line with business expansion goals. in soft form for ease of use by the customers of goods and services as well as in rental and the process of obtaining credit approvals arrangements. In addition, outsourcing the Central Operations was further streamlined. warehouse and archive centres continued to Central Operations undertook several provide considerable cost savings and process key centralisation initiatives in order to Card Operations efficiencies. Within the administration function enable front-line employees to focus on With the launch of Credit Cards, key focus was several add-ons were carried out to the strengthening customer relationships and placed on timely processing of applications. work-flow processes to reduce manual work engage in revenue generating activities. All The provision of hi-tech embossing equipment in the daily processes. The Bank is committed customer data maintenance was centralised within the Bank premises contributed towards sustainability and places much focus to provide accurate data in the Bank’s core significantly to provide faster delivery times. on conducting its operations to minimise the system. This initiative has brought enhanced In order to facilitate greater convenience impact on environment. As such, it carried out levels of confidentiality over customer related for Credit Card customers a project was several initiatives including energy saving and sensitive data. A new work-flow solution was commissioned to facilitate a gamut of services recycling of paper and waste. implemented to facilitate the submission of through online banking and mobile banking customer applications of accounts opened by platforms. The Bank’s ATM network was branches, resulting greater functional and cost upgraded to facilitate Credit Card payments. efficiencies. With the launch of credit cards, a system was set up to carry out all data entry Process Control and Operational related to applications centrally. The work-flow Excellence system was upgraded to provide faster service Within the purview of the function, continuous and turnaround times of loan disbursement of work is carried out to effect enhancements SMEs. to processes through automation with the implementation of new work flow based Treasury Operations process solutions and improvements to The operations of the Bank Notes division of existing solutions. Based on regulatory the Treasury commenced during the year and requirements a key project was implemented was effectively managed using the existing to facilitate online submission of exchange The Premises Department’s primary focus resources. Enhancements were done to the control forms to the Department of Foreign was placed on good upkeep of the Bank’s Treasury system aligning same to cater to Exchange by January 2019. The unit also infrastructure. Selected areas of the Head business expansion needs. Centralisation supported the Credit Card operations by Office premises, Pettah and Nawala branches of Inward RTGS process and the Foreign facilitating the back end reconciliation and were refurbished to provide an enhanced Exchange rates upload process were also settlement process. working environment to employees. Required implemented. Further, payments to Money working spaces were developed for three new Brokers was automated, enabling faster Administration and Premises sub-business units that were commissioned payments for brokerage fees. The system During the period under review, the during the year. A number of key initiatives related controls identified by the external Administration and Premises functions were were implemented by the unit during the auditors and regulators together with related segregated and realigned as independent year to maintain and improve the Head Office value additions were implemented during the departments to be in line with the electro-mechanical system. period under review. organisation structure.
Management Reports Management Discussion and Analysis 53 Union Bank | Annual Report 2018
Management Discussion and Analysis
Prospects for 2019 In the year 2018 several key automation The operational units will continuously strive projects were carried out to facilitate smoother to support the business units to achieve the business operations and support the growing “Information organisational goals to enhance business business volumes. Key focus was placed in technology plays development for sustainable growth and supporting the launch of Credit Cards with the service emerging markets. Focus in 2019 successful implementation of the Credit Card a pivotal role in will emphasise on identifying opportunities system and the integration of same to core the shaping the to realign the Bank-wide operational banking, Digital Banking and Mobile Banking processes through centralising, outsourcing modules. Bank to strengthen and automation with a view to enhance its evolution as a the customer experience, while improving Implementation of an enhanced Interactive controls, productivity and process efficiencies. Voice Recording system (IVR) paved way in rapidly-growing enhancing customer convenience providing full service bank Further, the operational units will also focus easy access to a series of banking services by supporting on areas that can be re-engineered to deliver through phone banking. greater cost savings. Key focus would be its digital placed on generating higher savings on Ensuring further controls for enhanced transformation. ” card related operations. During the year compliance in business operations the Anti- ahead, innovation will play a key role to Money Laundering (AML) System was further deliver enhanced customer service levels to upgraded to meet up-to-date regulatory cater to the growing business volumes. As requirements. During the year, automation was such, in supporting the growth trajectory also completed to facilitate the IFRS9 standard Further, a virtualisation project of the of the Bank, operational teams will focus in financial reporting. information technology infrastructure was also on implementation of process efficiencies commenced with the objective of reducing through improved productivity and greater The Bank’s SWIFT infrastructure was revamped the server footprint for enhanced resource technological support in order to better in order to meet advance and latest security utilisation. Bank also invested in new Core manage customer expectations. Further, standards. Also, measures were taken to Banking Test environment in order to facilitate operations as a positive enabler to the Bank’s update servers with advanced Security latest software environment versions. performance will implement a timely delivery Patches and a new Data Leakage Policy was plan to execute the strategies to maximise on implemented to ensure high quality of security Prospects for 2019 opportunities for outsourcing, centralisation standards in information technology initiatives Information technology will continue to be and automation. and operations. IT security framework was a key enabler for the Bank’s evolution and enhanced to provide further controls and growth and will continue to shape its digital Operational units will continue to work on servers and devices were updated to latest transformation to enhance reach and customer improving the knowledge and skill levels of versions to eliminate vulnerabilities. convenience with continuous upgrade to its the staff through initiatives such as formal technology infrastructure. The unit will aptly training, on the job training by cross functional The information technology function support to deliver enhanced productivity rotation and knowledge sharing sessions continues to enhance the existing systems and faster turnaround times to business units conducted periodically. to deliver higher operational efficiencies. The whilst ensuring the highest level of security Primary Dealer system and Treasury systems to customers for banking transactions. were further enhanced to facilitate the system Further, information technology will continue to support the Bank’s aggressive business INFORMATION TECHNOLOGY requirements and controls. An upgrade to the Cash Management System was also growth initiatives planned for 2019 with commenced during the year and is underway enhancements to systems for both existing Information technology plays a pivotal role in to facilitate new value added services to and new products and services. This entails the shaping the Bank to strengthen its evolution corporate and SME customers. Steps were also implementation of the key strategic pillars of as a rapidly growing full service bank by taken to initiate the development of a new digital transformation. supporting its digital transformation. loan origination system to enhance current processes and support growing business volumes.
54 Management Reports Management Discussion and Analysis Union Bank | Annual Report 2018
The Digital setup will be based on creating a and current account balances. Supporting “Connected & Intelligent Customer Experience” the growth of the liability portfolio of the that will drive significant business benefits. Bank, communications on the seasonal ‘Kalin “The outstanding The evolution will be based on moving from avurudu promotion’ aptly supported the Bank’s achievers of a closed to an open banking model where CASA drive providing an attractive gift scheme products, services, functions and data are to customers for the build-up of savings. the Retail and shared to create new business models with SME segments added value. An artificial intelligence driven Communications were stepped up to further technology strategy will provide the Bank a build “Union Bank Elite Circle“ the Bank’s of Union Bank holistic view of the customer life cycle, build proposition for high net-worth customers. were felicitated process agnostic improvement programmes A budget forum was also held on financial and create platforms to revolutionise ease information and implications, for the benefit at the inaugural of implementation. Further adaptation to of Elite Circle customers. The Bank also tied Cloud platform will provide business agility up as the corporate partner for Sri Lanka’s Union Bank Retail & responsiveness to customer needs whilst first Universal movie premiere ‘The Jurassic and SME Awards intelligent process automation will provide World; fallen Kingdom’ giving the Elite Circle greater speeds and efficiency to services. The customers a value added experience. ceremony held in Bank will also maximise on the advantages Colombo under the provided by Blockchain technology of The outstanding achievers of the Retail and maintaining the data records through a SME segments of Union Bank were felicitated theme ‘Winning is decentralised and distributed ledger system. at the inaugural Union Bank Retail and SME our Goal” Focus on Cyber Security which is now a Awards ceremony held in Colombo under the business imperative will be an integral element theme ‘Winning is our Goal’. in the Bank’s IT strategy for 2019. Adding further vibrancy to the persona of the branches, the outlook at Branches was MARKETING COMMUNICATIONS further enhanced with the completion of a initiative during the year was the successful new signage project covering a number of launch of a new website project that will be branches. Focus was also placed to create developed to meet the Bank’s ongoing digital Building the brand greater visibility for the Bank’s off-site ATM transformation needs whilst providing an Marketing communications during 2018 was network in order to enhance reach and enhanced digital experience to customers and targeted in further strengthening the Bank’s convenience. An island-wide Below the Line public. brand image as a fully-fledged commercial (BTL) communication plan which included a bank. An integrated communication strategy series of outdoor sites focusing on increasing Strengthening investor relations, the Bank with enhanced focus on digital platforms was awareness was implemented during the year. held its first investor forum in Colombo during implemented. the year. The Bank’s Annual Report 2017 was Greater emphasis was placed on taking concluded under the theme ‘Connect and During the year several communication advantage of the increasing consumer trends grow with us’. Once again highlighting the campaigns were launched to enhance in usage of digital and online platforms. As Bank’s commitment and standards in financial awareness on the Bank’s product portfolio. such, communications were stepped up on reporting, the Annual Report was awarded Debut of Credit Cards under the theme creating awareness for the Bank’s mobile a certificate of compliance at the 2018 “Extend your experience’ was launched with an app and online banking channels. Focus Annual Report awards held by the Institute of array of attractive offers positioning the card as was placed on creating enhanced awareness Chartered Accountants of Sri Lanka. a unique lifestyle card. The launch was further for the Bank’s brand across all social media supported with a customer networking event platforms and the communication plans During the year the brand gained strong held providing greater awareness for the cards. implemented saw the Bank make its mark momentum for its continued growth in The Union Bank Biz Partner, a tier based value amongst the top in reach and interaction performance across media publications and proposition, was launched to SMEs offering which is the much-needed measure for networks as a result of the cohesive public enhanced benefits based on their savings successful social media presence. A key relations strategy put in place.
Management Reports Management Discussion and Analysis 55 Union Bank | Annual Report 2018
Management Discussion and Analysis
Reaffirming its commitment to support the well-being of society and placing focus on youth and children as evident in the Bank’s policy towards corporate social responsibility the Bank carried out activities in branch localities targeting children and youth.
Prospects 2019 During the year ahead, marketing as a strategic enabler for continued business growth will focus primarily on implementing innovative and differentiated communications with a key focus on digital platforms to further establish its positioning as a rapidly progressing bank. High level of emphasis would be placed on devising communications that would focus on building Union Bank Credit Cards as a key driver during the year ahead and would also support the growth of the Bank’s liability and asset products.
Further emphasis would be placed on creating stronger links with all customer segments and selective initiatives will be carried out focusing on Personal Banking, SME and Corporate customer segments. Communications will focus on building convenience and reach for personal banking, enhancing knowledge and business acumen for SMEs and providing of state of the art transaction banking convenience for businesses.
56 Management Reports Management Discussion and Analysis Union Bank | Annual Report 2018
Corporate Highlights
‘Elite Circle’ Breakfast Forum Retail and SME Awards
The inaugural Union Bank Retail and SME awards was held under the theme ‘Winning is our Goal’ to recognise outstanding achievers.
A breakfast forum was held for ‘Elite Circle’ customers on ‘Personal Taxation and highlights of the Exchange Transaction Banking tie-up Control Act of Sri Lanka’.
Bancassurance partnership
Union Bank partnered with Union Assurance PLC to facilitate life insurance Union Bank partnered with Union Assurance PLC to facilitate cash solutions to customers through management services through Union Bank Biz Direct. Bancassuarance services.
Management Reports Corporate Highlights 57 Union Bank | Annual Report 2018
Corporate Highlights
Debut of Union Bank Credit Cards
A lifestyle Credit Card offering, an extended experience in a variance of gold, platinum and signature propositions was launched at an exclusive event held in Colombo amidst a large gathering of invitees.
58 Management Reports Corporate Highlights Union Bank | Annual Report 2018
Credit Cards to Kandy
Extending the Credit Card experience to Kandy, the Bank hosted a customer networking event in Kandy with the presence of customers of branches in Zone 2.
Management Reports Corporate Highlights 59 Union Bank | Annual Report 2018
Corporate Highlights
Investor Forum
An Investor Forum was held based on the Bank’s transformational journey and financial performance for 1H 2018.
Awards and Accolades
Union Bank secured Union Bank was two main awards at awarded the ‘Best the National Sales Bank for Seamless Congress Awards Back-end Operations’ (NASCO) organised by at the LankaPay the Sri Lanka Institute Technnovation of Marketing (SLIM). Awards 2018.
60 Management Reports Corporate Highlights Union Bank | Annual Report 2018
Employee Relations
Avurudu celebrations Vesak ‘Bodu Bathi Gee’ Christmas Carols
Annual staff trip Ifthar celebrations Navarathri celebrations
Sports
During the year, Union Bank teams excelled in Athletics and Badminton.
Management Reports Corporate Highlights 61 Union Bank | Annual Report 2018
Corporate Highlights
Honouring Long Service Employees Annual Dinner Dance
Long-standing employees who have served Union Bank for 20 years were recognised and felicitated.
Service Champions
The Annual Dinner Dance held Service Champions were recognised during the Customer Service Week. at the Waters Edge Hotel, was a gala, fun-filled event for staff.
62 Management Reports Corporate Highlights Union Bank | Annual Report 2018
63 Union Bank | Annual Report 2018
Media Highlights
64 Management Reports Media Highlights Union Bank | Annual Report 2018
Management Reports Media Highlights 65
Building a full service bank We empower our customers by offering a complete and diverse array of financial solutions. We integrate technology with a customer-centric approach to provide the widest reach. Union Bank | Annual Report 2018
Social and Environment Report
The social and environment report focuses are made available on the website in Sinhala, Product Responsibility (GRI 417-1) on the key stakeholder groups of customers, Tamil and English, outlining features, eligibility The Bank provides a comprehensive range of employees, and the community and aims to criteria, documentation and related fees and products and services that are relevant and provide our investor community a clear and charges for each product. Interest rates, fees effective in meeting the needs of its clientele sufficient view on our engagement with these and charges are clearly communicated via at various lifestyle stages and milestones stakeholders and how our operations impact rate sheets displayed at branches as well as of their personal/commercial endeavours. these key stakeholder groups. on an updated tariff sheet published on the Sustainability and relevance of products and Bank’s corporate website. Further enhancing services are assessed prior to introducing new the dissemination of information to customers products to ensure that the products and the Bank commissioned a new website Customers services of the Bank deliver optimum value to keeping abreast of the latest technological and clients. consumer trends. The Bank’s customer base comprises of On the above basis in 2018, as an integral individuals, SMEs and large to medium In addition, the Bank’s customer agreements, element of the retail banking product corporates spread across different parts of terms and conditions documents as well as portfolio the Bank introduced Credit Cards, the island. With a determination to place applications are designed in a customer- offering attractive interest rates and a host the customer at the heart of the banking friendly, easily comprehensible format and of benefits along with payment plans and experience, Union Bank consistently strives are made available in native languages year round offers for an extended experience to serve the emerging needs of its customers upon request. Additional details may also be to customers. The cards are offered in Gold, while enhancing their banking experience. inquired through the Bank’s 24-hour contact Platinum and Signature variants to suit the The Bank endeavours to consciously pay heed centre hotline where trained customer service lifestyle requirements and are embedded with to customer needs to offer customisable, and personnel will assist customers with requested the latest Visa Pay Wave feature providing relevant products and services to meet their information and queries. convenient point-of-sale check out at financial needs. merchant outlets. Customers can access their Sustainable Banking Initiative (SLBA SBI) credit cards through Union Bank ATMs and the Providing its clients convenient access to Ascertaining Union Bank’s commitment Bank’s online platforms of internet banking banking services is a key priority of Union towards sustainable banking practices, the and the mobile application. Bank’s omni-channel distribution strategy. Bank continued its role and responsibilities as The Bank’s channel strategy spans beyond part of the SLBA sustainable banking initiative In addition within the year under review, the an island wide brick and mortar presence, and is in a collective agreement with 18 other Bank continued to enhance customer reach to reach customers at their convenience via banks in the country in support of establishing and convenience and implemented an all new automated and online channels such as ATMs, a sustainable banking code in the industry. Interactive Voice Recording system (IVR). The Internet Banking, and Mobile Banking. The IVR system is trilingual and provides fast and segment-wise approach allows the Bank to The SLBA-SBI initiative is spearheaded by Sri easy access to customers to carry out a series offer a customised service to its discerned Lanka Banks’ Association and is partnered of banking services just by dialling the Bank’s client segments, where high-net-worth, by four European Development Financial 24-hour hotline. The Bank also continued to corporate and even some of the SME clientele Institutions (DFIs) namely DEG of Germany, enhance its reach with the are serviced by dedicated relationship FMO of the Netherlands, OeEB of Austria, and off-site ATMs and digital platforms. managers that deliver a personalised service Proparco of France. The sustainable banking experience. In addition, a sales force dispersed initiative aims to be a multi-stakeholder To enable the Bank’s customers to make well- around the island takes banking convenience engagement within the banking industry, informed decisions, details of products and to the clients’ doorsteps while acting as a geared towards funding a ‘green economy’. services offered at branches are made available channel for building awareness of the Bank’s The initiative is also endorsed by the CBSL on printed material such as leaflets, posters products and services amongst the masses. which is increasingly focusing on sustainable and banners prominently displayed for easy banking practices to help banks to effectively access. Details of the Bank’s products are also Further consolidating our commitment manage environmental and social risks in the available on the Bank’s corporate website in towards customers, the Customer Charter projects and promote sustainable banking for English, Sinhala and Tamil along with advise on mandated by the Central Bank of Sri Lanka the future. how to contact the Bank; providing customers (CBSL) is in full application at Union Bank. The with direct access to such details. Further, in Customer Charter sets the standards for fair The aims of the initiative include creating a compliance of the Customer Charter of the banking and provides guidance on customer platform where banks can work together on CBSL, ‘Key Fact Documents’ of all products rights, grievance mechanism and special sustainability issues. This platform will facilitate provisions for selected customer groups. decision-making and coordinate efforts to
68 Management Reports Social and Environment Report Union Bank | Annual Report 2018
increase efficiency and effectiveness while domain via public relations activities in the Complaints ensuring of a level playing field. The platform print, electronic and online media. Incidents Union Bank maintains a comprehensive will also facilitate suggesting and jointly of non-compliance with regulations and online complaint management system agreeing on minimal standards for integrating voluntary codes concerning communications where the complaints are resolved within a environmental and social considerations into that include advertising, promotions and stipulated frame of time based on the nature core operations, products and services and to sponsorships did not occur during the year and complexity of the complaint. Customers level the playing field through joint principles under review. could also contact the Bank via email to info@ or standards. By being a signatory to the unionb.com (displayed on the website) or via initiative, Union Bank will receive necessary The marketing communications initiatives of the 24-hour Contact Centre with feedback, inputs to implement the clauses agreed the Bank focus on creating better knowledge queries or suggestions for improvement. In to which include 11 sustainable banking and awareness of the Bank and its product addition a complaints and suggestions drop principles. The Bank’s staff will also gain access propositions. Outdoor promotions in suburbs box is also maintained at all branches. Various to tailor-made e-Learning and e-coaching and main cities outside Colombo have been precautionary measures are adopted from platforms through the association where conducted within the year under review time to time, in order to minimise negative staff will be better equipped to implement in order to raise awareness of the Bank’s implications to customers with a view of sustainable banking practices. Other benefits products and services, with a special focus on decreasing customer dissatisfaction as a whole. of being a part of the SLBA SBI initiative encouraging the public to save and invest. include, being involved in the latest discussion Outdoor visibility for the Union Bank brand on relevant issues, improving overall risk and its products have also been enhanced in Human resources management, better understanding of the 2018, with the enhancement of the branch and business case of proper E&S management ATM outlook as well as the acquisition of new HR as a Change Agent and receiving the knowledge to market the outdoor branding sites. As the Bank successfully continued its rapid information to clients and stakeholders. The growth agenda, the Human Resources main benefit however, will be the ability to The Bank adheres to a communication function partnered with the business and contribute to sustainable development for a policy approved by the Board of Directors support functions to mobilise employees beautiful, clean and green Sri Lanka. which governs the objectives, division of around significant changes in the business responsibilities and general guidelines for strategies. In some instances, this required communicating with various target groups. changes to skill sets and redeployment of Therefore, the communication policy employees to different roles. HR facilitated this encompasses the following aspects; by playing the role of the change agent, where it supported communication of business plans aa The communication of public and non- with employees to assist them understand public information the strategy and support them with necessary Communications aa Communications with media, skills and guide them through the process of Communication of the Bank’s products and shareholders, regulators and other executing the change for the betterment of services have been maintained via mass media stakeholder groups the organisation. In doing so, the function was (paid-for media such as TV, radio and press) aa Business communication and usage of guided by its long-term vision of partnering and key emphasis was also placed to enhance email etc. with all stakeholders to create an environment awareness across digital and social media aa Web and social media activity where employees can perform at their platforms. The communications are further aa Confidentiality and protecting of best and are enabled to deliver sustainable supported by branch branding, outdoor confidential information organisational performance. branding and localised awareness promotions conducted at targeted strategic locations. The Bank’s communications activities which The people strategy therefore took on a include advertising, outdoor branding for stronger focus on change management and A mix of communication tools including visibility, outdoor promotions as well as supporting the business to manage the human advertising, corporate literature, public sponsorships, community engagement etc. capital more efficiently in order to improve promotions, corporate sponsorships, social are conducted according to the guidelines performance and productivity in a sustainable media engagement, etc. have been employed specified in the said policy in addition to manner. to target the diverse client segments of the compliance to laws and regulations governing Bank. In addition to paid-for media, awareness the industry as a whole. of the Bank’s corporate image, products and services have been created in the public
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HR as a Business Partner understanding of the cost of input and the and Remuneration committee reviewing and At Union Bank, HR is positioned as a business value of the output. In 2018, HR took on the approving required revisions. partner with a key responsibility to deliver task of quantifying this for revenue generating The regular review of reward structures assisted services that positively impact business results. roles where staff costs were measured on the Bank to remain competitive in the talent This includes bringing HR expertise to support a monthly basis to ensure that all possible market to ensure it is able to attract and the business strategy, providing access to the action was taken to manage these prudently. retain the most capable talent central to the required skill sets and assisting in improving The performance and contribution of organisation’s success. the productivity in the human capital. A employees in revenue generating roles was key focus in this area was the timely supply monitored through multiple MI packs and Given the challenging industry and market of resources required and the continuous performance dashboards available with the conditions that prevailed throughout the upgrading of the knowledge and skills of the business to ensure that the human capital was year, a heavier emphasis was placed on existing talent. The human resource function productively deployed and HR worked closely improving productivity and managing also provided internal, cross-divisional career with the business to address any performance resources prudently. In this regard, a mobility opportunities through redeployment gaps on an ongoing basis. manpower assessment was undertaken across and transfers which provided further exposure all businesses and functions to ensure that required number and skill levels were provided to our employees for development. This The Bank also reviewed its incentive schemes to drive the business strategy. Where required, allowed them to take on roles which provide for revenue generating roles to reinforce action was taken to re-skill and redeploy staff diverse experience that lead to fulfilling careers. the pay-for-performance culture whereby in to areas that required further resources. A employees are rewarded for sustainable key objective was to focus on strengthening Managing Human Capital organisational performance. Other aspects the organisation for the future by ensuring Setting the standards for disciplined of compensation and reward were also that the knowledge and skills were deployed management of human capital requires an reviewed with the Board Human Resources to where they were most required.
Benefits provided to employees (GRI 401-2) The Bank provides the following benefits to its employees.
Benefits Provided Permanent Trainees & Fixed Term Employees Private Provident Fund with the option for increased contribution √ x Loans for staff members at concessionary interest rates for housing, motor vehicle, √ x personal needs, furniture loans, festival advances Medical reimbursement, spectacle reimbursement √ x Personal accident and Life Insurance √ √ Special critical cover insurance covering employee and spouse √ x Reimbursement of course fee and exam fees in relation to banking exams conducted by IBSL √ x Reimbursement of cost of obtaining a master’s degree for staff in the grade of manager and above √ x Payment of membership subscriptions of professional bodies for Assistant Manager and √ x above grades Difficult station allowance √ √ Travelling allowance √ x Incentives for high performing sales and recoveries staff √ x Bonuses based on Bank’s performance √ √ Awards for high performing teams √ √ Recognition of long-standing employees for those who completed 20 years of service √ x
70 Management Reports Social and Environment Report Union Bank | Annual Report 2018
Ratio of basic salary by gender (GRI 405-2)
Grade Male Female Key Management Personnel 1.00 0.90 Chief Manager 1.00 1.08 Senior Manager 1.00 0.87 Manager 1.00 0.91 Assistant Manager 1.00 0.98 Officer 1.00 0.96 Senior Banking Assistant 1.00 1.11 Banking Assistant 1.00 1.03 Management Trainee 0.00 1.00 Contact Centre Staff 1.00 1.04 Sales Staff 1.00 0.87 Recoveries Staff 1.00 1.04 Trainee 1.00 0.97 Support Staff 1.00 0.00
Talent Acquisition and Retention job roles. This has also helped the Bank in last three years consistently promoted talent Union Bank believes in providing equal minimising the staff cost while providing from within reflecting the rich and diverse opportunity for the internal and external career advancement opportunities. talent pool within the Bank and recognising individuals who seek opportunities within internal talent over external applicants. the organisation in order to learn and grow. Union Bank seeks to retain, develop and Through internal job postings the opportunity continue to attract people with the requisite The Bank continued to receive a significant is first given to the employees who are already skills to deliver the Bank’s strategy. During number of external applications for employed within the Bank, thus facilitating the year, the Bank promoted 67 staff to employment indicating the high value placed lateral transfers to broaden the exposure of higher grades recognising their ability to by the market on the Union Bank brand and employees within the organisation. Filling take on larger roles and providing employees employee experience. The Bank continued to jobs internally has given a strategic advantage opportunities to grow in their careers and recruit external talent where it was required to in terms of finding employees who fit the reach their full potential. The Bank has over the support the business strategy.
Staff recruitments – as at end December 2018 (GRI 401-1)
Province Age Category <30 30-50 <50 Male Female Male Female Male Female Total Western Province 150 (84%) 99 (81%) 33 (73%) 9 (90%) 1(100%) 292 (82%) Central Province 1 (1%) 3 (2%) 4 (9%) 1(10%) 9 (3%) Eastern Province 3 (2%) 3 (1%) Northern Province 2 (1%) 2 (1%) North Western Province 5 (3%) 5 (4%) 2 (4%) 12 (3%) Southern Province 9 (5%) 5 (4%) 14 (4%) Uva Province 2 (1%) 3 (2%) 5 (1%) Sabaragamuwa Province 5 (3%) 6 (5%) 4 (9%) 15 (4%) North Central Province 1 (1%) 1 (1%) 2 (4%) 4 (1%) Total 178 (50%) 122 (34%) 45 (13%) 10 (3%) 1(100%) 356 (100%)
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Staff resignations – as at end December 2018 (GRI 401-1)
Province Age Category Total <30 30-50 >50 Male Female Male Female Male Female Western Province 142 (68.3%) 49 (72.1%) 41 (73.2%) 15 (100%) 1 (100%) 2 (100%) 250 (71.4%) Central Province 14 (6.7%%) 3 (4.4%) 2 (3.6%) 19 (5.4%) Eastern Province 2 (1.0%) 2 (2.9%) 1 (1.8%) 5 (1.4%) Northern Province 10 (4.8%) 3 (4.4%) 13 (3.7%) North Western Province 5 (2.4%) 2 (3.6%) 7 (2.0%) Southern Province 10 (4.8%) 4 (5.9%) 3 (5.4%) 17 (4.9%) Uva Province 3 (1.4%) 1 (1.8%) 4 (1.1%) Sabaragamuwa Province 16 (7.7%) 6 (8.8%) 4 (7.1%) 26 (7.4%) North Central Province 6 (2.9%) 1 (1.5%) 2 (3.6%) 9 (2.6%) Total 208 (59.4%) 68 (19.4%) 56 (16.0%) 15 (4.3%) 1 (0.3%) 2 (0.6%) 350 (100%)
Our Unique Team a work environment that encourages diverse ideas, and enables the Bank to be approachable and (GRI 102-41/406-1/408-1/409-1) accessible to all stakeholders. The employees of Union Bank are not covered by a collective bargaining agreement or It is worthy to note that the Bank does not have any significant risks of running operations and represented by a trade union. Instead, the dealing with suppliers involved in incidents of child or forced labour. Bank believes in directly engaging with its employees to understand their needs and to Employee profile based on gender – As at end Employee profile based on employment respond in a timely manner. A robust policy December 2018 (GRI 102-8) type and gender – As at end December framework is in place to enable employees to 2018 (GRI 102-8) raise grievances or report suspicious activity through whistle-blowing. In addition, an open Gender Total door policy is maintained at all times at all Employment Male Female levels to ensure any staff member can directly 40% Type access senior management in order to discuss Permanent 572 377 949 any grievances or requests. The Bank had zero 60% (75%) (75%) (75%) incidents of discrimination for the year under review. Contract 102 40 142 (13%) (8%) (11%) At the Bank every employee is treated with Trainee 87 88 175 equal consideration. The diversity is significant (11%) (17%) (14%) Male in facilitating our unique organisation and Total 761 505 1266 Female our services. The Bank has a diverse yet an (60%) (40%) (100%) inclusive culture in which all employees feel valued, respected and supported. They have equal opportunities to excel in their careers Employee profile based on employment type and gender – As at end December 2018 and reach their full potential, irrespective of (GRI 102-7/102-8) their background, gender, age or ethnicity. Gender Total Individuals from different social, ethnic and Employment Type Male Female cultural backgrounds are constituent of our Full Time 761 (60%) 505 (40%) 1266 (100%) dedicated and committed team. By capitalising Part Time - - - on this dynamism, we have been able to create Total 761 (60%) 505 (40%) 1266 (100%)
72 Management Reports Social and Environment Report Union Bank | Annual Report 2018
Employee profile based on employment type and province – As at end December 2018 (GRI 102-8)
Province Employment Type Total Permanent Contract Trainee Western Province 694 (73.1%) 129 (90.8%) 133 (76.0%) 956 (75.5%) Central Province 41 (4.3%) 5 (3.5%) 7 (4.0%) 53 (4.2%) Eastern Province 10 (1.1%) 3 (1.7%) 13 (1.0%) Northern Province 38 (4.0%) 2 (1.4%) 2 (1.1%) 42 (3.3%) North Western Province 52 (5.5%) 3 (2.1%) 6 (3.4%) 61 (4.8%) Southern Province 51 (5.4%) 1 (0.7%) 8 (4.6%) 60 (4.7%) Uva Province 13 (1.4%) 4 (2.3%) 17 (1.3%) Sabaragamuwa Province 26 (2.7%) 2 (1.4%) 11 (6.3%) 39 (3.1%) North Central Province 24 (2.5%) 1 (0.6%) 25 (2.0%) Total 949 (74.9%) 142 (11.2%) 175 (13.8%) 1266 (100%)
Employee profile based on age, grade and gender – As at end December 2018 (GRI 405-1)
Age Corporate Chief Manager Fixed Contract Senior Manager Assistant Management Non- Executive Minor Staff Total Category Management and Manager Manager Trainee and Trainee and Fixed Term Contract
MFMFMFMFMFMFMFMF 18-24 1 1 158 139 48 18 365 (16.7%) (11.1%) (40.1%) (43.2%) (48.5%) (58.1%) (28.9%)
25-29 1 2 4 2 21 17 4 164 110 41 13 379 (16.7%) (22.2%) (3.3%) (3.9%) (18.6%) (21.0%) (100.0%) (41.4%) (34.2%) (41.4%) (41.9%) (29.9%)
30-34 1 1 1 28 12 59 38 60 56 6 262 (7.1%) (50.0%) (11.1%) (23.1%) (23.5%) (52.2%) (46.9%) (15.2%) (17.4%) (6.1%) (20.7%)
35-39 2 1 1 31 16 24 15 6 12 1 109 (15.4%) (7.1%) (50.0%) (25.6%) (31.4%) (21.2%) (18.5%) (1.5%) (3.7%) (1.0%) (8.6%)
40-44 4 1 5 33 10 3 4 5 3 2 70 (30.8%) (20.0%) (35.7%) (27.3%) (19.6%) (2.7%) (4.9%) (1.3%) (0.9%) (2.0%) (5.5%)
45-49 4 2 5 20 7 6 6 1 1 1 53 (30.8%) (40.0%) (35.7%) (16.5%) (13.7%) (5.3%) (7.4%) (0.3%) (0.3%) (1.0%) (4.2%)
50-54 2 2 2 1 5 4 1 1 18 (15.4%) (40.0%) (14.3%) (16.7%) (4.1%) (7.8%) (1.2%) (0.3%) (1.4%)
>=55 1 3 5 1 10 (7.7%) (50.0%) (55.6%) (0.3%) (0.8%)
Total 13 5 14 2 6 9 121 51 113 81 4 395 322 99 31 1266 (1.0%) (0.4%) (1.1%) (0.2%) (0.5%) (0.7%) (9.6%) (4.0%) (8.9%) (6.4%) (0.3%) (31.1%) (25.5%) (7.8%) (2.5%) (100%)
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Employment profile based on provinces Acknowledging a person’s individual handling large SME portfolios attended the performance and development as well as their course. This was facilitated by an external 3% 1% 2% personal contribution to overall organisational source and was established as the certification 5% 5% success is key. The performance management for SME Credit roles. 3% process comprises objective setting early 1% in the year, a mid-year and year-end review, Union Bank is committed to strengthening 4% with employee’s self-assessment playing a the capability of managers and holding them 76% critical role. By linking the bonus scheme to accountable to help their subordinates thrive the annual performance ratings, the Bank and meet their full potential. This was clearly has been able to recognise and reward the reflected in the talent and development plans efforts of the employees as they strive towards for managers. ‘INSIGHT’ – The Certification achieving their highest potential. Course in Leadership and People Management Western Province Southern Province introduced in 2017 continued for branch Central Province Uva Province Percentage of total employees by gender managers in the network. This course is Eastern Province Sabaragamuwa Province and by employee category who received established as the certification in leadership Northern Province North Central Province a regular performance and career for all Branch Managers where the future North Western Province development review during the reporting leaders are continuously up-skilled to face the period (GRI 404-3) challenges of a volatile market place.
Creating an Employee-Centric The Learning and Development Centre Performance-Driven Culture Gender Total conducted 158 programmes, clocking 18576 HR has concentrated on anchoring a Employment Male Female training hours during the year resulting in an performance cycle that constantly focuses Type average of 15.8 training hours per employee. on how employees go about their work and Permanent 508 358 866 The partnerships with external training on the results they achieve. The Bank places (59%) (41%) (100%) institutes continued with 241 employees increasing importance on managing and attending 87 programmes at local training Total 508 358 866 developing employee performance holistically institutes. (59%) (41%) (100%) and regularly giving feedback and taking appropriate action. With the increased geographical spread of the Building the Talent Pipeline branch network and the number of employees, Investment in skills and accelerating Union Bank has transitioned all performance a new Learning Management System was set employees’ professional and personal management and development processes into up with internal expertise. An online course on development are essential components of the one fully integrated approach, which aims to ‘Compliance’ was made mandatory for all staff. Bank’s people agenda. increase performance conversations between It was completed by 90% of the staff as at end managers and employees. 2018. In addition, several courses on Treasury, With 58.7% of the UB team being under 30 and Customer Service have been introduced years of age, talent development focused Following the implementation of the to update knowledge. Classroom training heavily on catering to the development SuccessFactors system for performance on Compliance was fully replaced by the E needs of the said group of young employees management, feedback on employee learning module, thereby saving substantial in the Bank. Several initiatives such as a new performance has been made regular with training costs and travel time whilst ensuring interactive Induction programme for Trainee an interim performance review being made that employees were trained on this critical Banking Assistants, a Refresher programme mandatory. area. with customer service field visits, and comprehensive training on Teller Duties at the Continuous learning and development are In order to up-skill the team to provide a Centre for Banking Studies were introduced to seen as vital to ensuring employees have the comprehensive service to the niche customer up-skill this segment of employees. skills, knowledge and abilities for their current segment they serve, the Relationship roles and are prepared for new challenges. Managers at the Elite Circle underwent intense With increased emphasis on SME lending, Enabling employees to develop their skills and training on Advanced Sales. The programme ‘CRAFT’ - A Certificate Course in SME Credit knowledge has always been a major focus in was highly interactive and practical. It was Evaluation was introduced and credit officers our transition to a performance-driven culture. facilitated by an external expert on the subject.
74 Management Reports Social and Environment Report Union Bank | Annual Report 2018
The Bank also continued its investment in the professional development of the leadership team members by partnering with global institutions such as INSEAD, Singapore.
158 TRAINING PROGRAMMES
Talent Development
18576 Training Hours 15.8 Training Hours per Employee
Average training hours (GRI 404-1)
Employee Category No. of Staff Total Training Average Hours Hours Trainee 171 5021 29.4
BA/SBA 303 2458.5 8.1
Officer 242 4024.5 16.6
Management 4 253 63.3 Trainee
Assistant Manager 194 3131 16.1
Manager 120 1812 15.1
Senior Manager 52 748 14.4
Chief Manager 16 132 8.3
Top Management 18 94 5.2
Grand Total 1120 17674 15.8
(Above is excluding FTC staff and Support Staff)
Gender-wise training hours details (GRI 404-1)
Gender No. of Staff Total Training Hours Average Hours Female 465 7721 16.6
Male 655 9953 15.2
Grand Total 1120 17674 15.8
(Above is excluding FTC staff and Support Staff)
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Social and Environment Report
Employee Engagement
Programmes for upgrading employee skills and transition assistance programmes (GRI 404-2)
Programme No. of No. of Training Total No. of Duration of the Programmes Hours Participants Programme Corporate Etiquette 1 100 25 4 Hours Skill Development for Elite RMs 1 843.5 28 24/32.5 Hours Training programme for Transactional Banking Staff 1 104 13 8 Hours Advanced Selling Skills 1 416 19 16/24 Hours Skill development for Treasury staff 1 104 13 8 Hours Training by Microsoft 1 104 26 4 Hours Inspirational Leadership by Sanjika 2 392 49 8 Hours Customer Service Excellence 2 646 76 8.5 Hours Customer Service & Recording System Programme 5 840 105 8 Hours Best Practices for Bank Tellers 1 448 28 16 Hours Preliminary workshop on SME 1 32 16 2 Hours Operational Efficiency 1 255 34 7.5 Hours Training on Facility Rating 1 28 8 3.5 Hours Flavour for Business Credit 2 840 30 28 Hours 21 5,152.5 470
Sustaining and improving employee engagement is a key focus area in the people strategy. Several initiatives were carried out in order to improve employee engagement on a consistent basis.
Building a High-Trust Workplace Culture Retail and SME Awards Welfare and Sports Initiatives The Bank aims to offer a work environment that The Bank’s first-ever Retail and SME awards This year the sports club conducted many is built on mutual respect, equal opportunity ceremony was held this year to recognise events with the objective of creating greater and trust. In order to objectively measure employees from the branch network for engagement with employees. The club engagement levels of employees, the Bank has their exemplary performance and significant also gave due prominence to all religions, obtained the services of external specialists, achievements in supporting the Retail and by having various activities linked with the The Great Place to Work Institute. Based on the SME businesses. different religious activities starting from dual-perspective GPTW Trust Index® survey and bakthi gee for Vesak, Iftar, Navarathri and the Culture Audit® done in 2017, the Bank has Christmas carols . The UB Avurudhu fiesta determined action plans at business unit level was held at BRC grounds with over 1000 and Bank level to further improve the levels employees participating. This year, the annual of employee engagement. These are now in trip was broken into 3 batches and employees progress with employees seeing the benefits were given the choice to travel to Hotel of the actions taken. The Bank will undertake Sigiriya or Weligama Bay Marriott Resort & another engagement survey in 2019 with the Spa with over 650 employees participating. Great Place to Work Institute to measure the The Annual dinner dance was held with a high effectiveness of the action plans and resultant level of participation by staff. Events were well employee engagement. attended by employees and the interaction Union Bank secured 2nd place in the created by these events did help overall team Banking category at the IPM HR Quiz work.
76 Management Reports Social and Environment Report Union Bank | Annual Report 2018
Employee Benefits resulted in consistently maintaining zero Bank. In engaging with the wider community, The Bank believes in taking care of its occupational health issues. All policies and the Bank focuses its CSR initiatives with employees as they strive to do their best for procedures have been put in place to ensure emphasis on education and the well-being of the organisation. In this regard, the Bank offers well-being and a secure work environment children and youth of the country. a very attractive and competitive benefit to our staff. There were no workplace related structure to its employees. These benefits injuries during the year under review. Standard Union Bank’s Corporate Social Responsibility are reviewed annually against the market safety measures such as periodic fire alarm projects are guided by a Board-approved and revised where required. This has helped checks, training of fire wardens, conducting CSR strategy that outlines the focus and gain the confidence of the staff and retain of fire drills etc, further ensures a safe work boundaries of the CSR activities of the Bank. their enthusiasm by ensuring that their best environment. A dedicated CSR committee manages and interests are taken care of. coordinates the CSR initiatives with the Vision to Reality guidance of the CEO of the Bank. Internal Communications The growing appreciation of the work carried Town hall meetings have helped the Bank out by HR to increase the value of the Bank’s Having prepared a foundation in 2016 improve internal communications in an employees has given HR its deserved place as a with the formation of CSR committee and effective and efficient way. All staff meetings strategic business partner. HR has the strategic development of a comprehensive policy to that are held quarterly, assist in keeping accountability in the business to work with the be guided by, the Bank took steps to support the staff informed and reminded of the line leaders and translate passion into results. CSR projects focusing on school children organisation’s direction. In order to gain the In other words, to do the right work, build the and the first was supporting and uplifting most out of a strategy, the Bank also ensures right skill, be at the right place, collaborate the lives of school children affected by the that the input of staff from all levels are with the right people, expect the right value severe floods that distressed the country in received through various communication proposition and apply this with the purpose to May 2017. This project entailed supporting channels. In addition, this year the Bank deliver the right performance. over 700 school children in two schools in launched the ‘Ask CEO’ communication Ratnapura and Akuressa-two of the worst channel where any employee can write directly affected areas. Two deserving schools were to the CEO with a question or suggestion. This COMMUNITY identified with the involvement of the Bank’s has received a very positive response with branches in these two areas where the floods several employees providing very useful ideas have cost the communities their livelihoods and suggestions. Union Bank continues to engage with and belongings, thus making the children’s identified community groups with a view education prospects bleak and vulnerable. Health and Well-being (GRI 403-2) of maintaining long-term and sustainable Through Union Bank’s ‘Back to School’ The Bank is committed to looking after its outcomes and fostering healthy relations while initiative, the Bank intended to support and employees’ well-being in the belief that a contributing positively to the communities in encourage these children to overcome their healthy body and mind will have a positive which it operates. dire circumstances and return to school to impact on their professional and personal resume their studies as early as possible. lives. In addition to the initiatives designed The Bank’s branch network dispersed across to improve the health, safety and well-being the island engages with their respective Throughout the year the Bank assisted its of our people at work, the Bank also offers communities by being an active partner in branch network to support the community a number of recreational and educational the social and trade related activities in the activities that support the well-being activities to help employees pursue their localities while responding with empathy of children. Several sponsorships were interests and find ways to unwind. Thus, Union at times of crisis caused by natural disaster, channelled towards assisting activities held at Bank maintains a gymnasium that is located weather phenomena etc. Towards the Bank’s local schools. at its Head Office. Further, HR has designed supplier markets, the Bank ensures fair and various welfare programmes to address staff transparent procurement practices and Looking into 2019 and beyond, Union Bank’s wellness, learning process, work-related stress ensures timely payments in order to maintain social responsibility will continue to uplift and and work-life balance. Support structures mutually beneficial relationships. The Bank also empower the children and youth in deserving have been put in place to oversee harmonious dedicates donations and sponsorships towards communities. The Bank will remain committed interventions in staff welfare. worthy and charitable causes throughout the to bring respite and hope to children and year guided by the Bank’s CSR policy which youth of the nation through its CSR strategy Ensuring employee health and safety is of determines the parameters for Corporate which places special focus on development, prime importance for the Bank. This has Social Responsibility (CSR) activities of the empowerment, education and social well- being of this key segment of the society.
Management Reports Social and Environment Report 77 Union Bank | Annual Report 2018
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Membership in Associations (GRI 102-13) 2) Adhere to prescribed standards, service providers, their level of environmental The Bank has general membership in a specifications, rules, regulations and good friendliness is looked into. The Bank too carries number of sectoral, industrial and professional governance; out its activities in an environment friendly organisations and associations. The list of the 3) Provide fair, transparent, equal and manner; during the year 2018 the Bank used Bank’s corporate memberships with relevant maximum opportunity for eligible 758 packets of A4 and recycled 7,358kgs of associations are as follows: interested parties to participate in waste paper. procurement; aa The Sri Lanka Banks’ Association 4) Expeditiously execute work and delivery of We work with many types of suppliers, who aa Institute of Bankers of Sri Lanka goods and services; are key stakeholders in our process and aa The Ceylon Chamber of Commerce 5) Ensure fairness, transparency and they are actively involved in our processes aa The Employers’ Federation of Ceylon consistency in the evaluation and selection as business partners in our end solutions aa The Association of Primary Dealers procedure; and providing a win-win solution for all parties aa Colombo Stock Exchange 6) Retain confidentiality of information involved in the process. Priority is given for aa The Institute of Internal Auditors Sri Lanka provided by bidders. local suppliers for ease of business, enhanced aa Payment Card Industry Association of monitoring and control. More than 95% of Sri Lanka Revisions were made to the areas of our suppliers are based in Sri Lanka. A few aa Sri Lanka Forex Association composition of technical evaluation important technological service providers committee, process of registration of suppliers, are based out of Sri Lanka. The Bank currently Supply Chain Management (Gri 102-9) solicitation document and receipt of offers sources from 230 suppliers. The Bank’s data The Bank’s procurement policy was reviewed and award of contracts. The supplier selection capturing, digital archiving, physical archival during the year and the reviewed policy was process gives preference to competitive management, inventory management, approved by the Board of Directors. The main pricing, quality and turnaround time for janitorial service, mail room service and objectives of the policy are; deliveries. Factors such as environment catering services are outsourced to specialists friendliness would give the suppliers an in the respective industries. We haven’t had 1) Maximise economy, timeliness and quality added advantage. During the signing up any significant changes in our supply chain in procurement resulting in the best value and annual review process of outsourced operations during the period under review. proposition for the Bank
The following is an analysis on the Bank’s suppliers. Suppliers are registered under the following types;
Types of Suppliers Location (Local) Janitorial services Sri Lanka
Messenger (Office Assistants) services Sri Lanka
Security services Sri Lanka
Courier services Sri Lanka
Supply of foliage plants and flowers Sri Lanka
Pest control services Sri Lanka
Supply of ATM consumables Sri Lanka
Supply of toners / ribbons / fax cartridges Sri Lanka
Supply of envelopes / registers / ledger binders / rubber stamps Sri Lanka
Printing of security documents such as cheque books, vouchers, advertising materials etc. Sri Lanka
Supply of all kinds of stationery / plastic material / advertising materials Sri Lanka
Statement printing (pressure seal) and dispatching Sri Lanka
78 Management Reports Social and Environment Report Union Bank | Annual Report 2018
Types of Suppliers Location (Local) Banking equipment Sri Lanka
Telecommunication equipment and accessories (mobile phones, iPads, Chargers etc.) Sri Lanka
Supply and maintenance of security related equipment (fire extinguishers, CCTV cameras, police alarm guard tour system etc.) Sri Lanka
Office furniture including bank safes, lockers, steel cupboards Sri Lanka
Waste paper collectors Sri Lanka
Movers / Goods & Safes Transporters Sri Lanka
Suppliers of vehicles on hire (vans / cars / three wheelers) Sri Lanka
Services & maintenance of office equipment (Photocopy, fax machines etc.) Sri Lanka
IT equipment / Hardware, Networking equipment Sri Lanka
Complimentary & public materials Sri Lanka
Gift items Sri Lanka
Civil construction & interior / exterior decor, architecture Sri Lanka
Electrical contractors Sri Lanka
Supply of sanitary items Sri Lanka
Generators Sri Lanka
The registered suppliers belong to different types of entities and the concentration of categories are as follows; 79.57% of our suppliers are private limited companies while 20.43% our suppliers would be categorised as small and medium enterprises.
Supplier types Our Existing and Proposed Commitment to Sustainable Business Practices
5.38% (GRI 206-1/417-2/417-3/418-1/419-1) 4.30%
10.75% Measurement Achievement Legal actions for anti-competitive behaviour, anti- trust, and monopoly practices. Incidents of non-compliance concerning 79.57% marketing communications Total number of substantiated complaints No incidents recorded during the year regarding breaches of customer privacy and 2018 under review. losses of customer data Private Limited Non-compliance with laws and regulations in the Partnership social and economic area Public Incidents of non-compliance concerning product and service information and labelling Sole Proprietor
Management Reports Social and Environment Report 79 Union Bank | Annual Report 2018
Subsidiary Update
returns to the investors in our funds, whilst a decline of 48.1% YoY to Rs. 12.3 Mn. Private developing products and channels that will portfolio income grew during the year by 5.6% attract new investors into the mutual fund to Rs. 3.1 Mn. 2018 witnessed a reduction in industry. The National Equity Fund, the first proprietary fund income to Rs. 9.8 Mn from mutual fund in the country, has delivered Rs. 24.3 Mn the previous year as a result Key Highlights 12.11% compounded annualised return to of a lower proprietary fund base as well as aa 6.43% market share in Assets under investors in its 27 years of existence. The unfavourable returns from the company’s Management (AUM) of the industry NAMAL Growth Fund which has been in equity holdings. Total income for the year aa PAT of Rs. 8.1 Mn existence for 21 years has reported a 13.08% declined to Rs. 82.2 Mn from Rs. 123.1 Mn aa Flagship National Equity Fund delivers annualised 12.1% return over 27 years annualised return. NAMAL continues to be in the previous year while total overheads aa Fixed Income funds continue to deliver the dominant player in the equity unit trust were reduced through cost rationalisation healthy returns sphere in terms of the number of unit holders to Rs. 76.9 Mn for the year from Rs. 94.5 with a market share of 53%. NAMAL’s total unit Mn in the previous year. PAT for 12 months Challenging market conditions influence holders, account for 38% of the entire unit ending December 2018 stood at Rs. 8.1 Mn in performance trust investor universe. comparison to Rs. 31.4 Mn during 2017. Subdued domestic economic activity combined with a volatile global environment Flight of funds post removal of tax Unit Trust business growth to be contributed to gloomy market conditions advantages augmented by Private Wealth during 2018. This resulted in a decline of March 2018 was the last month during which Management and other investor services the ASPI by 4.98% over the 12 months the tax concessions for the unit trust industry The existing environment requires NAMAL to and a decline of 14.61% for the S&P SL20 remained in force. Upon removal of the focus on broadening its product offering to index. Slow economic activity which was concession the industry experienced a flight of attract a greater number of clients. Accordingly exacerbated by unfavourable weather patterns funds as institutional investors redeemed their greater focus will be placed on acquiring and and a slowdown in the construction sector holdings in the fixed income funds offered by growing NAMAL’s private wealth management negatively impacted earnings of a number of Unit Trust Managers. The current tax status (PWM) base. PWM engagements enable companies listed on the market. These factors of unit trusts has resulted in unit trusts being NAMAL to cater to diverse requirements of combined with political turbulence locally converted into tax neutral investment vehicles. investors such as better diversification and and global volatility resulted in a net outflow returns commensurate with each client’s risk of USD 125 Mn from the equity markets Industry fixed income AUM decreased by appetite. This process commenced during driving down investor sentiments. The unit Rs. 60 Bn over CY18 as a result of the exit the latter part of FY18 and will be driven trust business was significantly impacted by of institutional investors from the industry. with increased vigour during FY19. Equity these unfavourable conditions resulting in The total fixed income AUM of the unit trust unit trusts will continue to be a key element a negative return of 18.94% in the National industry stood at Rs. 54 billion at the end of in NAMAL’s product offering and will enable Equity Fund, a negative return of 16.48% in the CY18. NAMAL to capitalise on its 27-year track record. NAMAL Growth fund and a negative return of We believe equity unit trusts will continue 23.64% in the NAMAL Acuity Value Fund. NAMAL AuM stood at Rs. 6.4 Bn in CY2018. to be an attractive investment vehicle for NAMAL’s equity unit trust AuM closed at Rs. investors with a long term investment horizon US Fed rate hikes which resulted in a flight of 3.3 Bn in CY18, while fixed income unit trust focused on sustainable value creation. The funds from emerging markets and political AuM also closed at Rs. 0.8 Bn. Private portfolio existing cheap valuations across equities volatility locally resulted in interest rates management business stood at Rs. 2.3 Bn creates a unique opportunity for such investors picking up over the year. The benchmark 1 in CY18. The contraction of equity AUM as to take positions in the equity markets through year TB yields appreciated by almost 230 basis a result of market movements resulted in NAMAL’s equity unit trusts. Investors with points to 11.2% by year-end while NDBIB- NAMAL’s market share contracting to 6.4% for an appetite for low risk fixed returns will be CRISL 91 day T-bill index reported a return of CY18. catered to in NAMAL’s fixed income funds. 8.17% during the year. NAMAL High Yield Fund Strong negotiations with counterparties provided an attractive annualised return of Redemptions driven by removal of tax and relationships with a large database of 10.45% during the year. concessions impacts earnings counterparties will enable NAMAL to generate The asset management fees for the full year better returns for its investors in the fixed NAMAL will continue to focus on delivering 2018 stood at Rs. 77.1 Mn (down 25.8% YoY). income funds. NAMAL’s clients will be exposed superior fund performance whilst focusing Income from equity unit trusts declined by to many novel investment opportunities across on innovation to cater to the changing needs 20.1%% YoY to Rs. 61.7 Mn while income from diverse asset classes in FY19 and we remain of Sri Lankan investors. We endeavour to fixed income unit trusts was most affected due optimistic that NAMAL will continue to deliver differentiate - in terms of investments strategy to high redemptions during the year, showing long term value creation to its investors. and style - to maintain sustainable long term
80 Management Reports Subsidiary Update Union Bank | Annual Report 2018
the franchise and maximising on emerging the Company’s market share and augment opportunities. Thereby, the Company its service offering. UB Finance’s focus on the delivered unsurpassed value to its diverse Small and Medium Enterprise (SME) sector customer base through a suite of products continued to gain momentum during the year. and services appropriately designed to meet Several initiatives were carried out across the Key Highlights their evolving financial needs. The portfolio of country to enhance its value proposition to the aa15% growth in interest income from core products include investment solutions such SME clientele, through wide ranging product business as fixed deposits and savings, coupled with and services portfolio designed to meet the aa12% increase in total income to Rs. 2,164 Mn asset-backed financing solutions in the form of specific needs of this sector. aa6% growth in gross loans and receivables to leasing, vehicle and mortgage loans as well as Rs. 10,362 Mn working capital solutions through easy draft, Risk management, compliance and corporate aaPositive Profit before Tax (PBT) of Rs. 63 Mn factoring and cheque discounting. governance have remained the structural aaExpanded the product portfolio in to the retail backbone of UB Finance, enabling well-organised lending space with the launch of ‘Gold Loans’ During the year under review, UB Finance growth of the Company. During the year under aaEnhanced process efficiencies by realigning the further expanded its product portfolio into review, several steps were taken to align these talent pool to deliver optimum value and better the retail lending space with the launch of processes with the parent company Union Bank. service standards ‘Gold Loans’. This product is designed to offer liquidity to retail and wholesale clients, giving Further in 2018, ICRA Lanka Limited re- 2018 culminated as a challenging year for the them the opportunity to leverage their gold affirmed the issuer rating of (SL) BB with financial services sector with the effects of the articles. Keeping its promise to offer true value a Stable Outlook in Recognition of the political turmoil that transpired during the to customers, UB Finance offers optimum Company’s growth prospects and stable latter part of the year. Considering prevalent value on Gold Loan facilities at competitive outlook. economic and industry conditions, UB interest rates, backed by prompt, high quality Prospects for 2019 Finance remained focused on consolidating service standards while ensuring the highest The Company expects the coming year to be and maintaining its market share through a security of gold articles. The Company expects a challenging year for the financial services dedicated team of employees, continued trust to expand its reach on this proposition with sector in terms of volatilities in exchange rate, and confidence of customers and the strategic greater focus in the coming years. interest rates, credit growth, credit quality, direction provided by its leadership. and the regulatory guidelines on capital and The Company enhanced its process efficiencies stringent provisioning standards. Key Performance Highlights during the year 2018, having realigned its During the year under review, UB Finance talent pool to deliver the best value and UB Finance will strive to stay ahead of such maintained a stable balance sheet while service standards; thereby contributing to macroeconomic challenges with focus on achieving a positive bottom line. The Company the noteworthy growth and profitability of achieving its financial objectives such as continued to reinforce its operations and the organisation. The Company continued to profitability and asset base while achieving governance procedures to ensure sustainable place significance on developing its human wholesome growth with enhanced corporate and progressive business expansion. capital as a key driver of the business. UB governance and improved community Finance continues to provide an enriching relations through strategic corporate social Interest income generated from the core work environment that motivates and responsibility. The Company will also engage business increased by 15%, supported by inspires its employees to perform at their a broad and forward-looking perspective in stable product yields and portfolio growth best. Re-engineering the business operations, order to foresee the customers’ needs and while the total income for the year 2018 documentation, processes and systems during actively seek opportunities to achieve a increased by 12% to Rs. 2,164 Mn. Gross loans the year has geared the company towards sustainable competitive advantage, enhance and receivables from customers grew by 6% offering its customers a superior level of corporate value and continue to create wealth from Rs. 9,774 Mn to Rs. 10,362 Mn despite the service with the enhancements of the overall for all stakeholders. tightened fiscal policy and sluggish economic efficiency and effectiveness of its business growth. The company recorded a positive operations. A number of tech-enabled In the year ahead, the Company will focus on Profit before Tax (PBT) ofRs. 63 Mn despite initiatives were introduced during the period entering a new phase of growth underpinned some unfavourable implications from the IFRS under review, enabling automation of most by capital infusion, resonating shareholder 9 implementation. processes and imbuing speed and efficiency confidence in its business potential. UB into the Company’s operations. Finance will continue to remain steadfast in Business Review its commitment to maintain high standards of The key focus of UB Finance during the year Brand and image building initiatives were compliance and ethical business practices in was placed on optimising the strengths of continued during the year to consolidate all its endeavours.
Management Reports Subsidiary Update 81 fostering employee growth Employees are our strongest asset and we diligently foster their growth, building a work place that nurtures their success. Union Bank | Annual Report 2018
Investor Relations
A strong disclosure regime is an essential feature of market-based monitoring of corporate conduct and is central to the ability of shareholders to exercise their voting rights effectively. Thus, the Bank pro-actively and fairly discloses information that it finds to be important or beneficial in furthering its stakeholders’ understanding of the Bank’s current performance, strategic direction, governance, risk management, and future business prospects.
The Bank also actively engages in constructive dialogue with shareholders, investors, securities analysts and other concerned parties, and uses the opinions received and other feedback as a reference for its management to improve its corporate value. Through such information disclosure and communication, the Bank enhances the transparency of its management and strives to maintain and improve its corporate trust.
This section of the Annual Report therefore aims to provide additional information to support investors in their decision making process. It also deals with the mandatory disclosures that the Bank is required to comply with as required by the relevant regulatory authorities.
1. Stock exchange listing The issued ordinary shares of the Bank are listed on the Main Board of the Colombo Stock Exchange (CSE) under the ticker symbol ‘UBC’. Summary of trading activity and daily prices of shares and debentures are published in most daily newspapers, including Daily FT, Daily News, The Island and Daily Mirror.
2. Movement in ordinary voting shares of the Bank during the year 2018
Index/Price Movement ASPI Index 16 6,800 6,600 15 6,400 14 6,200 13 6,000 5,800 12
UB Share Price( LKR) Price( UB Share 5,600 11 5,400 ASPI
10 5,200 Share Price 30 Jan 28 Feb 31 Mar 30 Apr 31 May 30 Jun 31 Jul 31 Aug 30 Sep 31 Oct 30 Nov 31 Dec 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018
3. Share information There were 31,221 Shareholders as at 31st December 2018 (2017 – 31,716) distributed as follows,
3.1 Shareholder Distribution
31st December 2018 31st December 2017 Share Range No. of % No. of % No. of % No. of % Shareholders Shares Shareholders Shares 1-1000 27,311 87.48 4,004,197 0.37 27,787 87.61 4,041,998 0.37 1001-10000 2,856 9.15 9,983,861 0.91 2,899 9.14 10,163,219 0.93 10001-100000 879 2.81 24,982,729 2.29 851 2.68 24,297,076 2.23 100001-1000000 139 0.45 39,368,883 3.61 142 0.45 39,875,169 3.65 1000001-10000000 29 0.09 96,512,269 8.84 30 0.10 97,451,083 8.93 10000001-& Above 7 0.02 916,554,310 83.98 7 0.02 915,577,704 83.89 Total 31,221 100.00 1,091,406,249 100.00 31,716 100.00 1,091,406,249 100.00
84 Management Reports Investor Relations Union Bank | Annual Report 2018
3.2 Analysis of Shareholders
Resident / Non-Resident
31st December 2018 31st December 2017 No. of No. of % No. of No. of % Shareholders Shares Shareholders Shares Resident shareholders 31,136 230,209,143 21.09 31,325 227,461,408 20.84 Non-resident shareholders 85 861,197,106 78.91 391 863,944,841 79.16
Individuals / Institutions
31st December 2018 31st December 2017 No. of No. of % No. of No. of % Shareholders Shares Shareholders Shares Individuals 30,723 133,505,113 12.23 31,196 128,044,810 11.73 Institutions 498 957,901,136 87.77 520 963,361,439 88.27
No. of Shareholders No. of Shareholders
85 498
31,136 30,723
Resident shareholders Individuals Non resident shareholders Institutions
4. Share trading
4.1 Market
2018 2017 2016 2015 2014 No. of transactions 885,657 981,977 1,056,849 1,506,790 1,982,709 No. of shares traded 6,000,737,306 8,468,273,611 7,195,805,445 9,414,661,048 16,721,524,209 Value of shares traded (Rs Mn) 200,069 220,591 176,935 253,251 340,917
4.2 Bank
2018 2017 2016 2015 2014 No. of transactions 10,033 6,871 9,282 20,263 34,068 No. of shares traded 33,088,913 29,756,713 31,611,520 96,166,661 181,775,746 Shares traded as a % of total shares in issue 3.03 2.73 2.90 8.81 16.66 Average daily turnover (Rs Mn) 1.78 1.81 2.22 10.30 16.90 Value of shares traded (Rs Mn) 428 435 533 2,452 4,074
Management Reports Investor Relations 85 Union Bank | Annual Report 2018
Investor Relations
5. Top 20 shareholders, market capitalisation and minimum public holding as at 31st December 2018
5.1 Top 20 Shareholders
No. Shareholder name 31st December 2018 31st December 2017 No. of Shares Ratio (%) No. of Shares Ratio (%) 1. Culture Financial Holdings Ltd 763,984,374 70.00 763,984,374 70.00 2. Vista Knowledge Pte Ltd 64,677,973 5.93 64,677,973 5.93 3. Associated Electrical Corporation Ltd 29,237,387 2.68 29,237,387 2.68 4. Mr. A.I. Lovell 24,371,269 2.23 24,136,649 2.21 5. Mr. C.P.A. Wijeyesekera 18,508,468 1.70 18,508,468 1.70 6. Dr. T. Senthilverl 17,480,977 1.60 19,830,860 1.82 7. Mr. D.A.J. Warnakulasuriya 14,842,730 1.36 14,842,730 1.36 8. Ashyaki Holdings (Pvt) Ltd 7,792,806 0.71 7,792,806 0.71 9. Mr. M.D. Samarawickrama 7,660,582 0.70 7,660,582 0.70 10. Mr. S.P. Khattar 7,323,365 0.67 7,343,365 0.67 11. Sterling Holdings (Private) Ltd 7,207,557 0.66 7,207,557 0.66 12. Softlogic Life Insurance PLC – A/C 05 (Non 6,023,317 0.55 6,023,317 0.55 Participating Fund) 13. Anverally and Sons (Pvt) Ltd A/C No 01 4,783,702 0.44 5,203,602 0.48 14. Commercial Agencies (Ceylon) Ltd 4,050,833 0.37 4,050,833 0.37 15. Ajita De Zoysa & Company Limited 4,050,832 0.37 4,050,832 0.37 16. Mr. W. Jinadasa 3,985,100 0.37 - - 17. Ideal Motors (Private) Limited 3,300,000 0.30 3,300,000 0.30 18. Mr. A.I.T. Hettiarachchi 3,032,000 0.28 2,082,000 0.19 19. Rosewood (Pvt) Limited - A/C No 01 2,774,542 0.25 2,876,063 0.26 20. Ceylon Investment Plc A/C # 01 1,801,454 0.17 1,940,775 0.18 996,889,268 91.34 994,750,173.00 91.32 Total No. of shares registered 1,091,406,249 100.00 1,091,406,249 100.00 Total No. of shares unregistered - - - - Total No. of shares issued 1,091,406,249 100.00 1,091,406,249 100.00 Shares held by Directors - - - - Shares held by Institutions 957,901,136 87.77 963,361,439 88.27 Balance held by Public 133,505,113 12.23 128,044,810 11.73 Total No. of shares issued 1,091,406,249.00 100.00 1,091,406,249.00 100.00 Shares held by Public 327,282,075 29.99 327,267,975 29.99 Shares held by Directors and Related Parties 764,124,174 70.01 764,138,274 70.01 Total No. of shares issued 1,091,406,249.00 100.00 1,091,406,249.00 100.00
86 Management Reports Investor Relations Union Bank | Annual Report 2018
5.2 Market capitalisation and minimum public holding (GRI 102-7)
31st December 2018 31st December 2017 Market Capitalisation (Rs.) 12,005,468,739.00 14,406,562,486.80 Public Holding percentage 29.9872 29.9858 Float adjusted market capitalisation 3,600,103,921.70 4,319,923,014.17 No. of shareholders representing public holding 31,212 31,707 Required minimum public holding percentage under option 4 of rule 7.13.1 (a) of the 10.0000 10.0000 Listing Rules of the CSE
The Minimum Public Holding of Union Bank of Colombo PLC as at 31st December 2018 complied with option 4 of rule 7.13.1(a) of the Listing Rules of the CSE.
6. Earnings
6.1 Value creation for shareholders
2018 2017 Change % Net asset value per share (Rs.) 15.23 16.36 -1.13 Group earnings per share - Basic (Rs.) 0.43 0.42 0.01 Market price per share as at 31st December (Rs.) closing 11.00 13.20 -16.67
6.2 Market Value
2018 2017 2016 2015 2014 Lowest market price (Rs.) 10.70 13.10 14.20 20.00 16.70 Highest market price (Rs.) 15.80 16.00 20.80 30.30 27.20 Closing price as at 31st December (Rs.) 11.00 13.20 15.40 20.20 25.30
Market Price Details Union Bank 7. Directors’ shareholding including the Chief Executive Officer None of the Directors, including the Chief Executive Officer, held any shares in the Bank as at 31st 35.00 30.00 December 2018. 33.00 31.00 29.00 25.00 8. Material foreseeable risk factors 27.00 25.00 Information relating to the material foreseeable risk factors that require disclosures in terms of 23.00 20.00 Rule No. 7.6 (vi) of the Listing Rules of the CSE are discussed in the Section on ‘ Risk Management 21.00 19.00 ’ on pages 90-105. 17.00 15.00 15.00 13.00 9. Material issues pertaining to employees and industrial relations pertaining to 11.00 10.00 9.00 the Bank 7.00 5.00 5.00 There were no material issues pertaining to employees and industrial relations pertaining to the 3.00 Bank that occurred during the year 2018 which require disclosure. 1.00 0.00 2014 2015 2016 2017 2018 10. Credit ratings Highest market price (Rs.) Fitch – BB+ (lka) Lowest market price (Rs.) ICRA – (SL) BBB Closing price as at 31st December (Rs.)
Management Reports Investor Relations 87 Union Bank | Annual Report 2018
Investor Relations
11. Compliance report on the contents of annual report in terms of the listing rules of the cse We are pleased to inform you that the Bank has fully complied with all applicable requirements of Section 7.6 of the Listing Rules of the CSE on the contents of the Annual Report and Accounts of a listed entity. The table below provides details of the relevant sections of this Annual Report where specified information is disclosed together with page references for the convenience of the readers.
Rule Disclosure Requirement Section Reference Page/s No. 7.6 (i) Names of persons who held the position of Directors during Annual Report of the Board of Directors on the Affairs of the 143 the financial year Bank 7.6(ii) Principal activities of the Bank and its subsidiaries during Note 1.2 of the Accounting Policies 180 the year and any changes therein Annual Report of the Board of Directors on the Affairs of the 140 Bank 7.6(iii) The names and the number of shares held by the 20 largest Item 5 of the ‘Investor Relations’ 86 holders of voting and non-voting shares and the percentage of such shares held as at the end of the financial year 7.6(iv) The float adjusted market capitalisation, public holding Item 5.2 of the ‘Investor Relations’ 87 percentage (%), number of public shareholders and under which option the Listed Entity complies with the Minimum Public Holding requirement. 7.6(v) Directors’ and Chief Executive Officer’s holding in shares of Item 7 of the ‘Investor Relations’ 87 the Bank at the beginning and end of the financial year Annual Report of the Board of Directors on the Affairs of the 146 Bank 7.6(vi) Information pertaining to material foreseeable risk factors Item 8 of the ‘Investor Relations’ 87 7.6(vii) Details of material issues pertaining to employees and Item 9 of the ‘Investor Relations’ 87 industrial relations 7.6(viii) Extents, locations, valuations and the number of buildings Note 31 to the Financial Statements on ‘Property, Plant & 240-242 of the land holdings and investment properties as at the Equipment’ end of the financial year 7.6(ix) Number of shares representing the stated capital as at the Note 39 to the Financial Statements on ‘Stated Capital’ 250 end of the financial year 7.6(x) A distribution schedule of the number of holders in each Item 3.1 of the ‘Investor Relations’ 84 class of equity securities and the percentage of their total holdings as at the end of the financial year 7.6(xi) Ratios and market price information on: Equity: Dividend per share, Dividend payout ratio, Net asset Note 17 to the Financial Statements 207 value per share, Market value per share (highest and lowest Statement of Financial Position 176 values during the financial year and the value as at the end Item 6 of the Investor Relations 87 of the financial year) Financial Highlights 4 Debt: Interest rate of comparable Government security, Not applicable as the Bank has not issued any listed debt - Debt/equity ratio, Interest cover, Quick asset ratio, market securities. prices and yield during the year (highest and lowest prices and last traded price) Changes in credit ratings Item 10 of the ‘Investor Relations’ 87
88 Management Reports Investor Relations Union Bank | Annual Report 2018
Rule Disclosure Requirement Section Reference Page/s No. 7.6(xii) Significant changes in the Bank’s or its subsidiaries’ fixed Note 31 to the Financial Statements on ‘Property, Plant & 240-242 assets and the market value of land, if the value differs Equipment’ substantially from the book value as at the end of the year 7.6(xiii) Details of funds raised through a public issue, Rights Issue Not applicable as no funds were raised by the Bank through - and a private placement during the year a public issue, Rights Issue or a private placement during the year. 7.6(xiv) Information in respect of Employee Share Ownership or Note 41 to the Financial Statements. 251-252 Stock Option Schemes: The number of options granted to each category of No options were granted during the Financial Year. - Employees during the financial year. Total number of options vested but not exercised by each No options were vested and exercised during the Financial - category of Employees during the financial year. Year. Total number of options exercised by each category of No options were exercised by employees during the - Employees and total number of shares arising therefrom Financial Year. during the financial year. Options cancelled during the financial year and the reasons No cancellations were reported during the Financial Year. - for such cancellation. The exercise price. No options were exercised by employees during the - Financial Year. A declaration by the Directors of the Bank confirming Annual Report of the Board of Directors on the Affairs of the 147 that the Bank or any of its subsidiaries has not, directly or Bank. indirectly provided funds for the ESOP. 7.6(xv) Disclosures pertaining to Corporate Governance Practices Annual Report of the Board of Directors on the Affairs of the 140-148 in terms of Rules 7.10.3, 7.10.5 c. and 7.10.6 c. of Section 7 of Bank the Listing Rules Corporate Governance Report 106-131 Profiles of the Board of Directors 158-161 Report of the Board Audit Committee 132-134 Report of the Human Resources and Remuneration 138 Committee Notes to the Financial Statements. 180-295 7.6(xvi) Related Party transactions exceeding 10% of the Equity or The Bank did not have any related party transactions - 5% of the total assets of the Entity as per Audited Financial exceeding this threshold as at end of 2018. Statements, whichever is lower
Contact Information Useful Links CBSL (Weekly economic indicators) Monday to Friday UBC share price, announcements, financials, https://www.cbsl.gov.lk/en/statistics/ 8.30 a.m. to 5.00 p.m. company profile, quotes, charts: economic-indicators/weekly-indicators +94 11 2374100 Colombo Stock Exchange http://www.cse.lk Union Bank of Colombo PLC The Company Secretary www.unionb.com Union Bank of Colombo PLC Ratings: No.64, Galle Road, Colombo 3, Fitch Ratings Lanka Limited Sri Lanka. http://www.fitchratings.lk
Management Reports Investor Relations 89 Union Bank | Annual Report 2018
Risk Management
Scope of Risk Management policies and processes are robust to mitigate Management Committee (IRMC), who in turn Banks are faced with different types of risks measurable shocks across an integrated guides the strategic risk direction process that may have a potentially adverse effect on business operations. by striking a balance between the probable both short-term and long-term objectives. Risk returns and the risk appetite. Management compromises of an awareness At Union Bank, we have established a of market uncertainties and thereafter comprehensive and reliable risk management As the business continues to grow, a assigning a bank-wide strategy to control such system, carefully integrated across all business wide spectrum of risks could hinder the externalities within the existing network. We activities to fulfil shareholder expectations. optimisation of the Bank’s performance. The believe that risk management cannot exist in Concerns with respect to Credit, Operational, IRMC reviews policies and places additional isolation and therefore decisions have to be Market, and the Bank’s liquidity are managed procedures to assist in the continuous growth taken to ensure that all its risk management by the Board, through the Integrated Risk of financial intermediation.
Risk Related Key Management Bodies
Committee Key Objectives Represented By Board Integrated Risk The committee ensures that Group-wide risks are Please refer Page 135 (Board Integrated Risk Management Committee (IRMC) managed within the risk strategy & appetite as Management Committee Report) approved by the Board of Directors. Board Credit Committee (BCC) To approve high value credit in line with the Chairman, Representative Directors and CEO Bank’s risk appetite and in line with regulatory requirements. Board Audit Committee (BAC) To assist the Board in maintaining an effective Please refer Page 132 (Board Audit Committee system of internal control, compliance with legal and Report) regulatory requirements of CBSL and CSE external financial reporting and internal audit function itself. Executive Credit Committee Review, and approve credit proposals under ECCs Wholesale Banking, Retail Banking, CEO and CRO (ECC) delegated authority as directed by BCC Executive Risk Management Review, monitor and evaluate the policies and Risk Management, Wholesale Banking, Treasury, Committee (ERMC) procedures in the areas of credit risk, operational Retail Banking, Operations, Finance, Compliance, risk and market risk in accordance with the IRMC Internal Audit and Information Technology. guidelines. Operational Risk Management Review and monitor the operational risk related Risk Management, Operations, Compliance, Internal Committee (ORMC) areas including people, process and systems in Audit and Information Technology accordance with the IRMC guidelines. Asset Liability Committee Optimise financial resources and to manage the Risk Management, Wholesale Banking, Retail (ALCO) connected risks in the areas of Asset and Liability Banking, Finance and Treasury. Management IT Steering Committee To monitor and review the IT infrastructure to Risk Management, Wholesale Banking, Retail support the optimisation of overall business strategy Banking, Operations, Finance, Compliance and and mitigate technological risks. Information Technology.
Three Lines of Defence Principle The Bank follows both the industry and international best practices in its risk management function. As identified by the BASEL committee and practiced worldwide, the three lines of defence principle is in force within the Bank. The front line or the business line management act as the first line of defence and deals with the risk exposures at the very primitive level. The Bank makes sure that business line managers are empowered to deal with risk and to take the ownership of the risks borne. The IRMC directs the Risk Management Department (RMD) as an independent corporate risk management function to act as the second line of defence, and directed by The Board the Audit and Compliance functions with their independent review mechanisms act as the third line of defence in managing risks.
90 Management Reports Risk Management Union Bank | Annual Report 2018
O pera et tion ark al Risk Appetite and Tolerance M (Busine ss U nit Risk appetite is an expression of the amount of risk that the Bank s) toring oni Risk is prepared to accept in delivering its promises and meeting the M M sk an L i ce a i responsibilities to the stakeholders at large. It is inevitable that the R lian A g q p ud e u m i m i o t d Bank will accept risks, hence risk taken within appetite may give t C & e i IRMC i C n t d o t y e rise to expected losses, but these as analysed and accepted will be e r m r u p C s l o i sufficiently absorbed by the expected earnings. l a g c n
n s c i i
e c e
D C i
r Risk e
r
t
P e The Bank strives to make the integrated risk management function
t
d Decisions i k
s I i i n t m as one of its most critical core competency. The Bank relies upon the
R d C e m n I o p o o n m overall policy framework to ensure the maintenance of consistent C ti t e BOD e n m it a r d r it d t high standards in its operations and to encourage the risk decision e R e te u s is n e A n t k t V e R P e c making process by raising the risk awareness that could hinder the a o rifi n t l ca o e ic tion y C risk and return relationship. Fra me work l na tio Leg uta al Rep
Basel Framework and Implementation
Basel III Framework
Pillar II Supervisory Review Liquidity Ratios Pillar 1 Pillar III Market Discipline Process (Connected to Pillar I)
Credit Risk Market Risk Operational Risk ICAAP Reporting
Standardised Approach Standardised Approach BIA
Refined with Brand New with Basel III Basel III
Management Reports Risk Management 91 Union Bank | Annual Report 2018
Risk Management
Under the new consultative paper issued by CBSL for implementation of Basel III minimum capital requirements, the regulator has advised that, capital adequacy ratio (CAR) shall be maintained as a percentage of risk weighted assets (RWA) based on the following approaches. i) The standardised approach for credit risk ii) The standardised measurement method for market risk iii) The basic indicator approach, the standardised approach or the alternative standardise approach for operational risk.
Bank’s Approach Credit Risk Market Risk Operational Risk Pillar I – The minimum For regulatory capital computation The Bank / Group have adopted Capital Charge for Operational capital requirements purposes, the Bank / Group use the Standardised Approach for Risk is computed using the Basic Standardised Approach under calculation of the Market Risk Indicator Approach (BIA) for the credit risk. capital charge Bank and Group. Pillar II – The supervisory Banks must conduct a comprehensive assessment of its risks on a periodical basis and retain adequate capital review funds to endure any unexpected losses which are not assessed under Pillar I. As per the Banking Act direction No. 5 of 2013 , the Bank must assess additional capital requirements for the risks such as interest rate, liquidity risk, concentration risk, reputational risk etc. A comprehensive Internal Capital Adequacy Assessment Process (ICAAP) for the assessment and documentation of additional capital requirements under pillar II. Pillar III – Market Discipline Pillar III prepares the Bank to promote the availability of material information and true and fair status of the Bank’s affairs. The Bank’s disclosures are mainly met through the annual reports and with periodic financial statements published.
Basel III and the Future Minimum capital adequacy ratios as a Commencing from January 2017, the Bank was As directed by the regulator, the Bank has percentage of RWA required, and was comfortably in a position fallen in-line with the requirement of sharing 14 to meet the new capital requirement as the Liquidity Coverage Ratio (LCR) with prescribed in this consultation paper. 12 the Central Bank of Sri Lanka (CBSL). The Bank has confidently met the set limits and 10 is comfortable in embracing the phased 8 developments of the future requirements of the Basel III requirements. 6
4 CBSL has issued a consultation paper with regards to the capital and disclosure 2 requirements under all the three pillars 0 recently. 2017 2018 2019 Under the new guidelines, banks are to maintain the capital requirements on a Common Equity Tier 1 (CET1) staggered basis to be fully implemented by Capital Conservation Buffer (CCB) January 2019. Additional Tier 1 Capital (AT1) Tier 1 Capital
92 Management Reports Risk Management Union Bank | Annual Report 2018
As at 31 December 2018 (Rs.’000) 2017 ( Rs.’000) 1. Capital Adequacy Ratios 1.1 Core Capital Ratio Eligible Core Capital (Eligible Tier 1) 15,031,473 15,357,209 Total Risk-Weighted Amount 86,356,645 81,454,631 Core Capital (Tier 1) Ratio,% 17.41 18.85 1.2 Total Capital Ratio Capital Base 15,031,473 15,357,209 Total Risk-Weighted Amount 86,356,645 81,454,631 Total Capital Ratio,% 17.41 18.85 2. Computation of Risk Weighted Assets - RWA Credit Risk RWA of on Balance Sheet Assets 68,354,206 60,525,515 RWA of off Balance Sheet Assets 5,704,753 3,851,499 Total RWA for Credit Risk 74,058,959 64,377,014 Market Risk Capital Charge for Interest Rate Risk 568,867 429,546 Capital Charge for Equity 238,607 956,717 Capital Charge for Foreign Exchange & Gold 22,837 8,545 Total Capital Charge for Market Risk 830,311 1,394,808 Total RWA for Market Risk 6,992,096 12,398,293 Operational Risk Gross Income Year 1 3,428,422 2,671,881 Year 2 4,068,517 3,721,406 Year 3 5,103,835 4,135,193 Average Gross Income 4,200,258 3,509,493 Total Capital Charge for Operational Risk (Average Gross Income x15%) 630,039 526,424 Total RWA for Operational Risk 5,305,589 4,679,324 Total Risk Weighted Assets 86,356,645 81,454,631
Management Reports Risk Management 93 Union Bank | Annual Report 2018
Risk Management
The Bank’s credit policy, approved by the Risk Governance Structure Board of Directors, provides the basic framework for lending and the Credit Manual and circular instructions give more details on how to perform the functional responsibilities. The credit policy and the credit manual are Board of reviewed regularly to ensure that the Bank is Directors able to meet its business objectives against the country’s frequently changing financial landscape.
The Bank’s credit proposal generation takes place at 3 locations namely Retail Assets Integrated Risk Centre, SME Asset Centre, and Corporate Management Committee Banking Division. The Bank took a policy decision to shift to ‘centralised credit Board Sub Board Credit processing’ as opposed to branch based Committees Committee credit processing and successfully set up the Retail and SME Asset Centre. Retail assets refer to housing loans, personal loans, vehicle Board Audit Executive Risk Committee loans, credit cards which are also known as Management Committee schematised loans.
Executive Credit Considering the weak macro environment Committee and rising NPLS , the Bank has initiated a segmentation analysis which classifies potential customers into different categories. Operational Risk CEO & Executive Management Committee Committees This is applied to assist in creating a risk averse customer base and improving the position of the loan portfolio. The customers are classified Asset Liability based on their recent turnover, ROE, proposed Committee LTV and other systematic factors that guide the loan approval process. IT Steering Credit Risk Committee Management Unit The Bank uses a sophisticated loan originating system which generates credit proposal and rates the borrower against specified Risk Management Market Risk Division Management Unit parameters, and is submitted for approval online. The ratings lie on a scale between AAA (lowest credit risk) and D (very high Operational Risk, Information Security vulnerability to default). & Business Continuity Management Unit The Bank’s credit disbursements to the rating categories of BBB and above have significantly increased due to the improved credit selection Credit Risk Management in sanctioning. At the same time, the portfolios Credit risk is the risk of potential loss arising due to the borrower or counterparty failing to meet below the rating of BB have reduced to lower its contractual obligations when they fall due. levels when compared to the previous year. The alignment of the Bank’s credit policies, The Bank strives to achieve / maintain a high quality of its loan portfolio by accommodating lending principles and risk appetite to the exposures within the Bank’s risk appetite and improving / maintaining the non-performing loans strategic objectives have driven the rating percentage below the industry norm. composition to the current improved mix.
94 Management Reports Risk Management Union Bank | Annual Report 2018
Corporate and SME Rating - 2017 Corporate and SME Rating - 2018 positions of a counterparty. At present, Union 10% 4% 3% 11% 5% Bank’s counterparty credit risk is minimal due 6% to the relatively small volumes in trading book, 14% mainly consisting of government securities. 27% 17% 22% Managing Borrower Risk The Bank’s credit policy and the credit manual can be described as the rules and parameters 42% within which the Bank’s credit officers manage 38% daily business activities. These documents define the principles encompassing client AAA AA AAA AA selection, early warning reporting, tolerable A BBB A BBB levels of concentration risk and portfolio BB B & Below BB B & Below monitoring in-line with the Bank’s risk appetite. Apart from a clearly defined Credit policy and the credit manual, the Bank has a Managing Counterparty Risk comprehensive credit approval process with Counterparty credit risk emanating from the Bank’s trading book is managed by fixing limits delegated authority linked to the risk profile of against the counterparties and in certain trade transactions, against an approved underlying the borrower. transaction. The Bank can also reduce the counterparty risk by its ability to off-set trading
L oan Origination Approval Disbursement Monitoring
Scientific risk rating derived DAs are individual to each Loan disbursement is All loans are reviewed annually from Kalypto system using eligible staff member independent from Loan or earlier if warranted quantitative and qualitative In-built in the system origination Past dues are constantly information Higher levels of authority at Centralised Credit monitored by the RMs, Branch Executive Credit Committee Choose appropriate model Administration is responsible Managers and the Recoveries and Board Credit Committee (Corporate, SME W/Fin & for loan sanctioning and department Recommendations of Risk Mgt Without Fin, NBFC etc.) and house-keeping 60 to 90 days past dues cannot be overridden, thus are ‘Watch-listed’ for close economic sector maintaining independence Loan Review at Risk Vertical and lateral Management Department monitoring submission of independently verifies the Various portfolio level MIS are e-applications sanctions according to prepared by Risk Management approval terms Department for Management and Board information
Managing Concentration Risk To manage the credit concentration of the Effective discussions take place at various Disproportionate concentration to one area or book the Bank has devised the credit model forums to mitigate risks of the credit portfolio. segment creates a potentially high risk since to define various limits on the maximum Apart from the economic sector and name there are borrowers with similar characteristics exposure for different industry segments. concentration mentioned above, the Bank within such groups e.g. unexpected drought or Depending on the performance of the specific reviews borrower rating distributions, age heavy rains will affect Agriculture sector etc. industries and micro-economic conditions analysis, geographical distribution, country risk that affect the performance of such industries, etc. for portfolio level monitoring. The Bank mainly monitors credit concentration interim limits too are put in to place. risk using economic sector groups and large names group. The economic sector Meeting the regulatory requirements concentration risk is monitored against Board assessment on top borrowers and adherence approved limits as well as stress tests using the to the single and related party limits are HHI (Herfindhal-Hirshman Index) method. closely monitored by the Bank.
Management Reports Risk Management 95 Union Bank | Annual Report 2018
Risk Management
Economic sector concentration December 2018 Geographical distribution as at 31.12.2017 Total portfolio % HHI Number 1% 2%3% 1% 35% 0.0400 7% 30% 0.0350 3% 2% 0.0300 25% 0.0250 20% 81% 0.0200 15% 0.0150 10% 0.0100 5% 0.0050 Western Central
0 0.0000 North Western Southern Eastern Uva Fishing Traders Tourism
Products Products North Central Northern Transport Consumer Consumer Wholesale Wholesale Financial & & Financial Construction Agriculture & & Agriculture
Retail Traders Sabaragamuwa Other Traders Infrastructure New Economy Other Services Manufacturing Non Consumer Non Consumer Business Services
% of Portfolio Limit HHI In-line with the CBSL directions, the Bank has set up a separate unit for loan review within the Risk Management Department. The unit Geographical distribution as at 31.12.2018 Managing Delinquent Loans was formulated to continuously monitor the 1% 3% The Bank’s non-performing portfolio is Bank’s lending portfolio by focusing the top 1% 1% monitored on a proactive basis through 5% exposures in each of the business unit/group, 3% regular follow up with clients and 2% bringing about qualitative improvements in restructuring of facilities on a need basis. Risk credit administration. management department monitors the watch- listing of accounts by recommending action 83% The high-valued loans are reviewed plans and close monitoring to prevent such periodically and more frequently when factors borrowers becoming non-performing. indicate a potential for deterioration in credit NPL movement (Dec 2017 to Dec 2018) quality. A minimum of 30%-40% of the loan portfolio is reviewed each year to provide a Western Central reasonable assurance that all major credit risks 4.0% North Western Southern post-sanctions have been tracked. 3.5% Eastern Uva 3.0% The loans are reviewed keeping in mind the North Central Northern approval processes, accuracy and timeliness Sabaragamuwa 2.5% of credit ratings, adherence to internal policies 2.0% and procedures, applicable laws / regulations, 1.5% compliance to loan covenants, post sanction 1.0% follow ups and sufficiency of documentation. 0.5% Managing Cross-Border Exposures 0 The Bank is also exposed to cross-border Dec. March June Sept. Dec. risks, where in the instances that the Bank is 2017 2018 2018 2018 2018 unable to receive or recover the dues overseas. Convertibility, transferability, government Gross NPL Ratio (%) specific rules and regulations affect the cross- Net NPL Ratio (%) border exposure risk.
96 Management Reports Risk Management Union Bank | Annual Report 2018
Country-wise exposure- December 2017 Operational Risk The Bank’s risk appetite and tolerance are generally set by the Board and/or the 6% 3% Operational Risk Management Framework executive management and are linked with 8% Operational risk is defined as the risk of loss the Bank’s strategy and growth targets. The risk resulting from inadequate or failed internal tolerance limit breaches are escalated to the 11% processes, people and systems or from external IRMC. In case a residual risk is assessed to be 56% events. The definition includes legal risks but outside our risk appetite, further risk reducing excludes strategic and reputational risks. actions must be undertaken including further remediating risks, insuring risks or ceasing 16% The governance of the Bank’s operational risks business. follows the three lines of defence approach, to protect the Bank, its customers and The Bank’s Risk Management Department South Africa Turkey shareholders against risk losses and resulting (‘RMD’) is the risk management function for U.S.A Azerbaijan reputational damages. It seeks to ensure that all major risk types of the Bank, including Peru Other Countries all our operational risks are identified and Operational Risk and owns the overarching included, that accountabilities regarding Operational Risk Management Framework the management of such operational risks (ORMF). are clearly assigned, risks are taken on and managed in the best and long-term interest of The ORMF is a set of inter-related tools and Country-wise Exposure- December 2018 the Bank. The three lines of defence approach processes that are used to identify, assess, 4% 2% and its underlying principles, i.e., the full measure, monitor and remediate operational 6% accountability of the first line of defence risks. Its components have been designed to to manage its own risks, the existence of operate together to provide a comprehensive an independent second line of defence to approach to managing the Bank’s most 28% oversee and challenge risk taking and risk material operational risks. ORMF also spells management, applies to all levels of the out the three lines of defences and roles organisation and independent third line of and responsibilities for the Operational Risk 60% defence to audit the overall risk management management process, stakeholders and the process. Bank’s approach to setting Operational Risk appetite and adhering to it, tools, independent South Africa Turkey governance, and the Bank’s Operational Risk U.S.A Azerbaijan capital model. Peru Other Countries Operational Risk Management Framework
Reporting
Modelling Appetite and Objective Risk
Loss Event Scenario New Product KRI & SAQ RCSA Data Analysis Reviews Governance and Organisation Governance Policies and Procedures
Culture and Awareness
Management Reports Risk Management 97 Union Bank | Annual Report 2018
Risk Management
Operational Risk Governance Structure In order to cover the broad range of risk types Management of Operational Risk is the primary responsibility of business and support functions underlying Operational Risk, the Bank’s ORMF and acts as risk owners. They identify and report risk in a timely manner while RMD oversees contains a number of management techniques the bank-wide management of operational risks, reports risk concentrations and promotes a that apply to all Operational Risk types. consistent application of the ORMF across the Bank. RMD is headed by the Chief Risk Officer and overseen by the Board Integrated Risk Management Committee (IRMC). Further, the Bank as a risk transfer strategy, has signed up for insurance to cover Fire, Operational Risk Management Committee (ORMC) is chaired by the Chief Risk Officer and Natural Disaster, Theft/ Robbery and Fraud responsible for the oversight, governance and coordination of the management of Operational and outsourced certain back-office functions Risk at operational level while the Executive Risk Management Committee (ERMC) is chaired by / processes that are permitted by the Director/ Chief Executive Officer (D/CEO) while CRO is a permanent member and convener of the outsourcing direction issued by the regulator. ERMC meetings. ERMC is a Senior Management level committee that is managing risks including RMD also reviews and ensures the adequacy Operational Risk on behalf of the Board IRMC by establishing a cross-risk and holistic perspective of the Bank’s insurance policies and that the of the key operational risks of the Bank. Its decision-making and policy related authorities include acceptable levels of control are in place in the review, advice and management of all Operational Risk issues which may impact the risk the outsourced activities of the Bank prior profile of the Bank’s business units and support functions. to signing up. The sound operational risk management could be evident via the actual loss data given below. Operational Risk Governance Structure Methods of Operational Risk Management
D/ CEO Board of Directors a. loss Event Data Loss event data are historic and backward looking which provides valuable insights IRMC into current operational risk exposures. Data gathered are segregated into seven Basel risk types (excluding legal and compliance risk) for advanced capital computation in ERMC the future. All staff members are responsible to report risk / loss events as soon as they perceive or materialise and are responsible to ORMC record such risk/ loss events immediately as either an actual loss, a potential loss or a near miss using one of industry’s best web-based Chief Risk solution for operational risk management Branch Op-Risk Officer (ORM). Once an event is entered, it is reviewed Coordinators independently, and submitted to operational risk management department for causal and Department Senior impact analysis and subsequently recording Manager ORMD Op-Risk Coordinators cause, effect, recovery and provisioning before closure, if applicable. Action follow- ups, reports from Audit department and any other branch / department can be collected using the Action Management module of the Managing Operational Risk ORM solution. There are various dashboards The Bank manages operational risks by employing the tools and processes provided in the ORMF, available in the ORM solution to provide which enables the Bank to determine Operational Risk profile in comparison to its risk appetite snapshot of Operational Risk information for Operational Risk, to systematically identify Operational Risk and its concentrations, and to at Branch, Management and Business Unit define risk mitigating measures and priorities. level and as a Bird-Eye view for the Bank which are useful in determining the trends
98 Management Reports Risk Management Union Bank | Annual Report 2018
and potential areas to avoid or mitigate by to assess the risk areas of the Bank and j. Appointment of Operational Risk improving/ implementing control/s. The Bank apply controls where necessary. Information Coordinators within the first line of defence understands the importance of managing so gathered will also be used for capital Operational Risk Coordinators (ORCs) are major operational failures caused by human computation purposes under score card appointed bank-wide at Branches and all or systems and it well managed the financial method in the Advanced Measurement departments who are the prime liaison with losses incurred by the Bank due to such Approach in the future. The Bank has rolled out the Operational Risk Management Department failures during the reporting period. The losses RCSA. (ORMD). incurred during the year amounts to LKR 49.85 Mn which is 1.19% of the three year average There are three types of RCSAs: Questionnaire Operational Risk (OR) Information System gross income of the Bank while there aren’t approach, Workshop approach and The Bank’s operational risk information system, any losses related to Credit Risk. This indicates Hybrid (mix of above two) approach. The called Care Kalypto, supports operational risk that Bank will survive in a stressed situation. questionnaire based approach is used to management tools, providing information assess risks under RCSAs. for reporting functions. The objective of Care b. Key Risk Indicators (KRI) and Self- Kalypto is to improve decision making for OR Assessment Questions (SAQs) e. Ad-hoc Incident Reporting management throughout the Bank. Detailed KRI and SAQ programmes are Bank encourages staff to report any scheduled monthly, quarterly and semi- operational lapses or potential or actual frauds Measuring Operational Risks annually to record the changing environment. directly to designated senior management The Bank calculates and measures the capital Answers to KRIs will be number driven whilst officials as described in the Bank’s Whistle- charge requirements for Operational Risk for SAQs, will be a selection from a drop-down Blower policy, if the staff member is fearful using the Basic Indicator Approach (’BIA’) list of answers. The information, so gathered to route the concerns through the line methodology where the average of the last is then analysed to see if there are any trends management. The Bank views this method as three years annual gross income into 15% is that poses/ would result in Operational Risk/ a useful method of communication to reduce considered as the capital charge. Loss to the Bank and accordingly mitigative potential losses to a greater extent and proved action taken. effective. Information Security Management Today’s increasingly complex IT landscape c. Scenario Analysis f. New Product, Service or Process Launch in the banking sector sets new demands on The objective is to identify potential events Prior to launching new products, services or information security for protecting customers with a very low probability of occurrence, but processes, the owners must evaluate the risks and business-critical information. Information which could result in a very high loss for the as per new product policy. Then the detailed security resilience is a fundamental part of the Bank. The possible effects of these are assessed Product Programme Guide with a Risk Matrix Bank’s business, and is vital for maintaining and extra controls and mitigating measures listing such risk identified and mitigants shall customers’ trust. are identified to reduce the likelihood of high be signed off by all key stakeholders. economic impact. The Bank is constantly updating its processes g. Customer complaints to achieve superior information security Hence, a scenario analysis has to be completed The Bank monitors complaints and their root performance and uses different international on a monthly basis. In this, assignees are causes and provides relevant information standards as reference where applicable. For free to report any current and potential risks to ORMD for identifying and measuring risk. instance, ISO/IEC 27001:2013 Information that they envisage within their area of work, ORMD further analyses and escalates to the Security Management System standard is used whether internal or external. In addition, relevant risk committee for further action. for enhancing the Bank’s current Information scenarios of potential events, which are Security Policies and Procedures and ISO infrequent, but have severe impact to the Bank h. Audit and regulatory recommendations 31000:2018 Risk management standard used for when they happen would be identified and These provide relevant information on the development of Risk Assessment and Risk analysed by the Operational Risk Management inherent risk due to internal and external Treatment (RART) Methodology and RART Plans. Department (ORMD). factors, enabling weaknesses in the controls to be identified. The Bank strives to increase information d. Risk & Control Self-Assessment (RCSA) security awareness among employees by In a RCSA programme, branches and i. Training and Awareness Creation various means, such as organising e-learning departments take the ownership of their Internal training sessions are conducted to courses, conferences and training programmes own risks and controls and assess the risks enhance/ inculcate the need of risk reporting to enable employees on new threat vectors, that may exist in their respective areas. RCSA for new recruits and refresher training sessions counter measures to safe-guard internal programmes are done on a set frequency too are conducted for existing staff. systems and business-critical information.
Management Reports Risk Management 99 Union Bank | Annual Report 2018
Risk Management
At Union Bank, the responsibility for Managing of Market Risk Foreign exchange risk is managed through Information Security arrangements are Asset and Liability Management Committee approved limits by the Board of Directors and managed by Information Security Officer who (ALCO) of the Bank is mainly responsible for in-line with the CBSL requirements. Limits is attached to Risk Management Department. managing the Interest Rate Risk, Exchange include Net Open Position, Trading Limits, Further, IT Security responsibilities lie with Rate Risk, and Liquidity Risk and Equity Price Dealer Limits, counterparty Limits and Gap the IT Security team, which is attached to the Risk. Within the overall Risk Management Limits. IT Department. Internal and external audits Framework, both treasury front office and are also regularly followed up by the Bank’s back office functions are monitored by The Bank has been prudent in managing the Leadership Team and the Board Audit and Risk Treasury Middle office (TMO). TMO operates foreign exchange risk throughout. The Bank Management Committees. independent to the business functions. In the has been able to manage its open positions Bank, market risk management is governed (NOP) within the limit allowed by CBSL and no Business Continuity Management by the Integrated Risk Management Policy, major losses were incurred during the volatile The Business Continuity Management (BCM) Market Risk Management Policy & Asset period underwent by USD/LKR exchange rate function, which is under the purview of ORMD Liability Risk Management Policy. in the recent past. ensures that a sound Business Continuity Plan (BCP) is in place for the Bank. The bank- TMO is primarily responsible for the setting up wide BCP is well structured and reviewed of suitable policy/procedures for the treasury Net Open Position periodically, in assuring the immediate operations and setting up and monitoring of USD in continuity of essential business operations. various limits to monitor business operations. Mio 2.50 While being fully equipped with a Disaster TMO also maintains its independent MIS Recovery Site along with an integrated reports and dashboard reports which are 2.00 IT recovery strategy, the Bank conducts reported to Senior Management, ALCO, drills to test the effectiveness of the BCP at Integrated Risk Management Committee and 1.50 least annually in order to ensure readiness. to the Board of Directors in support of the Furthermore, training sessions are conducted decision making process. TMO uses various to create awareness among the Emergency tools in measuring Market Risk exposures 1.00 Coordination Team members on fire safety such as Value at Risk (VaR), Duration, aspects, while evacuation drills are facilitated Modified Duration(MD), Mark to Market 0.50 to test the preparedness of staff to act in case valuations(MTM) and Stress testing. of an emergency. 0 Managing Foreign Exchange Risk 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Market Risk The foreign exchange (FX) risk arises due to Market risk is defined as the risk of losses in mismatches in assets and liabilities in different On/Off balance sheet positions arising from currencies. The cost of aggregate exposure will movements in market prices. It comprises of fluctuate with the changes in the exchange Interest Rate Risk (IRR), Foreign Exchange Risk rates. (FX), Equity Price Risk and Commodity Price Risk.
Board Integrated Risk Management Stress Test on Net Open Position Committee NOP as at 31.12.2018 1,051,180 in USD
ERMC ALCO Spot Rate 182.93 Scenarios Upward Movement Downward Movement Shock Levels 5% 10% 15% -5% -10% -15% Stressed Fx Spot Rate 192.08 201.23 210.37 173.79 164.64 155.49 Market Risk Management 9,615 19,230 28,844 (9,615) (19,230) (28,844)
100 Management Reports Risk Management Union Bank | Annual Report 2018
Foreign Exchange Position as at 31.12.2018
On Balance Sheet Off Balance Sheet Net Position in FX Rate Net Position in CURRENCY original + - + - LCY currency AED 93,838.35 93,838.35 49.81 4,673,862.49 AUD (1,789,393.51) 1,817,000.00 27,606.49 129.18 3,566,161.47 BHD 66.50 66.50 485.23 32,268.08 BND 1,305.00 1,305.00 133.36 174,031.71 CAD (87.65) (87.65) 134.28 (11,769.88) CHF 10,290.00 10,290.00 185.81 1,912,020.31 CNY 4,395.79 4,395.79 26.59 116,905.80 DKK 4,800.00 4,800.00 28.02 134,494.35 EUR (993,160.50) 1,010,700.00 17,539.50 209.21 3,669,468.73 GBP (1,783,640.98) 1,792,500.00 8,859.02 232.69 2,061,415.99 HKD 17,340.00 17,340.00 23.36 405,023.62 JOD 51.00 51.00 258.02 13,158.82 JPY 902,227.56 902,227.56 1.66 1,497,980.53 KWD 195.00 195.00 603.04 117,593.54 MYR 3,713.00 3,713.00 44.23 164,234.17 NOK 1,000.00 1,000.00 21.04 21,038.79 NZD 3,750.08 3,750.08 122.79 460,487.32 OMR 549.10 549.10 475.15 260,905.70 QAR 6,778.00 6,778.00 50.24 340,544.39 SAR 10,028.00 10,028.00 48.76 488,940.39 SEK 5,280.00 5,280.00 20.42 107,828.88 SGD 12,569.06 5,500.00 18,069.06 134.19 2,424,760.40 THB 5,110.00 5,110.00 5.62 28,720.77 USD 18,836,409.61 (17,909,397.57) 927,012.04 182.93 169,581,402.52 ZAR 4,280.00 4,280.00 12.69 54,323.19
Managing Liquidity Liquidity risk is mainly managed through Stock approach & Floor approaches under the supervision of ALCO. Under stock approach, liquidity is measured in terms of key ratios which portray the liquidity stored in the balance sheet whereas under floor approach Banks should prepare a statement of Maturities of Assets and Liabilities placing all cash inflows and outflows in the time bands according to the residual time to maturity.
With regard to the stock approaches TMO Monitors a comprehensive list of ratios against their approved limits and any deviations and exceptions to the approved ratios will be reported to IRMC. In assessing the liquidity position of the Bank, advances to deposits ratio, maturity profile of the assets and liabilities, liquidity gap and statutory liquid asset ratio are considered pivotal.
Also, the Bank conducts regular stress tests and scenario analysis to measure impact on liquidity due to adverse movements in its cash flows. The Bank has already devised the contingency Funding plan which makes sure the completeness of a comprehensive market risk management framework.
Management Reports Risk Management 101 Union Bank | Annual Report 2018
Risk Management
Maturities of Assets and Liabilities (MAL)
LKR Only Maturities of Assets & Liabilities (MAL) Rs’000 December-18 *Behavioural Pattern for OD & Deposits Liabilities Item up to 1 to 3 3 to 6 6 To 9 9 To 12 1 To 3 3 To 5 over Total 1 month Months Months Months Months Years Years 5 Years Inflows
Cash on Hand 2,065,971 ------2,065,971 Nostros 7,069 ------7,069 Deposits with CBSL ------4,219,932 4,219,932 Investments 1,515,054 1,356,867 486,351 13,665,435 691,694 13,802,579 6,883,735 3,391,698 41,793,413 Bills of Exchange 70,024 ------70,024 Overdrafts 1,060,229 2,084,413 3,065,637 2,961,222 2,853,287 - - - 12,024,788 Loans & Advances 16,666,310 7,952,696 4,175,588 2,178,323 2,221,333 14,433,506 8,256,943 8,911,082 64,795,781 NPL - - - - 695,487 - - 2,086,462 2,781,949 Other Assets ------1,120,093 1,120,093 Fixed Assets ------1,991,607 1,991,607 21,384,657 11,393,975 7,727,576 18,804,980 6,461,802 28,236,086 15,140,678 21,720,873 130,870,626 Letters of Credit ---Sight - 6,581 3,284 - - - - - 9,865 Letters of Credit ---Usance - - 1,454 - - - - - 1,454 Overdraft undrawn 1,669,901 3,339,803 5,009,704 5,009,704 5,009,704 - - - 20,038,816 Forex Spot Forward 2,878,664 806,074 73,392 - - - - - 3,758,129 Guarantees 57 10,392 8,042 10,965 13,128 10,296 521 5 53,407 4,548,622 4,162,849 5,095,875 5,020,669 5,022,832 10,296 521 5 23,861,670 Total (a) 25,933,279 15,556,824 12,823,451 23,825,649 11,484,634 28,246,381 15,141,199 21,720,878 154,732,296 Outflows Demand Deposits 321,405 321,405 257,124 192,843 192,843 1,980,692 - - 3,266,313 Savings Deposits 450,935 450,935 450,935 450,935 450,935 10,657,052 1,127,337 - 14,039,062 Time Deposits 2,858,054 4,740,607 2,405,858 1,788,306 1,064,480 38,572,508 821,633 - 52,251,445 Certificates of Deposits 108,011 67,853 346,847 172,809 8,284 1,896,637 - - 2,600,441 Nostros ------Borrowings 18,320,768 3,508,429 398,049 36,956 102,347 1,670,293 - - 24,036,843 Other Liabilities 1,808,868 ------1,808,868 Shareholders Funds ------17,165,025 17,165,025 23,868,041 9,089,229 3,858,813 2,641,849 1,818,889 54,777,182 1,948,969 17,165,025 115,167,997 Letters of Credit ---Sight 6,020 3,844 ------9,865 Letters of Credit ---Usance 1,454 ------1,454 Overdraft undrawn 5,851,826 8,999,027 2,483,338 1,352,313 1,352,313 - - - 20,038,816 Forex Spot Forward 500,325 805,694 72,180 - - - - - 1,378,199 Guarantees 1,278 11,725 7,372 13,408 10,044 9,059 514 5 53,407 6,360,903 9,820,290 2,562,890 1,365,721 1,362,357 9,059 514 5 21,481,740 Total (b) 30,228,944 18,909,519 6,421,703 4,007,570 3,181,246 54,786,241 1,949,483 17,165,031 136,649,737 Gap=(a)-(b) (4,295,665) (3,352,695) 6,401,748 19,818,079 8,303,388 (26,539,860) 13,191,716 21,720,873 18,082,560 Cumulative Gap (4,295,665) (7,648,359) (1,246,611) 18,571,468 26,874,856 334,996 13,526,712 35,247,585 -
102 Management Reports Risk Management Union Bank | Annual Report 2018
Managing Interest Rate Risk in interest rates can affect the Bank’s earnings perspective and economic value of equity IRR is the risk to the Bank’s earnings and capital by changing its Net Interest Income (NII). perspective that arises out of meeting customers’ demands Changes in interest rates also affect the for interest rate-related products with various economic value of the Bank’s assets, liabilities The Bank’s trading portfolio mainly comprises re-pricing profiles and the Bank’s interest rate and off-balance sheet items. An effective risk of T-bills, T bonds and Unit trust are monitored mismatch strategy. As interest rates and yield management process that maintains interest daily against the portfolio size limit, maturity curves change over time, theoretically the rate risk within prudent levels is essential not bucket limits, portfolio category limit, VaR Bank may be exposed to a loss in earnings and only to safety and soundness but also to the limits. TMO monitors duration and the PVO1 capital due to the re-pricing structure of all Bank’s profitability. The Bank currently measure for FIS on daily basis. on- and off-balance sheet items. Movements the interest rate risk from both earnings
Sensitivity Report on Interest sensitive Assets & Liabilities (SAL) December-18 Rs. ‘000 Item Non up to 1 to 3 3 to 6 6 To 9 9 To 12 1 To 3 3 To 5 over over Total Sensitive 1 month Months Months Months Months Years Years 5 Years 5 Years Inflows Cash on Hand 2,147,380 2,147,380 Nostros 1,412,923 1,412,923 Deposits with CBSL 4,219,932 4,219,932 Investments 1,172,797 4,955,443 3,398,651 289,152 12,916,137 397,074 10,444,230 6,196,081 1,842,430 1,842,430 41,611,995 Bills of Exchange 964,810 278,124 77,387 ------1,320,321 Overdrafts 11,094,721 ------11,094,721 Loans & Advances 30,228,260 10,543,625 2,944,042 1,024,119 908,730 7,328,778 4,199,397 2,069,870 2,069,870 59,246,822 NPL (224,013) -224,013 Other Assets 1,150,474 1,150,474 Fixed Assets 1,963,035 1,963,035 Total (a) 11,842,528 47,243,235 14,220,401 3,310,581 13,940,256 1,305,804 17,773,009 10,395,477 3,912,301 3,912,301 123,943,591 Outflows Demand deposits 3,671,199 3,671,199 Savings deposits 14,547,859 ------14,547,859 Time Deposits 11,224,228 18,831,940 8,876,107 8,696,385 5,741,337 1,096,923 1,736,534 - - 56,203,455 Certificates of 378,037 224,174 1,150,356 568,092 27,281 360 -- - 2,348,300 Deposits Unfavourable 742,137 742,137 Nostros Borrowings 19,824,481 1,296,466 4,859,048 36,006 100,672 1,227,520 -- - 27,344,193 Other liabilities 759,291 759,291 Shareholders Funds 16,658,641 16,658,641 Total (b) 21,831,268 45,974,605 20,352,579 14,885,512 9,300,484 5,869,290 2,324,802 1,736,534 - - 122,275,074 Gap=(a)-(b) (9,988,739) 1,268,630 (6,132,179) (11,574,931) 4,639,773 (4,563,486) 15,448,206 8,658,943 3,912,301 3,912,301 1,668,518
Duration of FIS
Years 2.50 Bill Bond 2.00
1.50
1.00
0.50
0 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Management Reports Risk Management 103 Union Bank | Annual Report 2018
Risk Management
L egal Risk As per the definition of Basel the legal risk is covered under operational risk management. Legal risk is connected with the people, processes, systems and also the outside events affecting the normal cause of business.
In managing Banks’ legal risk, factors such as regulatory guidelines which may lead to subsequent penalties and fines in non compliance are taken in to consideration. Banking relationships maintained with other entities, individuals both domestic and foreign are also giving rise to legal risk. This is mainly due to the non fulfilment of required precise contractual documentation and adherence to the same. The Bank takes adequate measures, process enhancements to ensure the compliance of such legal requirement under its overall risk governance structure.
Strategic Risk Strategic Risk refers to the strategic decisions / plans / objectives which may go wrong due to actions or inactions by the parties to strategic decision making process, adversely affecting the shareholder wealth of the Bank e.g. incorrect decisions, inadequate information for decision making, delayed remedial actions etc.
Drivers of Strategic Risk
Formulation of Business & Corporate Objectives Business Strategy Environment Implementation Scan
Economic Business Strategic Environment Planning Risk Scan
Change Customer Management Profiling
Product Profiling
Compliance Risk Compliance risk is the current and prospective risk to earnings or capital arising from violations of, or non-conformance with laws, rules, regulations, prescribed corporate governance practices, internal policies and procedures, or ethical standards.
Compliance risk also arises in situations where the laws or rules governing certain Bank products or activities of the Bank’s clients may be ambiguous or untested. This risk exposes the institution to fines, penalties, payment of damages, and the voiding of contracts. Compliance risk can lead to diminished reputation, limited business opportunities, reduced expansion potential, and an inability to enforce contracts. The Bank has identified this risk as a material risk and various internal controls, policies, procedures are in place to manage risk.
104 Management Reports Risk Management Union Bank | Annual Report 2018
Reputation Risk Reputation Risk refers to the potential adverse effects, which can arise from the Bank’s reputation being tarnished due to factors such as unethical practices, regulatory actions, subsidiary/ associate company’s actions, customer dissatisfaction and complaints, negative/adverse publicity etc. The Bank remains committed to continuously strive to maintain and improve its reputation in all the businesses it operates.
Drivers of Reputation Risk
Loss Event Identification Transparency/ Peer Group Accountability Comparison
Crisis Management Management Integrity
Staff Contagion Competence & Risk Reputation Support Risk
Legal/ Corporate Regulatory Culture Compliance
Risk Customer Management Satisfaction & Control Environment Business Financial Practices Soundness
Stress Testing The Bank uses various techniques (quantitative and/or qualitative) to gauge the vulnerability to exceptional but plausible risk events. Stress Testing is a risk management technique used to evaluate the potential effects of a specific event and/or movement in a set of financial variables on the Bank’s financial condition.
Stress testing is an important part of risk management function in the Bank and is considered as an integral part of ICAAP under Pillar II.
The Bank has a robust Stress Testing Policy which describes the procedure for identifying principal risk factors, frequency, methodology for constructing stress tests and procedure for setting risk tolerance limits. The findings are communicated effectively to the management group in support of the decision making and capital planning process.
Management Reports Risk Management 105 Union Bank | Annual Report 2018
Corporate Governance
Chairman’s Statement
Dear stakeholders,
It gives me pleasure to present the We operate within a clearly defined Concluding, as its Chairman, I confirm 2018 corporate governance statement governance framework approved by that the Bank has been compliant with on behalf of the Board of Directors the Board. This framework outlines Direction No. 11 of 2007 on Corporate of Union Bank of Colombo PLC. This mechanisms for the Bank to implement Governance issued by the Central Bank corporate governance statement details robust governance practices and provides of Sri Lanka under the Banking Act No.30 our approach to corporate governance clear direction for decision-making across of 1988 (as amended) in the manner principles and practices. all disciplines. Through this framework the discussed in this Report. The observations Board has delegated certain of its functions in the ‘Factual Findings Report’ of the We believe that sound corporate to Board committees based on clearly External Auditors in respect of compliance governance depends upon the people documented and defined terms of reference with the said Direction reveals that it is in and the culture within the organisation. without abdicating the Board’s responsibility. line with this Report, and to the best of my Hence, corporate governance is knowledge there are no material violations embedded in our values, culture, The Board and its committees regularly of the said Direction. processes, functions and organisational review the Bank’s governance structures and structure. Our values require that processes to ensure they support effective directors and employees behave with and ethical leadership, the entrenchment of integrity and accountability in order a values-driven ethical culture and that they to promote and maintain trust. The are applied in the best interests of the Bank Board sets the tone from the top in and its stakeholders. Where appropriate, Atul Malik the manner in which it conducts itself governance structures and processes are Chairman and oversees the structures and the adapted to best practice developments Union Bank of Colombo PLC framework for corporate governance. within the statutory and non-statutory spheres. 26th February 2019.
106 Stewardship Corporate Governance Union Bank | Annual Report 2018
Governance Structure GRI 102-18 The governance structure of the Bank is clearly defined and demonstrates the distinction of the functions between the Board and the Management. It guides the Board in the formulation and implementation of Bank’s strategies to create enduring value to the benefit of all its stakeholders whilst ensuring an appropriate balance of power, accountability and independence in decision-making.
The Bank’s governance structure is founded on the principles of accountability, transparency, ethical management and fairness. Sound governance is entrenched across the entire business. Governance processes are regularly reviewed to align with regulatory changes and to reflect best practice.
The governance structure of the Bank is depicted below.
Board of Directors
Human Resources Related Party Integrated Risk Audit Credit Nomination and Remuneration Transactions Review Management Committee Committee Committee Committee Committee Committee
Head of Head of Internal Audit Compliance Chief Executive Officer Company Chief Risk Secretary Officer
VP Chief VP Retail VP Human VP Head of Head of AVP Head of Head of Wholesale Financial AVP IT Banking Resources Operations Treasury Legal Marketing Recoveries Credit Banking Officer
External Framework Internal Framework Legislations, regulations, directions, Articles of Association, Code of Corporate Governance, Charters and TORs stock exchange rules of Board and Management Committees, policies and guidelines
Direct Reporting Indirect Reporting
Stewardship Corporate Governance 107 Union Bank | Annual Report 2018
Corporate Governance
Board of Directors oversight. Directors have the necessary applicable laws and regulations and relevance competence to discharge their duties and to to the evolving business needs. Role of the Board provide strategic direction and control of the The Board is the focal point and custodian of Bank. The Board’s pivotal role is to lead and the Bank’s corporate governance. The Board is establish the Bank’s vision, strategic direction, responsible for providing ethical and effective Bank’s Code of Corporate Governance (“the key policies and framework, including the leadership to the Bank. It agrees the strategic Governance Code”) details the role and management of the succession planning direction and approves the policy frameworks responsibilities of the Board. The mandate, process and the appointment of key used to measure organisational performance. which also specifies matters reserved for management personnel. Certain of these This is achieved through transparent reporting board decision, is reviewed at least annually to functions are delegated to board committees. on the part of management and active Board ensure compliance with the provisions of the
� Sets the mission and vision � Engage actively in strategic decision � Oversee financial management � Ensure appropriate risk making and policy decision management Monitor and Shape mission � Monitor performance improve and strategic � Ensure accountability direction � Improve board performance performance
� Select evaluate and develop Key Management Personnel Ensure leadership � Ensure availability of adequate and resources resources � Lend expertise � Protect and enhance reputation of organisation
Board Composition Relationship between Executive and Non-executive Directors The Board’s composition is both qualitatively and quantitatively balanced in terms of knowledge, skills, nationalities, experience Higher Board Performance and tenure and the collective background of the Directors provides for a balanced mix of Challenge & Performance Integrity Dedication Trust attributes and skills that enable the Board to Debate Culture fulfil its duties and responsibilities. There is a clear division of responsibilities ensuring that no one director has unfettered powers in the Non-Executive Directors’ Non-Executive Directors’ Oversight Responsibilities Value-added responsibilities decision-making process. � Understanding of � Facilitating and encouraging performance, key trends and Board of value add in key strategy Directors A majority of the Directors, including the risks areas Chairman, are Non-Executive and they bring � Building trust and � Independent thinking encouraging support of the � Encouraging strong work diverse perspectives to board deliberations executives ethics and constructively challenge management.
The profiles of the Board of Directors including CEO and the Executive Team aa Commitment to the Board on integrity, accountability and transparency their experience and expertise are set out on aa Supporting non-executive directors’ responsibilities of oversight and value addition pages 158-161 of this Report. aa Open attitude to share performance information, timely reporting issues and risks
108 Stewardship Corporate Governance Union Bank | Annual Report 2018
Board Composition Board Tenure experience, availability and likely fit, the committee also considers the candidate’s 8% 17% demonstrated integrity, proven leadership as well as other directorships and commitments to ensure that they will have sufficient time to discharge their role properly. Candidates must satisfactorily meet the fit and proper test, as 50% 50% required by the Banking Act. 42% 33% In terms of the Articles of Association, a Director appointed by the Board holds office until the next annual general meeting, where Non-Executive/ Independent Less than three years he must retire and stand for re-election by shareholders. In addition, one-third of the Non-Executive/Non-Independent 3-5 years Bank’s Non-Executive Directors are also Executive Above 5 years required to retire by rotation at each annual general meeting, and the retiring Directors Board Meetings may offer themselves for reappointment by The Board meets every month to discuss strategic direction, policy decisions and control of the shareholders. the Bank, through, among other activities, the approval of budgets and the monitoring of performance. Meeting dates are communicated to the Board in advance on a meeting plan. In terms of its mandate, the suitability of Agenda items for each meeting are carefully planned and put together by the company secretary the Directors eligible to be re-elected at the in consultation with the Chairman and the Executive Director. Non-executive Directors are next annual general meeting was assessed also provided the opportunity to add to the agenda. Detailed meeting packs are prepared and by the Nomination Committee, and the provided to the Board well in advance to enable the Directors to prepare for the meeting. Board resolved to submit these re-elections for shareholders’ approval based on the At Board meetings, the Chairman encourages constructive and healthy debates, and Directors are recommendation of the committee. free to express their views. Decisions of the Board are made unanimously or by consensus with dissenting views raised by any Director being recorded in the minutes of meetings. As part of the Board’s responsibility to ensure that effective management is The table on page 112 of this Report provides the details of attendance of the Board and Board in place for the continued growth and Committee members in respect of the Board and Board Committee meetings held during the ongoing sustainability of the Bank, the year 2018. Board also regularly monitors whether there is appropriate succession planning at the Succession planning management level. The Board has a formal and transparent process in place for appointing Directors. While the appointments are a matter for the Board as a whole, the responsibility to oversee the nomination process has been delegated to the Nomination Committee. Apart from a candidate’s skills,
Appointment of Directors The Board approves The regulator assesses the Nomination Committee the nomination and fitness and propriety of the Recommends candidates commencement of the candidate and approves to the Board regulatory process the appointment
The Bank makes an The director retires at the The Board approves the announcement to the AGM and is then re-elected candidate as a director market on the appointment by shareholders of the director
Stewardship Corporate Governance 109 Union Bank | Annual Report 2018
Corporate Governance
On-going education and access to Avoidance of conflicts of interest An important component of the evaluation information and advice The Bank has implemented necessary process is the actions taken after the Ongoing education remains a focal point for processes and procedures requiring the assessment. In 2017, several items were the Board and accordingly, the Directors are Directors to identify and declare any actual identified as improvement areas and work was kept abreast of all applicable legislation and or potential conflict of interest with the Bank. performed in 2018 to address them. regulations, changes to rules, standards and Notifications of such interests are required The 2018 board evaluation was facilitated codes, as well as relevant sector developments to be made by the Directors soon as he/she by the company secretary and overseen by which could potentially impact the Bank and becomes aware of it. the Chairman in line with the parameters its operations. agreed by the Directors during the 2017 board Directors who have an interest in a matter evaluations. Directors have unrestricted access to the under discussion at meetings of the Board or management and Bank’s information, as well any of its committees refrain from engaging The assessment concluded that the as the resources required to carry out their themselves in the discussions on that matter performance of the Board and its duties and responsibilities. Access to external and abstain from voting thereon. Such committees, when evaluated against the specialist advice is available to Directors at the abstentions are duly recorded in the minutes relevant areas were considered effective. Bank’s expense, in terms of the Governance of the relevant meeting. The Board is satisfied that the evaluation Code. process contributes to its performance and Annual evaluations effectiveness. The Board uses an electronic board paper The effectiveness of the Board and its system which provides quick, easy and secure committees is assessed annually. These access to board papers and materials. Board evaluations are undertaken through a series packs are circulated via this system prior to of standardised questionnaires that are meetings, with enough time for the Board structured according to the Governance Code members to apply their minds to the content. and applicable rules and regulations.
Questionnaire Feedback Collated Reporting Written questionnaires for the Board Feedback of directors collated and Summary of self-assessment results solicits directors’ feedback summarised by the company secretary in provided to the Board consultation with Chairman
Ongoing Feedback Incorporated Open Discussions Directors’ suggestions for improvements Policies and practices updated as Candid and constructive discussions to self-assessment questionnaire and appropriate based on self-assessment between the directors to solicit further process incorporated the following year observations and suggestions colour on the directors’ observations and suggestions
110 Stewardship Corporate Governance Union Bank | Annual Report 2018
Board Sub-committees The Board has delegated authority to the following Board committees to enable them to oversee certain specific responsibilities based on their terms of reference: aa Board Audit committee aa Integrated Risk Management Committee aa Human Resources and Remuneration Committee aa Nomination Committee aa Board Credit Committee aa Related Party Transactions Review Committee
The committees are appropriately constituted to promote independent judgement, and assist with the balance of power. The terms of reference of the Board committees set out the responsibilities of the committee, conduct of meetings including quorum, voting requirements and qualifications for committee membership. The Board applies its mind to the information and results provided to it by its committees as delegation to a committee does not discharge the Board of its accountability.
Self-evaluations were done for all committees and the Board is satisfied that the evaluation processes support continued improvement in the Bank’s performance and effectiveness.
Sub-Committee Scope Composition as at 31 December 2018 Board Audit Committee Assists the Board in maintaining an effective system Yudhishtran Kanagasabai (Chairman) of internal control, compliance with applicable legal Priyantha Fernando and regulatory requirements, external financial Ranvir Dewan reporting and internal audit function. Michael J O’Hanlon Dilshani Wijayawardana Integrated Risk Management Ensures that Group wide risks are managed within Priyantha Fernando (Chairman) Committee the risk strategy and appetite as approved by the Michael J O’Hanlon Board. Ranvir Dewan Trevine Fernandopulle Puneet Bhatia Yudhishtran Kanagasabai Indrajit Wickramasinghe Human Resources and Remuneration Assists the Board in the determination of Dilshani Wijayawardana (Chairperson) Committee remuneration of the Directors, CEO and KMPs, Priyantha Fernando HR Policies, Organisational structure, HR systems Sabry Ghouse including performance evaluation. Gaurav Trehan Michael J O’Hanlon Nomination Committee Assists the Board in the selection and appointment Dilshani Wijayawardana (Chairperson) of Directors and KMPs, and succession planning at Priyantha Fernando both Board and Management level. Sabry Ghouse Gaurav Trehan Michael J O’Hanlon Related Party Transactions Review Assists and guides the Board in the determination of Dilshani Wijayawardana (Chairperson) Committee Related Party Transactions Policy and processes. Sabry Ghouse Indrajit Wickramasinghe Board Credit Committee Approves credit proposals above a pre-determined Atul Malik (Chairman) threshold in line with the Bank’s risk appetite and Sabry Ghouse regulatory requirements Trevine Fernandopulle Indrajit Wickramasinghe
Refer pages 132-139 for the reports of the Board sub committees.
Stewardship Corporate Governance 111 Union Bank | Annual Report 2018
Corporate Governance
Separation of Roles The role of Chairman is distinct from that of the Chief Executive Officer who is the only Executive Director of the Bank. There is a clear division of responsibilities which are well-defined in the Governance Code and the Board approved Terms of Reference. In compliance with the requirements of Direction No. 11 of 2007 on Corporate Governance issued under the Banking Act No.30 of 1988, the Board of Directors of the Bank has designated Mr. Priyantha Fernando as the Senior Director with Board approved Terms of Reference.
Chairman Chief Executive Officer Senior Director
aa setting the ethical tone for the board aa appointing and ensuring proper aa further strengthening the and Bank succession planning of the executive independence of the board team, and assessing their performance aa leading the board and ensuring its aa acting as an intermediary between developing the Bank’s strategy for effective functioning aa the chair and other members of the consideration and approval by the board aa setting the board’s annual work plan board, if necessary and agendas, in consultation with aa developing and recommending to the board budgets that support the Bank’s aa maintaining an additional channel the company secretary, the chief long-term strategy to deal with shareholders’ concerns executive and other directors aa monitoring and reporting to the board where contact through the normal building and maintaining stakeholder aa on the performance of the Bank and its channels has failed to resolve trust and confidence compliance with applicable laws and concerns, or where such contact is a conveying feedback in a balanced and a corporate governance principles inappropriate accurate manner between the board aa setting the tone for ethical leadership and chairing discussions by the board on and the chief executive aa creating an ethical environment matters where the Chairman would aa monitoring the effectiveness of a ensuring a culture that is based on the a have a conflict of interest. the board and assessing individual Bank’s values performance of directors aa ensuring that the Bank operates within the approved risk appetite.
Attendance at Board and Committee Meetings
Board Board Audit Integrated Nomination Human Board Credit Related Party Committee Risk Committee Resources & Committee Transaction (BAC) Management (NC) Remuneration (BCC) Review Committee Committee Committee (IRMC) (HRRC) (RPTRC) Number of Meetings 13 08 04 03 10 12 04 Atul Malik 13 - - - - 12 - Priyantha Fernando 13 07 04 02 09 - - Sabry Ghouse 12 - - 03 09 10 04 Ranvir Dewan 11 06 03 - - - - Gaurav Trehan 09 - - 02 06 - - Puneet Bhatia (or his 09 ------alternate Keshav Thakkar*) Michael J O’Hanlon (or his 13 07 04 03 10 - - alternate Sumedh Jog**) Sow Lin Chiew (or her 12 ------alternate Yoke Sun Woon) Yudhishtran Kanagasabai*** 12 08 04 - - - - Dilshani Wijayawardana 13 08 - 03 10 - 04 Trevine Fernandopulle 12 - 04 - - 11 - Indrajit Wickramasinghe 13 - 04 - - 12 04 # Attendance percent is calculated on board attendance during the tenure of directorship * Appointed as alternate with effect from 24th May 2018 ** Ceased to be the alternate with effect from 11th May 2018 *** Resigned with effect from 31st December 2018
112 Stewardship Corporate Governance Union Bank | Annual Report 2018
Executive Committees The Board has delegated the management of the day-to-day business and affairs of the Bank to the Chief Executive Officer who is the apex executive. The Chief Executive Officer is accountable for the implementation of the strategy and its performance, and is supported by a number of committees established at the management level subject to statutory parameters and matters reserved for the Board which are documented in the Bank’s Governance Code.
Based on the governance requirements and the nature of operations of the Bank, six (06) such committees are in place. The composition and key tasks of these committees are outlined in written terms of reference which are reviewed periodically to ensure that levels of delegation and authority remain appropriate and consistent with the Bank’s strategy.
Management Committees
Committee Scope Asset and Liability Management Committee Optimising the financial resources and managing the connected risks in the areas of Market and Liquidity. Executive Risk Management Committee Reviewing, monitoring and evaluating the policies and procedures in the areas of credit risk, operational risk, and market risk in accordance with the guidelines of the Integrated Risk Management Committee. Information Technology Steering Committee Monitoring and reviewing the IT infrastructure to support the optimisation of overall business strategy and mitigating technological risks. Operational Risk Management Committee Reviewing and monitoring the operational risk related areas including people, process and systems in accordance with guidelines of the Integrated Risk Management Committee.
Outsourcing Management Committee Reviewing, monitoring and evaluating outsourced functions of the Bank. Executive Credit Committee Reviewing and approving credit proposals within the delegated authority levels of the Committee as directed by Board Credit Committee.
Governance Policies Over the years the Bank has adopted a number of policies to evaluate the methods and procedures for risk management, implementation of the Bank’s corporate governance framework and compliance with applicable laws and regulations. The framework provided by these policies aims to support a higher growth, institutionalisation of best processes for governance, effective management of risks, controls and compliances across the organisation.
Annual General Meetings An important part of the Bank’s approach to governing our stakeholder relationships is to ensure that shareholders’ views are heard and fully considered. The Annual General Meetings provide an opportunity for the Board to interact with and be accountable to shareholders. The Board provides an update to shareholders on the Bank’s performance and offer an opportunity for shareholders to ask questions and vote on resolutions. The Board and key members of management are present and available to answer questions. The external auditors also attend to address any queries raised.
The informed participation of shareholders at general meetings is encouraged by the Board and therefore notices of general meetings are sent to shareholders within the timeframes stipulated by law.
Stewardship Corporate Governance 113 Union Bank | Annual Report 2018
Corporate Governance
The Bank’s compliance with Direction No. 11 of 2007, issued by the Central Bank of Sri Lanka on the subject ‘Corporate Governance for Licensed Commercial Banks in Sri Lanka’.
Annual Corporate Governance Report of Union Bank of Colombo PLC for the year ended 31st December 2018 is given below:-
Section Rule Level of Compliance 3 (1) The Responsibilities of the Board 3 (1)(i) The Board shall strengthen the safety and Soundness of the Bank by ensuring the implementation of the following (a) Approve and oversee the Bank’s strategic objectives and Complied. corporate values and ensure that these are communicated The Bank has set its strategic objectives and goals through throughout the Bank; the Board approved strategic plan and through the annual budgets. Strategies and Corporate values have been communicated to all business units and other staff through regular management meetings. (b) Approve the overall business strategy of the Bank, including Complied. the overall risk policy and risk management procedures and The Bank’s overall three year strategic plan for 2019 - mechanisms with measurable goals, for at least the next three 2021 was approved by the Board subsequent to detailed years. deliberations by the Board and the Corporate Management. Strategic plan includes measurable goals for the period of 2019-2021. Board has also discussed the risks arising out of new strategies and the ways and means to mitigate them. (c) Identify the principal risks and ensure implementation of Complied. appropriate systems to manage the risks prudently; Overall risk framework of the Bank is the Board’s responsibility. Further Identifying principal risks and implementation of appropriate risk management techniques are performed via the Board appointed Integrated Risk Management Committee (IRMC). Risk Management Department has sent in policies and procedures on Integrated Risk Management Framework and have enforced mechanisms in order to assist the IRMC to identify principal risks prudently. Risk Reports in Pages 90-105 provide detailed insight of the Bank’s Integrated Risk Management Framework. (d) Approve implementation of a policy of communication with Complied . all stakeholders, including depositors, creditors, shareholders Board approved Communication policy is in place. and borrowers. (e) Review the adequacy and the integrity of the Bank’s internal Complied. control systems and management information systems. Adequacy and the integrity of the Bank’s internal control systems and Management Information Systems are reviewed by the Board Audit Committee (BAC) on a regular basis and annually by the Board of Directors. (f) Board has identified and designated Key Management Complied. Personnel, as Officers Performing Executive Functions of LCBs The Board of Directors has identified and designated the as defined in Banking Act Determination No. 3 of 2010 as per CEO, VPs, Chief Risk Officer, Chief Financial Officer, Head of Bank Supervision Dept. and Guideline ref. 02/17/550/0002/003 Internal Audit, Head of Compliance, Head of Treasury, Head on 02 December 2015. of Information Technology, Board Secretary/Head of Legal, Officers serving as Consultants / Advisors to the Board or Bank, as Key Management Personnel (KMPs) of the Bank.
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Section Rule Level of Compliance (g) Define the areas of authority and key responsibilities for the Complied. Board of Directors themselves and for the Key Management Segregation of duties and authority between the Board of Personnel. Directors and KMPs is in place. Articles of the Bank stipulate the authority of Directors and matters specifically reserved for the Directors. Bank’s Internal Code of Corporate Governance, also sets areas of responsibility of the Directors. Further responsibilities and authority are delegated to the Directors and KMPs via Board approved policies, Terms of References, and operational delegation arrangements. Key responsibilities of the KMPs are included in their respective job descriptions. (h) Ensure that there is appropriate oversight of the affairs of the Complied. Bank by Key Management Personnel, that is consistent with Board of Directors has oversight on KMPs primarily at Board Board policy; Meetings and Board Sub-Committee Meetings. KMPs make regular presentations to the Board on matters under their purview and are also called in by the Board and to Board Sub- Committees to explain matters relating to their concerns. (i) Periodically assess the effectiveness of the Board Directors’ Complied. own governance practices, including: Directors’ assessments are conducted annually and complied for 2018.
(i) the selection, nomination and election of Directors and Board has a procedure for selection and appointment of Key Management Personnel; Directors, CEO & KMPs, which is delegated to the Nomination (ii) the management of conflicts of interests; and Committee. (iii) the determination of weaknesses and implementation of changes where necessary; Code of Corporate Governance approved by the Board has a provision (Section 8) in this regard.
Bank has a Self -evaluation process in place for the Board of Directors which includes the evaluation of Board Directors’ own governance practices.
Summary of self-evaluations obtained have been submitted to the Board for their review and action if deemed necessary. (j) Ensure that the Bank has an appropriate succession plan for Complied. Key Management Personnel; The HRRC and the Board has approved succession plan for KMPs, which has been reviewed for 2018. (k) Meet regularly, on a needs basis, with the Key Management Complied. Personnel to review policies, establish communication lines KMPs make regular presentations to the Board on matters and monitor progress towards corporate objectives; under their purview and are also called in by the Board and to Board Sub-Committees to explain matters relating to their concerns. (l) Understand the regulatory environment and ensure that the Complied. Bank maintains an effective relationship with regulators; Compliance Officer submits quarterly reports to the Board that assists the Board to identify the regulatory environment. Board ensures that an effective relationship with the regulators are maintained by way of active participation at meetings with the regulators by the CEO.
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Section Rule Level of Compliance (m) Exercise due diligence in the hiring and oversight of external Complied. auditors. Terms of Reference of the Board Audit Committee (BAC) includes provisions to recommend appointment of External Auditors; Recommended the re-appointment of Messrs Ernst & Young, Chartered Accountants as the Bank’s External Auditors for audit services for year 2018. Pursuant to recommendations, Messrs Ernst & Young was re-appointed as the Auditors for the financial year 2018 by the shareholders at the Annual General Meeting held on 28 March 2018. 3 (1)(ii) The Board shall appoint the Chairman and the Chief Executive Complied. Officer and define and approve the functions and responsibilities of Positions of the Chairman and the Director/ Chief Executive the Chairman and the Chief Executive Officer in line with Direction Officer (CEO) are separated. 3(5) of these Directions. Further, functions and responsibilities of the Chairman and the CEO are properly defined and approved in line with the Direction 3(5) of this Direction through the Board approved Terms of References - Functions and Responsibilities of Chairman, CEO and Senior Director. 3 (1)(iii) The Board shall meet regularly and Board meetings shall be held at Complied. least twelve times a year at approximately monthly intervals. Such Board ensures that it meets regularly and involves active regular Board meetings shall normally involve active participation participation by the Directors. in person of a majority of Directors entitled to be present. Obtaining Board has met thirteen times during the year at monthly the Board’s consent through the circulation of written resolutions/ intervals and as and when it was required. papers shall be avoided as far as possible. There were 04 Circular resolutions passed during the year. 3 (1)(iv) The Board shall ensure that arrangements are in place to enable all Complied. Directors to include matters and proposals in the agenda for regular Code of Corporate Governance sets a procedure to include Board meetings where such matters and proposals relate to the such matters and proposals. Meetings are notified in advance promotion of business and the management of risks of the Bank. allowing Directors to raise matters concerning promotion of business and management of risks. 3 (1)(v) The Board procedures shall ensure that notice of at least 7 days Complied. is given of a regular Board meeting to provide all Directors an Regular monthly meetings are informed to the Directors prior opportunity to attend. For all other Board meetings, reasonable to seven days giving them the opportunity to attend. notice may be given. Formal notices, agenda and Board Papers are circulated to Directors seven days in advance through the Board Paper Management System. 3 (1)(vi) The Board procedures shall ensure that a Director, who has not Complied. attended at least two-thirds of the meetings in the period of 12 Directors’ attendance register is maintained by the Company months immediately preceding or has not attended the immediately Secretary to ensure compliance with the direction. preceding three consecutive meetings held, shall cease to be As per Board Attendance schedule, all Directors have a Director. Participation at the Directors’ meetings through an attended the required number of meetings for 2018. alternate Director shall, however, be acceptable as attendance. 3 (1)(vii) The Board shall appoint a Company Secretary who satisfies the Complied. provisions of Section 43 of the Banking Act No. 30 of 1988 whose The Board has appointed a Company Secretary whose primary responsibilities shall be to handle the secretariat services primary responsibilities are handling secretariat services to to the Board and shareholder meetings and to carry out other the Board and Shareholder meeting and to carry out the functions specified in the statutes and other regulations. other functions specified in the statues and other regulations and is also stipulated in the Code of Corporate Governance of the Bank.
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Section Rule Level of Compliance 3 (1)(viii) All Directors shall have access to advice and services of the Company Complied. Secretary with a view to ensuring that Board procedures and all All the Directors have equal opportunity to access the applicable rules and regulations are followed. Company Secretary. Board approved procedure is in place to enable all Directors to have access to advice and services of the Company Secretary. 3 (1)(ix) The Company Secretary shall maintain the minutes of Board Complied. meetings and such minutes shall be open for inspection at any Minutes of Board meetings are maintained by the Company reasonable time, on reasonable notice by any Director. Secretary and there is a Board approved procedure under Corporate Governance Code in place to enable all Directors to have access to such minutes. Any Director can inspect the minutes of Board meeting with reasonable notice that is being maintained by the Company Secretary. 3 (1)(x) Minutes of Board meetings shall be recorded in sufficient detail Complied. so that it is possible to gather from the minutes, as to whether the The Minutes of the meetings include: Board acted with due care and prudence in performing its duties. (a) A summary of data and information used by the Board in The minutes shall also serve as a reference for regulatory and its deliberations; supervisory authorities to assess the depth of deliberations at the (b) The matters considered by the Board; Board meetings. Therefore, the minutes of a Board meeting shall (c) The fact-finding discussions and the issues of contention clearly contain or refer to the following: or dissent; (a) a summary of data and information used by the Board in its (d) The testimonies and confirmations of relevant Executives deliberations; with regard to the Board’s strategies and policies and (b) the matters considered by the Board; adherence to relevant laws and regulations; (c) the fact-finding discussions and the issues of contention or (e) Matters regarding the risks to which the Bank is dissent which may illustrate whether the Board was carrying out exposed to and an overview of the risk management its duties with due care and prudence; measures including reports of the Board Integrated Risk (d) the testimonies and confirmations of relevant executives which Management Committee; and indicate compliance with the Board’s strategies and policies and (f) The decisions and Board resolutions including reports of adherence to relevant laws and regulations; all Board Committees. (e) the Board’s knowledge and understanding of the risks to which the Bank is exposed and an overview of the risk management measures adopted; and (f) the decisions and Board resolutions. 3 (1)(xi) There shall be a procedure agreed by the Board to enable Directors, Complied. upon reasonable request, to seek independent professional advice Code of Corporate Governance includes provisions for Board in appropriate circumstances, at the Bank’s expense. of Directors to seek professional advice required to assist The Board shall resolve to provide separate independent them on discharging their duties effectively. professional advice to Directors to assist the relevant Director or Directors to discharge his/ her/ their duties to the Bank.
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Section Rule Level of Compliance 3 (1)(xii) Directors shall avoid conflicts of interests, or the appearance of Complied. conflicts of interest, in their activities with, and commitments to, The Board approved procedure is in place to avoid conflicts of other organisations or related parties. If a Director has a conflict of interests or the appearance of conflicts of interest is included interest in a matter to be consider by the Board, which the Board in the Corporate Governance Code and is implemented. has determined to be material, the matter should be dealt with at This procedure further evidence that the Director is to abstain a Board meeting, where Independent Non Executive Directors who from voting on any Board resolution in relation to which he/ have no material interest in the transaction are present. Further, a she or any of his/ her close relation or a concern in which a Director shall abstain from voting on any Board resolution in relation Director has substantial interest and he/ she has not been to which he/ she or any of his/ her close relation or a concern in counted in the quorum. which a Director has substantial interest, is interested and he/ she During the year Board of Directors has complied to the shall not be counted in the quorum for the relevant agenda item at procedure. the Board meeting. 3 (1)(xiii) The Board shall have a formal schedule of matters specifically Complied. reserved to it for decision to ensure that the direction and control of Article 98 of the Bank’s Articles of Association defines the the Bank is firmly under its authority. areas of authority and responsibilities for the Board and notes the matters that cannot be delegated and that are reserved exclusively to the Board. Various Policies, Terms of References, and operational delegation arrangements sets authority and responsibilities of Directors. 3 (1)(xiv) The Board shall, if it considers that the Bank is, or is likely to be, Complied. unable to meet its obligations or is about to become insolvent or is The Board is aware of the requirements to inform the Director about to suspend payments due to depositors and other creditors, Banking Supervision of the situation of the Bank prior to forthwith inform the Director of Bank Supervision of the situation of taking any decision or action. The Bank has not come across the Bank prior to taking any decision or action. any situation as such during the year 2018. 3 (1)(xv) The Board shall ensure that the Bank is capitalised at levels as Complied. required by the Monetary Board in terms of the capital adequacy The Bank has set Internal Capital Adequacy Arrangements ratio and other prudential grounds. with the approval of the Board and the Central Bank of Sri Lanka (CBSL). These are being implemented to ensure the Bank is capitalised at all times adequately. Reports of such are submitted to the Integrated Risk Management Committee (IRMC) and to the Board. 3 (1)(xvi) The Board shall publish in the Bank’s Annual Report, an annual Complied. corporate governance report setting out the compliance with The Bank has published the Corporate Governance report in Direction 3 of these Directions. Annual Report 2018. 3 (1)(xvii) The Board shall adopt a scheme of self-assessment to be undertaken Complied. by each Director annually, and maintain records of such assessments. The Bank has a scheme of self-evaluation of Directors in place and Company Secretary has obtained self assessment of Directors for the year 2018. 3 (2) Board’s Composition 3 (2)(i) The number of Directors on the Board shall not be less than 7 and Complied. not more than 13. The Board comprises of 12 Directors. 3 (2)(ii) The total period of service of a Director other than a Director who Complied. holds the position of Chief Executive Officer shall not exceed nine Service period has not exceeded nine years for any of the years, and such periods in office shall be inclusive of the total period Directors. or service served by such Director up to 01 January 2008.
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Section Rule Level of Compliance 3 (2)(iii) An employee of a Bank may be appointed, elected or nominated Complied. as a Director of the Bank (hereinafter referred to as an “Executive There is only one Executive Director on the Board; the number Director”) provided that the number of Executive Directors shall not does not exceed the 1/3 of the Board. exceed one-third of the number of Directors of the Board. In such an event, one of the executive Directors shall be the Chief Executive Officer of the Bank. 3 (2)(iv) The Board shall have at least three Independent Non Executive Complied. Directors or one third of the total number of Directors, whichever is The Board comprises of 05 Independent Non Executive higher. This sub-direction shall be applicable from January 1, 2010 Directors, which is more than one third of the total number of onwards. Directors. A Non Executive Director shall not be considered independent if he/ she a) has direct and indirect shareholdings of more than 1% of the Please refer pages 86 and 143. Bank b) currently has or had during the period of two years immediately preceding his/her appointment as Director, any business transactions with the Bank as described in Direction 3 (7) hereof, exceeding 10% of the regulatory capital of the Bank; c) has been employed by the Bank during the two-year period immediately preceding the appointment as Director d) has a close relation who is a Director of Chief Executive Officer or a member of Key Management Personnel or a material shareholder of the Bank or another Bank. For this purpose, a ‘close relation’ shall mean the spouse or a financially dependent child; e) represents a specifics stakeholder of the Bank; f) is an employee or a Director or a material shareholder in a company or business organisation: i. which currently has a transaction with the Bank as defined in Direction 3 (7) of these Directions, exceeding 10% of the regulatory capital of the Bank, or ii. In which any of other Directors of the Bank are employed or are Directors or are material shareholders; or iii. In which any of other Directors of the Bank has a transaction as defined in Direction 3(7) of these Directions, exceeding 10% of regulatory capital in the Bank 3 (2)(v) In the event an alternate Director is appointed to represent an Complied. Independent Director, the person so appointed shall also meet the Independent Directors had not appointed alternates during criteria that applies to the Independent Director. the year 2018. 3 (2)(vi) Non Executive Directors shall be persons with credible track records Complied. and/or have necessary skills and experience to bring an independent Nomination Committee has a procedure in place to appoint judgment to bear on issues of strategy, performance and resources. Non Executive Directors, who possess skills and experience and new appointments during 2018 done in accordance with the Policy. 3 (2)(vii) A meeting of the Board shall not be duly constituted, although the Complied. number of Directors required to constitute the quorum at such During 2018 all the quorum of meetings had been in line with meeting is present, unless more than one half of the number of the Direction. Directors present at such meeting are Non Executive Directors.
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Section Rule Level of Compliance 3 (2)(viii) The Independent Non Executive Directors shall be expressly Complied. identified as such in all corporate communications that disclose Please refer pages 156-161. the names of Directors of the Bank. The Bank shall disclose the composition of the Board, by category of Directors, including the names of the Chairman, Executive Directors, Non Executive Directors, and Independent Non Executive Directors in the Annual Corporate Governance Report. 3 (2)(ix) There shall be a formal, considered and transparent procedure for Complied. the appointment of new Directors to the Board. There shall also be Nomination Committee has a procedure in place to appoint procedures in place for the orderly succession of appointments to Directors and all new appointments have been done in the Board. accordance with the procedure. 3 (2)(x) All Directors appointed to fill a casual vacancy shall be subject to Complied. election by shareholders at the first general meeting after their All Directors appointed to fill casual vacancies during the appointment. year 2018 are subject to election at the first Annual General Meeting after their appointment. 3 (2)(xi) If a Director resigns or is removed from office, the Board shall: (a) Complied. announce the Director’s resignation or removal and the reasons for Directors’ resignation and the reason for such resignation are such removal or resignation; and (b) issue a statement confirming duly informed to CBSL and Colombo Stock Exchange (CSE). whether or not there are any matters that need to be brought to the All resignations during the year are disclosed in the Annual attention of shareholders. Report. Please refer page 143. 3 (2)(xii) A Director or an employee of a Bank shall not be appointed, elected Complied. or nominated as a Director of another Bank except where such The Bank has a process to identify whether a Director of a Bank is a subsidiary company or an associate company of the first Bank is appointed, elected or nominated as a Director of mentioned Bank. another Bank based on the affidavit obtained and submitted to CBSL annually. Letter of Appointment of selected employees includes a clause with regard to this restriction. None of the present Directors or an employee acts as a Director of any Banks. Nomination Committee shall ascertain at the time of selection of Directors for such appointment of their fit and propriety in accordance with the Banking Act and other regulations by the CBSL. 3 (3) Criteria to assess the fitness and propriety of Directors 3 (3)(i) The age of a person who serves as Director shall not exceed 70 years. Complied. None of the Directors exceeds 70 years. 3 (3)(ii) A person shall not hold office as a Director of more than 20 Complied. companies/ entities/ institutions inclusive of subsidiaries or associate None of the Directors holds Directorships of more than 20 companies of the Bank. Companies/ Entities/ Institutions inclusive of Subsidiaries or Associate Companies of the Bank. 3 (4) Management functions delegated by the Board 3 (4)(i) The Directors shall carefully study and clearly understand the Complied. delegation arrangements in place. The Board is empowered by the Articles 98 of the Bank’s Articles of Association to delegate its powers to CEO upon such terms and conditions and with such restrictions as the Board may think fit and in terms of the Articles. Directors are aware of such delegation arrangements.
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Section Rule Level of Compliance 3 (4)(ii) The Board shall not delegate any matters to a Board Committee, Complied. Chief Executive Officer, Executive Directors or Key Management The Board has delegated powers to the Sub-Committees, CEO Personnel, to an extent that such delegation would significantly and the KMPs without hindering their ability to discharge hinder or reduce the ability of the Board as a whole to discharge its functions. Please refer 3.1.(i) g functions. 3(4)(iii) The Board shall review the delegation processes in place on a Complied. periodic basis to ensure that they remain relevant to the needs of Section 98 of the Bank’s Articles of Association defines the the Bank. delegation process and review of such delegated powers on a periodic basis.
Such delegated powers are reviewed periodically to ensure that they are remaining relevant to the needs of the Bank at Board meetings, Sub-Committee meetings when reviewing polices and Terms of References. 3 (5) The Chairman and Chief Executive Officer 3 (5)(i) The roles of Chairman and Chief Executive Officer shall be separate Complied. and shall not be performed by the same individual. Roles of Chairman and CEO are held by two individuals appointed by the Board. 3 (5)(ii) The Chairman shall be a Non Executive Director and preferably an Complied independent Director as well. In this case where the Chairman is not An independent Non Executive Director has been appointed an Independent Director, the Board shall designate an Independent as Senior Director of the Bank. Designation of the Senior Director as the Senior Director with suitably documented terms of Director is disclosed in pages 143, 157 and 158. reference to ensure a greater independent element. The designation of the Senior Director shall be disclosed in the Bank’s Annual Report. 3 (5)(iii) The Board shall disclose in its Corporate Governance Report, the Complied. identity of the Chairman and the Chief Executive Officer and the Identity of the Chairman and the CEO are disclosed in the nature of any relationship [including financial, business, family Annual Report. Refer Pages 156 and 158. or other material/ relevant relationship(s)], if any, between the Directors’ interests in contracts with the Bank have been Chairman and the Chief Executive Officer and the relationship separately disclosed in the Annual Report of 2018. among members of the Board. Please refer page 146. The Bank has a process in this regard. Company Secretary obtains an annual declaration from all members of the Board to this effect. Accordingly, there are no financial, business, family or other material/ relevant relationships between, Chairman, CEO and among Directors. 3 (5)(iv) The Chairman shall: provide leadership to the Board; ensure that Complied. the Board works effectively and discharges its responsibilities; and Functions and Responsibilities of the Chairman approved by ensure that all key and appropriate issues are discussed by the Board the Board includes the requirements stipulated and Chairman in a timely manner. provides leadership to the Bank and to the Board in line with the Code of Corporate Governance of the Bank. 3 (5)(v) The Chairman shall be primarily responsible for drawing up and Complied. approving the agenda for each Board meeting, taking into account Chairman has delegated drawing of the agenda to the where appropriate, any matters proposed by the other Directors for Company Secretary and is drawn in consultation with the inclusion in the agenda. The Chairman may delegate the drawing up Chairman. of the agenda to the Company Secretary.
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Section Rule Level of Compliance 3 (5)(vi) The Chairman shall ensure that all Directors are properly briefed Complied. on issues arising at Board Meetings and also ensure that Directors Board Papers are circulated seven days prior to the meeting receive adequate information in a timely manner. in order for Directors to request any other information if necessary. 3 (5)(vii) The Chairman shall encourage all Directors to make a full and active Complied. contribution to the Board’s affairs and take the lead to ensure that Code of Corporate Governance sets Directors’ responsibilities the Board acts in the best interests of the Bank. and principles in respect of leading and acting in the best interest of the Bank. 3 (5)(viii) The Chairman shall facilitate the effective contribution of Non Complied. Executive Directors in particular and ensure constructive relations Code of Corporate Governance sets Directors’ responsibilities between Executive and Non Executive Directors. and principles in respect of leading and acting in the best interest of the Bank, to ensure full and active contribution by Non Executive Directors. 3 (5)(ix) The Chairman shall not engage in activities involving direct Complied. supervision of Key Management Personnel or any other executive Chairman is a Non Executive Director. The Chairman does not duties whatsoever. directly get involved in the supervision of KMPs or any other executive duties. 3 (5)(x) The Chairman shall ensure that appropriate steps are taken to Complied. maintain effective communication with shareholders and that the Communication with shareholders are done in accordance views of shareholders are communicated to the Board. with the Board approved Communication Policy. 3 (5)(xi) The Chief Executive Officer shall function as the apex executive-in- Complied. charge of the day-to-day-management of the Bank’s operations and The Chief Executive Officer is in charge of the day-to-day business. management of the Bank’s operations and business and is supported by the Corporate Management. 3 (6) Board appointed committees 3 (6)(i) Each Bank shall have at least four Board Committees as set out in Complied. Directions 3 (6) (ii), 3 (6) (iii), 3 (6) (iv) and 3 (6) (v) of these Directions. The following mandatory Board Sub-Committees have been Each committee shall report directly to the Board. All committees appointed by the Board requiring each such committee to shall appoint a secretary to arrange the meetings and maintain report to the Board: minutes, record, etc., under the supervision of the Chairman of the 1. Human Resources and Remuneration Committee Committee. The Board shall present a report of the performance on 2. Integrated Risk Management Committee each Committee, on their duties and roles at the Annual General 3. Nomination Committee Meeting. 4. Audit Committee
All committees have a secretary appointed. Report of each Board Committee is presented in the Annual Report. Refer Pages 132-139. 3 (6)(ii) The following rules shall apply in relation to the Audit Committee: (a) The Chairman of the committee shall be an Independent Non Complied. Executive Director who possesses qualifications and experience The Chairman of Audit Committee, Mr. Yudhishtran in accountancy and/ or audit. Kanagasabai was an independent, Non Executive Director who possesses required qualifications and related experiences. (b) All members of the committee shall be Non Executive Directors. Complied. All members of the Committee are Non Executive Directors
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Section Rule Level of Compliance (c) The committee shall make recommendations on matters in Complied. connection with: In line with its Terms of Reference, the Board Audit Committee (i) the appointment of the External Auditor for audit services to (BAC) has reviewed and/or made relevant recommendations be provided in compliance with the relevant statutes; including the following: (ii) the implementation of the Central Bank guidelines issued to auditors from time to time; (i) The re-appointment of Messrs Ernst & Young, Chartered (iii) the application of the relevant accounting standards; and Accountants as the Bank’s External Auditors for audit (iv) the service period, audit fee and any resignation or dismissal services in compliance with the relevant regulations and of the auditor; provided that the engagement of the Audit guidelines. partner shall not exceed five years, and that the particular (ii) The implementation of guidelines applicable to the Audit partner is not re-engaged for the audit before the External Auditors issued from time to time by the Central expiry of three years from the date of the completion of the Bank of Sri Lanka. previous term. (iii) The application of relevant Accounting Standards, including the requirements of the Sri Lanka Financial Reporting Standards (SLFRS/LKAS) complying with the IAS and the IFRS complying to it in all material respects.
(iv) Reviewed and recommended the service period and audit fee. As required, the change of Partner was effected. (d) Review and monitor External Auditor’s independence and Complied. objectivity and the effectiveness of the audit processes. The BAC discussed with the External Auditors, the nature and the scope of audit and the effectiveness of the audit processes in respect of the financial year 2018, at a meeting held with the Auditors in the last quarter of 2018. Representation submitted by the External Auditors stating their independence and the objectivity and effectiveness of the audit processes in accordance with Sri Lanka Auditing Standards and best practices. (e) The committee shall develop and implement a policy on the Complied. engagement of an External Auditor to provide non-audit services that are permitted under the relevant statutes, The Committee has implemented a process on the regulations, requirements and guidelines, in doing so; the engagement of an External Auditor to provide non-audit Committee shall ensure that the provision by an External Auditor services after considering relevant statutes, regulations, of non-audit service does not impair the External Auditor’s requirements and guidelines. Independence or objectivity. When assessing the external auditor’s independence or objectivity in relation to the provision non-audit services, the Committee shall consider, Further, relevant information is obtained from External i. whether the skills and experience of the audit firm make it a Auditors to ensure that their independence or objectivity is suitable provider of the non-audit services not impaired, as a result of providing any non-audit services. ii. whether there are safeguards in place to ensure that there is no threat to the objectivity and/or independence in the conduct of the audit resulting from the provision of such services by the External Auditor; and iii. whether the nature of the non-audit services, the related fee levels and the fee levels individually and in aggregate relative to the audit firm, pose any threat to the objectivity and/ or independence of the External Auditor
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Section Rule Level of Compliance (f) The committee shall, before the audit commences, discuss and Complied. finalise with the external auditors the nature and scope of the The Auditors make a presentation at the Board Audit audit, including (i) an assessment of the Bank’s compliance with Committee Meeting with details of the proposed Audit Plan the relevant Direction in relation to Corporate Governance and and the Scope. The committee discussed and agreed on the management’s internal controls over financial reporting; (ii) the nature and the scope of the audit to be performed in the preparation of financial statements for external purposes in accordance with Sri Lanka Auditing Standards. The letters of accordance with relevant accounting principles and reporting engagement of the External Auditors in respect of the audits obligations; and (iii) the co-ordination between firms where of the year 2018 were reviewed and recommended by the more than one audit firm is involved. BAC prior to approval of the Board. (g) Check that the committee has a process to review the financial Complied. information of the Bank, in order to monitor the integrity of the financial statements of the Bank, its annual report, accounts and Committee has a process to review financial information of quarterly reports prepared for disclosure, and a process in place the Bank when the quarterly and annual audited financial to receive from the CFO the following; statements and the reports prepared for disclosure are (i) major judgemental areas; presented to the committee by the Chief Financial Officer. (ii) any changes in accounting policies and practices; Once the members of the Board Audit Committee have (iii) the going concern assumption; and obtained required clarifications in respect of all aspects (iv) the compliance with relevant accounting standards and included in the Financial Statements, such Financial other legal requirements, and; Statements are recommended for approval by the Board of (v) in respect of the annual financial statements the significant Directors. adjustments arising from the audit. (h) The committee shall discuss issues, problems and reservations Complied. arising from the interim and final audits, and any matters the The BAC met with the External Auditors during the year auditor may wish to discuss including those matters that may which included two meetings without the presence of the need to be discussed in the absence of Key Management management and ensured that there was no limitation of Personnel, if necessary. scope or incidents that could have negatively impacted on the effectiveness of the External Audit. (i) The committee shall review the External Auditor’s management Complied. letter and the management’s response thereto. BAC reviewed management letter with the management’s responses thereto. A separate Board Audit Committee meeting was held with the External Auditors and relevant Heads of Departments to discuss significant findings and remedial actions to be taken in respect of such findings.
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Section Rule Level of Compliance (j) The committee shall take the following steps with regard to the Complied. Internal Audit function of the Bank:
i. Review the adequacy of the scope, functions and resources i. The Annual Audit Plan prepared by the Internal Audit of the Internal Audit Department, and satisfy itself that the Department is submitted to the Board Audit Committee department has the necessary authority to carry out its for approval. The plan covers the scope and resources work; requirement relating to the Audit Plan.
ii. Review the Internal Audit programme and results of the ii. The Head of Audit updates the BAC on status of the Internal Audit process and, where necessary, ensure that Audit Plan and the actions taken by the management on appropriate actions are taken on the recommendations of Internal Audit recommendations. the Internal Audit department;
iii. Review any appraisal or assessment of the performance of iii. The appraisal of the Head of Audit is undertaken by the the head and senior staff members of the Internal Audit Audit Committee Chairman and performance appraisal of department; the Senior Staff are carried out by the Head of Audit and reviewed by the BAC. iv. Recommend any appointment or termination of the head, senior staff members and outsourced service providers to iv. The Acting Head of Audit was appointed as the Head of the Internal Audit function; Audit in March 2018.
v. Ensure that the committee is appraised of resignations of v. The BAC’s Terms of Reference covers the stipulated senior staff members of the Internal Audit Department requirement.
vi. Ensure that the Internal Audit function is independent of the vi. The BAC reviewed the adequacy of the Internal Audit activities it audits and that it is performed with impartiality, function and ensured that it conforms to the principles proficiency and due professional care; of the Internal Audit Charter. The BAC reviewed and recommended revisions to the Internal Audit Charter during the year. The Internal Audit Charter defines the scope, functions, authority, responsibility, adjudication, external relationship management and ethics that assist and direct/guide the Internal Audit Department to discharge its functions independently. Also the BAC has ensured that the Internal Audit function was independent of the activities it audits and that it performs impartially and with required proficiency and exercises due professional care in performing the audit function. (k) The committee shall consider the major findings of internal Complied. investigations and management’s responses thereto; The committee reviewed Investigation Reports issued and has considered the major findings of internal investigations. The BAC reviewed the management responses and made appropriate recommendations, where necessary.
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Section Rule Level of Compliance (l) The Chief Finance Officer, the Chief Internal Auditor and a Complied. representative of the External Auditor may normally attend The Head of Audit who is secretary to the Audit Committee meetings, other Board Members and the Chief Executive Officer attends meetings regularly and the Chief Financial Officer, may also attend meetings upon the invitation of the Committee. Director/ CEO and other Corporate Heads have attended However, at least twice a year, the Committee shall meet with meetings by invitation as appropriate. Committee has met the External Auditors without the Executive Directors being the external auditors 02 times without the executive Directors present. being present. (m) The committee shall have: Complied. The BAC’s Terms of Reference provides it authority to (i) explicit authority to investigate into any matter within its investigate into any matter within its Terms of Reference; Terms of Reference; obtain the resources which it needs to carry out the (ii) the resources which it needs to do so; investigation; full access to information and authority to (iii) full access to information; and obtain external professional advice and to invite outsiders (iv) authority to obtain external professional advice and to invite with relevant experience to be involved, if necessary. outsiders with relevant experience to attend, if necessary. (n) The committee shall meet regularly, with due notice of issues to Complied. be discussed and shall record its conclusions in discharging its The BAC met 08 times during the year with due notice. The duties and responsibilities. agenda and the papers for discussions and consideration/ approval were circulated prior to the meeting. The minutes of the meetings were recorded by the Head of Internal Audit who functioned as the Secretary to the Committee. The minutes were approved by the BAC at the next regular meeting. (o) The Board shall disclose in an informative way, (i) details Complied. of the activities of the Audit Committee; (ii) the number of Please Refer the BAC Report on pages 132-134 which covers Audit Committee meetings held in the year; and (iii) details of the details of number of meetings held and the attendance of attendance of each individual Director at such meetings. the Audit Committee Members. (p) The secretary of the committee (who may be the company Complied. secretary or the head of the Internal Audit function) shall record The Head of Audit, who is the Secretary of the Committee, and keep detailed minutes of the committee meetings. records and maintains all minutes of the meetings. (q) The committee shall review arrangements by which employees Complied. of the Bank may, in confidence, raise concerns about possible The Bank has in place a Whistle-Blower Policy which was improprieties in financial reporting, internal control or other reviewed/ revised during the year. The BAC has ensured that matters. Accordingly, the committee shall ensure that proper all employees are duly informed and duly advised of the arrangements are in place for the fair and independent effective use of the Whistle-Blower process. Independent investigation of such matters and for appropriate follow-up investigations were carried out by the Internal Audit action and to act as the key representative body for overseeing Department on whistle blower complaints and were reported the Bank’s relations with the External Auditor. to the BAC. 3 (6)(iii) The following rules shall apply in relation to the Human Resources and Remuneration Committee: (a) The committee shall determine the remuneration policy Complied. (salaries, allowances and other financial payments) relating to A Board approved Remuneration Policy is in place to Directors, Chief Executive Officer (CEO) and Key Management determine remuneration in relation to Directors, CEO and Personnel of the Bank. KMPs of the Bank. (b) The committee shall set goals and targets for the Directors, CEO Complied. and the Key Management Personnel. Goals and targets for Directors are in place approved by the Committee. Goals and Targets for KMPs had been set for the year 2018.
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Section Rule Level of Compliance (c) The committee shall evaluate the performance of the CEO and Complied. Key Management Personnel against the set targets and goals A balanced score card was used to set the targets for the periodically and determine the basis for revising remuneration, KMPs in 2018. Their performance will be assessed in the 1st benefits and other payments of performance-based incentives. quarter 2019 against the set targets. Revision of remuneration in 2019 will be linked to the 2018 performance of the respective KMPs. (d) The CEO shall be present at all meetings of the committee, Complied. except when matters relating to the CEO are being discussed. Board approved HRRC Charter defines the criteria that the CEO shall attend all meetings of the committee by invitation except when matters relating to him are being discussed. 3 (6)(iv) The following rules shall apply in relation to the Nomination Committee: (a) The committee shall implement a procedure to select/ appoint Complied. new Directors, CEO and Key Management Personnel. Board approved policy is in place to select/ appoint new Directors, CEO and KMPs. (b) The committee shall consider and recommend (or not Complied. recommend) the re-election of current Directors, taking into Board approved policy and process in place. account the performance and contribution made by the The Committee has considered and recommended the Director concerned towards the overall discharge of the Board’s appointment of current Directors. responsibilities. (c) The committee shall set the criteria for eligibility to be Complied. considered for appointment or promotion to the post of CEO Policy is in place for ‘Selection Criteria for Directors, CEO and and the key management positions. KMPs’ which includes the required criteria for appointments and promotions. All KMPs have been appointed with the approval of the committee. (d) The committee shall ensure that Directors, CEO and Key Complied. Management Personnel are fit and proper persons to hold office Policy is in place for ‘Selection Criteria for Directors, CEO and as specified in the criteria given in Direction 3(3) and as set out Key Management Personnel’ which includes the required in the Statutes. criteria for appointments and promotions. All KMPs have been appointed with the approval of the committee.
A fit and proper certificate from CBSL has been obtained for all appointments of KMPs. (e) The committee shall consider and recommend from time Complied. to time, the requirements of additional/new expertise and The committee has considered the requirements for the succession arrangements for retiring Directors and Key succession arrangements for new Directors and KMPs during Management Personnel. the year 2018. (f) The Committee shall be chaired by an Independent Director. The Complied. CEO may be present at meetings by invitation. Chairman of Nomination Committee (NC) is an independent Director. CEO has attended NC meetings by invitation.
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Section Rule Level of Compliance 3(6)(v) The following rules shall apply in relation to the Integrated Risk Management Committee: (a) The committee shall consist of at least three Non Executive Complied. Directors, Chief Executive Officer and Key Management A Board approved Terms of Reference for the Integrated Risk Personnel supervising broad risk categories, i.e., credit, market, Management Committee (IRMC) is in place. liquidity, operational and strategic risks. The committee shall work with Key Management Personnel very closely and make Committee consists of six Non Executive Directors, CEO decisions on behalf of the Board within the framework of the and Chief Risk Officer. Other KMPs supervising broad risk authority and responsibility assigned to the Committee. categories, i. e. Chief Financial Officer, VP – Wholesale Banking, VP - Retail Banking, Head of IT, VP – Operations, Head of Audit and Compliance Officer are called by invitation to discuss respective risk areas. (b) The committee shall assess all risks, i.e., credit, market, liquidity, Complied. operational and strategic risks to the Bank on a monthly basis. On a monthly basis, IRMC has implemented a procedure to In the case of subsidiary companies and associate companies, assess the risks such as credit, market and operational risks of risk management shall be done, both on a Bank basis and Group the Bank through relevant risk indicators and management basis. information and such risks are reported to IRMC through Quarterly Risk Report and Risk Matrix table. Bank has also formed a Group Risk Governance structure covering its connected entities. (c) The committee shall review the adequacy and effectiveness of Complied. all management level committees such as the Credit Committee The Committee reviews the adequacy and effectiveness of all and the Asset-Liability Committee to address specific risks and to management level committees. manage those risks within quantitative and qualitative risk limits as specified by the Committee. (d) The committee shall take prompt corrective action to mitigate Complied. the effects of specific risks in the case such risks are at levels Committee identifies specific risks through periodical reports beyond the prudent levels decided by the Committee on the submitted to them and gives advice on a need basis to basis of the Bank’s policies and regulatory and supervisory mitigate such risks. requirements. (e) The committee shall meet at least quarterly to assess all aspects Complied. of risk management including updated business continuity Committee meets at least quarterly and at regular frequencies plans. if need arises. (f) The committee shall take appropriate actions against the officers Complied . responsible for failure to identify specific risks and take prompt The Board approved Disciplinary Policy includes provisions corrective actions as recommended by the committee, and/ or and criteria for such situations. as directed by the Director of Bank Supervision. (g) The committee shall submit a risk assessment report within a Complied. week of each meeting to the Board seeking the Board’s views, Risk assessment reports are circulated to Board members concurrence and/or specific directions. within one week from the date of IRMC. (h) The committee shall establish a compliance function to assess Complied. the Bank’s compliance with laws, regulations, regulatory A compliance function has been established to assess guidelines, internal controls and approved policies on all areas the Bank’s compliance with laws, regulations, regulatory of business operations. A dedicated compliance officer selected guidelines, internal controls and approved policies on all from Key Management Personnel shall carry out the compliance areas of business operations. This function is headed by function and report to the committee periodically. the Compliance Officer who reports directly to the Board Integrated Risk Management Committee. Compliance function assesses the Bank’s internal controls and approved policies on all areas of business operations.
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Section Rule Level of Compliance 3 (7) Related Party Transactions 3 (7)(i) The Board shall take the necessary steps to avoid any conflicts of Complied. interest that may arise from any transaction of the Bank with any The Board takes necessary steps in line with the Banking Act, person, and particularly with the following categories of persons this direction and as stipulated in the Bank’s Internal Code of who shall be considered as “ related parties” for the purpose of this Corporate Governance and Related Party Transactions Policy direction to avoid any conflicts of interest that may arise from any a. Any of the Bank’s subsidiary companies; transaction of the Bank with its related parties. b. Any of the Bank’s associate companies; c. Any of the Directors of the Bank; Related Party Transaction Policy of the Bank has been d. Any of the Bank’s Key Management Personnel; reviewed by the Board in 2018 and is implemented. e. A close relation of any of the Bank’s Directors or Key Management Personnel; f. A shareholder owning a material interest in the Bank; g. A concern in which any of the Bank’s Directors or a close relation of any of the Bank’s Directors or any of its material shareholders has a substantial interest. 3 (7)(ii) The type of transactions with related parties that shall be covered by Complied. this Direction shall include the following: (a) The grant of any type of accommodation, as defined in the Monetary Board’s Directions on maximum amount of accommodation, (b) The creation of any liabilities of the Bank in the form of deposits, borrowings and investments, (c) The provision of any services of a financial or non-financial nature provided to the Bank or received from the Bank, (d) The creation or maintenance of reporting lines and information flows between the Bank and any related parties which may lead to the sharing of potentially proprietary, confidential or otherwise sensitive information that may give benefits to such related parties. 3 (7)(iii) The Board shall ensure that the Bank does not engage in Complied. transactions with related parties as defined in Direction 3 (7)(i) The staff concerns are informed through operational above, in a manner that would grant such parties “more favourable circulars to refrain from granting accommodations with more treatment” than that accorded to other constituents of the Bank favourable treatment as defined in the Banking Act Direction carrying on the same business. No. 11 of 2007. Monitoring process has been strengthened by the implementation of on line preventive monitoring system to ensure that there is no favourable treatment offered as mentioned in point number 3 (7)(iii) 3 (7)(iv) A Bank shall not grant any accommodation to any of its Directors Complied. or to a close relation of such Director unless such accommodation Please refer 3.7 (i). All such accommodation has to be is sanctioned at a meeting of its Board of Directors, with not less approved at the Board level meetings with not less than 2/3 than two-thirds of the number of Directors other than the Director of the number of Directors other than the Director concerned, concerned, voting in favour of such accommodation and that this voting for such accommodations granted. accommodation be secured by such security as may from time to time be determined by the Monetary Board as well.
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Corporate Governance
Section Rule Level of Compliance 3 (7)(v) (a) Where any accommodation has been granted by a Bank to Complied. a person or a close relation of a person or to any concern in The Bank did not encounter such a situation during the year. which the person has a substantial interest, and such person is subsequently appointed as a Director of the Bank, steps shall be taken by the Bank to obtain the necessary security as may be approved for that purpose by the Monetary Board, within one year from the date of appointment of the person as a Director. (b) Where such security is not provided by the period as provided in Direction 3(7)(v)(a) above, the Bank shall take steps to recover any amount due on account of any accommodation, together with interest, if any, within the period specified at the time of grant of accommodation or at the expiry of a period of eighteen months from the date of appointment of such Director, whichever is earlier (c) Any Director who fails to comply with the above sub-directions shall be deemed to have vacated the office or Director and the Bank shall disclose such fact to the public (d) This sub-direction, however, shall not apply to a Director who at the time of the grant of the accommodation was granted under a scheme applicable to all employees of such Bank. 3 (7)(vi) A Bank shall not grant any accommodation or “more favourable Complied. treatment” relating to the waiver of fees and/ or commissions to any No accommodation has been given to employees on a employee or a close relation of such employee or to any concern favourable basis other than the general schemes applicable to in which the employee or close relation has a substantial interest all employees of the Bank, such as staff loan facilities. other than on the basis of a scheme applicable to the employees of such Bank or when secured by security as may be approved by Please refer 3.7 (i) the Monetary Board in respect of accommodation granted as per Direction 3 (7) (v) above. 3 (7)(vii) No accommodation granted by a Bank under Direction 3 (7) (v) and 3 Complied. (7) (vi) above, nor any part of such accommodation, nor any interest The Bank did not encounter such a situation during the year. due thereon shall be remitted without the prior approval of the Monetary Board and any remission without such approval shall be void and of no effect.
3 (8) Disclosures 3 (8)(i) The Board shall ensure that: (a) annual audited financial statements and quarterly financial a) Complied. statements are prepared and published in accordance with the formats prescribed by the supervisory and regulatory authorities and applicable accounting standards, and that (b) such statements are published in the newspapers in an abridged b) Complied. form, in Sinhala, Tamil and English
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Section Rule Level of Compliance 3 (8)(ii) The Board shall ensure that the following minimum disclosures are made in the Annual Report: (a) A statement to the effect that the annual audited financial Please refer page 141. statements have been prepared in line with applicable accounting standards and regulatory requirements, inclusive of specific disclosures. (b) A report by the Board on the Bank’s internal control mechanism Please refer pages 149-150. that confirms that the financial reporting system has been designed to provide reasonable assurance regarding the reliability of financial reporting, and that the preparation of financial statements for external purposes has been done in accordance with relevant accounting principles and regulatory requirements. (c) The External Auditor’s certification on the effectiveness of the Please refer page 151. internal control mechanism reported by the Board of Directors (d) Details of Directors, Please refer pages 146, 147 and 156-161. i. including names, fitness and propriety, ii. transactions with the Bank and iii. the total of fees/remuneration paid by the Bank. (e) Total net accommodation as defined in 3 (7) (iii) granted to each Please refer page 146. category of related parties. The net accommodation granted to each category of related parties shall also be disclosed as a percentage of the Bank’s regulatory capital. (f) The aggregate values of remuneration paid by the Bank to its Please refer page 146. Key Management Personnel and the aggregate values of the transactions of the Bank with its Key Management Personnel, set out by broad categories such as remuneration (g) The External Auditor’s certification of the compliance with The Bank has obtained the External Auditor’s factual finding these Directions in the annual Corporate Governance reports report on this Corporate Governance Report. published in the annual report. (h) A report setting out details of the compliance with Please refer pages 147 and 148. i. prudential requirements, regulations, laws and ii. internal controls and iii. Measures taken to rectify any material non-compliance. (i) A statement of the regulatory and supervisory concerns on There is no such non-compliance issues pointed out by the lapses in the Bank’s risk management, or non-compliance with Director of Bank Supervision to be disclosed to the public. these Directions that have been pointed out by the Director of Bank Supervision, if so directed by the Monetary Board to be disclosed to the public, together with the measures taken by the Bank to address such concerns.
Stewardship Corporate Governance 131 Union Bank | Annual Report 2018
Board Audit Committee Report
Members of the Board Audit Committee Corporate Governance under Listing Rules of the Colombo Stock Exchange’ and ‘Code Name Eligibility Attendance Excused of Best Practices on Corporate Governance’, Mr. Yudhishtran Kanagasabai – Independent 8 - issued jointly by The Institute of Chartered Chairman (Resigned 31/12/2018) Non-Executive Director Accountants of Sri Lanka and the Securities Mr. Priyantha Fernando Independent 7 1 and Exchange Commission of Sri Lanka, further Non-Executive Director regulate the composition, roles and functions of the Committee. Ms. Dilashani Wijayawardana Independent 8 - Non-Executive Director The Committee meets regularly with the Mr. Ranvir Dewan Non Independent 6 2 Bank’s senior financial and internal audit Non-Executive Director management, and the external auditor Mr. Michael O’Hanlon Non Independent 7 1 to consider, inter alia, the Bank’s financial Non-Executive Director reporting, the nature and scope of audit reviews and the effectiveness of the systems of internal control relating to financial The other attendees of the Audit Committee and advice to the Board on financial reporting reporting. It also assists the Board of Directors meeting included: related matters and internal controls over in its general oversight of financial reporting, D/CEO and CFO financial reporting and has exercised oversight internal controls and functions relating to The members of the Board Audit Committee of the work undertaken by the Group Internal internal and external audit. The Committee has (Committee) have detailed and relevant Audit and Group’s External Auditors. the authority to investigate any matter within experience and bring an independent mindset its terms of reference, and has full access to, to their role. The Committee of the Bank was Significant amount of time has been spent and co - operation by, management. chaired by Yudhishtran Kanagasabai, a Fellow discussing the root causes of control of the Institute of Chartered Accountants weaknesses and regulatory breaches and the Key Responsibilities of the Bac of Sri Lanka for the period of 1st January to resulting remediation and mitigating action 31st December 2018 and with his resignation taken by management. We have also discussed Financial reporting: Priyantha Fernando took over the position the Group’s relationships with its regulators in The primary role of the Committee in relation of Interim Chairman of the Board Audit light of compliance issues and internal control to financial reporting is to monitor the Committee (BAC). The Board is satisfied that weaknesses that have arisen. integrity of the Group Financial Statement they have requisite experience in the fields and formal announcements, if any, relating to of Accounting, Auditing and Banking. Brief The Head of Internal Audit continues to Group financial performance. profiles of the Committee members are given function as the Secretary to the Committee. in pages 156-161. The BAC comprises of five The Committee met 8 times during the period The Committee reviewed and discussed with members - three Independent Non-Executive under review. the management, the internal auditors and Directors and two Non-Executive Directors. the external auditors the critical accounting Terms of Reference policies, practices, related changes thereto, Most of the Committee members serve on The Charter of the Committee, approved alternative accounting treatments, major other committees including the Integrated by the Board, clearly defines the Terms of judgemental areas, material audit adjustments, Risk Management Committee. This Reference of the Committee and is annually compliance with accounting standards, going interweaving linkage between the Board Audit reviewed to ensure that new developments concern assumptions, financial reporting Committee and other Committees within the relating to the Committee’s functions are controls and compliance with applicable laws Bank has been a key driver in ensuring that addressed. The Charter of the Committee was and regulations that could impact the integrity gaps and unnecessary duplications, if any, are last reviewed and approved by the Board on of the Bank’s financial statements, its annual avoided whilst ensuring that key issues having 19 December, 2018. report and its quarterly financial statements an impact on Financial Reporting are escalated prepared for publication. to the Board Audit Committee. The Banking Act Direction No. 11 of 2007 on ‘Corporate Governance for Licensed In 2018, the Bank adopted IFRS 9 – Financial The Committee’s role is to review on behalf Commercial Banks in Sri Lanka’ and its Instruments with a focus on Impairment of of the Board, the Group’s internal financial subsequent amendments (hereinafter Loans and Advances and Valuation of Financial controls. It is also responsible for oversight referred to as the Direction), ‘Rules on Instruments held at fair value. In addition,
132 Stewardship Board Audit Committee Report Union Bank | Annual Report 2018
areas relating to Goodwill Impairment, effectiveness of the Bank’s internal controls year. The BAC also monitored and assessed Taxation, Provisions for legal and regulatory through a review of follow-up on the Bank’s the role and effectiveness of the GIA function matters, and Impairment of investments were internal audit reports. The Committee and is responsible for the hiring, removal, reviewed together with the multidisciplinary discussed the control environment issues, resignation and evaluation of HIA The BAC is project to implement the systems capabilities root causes, management responses and of the view that GIA function understands the required for IFRS 9. The Committee has remediation activities. risks that the Group faces and has aligned its discussed the above matters with both the work to review these risks. There is at least one management and the External Auditors and The Committee reviews the adequacy and scheduled private session annually for the HIA found the carrying values to be appropriate. effectiveness of internal controls, such to meet the BAC. The BAC regularly meets the as financial, operational, compliance and HIA to discuss the Audit Plan, current work, key The Group’s financial reporting process for information technology controls, as well as findings and other significant matters. preparing the consolidated Annual Report accounting policies and systems. This process and Accounts 2018 is controlled using assesses the adequacy and effectiveness of External Audit: documented accounting policies. The changes the internal controls and the processes for The BAC has unfettered access to the Group to the Accounting Policies are approved at controlling business risks to ensure compliance External Auditor- Ernst and Young. During the the Committee. The Committee reviews the with laws and regulations. financial year, separate sessions were held for financial statements prior to submission to the the BAC to meet with the External Auditor Board to ensure that a reliable and true and Internal Audit: without the presence of management at each fair view of the state of affairs of the Bank, and The establishment and maintenance of BAC meeting to discuss and express their the Group, are presented. appropriate systems of risk management and opinions on any matter and for the Committee internal control is primarily the responsibility to have the assurance that the Management Internal Control: of business management. The Group Internal has fully-provided all information and The Directors are responsible for maintaining Audit (GIA) function provides independent and explanations requested by the Auditors and and reviewing the effectiveness of risk objective assurance in respect of the adequacy even on concerns that might have to be raised management and internal control systems and of the design and operating effectiveness of privately. for determining the nature and extent of the the framework of risk management, control principal risks it is willing to take in achieving and governance processes across the Group, The BAC reviewed the non-audit services its strategic objectives. In addition, Sections focusing on the areas of greatest risk to Union provided by the External Auditor during 3(8) (ii) (b) and (c) of the Banking Act Direction Bank using a risk-based approach. Executive the financial year and the associated fees. No. 11 of 2007, stipulates the requirements management is responsible for ensuring that The BAC is satisfied that the independence to be complied with by the Bank to ensure recommendations made by the Group Internal and objectivity of the External Auditor has reliability of the financial reporting system in Audit functions are implemented within an not been impaired by the provision of those place at the Bank. appropriate and agreed timetable services. A BAC approved policy is in place on Non Audit Services provided by the External The Bank has adopted a risk-based audit During the year, the GIA reviewed the Auditors. approach to its audits to gauge the adequacy and effectiveness of the Group’s effectiveness of the internal control procedures internal audit function and processes. The BAC In accordance with Corporate Governance in place and to assess whether additional risks reviewed whether GIA is adequately resourced Direction Sec 3,6 (11) ( c ) ( 1V) , the current emerging do in fact have mitigating controls. A and set up to carry out its functions, including lead engagement partner rotated out Risk Matrix is used for assessing and measuring approving its budget and Audit Plan. The work following the completion of the Audit of the risks identified during audit assignments undertaken by GIA has been reviewed and accounts of Financial Year in 2017, having held carried out. The Committee seeks and obtains discussed against a backdrop of numerous the role for five years. As part of the evaluation the required assurances from the Business significant projects and programmes so as process on the change in lead audit partner line on the remedial action in respect of the to understand and fully challenge where for the 2018 audit team, the BAC considered identified risks to maintain the effectiveness of GIA function has been focusing and how it the experience and expertise of the proposed internal control procedures. maximises value from GIA resources so as to be partner, the quality of the supporting audit as productive as possible. team as well as the support from the External On a regular basis, the Internal Audit reports Auditor’s global network. provide the Committee with Internal Auditors’ The BAC has direct oversight of Group Audit view on the system of internal controls across and continues to interact regularly with the The Committee continues to exercise oversight all risk types. The Committee reviews the Head of Internal Audit( HIA) throughout the of the work undertaken by the Group External
Stewardship Board Audit Committee Report 133 Union Bank | Annual Report 2018
Board Audit Committee Report
Auditor during the year. The Committee has Audit Committee has recommended to the to take action about any genuine concern also reviewed the scope of, and the results Board of Directors that Messrs Ernst & Young, that the staff may have in relation to activities of, the external audits and the independence Chartered Accountants, be reappointed for which they feel are wrongful or illegal or and objectivity of the external auditor. In its the financial year ending 31 December 2019 otherwise harmful to the interests of the review of the External Auditor’s performance subject to the approval of shareholders at the Bank, its employees, customers and all other and when formulating its recommendation on next Annual General Meeting. stakeholders. Highest standards of Corporate the re-appointment of the external auditor, the Governance and adherence to the Bank’s code BAC took into consideration: Keeping updated on relevant information of ethics are ensured. The Members are regularly kept updated aa Performance of the external auditor in on changes to accounting standards, issues All appropriate procedures and techniques providing constructive, practical and related to financial reporting and even on are in place to conduct independent proactive solutions; changes to regulatory guidelines through investigations into incidents reported through aa Scope of the audit plan and areas of audit periodic meetings with the Finance Team, whistle-blowing or identified through other focus; Internal Audit and External Auditors. channels. The policy is subject to annual aa Quality of audit services rendered, and review in order to further enhance the reports and findings presented by, the Ethics and Good Governance: effectiveness. external auditor during the year; and The Committee continuously emphasised aa Feedback received on the adequacy and upholding ethical values of the staff members. Evaluation of the Committee: quality of the audit team’s resources, the In this regard, a Code of Ethics and Whistle- An independent evaluation of the level of independence and scepticism Blowers Charter was put in place and followed effectiveness of the Committee was carried exercised in carrying out their work, and its for educating and encouraging all members out by the other members of the Board and overall efficiency and effectiveness; of staff to resort to whistle-blowing if they the Committee has been found to be highly suspect wrong doings or other improprieties. effective. The Committee has discussed the business and Highest standards of Corporate Governance financial risks with the Group External Auditor and adherence to the Bank’s Code of Ethics and has sought and received assurance that were ensured. All appropriate procedures these risks have been addressed in their audit were in place to conduct independent strategy. The Committee has enquired from investigations into incidents reported through Priyantha Fernando the Group External Auditor that no undue whistle-blowing or identified through other Interim Chairman pressure has been brought to bear on the means. The Whistle-Blowers Policy guarantees Board Audit Committee Audit and the level of the audit fees paid the maintenance of strict confidentiality of the has in no way negatively affected the audit identity of the Whistle-Blowers. 25th February 2019 work being conducted. The Audit Committee makes recommendations to the Board for The Committee has spent time discussing the appointment, re-appointment and enhancement of the Group Whistle Blowing dismissal of the external auditor including the policy. The Whistle-Blowing policy of the Bank remuneration and terms of engagement. The serves as a communication channel in order
134 Stewardship Board Audit Committee Report Union Bank | Annual Report 2018
Integrated Risk Management Committee Report
The Integrated Risk Management Committee, responsibilities and authority. The detailed Specialised Banks in Sri Lanka”. The Bank the apex body which formulates the risk functionalities, supportive structures and has met regulatory deadlines made during appetite of the Bank under the guidance of framework are discussed in detail under “Risk the year 2018 and has the ability to reach the Board of Directors, comprised of seven Management at Union Bank” from pages 91-92 the required capital base over the next members in the year 2018. Six of the members of this annual report. two years. The Committee was satisfied are Non – Executive Directors as listed. that Bank has trained staff to monitor and Meetings of the Committee ensure smooth reporting mechanisms. aa Mr. P D J Fernando – Chairman/IRMC The IRMC held four meetings on a quarterly aa A Risk Based Segmentation Framework (Independent Non-Executive Director) basis in the year 2018. was adopted to ensure that the Bank maintains a robust and healthy credit aa Mr. Puneet Bhatia The IRMC is responsible for the portfolio. It entails a prudent selection (Non Independent Non-Executive Director) implementation of the Risk Strategy of criteria for Corporate and SME Clients to the Bank as laid down by the Board of better understand the associated risks of aa Mr. Michael J O’Hanlon Directors. The Committee is vested with the potential and existing customers whilst (Non Independent Non-Executive Director) responsibility of approving frameworks for identified risks are pro-actively managed the efficient functioning of business units and and suitably priced. aa Mr. Ranvir Dewan monitoring of risks. The Committee is also aa The CRO has oversight over the risk (Non Independent Non-Executive Director) in charge of reviewing the risk profile of the functions of the respective subsidiary Bank within the context determined by the companies, where group risk concerns aa Mr. Trevine Fernandopulle (Independent Board. The Committee is also responsible for with respect to impairment strategies, Non Executive Director) the assessment of all risks relating to Credit, credit risk and operational risk will be Operational, Market, and Liquidity. Using escalated to the IRMC. aa Mr. Yudhishtran Kanagasabai appropriate risk indicators and management aa The Bank is continuing to improve (Independent Non Executive Director) information, necessary recommendations customer convenience with the will be made to the Board. Among other introduction of Credit cards. Since credit aa Mr. Indrajit Wickramasinghe responsibilities pertaining to risk management, cards have been identified as one of the (CEO-Executive Director) the Committee has an oversight over the main drivers for NPL within the industry. implementation and risk management in The Bank has developed an extensive aa Mr. Suhen Vanigasooriya relation to legal and compliance functions and underwriting standards and collections (Chief Risk Officer) takes prompt corrective actions to alleviate the management process given the inherent risk effects. risks associated with cards portfolio. Charter of the Committee aa Review of key risk indicators are The IRMC was established as a Committee In compliance with the section No. 3(6)(v)(g) continuously performed to strengthen of the Board, in compliance with Section of Corporate Governance Direction No.11 of the review processes. Risk mitigating 3 (6) of the Banking Act Direction No. 11 2007 issued by the Central Bank of Sri Lanka, techniques and establishing of new of 2007, on “Corporate Governance for the Committee submitted a quarterly Risk portfolio/individual limits are placed to Licensed Commercial Banks in Sri Lanka”. Assessment report within a week of each support the continuous growth of the The composition and the scope of work of meeting to the Board seeking Board’s views, Bank portfolio. the Committee are in conformity with the concurrence and / or specific directions. aa Business Continuity Plan (BCP) for the year provisions of the aforementioned Direction. 2018 was reviewed by the Committee and The Bank has adopted an Integrated Risk Undertakings of the Committee thereafter Contingency Event Reports Management (IRM) framework in line with the In fulfilling the duties and responsibilities, the were submitted to CBSL on a quarterly Central Bank of Sri Lanka Banking Act Direction Committee engaged in following activities basis. During the year 2018, a BCP and No. 7 of 2011. during the year. fire evacuation drills at Head Office were conducted and no major findings were The Charter of the Integrated Risk aa The Committee took note of the observed that hinders business activity. Management Committee was approved Banking Act Direction No. 1 of 2016, on Furthermore call tree testing, fire safety by the Board outlining the responsibilities. “Capital Requirements under Basel III for and first aid trainings were conducted to The Charter details the composition, duties, Licensed Commercial Banks and Licensed strengthen the overall business continuity management process.
Stewardship Integrated Risk Management Committee Report 135 Union Bank | Annual Report 2018
Integrated Risk Management Committee Report
aa To mitigate Information Security The Year 2018 has been very challenging Risk factors, a Risk Assessment and with many uncertainties both in global Risk Treatment plan (RART) has been and domestic fronts which have adversely initiated and will be applied across affected the Macro-Economy of the country. critical departments. Quarterly reviews The Committee contends that the Bank has of Information Security Policy and the improved risk controls by introducing policies, Banks Firewall testing are performed. At procedures and tools to better manage the Employee Induction, Information Security risks. The Committee expects to further Awareness sessions are conducted to instil strengthen it’s coverage over the group risk the risk measures in the long run. function and update the risk appetite of the aa Internal Capital adequacy assessment bank, in line with changes in macro economy process (ICAAP) was continuously to support the strategic growth focus of the upgraded with reviews on subsidiary Bank. companies, to assess the capital adequacy at group level. Moreover, ICAAP includes weightages to the Strategy, Reputation and Compliance risks. The Committee provided it’s guidance in adopting Basel III Priyantha Fernando and IFRS guidelines. Chairman aa Bank’s risk infrastructure was reviewed by Board Integrated Risk Management Committee the Committee by reviewing the adequacy and performance of the closely related 25th February 2019 management committees such as Asset and Liability Committee (ALCO),Executive Risk Management Committee (ERMC) and Operational Risk Management Committee (ORMC).Effectiveness of the Compliance function too was reviewed ensuring the status of compliance with the regulations, guidelines, laws and internal controls.
136 Stewardship Integrated Risk Management Committee Report Union Bank | Annual Report 2018
Nomination Committee Report
Composition of the Committee by rotation and offering themselves for re- The Nomination Committee (“the Committee”) comprises five Non-Executive Directors appointed election at the Annual General Meeting. All by the Board of the Bank. The following Directors whose profiles are given on pages 158-161 of these reviews and recommendations were this Annual Report, served on the Committee as at 31st December 2018, made taking into account the performance and contribution made by each of the directors towards the overall discharge of the Name Directorship Committee Membership Board’s responsibilities. Further, the Committee Status Status reviewed and recommended the appointment Dilshani Wijayawardana Independent Chairperson of the alternate director to Puneet Bhatia, a Priyantha Fernando Independent Member Non-Executive, Non-Independent Director on the Board of the Bank. Sabry Ghouse Independent Member
Michael J O’Hanlon Non Independent Member The Committee, also reviewed the expertise, Gaurav Trehan Non Independent Member skills and talents of potential candidates both internally and externally in line with internal The Committee reports directly to the Board of Directors and the Company Secretary functions as policies and applicable rules and regulations, the secretary to the Committee. in order to fill several key managerial positions of the Bank.
Meetings a Considers and recommends the re- a The succession planning efforts at the level The Committee met three times during the election of current directors, taking into of Key Management Personnel (KMP) also year 2018. Attendance of the members at account the performance and contribution remained a key area of focus during the year. each of these meetings is given in the table made by the directors concerned towards Accordingly, the Committee deliberated in on page 112 of this Annual Report. Where the overall discharge of the Board’s depth the succession plan of the Bank to necessary, the Chief Executive Officer and the responsibilities. ensure the achievement of strategic objectives. Vice President, Human Resources attended the aa Sets the criteria such as qualifications, meetings of the Committee by invitation. experience and key attributes required Evaluation of the Committee’s for eligibility to be considered for Effectiveness The proceedings of the Committee meetings appointment or promotion to the post of As part of the annual self-assessment of the have been regularly reported to the Board of CEO and Key Management positions. Directors, the performance and effectiveness Directors. a Ensures that Directors, CEO and Key a of the Committee was also assessed by the Management Personnel are fit and proper Board as a whole. Terms of Reference persons to hold office as specified in the The Terms of Reference (TOR) sets out the main applicable rules and regulations. responsibilities entrusted to the Committee, aa Considers and recommends, from time its composition, authority and conduct and to time, the requirements of additional/ scheduling of meetings. The Committee was new expertise and the succession Dilshani Wijayawardana established by the Board in compliance with arrangements for retiring Directors and Chairperson Section 3 (6) of the Banking Act Direction Key Management Personnel. Nomination Committee No. 11 of 2007 (as amended) on “Corporate Governance for Licensed Commercial Banks in Activities in 2018 26th February 2019 Sri Lanka” issued by the Monetary Board of the During the year, the Committee reviewed Central Bank of Sri Lanka under the Banking the fitness and propriety of the existing Act No. 30 of 1988 (as amended). directors in terms of the provisions of the Banking Act No.30 of 1988 (as amended) and Key Responsibilities of the Committee the Directions issued thereunder and made aa Implements a procedure to select/appoint recommendations to the Board on their new directors, CEO and Key Management continuation in office during the ensuing Personnel according to the applicable year. The Committee also recommended to regulations and directions. the Board the re-election of directors retiring
Stewardship Nomination Committee Report 137 Union Bank | Annual Report 2018
Human Resources and Remuneration Committee Report
Composition of the Committee In achieving the above objectives in the In order to provide career growth for the Bank The Human Resources and Remuneration year under review, the Committee strived to employees, the committee also approved the Committee (“the Committee”) comprises strengthen and develop the human resource promotions of 67 staff members who were of five Directors appointed by the Board of pool of the Bank with appropriate professional, identified as having potential to take higher Directors of the Bank out of whom three are managerial and operational expertise responsibilities. Independent Non-Executive Directors. necessary to achieve the overall objectives of the Bank. In addition, multiple HR policies were The present Committee is constituted with Ms. reviewed, revised where required to better Dilshani Wijayawardana as Chairperson and Key Focus Areas in 2018 reflect internal and external operating contexts Mr. Priyantha Fernando, Mr. Micheal O’Hanlon, The Committee’s main focus in 2018 was and approved during the year. Mr. Sabry Ghouse, and Mr. Gaurav Trehan as to ensure that the Bank’s HR policies and Committee members. practices were aligned to the revised business Meetings strategy in order to provide the best possible The Committee held Ten (10) meetings during Given the significance of the Committee Human Resource capability. the year 2018. towards the strategic objective of investing and developing employees, the Chairman of A key business initiative for 2018 was the The minutes of these meetings reflecting the Board, Mr. Atul Malik and the Director/ launch of Credit Cards and the Committee the decisions of the Committee including Chief Executive Officer (CEO) Mr. Indrajit reviewed and approved the recruitment recommendations were presented at Wickramasinghe, attended and participated in and remuneration policies applicable to subsequent monthly meetings of the Board meetings of the Committee by invitation. employees in this business. A key feature in the of Directors for discussion, approval and remuneration was the introduction of a market ratification or to otherwise be acted upon by The Committee reported directly to the Board competitive sales incentive scheme, which the Board. of Directors of the Bank. was designed to reward performance whilst mitigating risks associated with such schemes. The Company Secretary of the Bank functioned as the Secretary to the Committee. As in previous years the annual performance goals for the year 2018 for Director /CEO and Dilshani Wijayawardana The Committee Charter Key Management Personnel (KMP), were Chairperson The Committee which is governed by reviewed and approved by the Committee to Human Resources and Remuneration the Human Resources and Remuneration ensure these are aligned to the overall board Committee Committee Charter has set the following as its approved business strategy. The Committee objectives: also evaluated the performance of the CEO 26th February 2019 and the Key Management Personnel for the aa To establish and maintain performance prior year. The remuneration of CEO and and market oriented remuneration policies KMP’s were revised in 2018 based on the in relation to Directors, Chief Executive performance assessment with the approval of Officer, Key Management Personnel and the Committee. Staff. aa To determine goals and targets for the In order to ensure market oriented and Directors, Chief Executive Officer and Key performance based remuneration structures Management Personnel of the Bank, and are in place, the Committee also reviewed and evaluate performance against those. approved the aggregate bonus payments, aa To provide assistance to the Board on salary revisions and incentive schemes of Non- Corporate Governance matters in relation KMP staff during 2018. to the Committee aa To prepare a sustainable succession plan for all Key Management Positions.
138 Stewardship Human Resources and Remuneration Committee Report Union Bank | Annual Report 2018
Related Party Transactions Review Committee Report
Composition of the Committee Methodology used by the Committee The Related Party Transactions Review Committee (“the Committee”) comprises two Non- In the performance of its duties, the Executive Directors and one Executive Director appointed by the Board of the Bank. The following Committee avoids ‘conflicts of interest’ Directors whose profiles are given on pages 158-161 of this Annual Report, served on the which may arise from any transaction of Committee as at 31st December 2018, the Bank with any person particularly with related parties, ensure arm’s length dealings Name Directorship Status Committee Membership with related parties whilst ensuring strict Status compliance with the provisions of the Code, Dilshani Wijayawardana Independent Chairperson the Listing Rules and the Directions. Sabry Ghouse Independent Member Activities in 2018 Indrajit Wickramasinghe Executive Non-Independent Member Details of all transactions with the related parties during the year 2018 were reviewed by The Committee reports directly to the Board of Directors and the Company Secretary functions as the Committee. There were no non-recurrent the secretary to the Committee. or recurrent related party transactions that exceeded the respective thresholds specified Meetings in the Listing Rules. Details of related party Meetings are held mandatorily, at least once a quarter. Accordingly, the Committee met four transactions are disclosed under Note 45 on times during the year under review. Attendance of the members at each of these meetings is pages 258-260 of the Financial Statements. given in the table on page 112 of this Annual Report. Evaluation of the Committee’s The proceedings of the Committee meetings have been regularly reported to the Board of Directors. Effectiveness As part of the annual self-assessment of the Terms of Reference Directors, the performance and effectiveness The Terms of Reference (TOR) sets out the functions of the Committee in line with the Code of the Committee was also assessed by the of Best Practices on Related Party transactions published by the Securities and Exchange Board as a whole. Commission of Sri Lanka (‘the Code’) and Section 9 of the Listing Rules of the Colombo Stock Exchange (‘the Listing Rules’) and the Banking Act Direction No 11 0f 2007 on Corporate Declaration Governance for Licensed Commercial Banks in Sri Lanka (‘Directions’). The declaration by the Board of Directors that no related party transaction falling within the Key Responsibilities of the Committee ambit of the Listing Rules was entered into The TOR adopted on the 20th January 2016 and periodically reviewed by the Board, provides for by the Bank during 2018 is contained in the the responsibilities and functions of the Committee, which include: Annual Report of the Board of Directors on the Affairs of the Company on page 147 of this a reviewing all related party transactions of the Bank as per the Listing Rules prior to the a Report. transaction being entered into, and/or if the transaction is expressed to be conditional on such review, prior to completion of the transaction. aa advising the Board to convene a shareholders’ meeting and to obtain shareholder approval as and when mandatorily required, for related party transactions. a in the absence of a Related Party Transactions Review Committee of a subsidiary, which a Dilshani Wijayawardana is a listed entity, functioning as the Related Party Transactions Review Committee of such Chairperson subsidiary company on the instructions and advice of the Board of the Bank. Related Party Transactions Review Committee aa reviewing and making recommendations for changes to the Related Party Transactions Policy of the Bank from time to time, as and when deemed fit. 26th February 2019 aa considering any other matters relating to a related party transaction, as the Management, the Committee or the Board of the Bank may think relevant taking into account the interests of the shareholders as a whole when entering into a related party transaction and to prevent a related party taking advantage of his or her or its position. aa referring related party transactions for approval of the Board.
Stewardship Related Party Transactions Review Committee Report 139 Union Bank | Annual Report 2018
Annual Report of the Board of Directors on the Affairs of the Bank
General Act”) and was incorporated as a public limited 3.1 The Bank The Board of Directors of Union Bank of liability company in Sri Lanka on 2nd February The principal activities of the Bank are Colombo PLC is pleased to present the Annual 1995. The Bank was re-registered as required commercial banking and provision of related Report on the Affairs of the Bank for the year under the provisions of the Companies Act financial services including, accepting ended 31st December 2018 together with No.7 of 2007 on 23rd September 2008 under deposits, personal banking, retail banking, the Audited Financial Statements of the the Registration No. PB 676 PQ. The Registered trade financing, off-shore banking, resident Bank, the Audited Consolidated Financial Office as well as the Head Office of the Bank is and non-resident foreign currency operations, Statements of the Group for that year and the situated at No.64, Galle Road, Colombo 3. corporate and retail credit, pawning, project Auditor’s Report on these Financial Statements financing, lease financing, rural credit, internet conforming to all statutory requirements. The Ordinary Shares of the Bank are listed banking, money remittance facilities, dealing on the Main Board of the Colombo Stock in Government Securities and treasury related The financial statements and this Report Exchange since 29th March 2011. products and margin trading etc. was reviewed and approved by the Board of Directors on 26th February 2019. This Report 2. Vision, Mission and Values 3.2 Subsidiaries includes the information as required by The Bank’s Vision, Mission and Values are given The Bank had two Subsidiaries as at 31st the Companies Act No. 07 of 2007, Banking on page 5 of this Annual Report. The business December 2018. The details of these Act Direction No. 11 of 2007 on Corporate activities of the Bank are conducted in keeping subsidiaries, including their principal business Governance for Licensed Commercial Banks with the highest level of ethical standards and activities and directorate are tabulated below: and subsequent amendments thereto, the integrity in achieving its vision and mission. Listing Rules of the Colombo Stock Exchange and the recommended best practices on 3. Principal Business Activities Corporate Governance. There were no significant changes in the nature of the principal activities of the Bank 1. legal Status and the Group during the financial year under Union Bank of Colombo PLC (“the Bank”) is a review. The said principal business activities of Licensed Commercial Bank registered under the Bank and its subsidiaries during the year the Banking Act No. 30 of 1988 (“Banking are as follows.
Name of the Subsidiary National Asset Management Limited (NAMAL) UB Finance Company Limited (UBF) Principal business activities NAMAL is the pioneer Unit Trust management company The principal activity of UBF is carrying on finance in Sri Lanka established in 1991. With 26 years of business including, providing financial services namely experience and a successful track record of investing accepting deposits, maintaining savings accounts, lease in equity and fixed income markets, NAMAL launched financing, hire purchase, vehicle loans, mortgage loans, the first Unit Trust to be licensed in Sri Lanka (National pawning, factoring, working capital financing and real Equity Fund) and the first listed Unit Trust (NAMAL estate. Acuity Value Fund). NAMAL Operates six Unit Trusts and offer private portfolio management services as well. Legal status and Registered A company formed as a Limited Liability Company and A company formed as a Limited Liability Company and office re-registered under the Companies Act No.7 of 2007. re-registered under the Companies Act No.7 of 2007.
Registered office and principal place of business at No. Registered office and principal place of business at No. 07, Glen Aber Place, Colombo 03, Sri Lanka. 10, Daisy Villa Avenue, Colombo 04, Sri Lanka. Bank’s Shareholding in the The Bank holds 51% of the issued capital of NAMAL. The Bank holds 73.31% of the issued capital of UBF. Subsidiary
140 Stewardship Annual Report of the Board of Directors on the Affairs of the Bank Union Bank | Annual Report 2018
Name of the Subsidiary National Asset Management Limited (NAMAL) UB Finance Company Limited (UBF) Board of Directors Alexis Indrajit Lovell - Chairman Alexis Indrajit Lovell - Chairman Suren Madanayake Ananda Atukorala - Deputy Chairman Indrajit Wickramasinghe Lisa Gayle Thomas Malinda Samaratunga Indrajit Wickramasinghe Wijenanda Punchi Banda Dambawinne Malinda Samaratunga Siew Bee Khoo Chandrakumar Ramachandra Tyrone Wilfred de Silva Ranvir Dewan Kapila Ruwan Nanayakkara Atul Malik Ransith Karunaratne - Chief Executive Officer
4. Changes to the Group Structure 8. Directors’ Responsibility for During the year, there were no changes to the Group structure which is exhibited below. Financial Reporting The Directors are responsible for the preparation of the financial statements of the Bank to present a true and fair view of its Culture Financial Holdings Ltd. state of affairs. The Directors are of the view that these financial statements appearing on pages 174-295 have been prepared in conformity with the requirements of the Sri Union Bank of Colombo PLC Lanka Accounting Standards, Companies Act No. 7 of 2007, Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995, Banking Act No. 30 of 1988 (as amended), Banking Act Direction No. 11 of 2007 National Asset Management Limited UB Finance Company Limited (Corporate Governance for Commercial Banks in Sri Lanka as amended) and the Listing Rules of the Colombo Stock Exchange. The Directors’ Statement on Internal Control over Financial 5. Review of Operations Reporting appearing on pages 149-150 forms A review of the financial and operational performance of the Bank during the financial year 2018 an integral part of the Annual Report of the are contained in the Chairman’s Message on pages 24-25, the Chief Executive Officer’s Message Board of Directors. on pages 26-28 and the Management Discussion and Analysis on pages 32-56. These reports form an integral part of the Annual Report of the Board of Directors. 9. Auditor’s Report The Auditors of the Bank Messrs Ernst & 6. Future Developments Young carried out the audit on the Financial An overview of the future developments of the Bank is given in the Chairman’s Message on pages Statements of the Group and the Bank for the 24-25, the Chief Executive Officer’s Message on pages 26-28 and the Management Discussion and year ended 31st December 2018 and their Analysis on pages 32-56. report thereon is given on pages 170-173 of this Annual Report. 7. Financial Statements The financial statements of the Bank and the Group have been prepared in accordance with 10. Accounting Policies the Sri Lanka Accounting Standards laid down by the Institute of Chartered Accountants of Sri The significant accounting policies adopted in Lanka, and comply with the requirements of the Companies Act No. 7 of 2007 and the Banking the preparation of the Financial Statements are Act No. 30 of 1988. These financial statements of the Bank and the Group for the year ended 31st given on pages 180-189. December 2018 duly signed by the Chief Financial Officer, two Directors of the Bank and the Company Secretary are given on pages 174-295 and form an integral part of the Annual Report of the Board of Directors.
Stewardship Annual Report of the Board of Directors on the Affairs of the Bank 141 Union Bank | Annual Report 2018
Annual Report of the Board of Directors on the Affairs of the Bank
11. Financial Results and Appropriations The details of capital expenditure approved and contracted for are given in Note 43.2 to 11.1 Income the Financial Statements on page 256. The gross income of the Group for 2018 was Rs. 16,076 Mn (Rs. 13,899 Mn in 2017) while the Bank’s gross income was Rs. 13,910 Mn (Rs. 11,938 Mn in 2017). An analysis of the income is given 14. Net Book Value of Freehold in Note 4 to the financial statements on page 194. Properties The net book values of freehold properties 11.2 Profit and appropriations owned by the Group as at 31st December The Bank has recorded a growth in profit before tax of 46% and a growth in profit after tax of 3% 2018 are included in the accounts at Rs. 44 Mn in 2018. The Group’s profit before tax recorded a growth of 32% in 2018. (2017: Rs. 45 Mn).
Total Comprehensive Income (net of tax) of the Group for the year is Rs. 42 Mn (Rs. 960 Mn in 15. Stated Capital 2017) while the Bank has recorded a total comprehensive income (net of tax) loss of Rs. 7 Mn (Rs. The stated capital of the Bank as at 31st 869 Mn in 2017). Details of the Bank’s performance and appropriation of profit are tabulated as December 2018 was Rs.16,334,781,723 follows, consisting of 1,091,406,249 ordinary shares (2017: Rs.16,334,781,723 consisting of 2018 2017 1,091,406,249 ordinary shares). Rs 000 Rs 000 Profit before income tax 777,394 534,118 16. Share Information Less: income tax expense 304,846 73,500 Information relating to earnings, dividend, net assets and market value per share is given in Profit for the year 472,548 460,618 ‘Financial Highlights’ on page 4. Profit brought forward from previous year 1,154,757 821,568 Transitional adjustment on the implementation (1,130,841) - Information on the trading of the shares is of SLFRS 9 given in the Section on ‘Investor Relations’ on Restated profit brought forward 23,916 - pages 84-87. 496,464 1,282,186 Profit available for appropriation 17. Shareholdings As at 31st December 2018, there were Less: Appropriations 31,221 registered ordinary shareholders (2017: 31,716). Names of the twenty largest Transfer to the reserves (23,627) (20,817) shareholders, percentages of their respective Dividend paid for previous/current year (109,141) (109,141) holdings and percentage holding of the Other comprehensive income (18,322) 5,622 public, etc. are given in the Section on ‘Investor Relations’ on pages 84-87. Change in control - (3,093) (151,090) (127,429) Total appropriation 18. Equitable Treatment to Shareholders Unappropriated profit carried forward 345,374 1,154,757 The Bank has at all times ensured that all shareholders are treated equitably. 12. Taxation 19. The Board of Directors Income tax rate applicable on the Bank’s operations is 28% (2017: 28%). The Bank is also liable for Financial Services VAT at 15% (2017: 15%), NBT on Financial Services at 2% (2017: 2%) and Debt 19.1 Composition Repayment Levy on Financial Services at 7%. The Board of Directors of the Bank during 2018 comprised 12 (2017:12) Directors with The Group has also provided deferred taxation on all known temporary differences under the wide financial and commercial knowledge and liability method, as permitted by the Sri Lanka Accounting Standard - LKAS 12 (Income Taxes). experience. The profiles of the Directors are given on pages 158-161. 13. Property, Plant and Equipment and Intangible Assets Information on Property, Plant & Equipment and Intangible Assets of the Group and the Bank are given in Notes 30 and 31 to the Financial Statements on pages 237-242.
142 Stewardship Annual Report of the Board of Directors on the Affairs of the Bank Union Bank | Annual Report 2018
19.2 Classification of Directors and appointments, retirements and cessations during 2018 Names of the Directors of the Bank during the year 2018 including the new appointments and cessations are given in the table below:
Name Status Length of Service Name of Alternate Director Atul Malik (Chairman) Non-Independent Non- Director since 02.10.2017 and None Executive Director Chairman since 25.10.2017 Priyantha Damian Joseph Fernando Independent Non- Director since 02.11.2011 None (Deputy Chairman/Senior Director) Executive Director Indrajit Asela Wickramasinghe (Director/ Non-Independent Director since 19.11.2014 None CEO) Executive Director Mohamed Hisham Sabry Ghouse Independent Non- Director since 30.08.2012 None Executive Director Ranvir Dewan Non-Independent Non- Director since 29.09.2014 None Executive Director Gaurav Trehan Non-Independent Non- Director since 29.09.2014 None Executive Director Puneet Bhatia Non Independent Non- Director since 27.10.2014 Keshav Thakkar Executive Director (appointed on 24.05.2018) Michael J O’ Hanlon Non-Independent Non- Director since 27.10.2014 None Executive Director (Sumedh Jog who was the alternate to Michael J O’ Hanlon resigned on 11.05.2018) Sow Lin Chiew Non-Independent Non- Director since 20.01.2015 Yoke Sun Woon Executive Director (appointed on 20.01.2015) Yudhishtran Kanagasabai Independent Non- Director since 27.07.2016 None Executive Director (Resigned on 31.12.2018) Dilshani Gayathri Wijayawardana Independent Non- Director since 01.04.2017 None Executive Director Trevine Sylvester Anthony Fernandopulle Independent Non- Director since 01.04.2017 None Executive Director
19.3 Retirement by rotation/reappointment of Directors Mr. Puneet Bhatia, Mr. Michael J O’ Hanlon and Ms. Sow Lin Chiew who are subject to retirement by rotation in terms of Article 88 read together with Article 89 of the Articles of Association of the Bank, will offer themselves for re-election in terms of Article 89.
Having considered the contents of the Affidavits and Declarations submitted by each of the above Directors and all other related issues, and based on the endorsement of the Nomination Committee, the Board recommended the re-election of the said Directors at the forthcoming Annual General Meeting.
Stewardship Annual Report of the Board of Directors on the Affairs of the Bank 143 Union Bank | Annual Report 2018
Annual Report of the Board of Directors on the Affairs of the Bank
19.4 Other Directorships of Directors Information on other directorships of the Directors who served the Bank during 2018 are tabulated below.
Name of Director Name of Entity Position Atul Malik Bobcards Limited, India Director UB Finance Company Limited Director Priyantha Fernando Commercial Leasing & Finance PLC Director Ambeon Holdings PLC (formerly known as Taprobane Holdings PLC) Director Golden Key Credit Card Company Limited Director Imperial Institute of Higher Education Director Ceylon Leather Products PLC Director Thomas Cook Travels Sri Lanka (Pvt) Ltd. Director Ceylon Leather Company Ltd. Director Golden Key Hospitals Limited Chairman Millennium Information Technologies (Pvt) Ltd. Director Indrajit Wickramasinghe National Asset Management Ltd. Non-Executive Director UB Finance Company Ltd. Non-Executive Director Sabry Ghouse Shah Associates Pvt. Ltd. Director Ranvir Dewan Shriram City Union Finance Limited Director UB Finance Co. Ltd Director Gaurav Trehan Shriram Automall India Ltd. Director ESS KAY Fincorp Ltd Nominee Director Five-Star Business Finance Ltd. Director Shriram Capital Ltd. Alternate Director Shriram General Insurance Co. Ltd. Director Shriram Life Insurance Co. Ltd. Director Jana Capital Limited Nominee Director Shriram Properties Private Ltd. Director Manipal Health Enterprises Pvt. Ltd. Nominee Director Puneet Bhatia Flare Estate Private Limited Additional Director TPG Capital India Private Limited Director Janalakshmi Financial Services Limited Director Manipal Health Enterprises Private Limited Nominee Director Havells India Limited Director Shriram Transport Finance Company Limited Director Shriram City Union Finance Limited Director Mylan Laboratories Limited Director Vishal E-Commerce Private Limited Director Vishal Mega Mart Private Limited Director Shriram Capital Limited Nominee Director Jana Capital Limited Nominee Director AGS Transact Technologies Limited Additional Director Shriram Properties Private Limited Director India Transact Services Limited Additional Director Campus Activewear Private Limited Nominee Director Securevalue India Limited Additional Director Shriram Holdings Madras Private Limited Nominee Director Michael J O’Hanlon Roosevelt Management Company LLC Director & Chairman Rushmore Loan Management Services LLC Director & Chairman
144 Stewardship Annual Report of the Board of Directors on the Affairs of the Bank Union Bank | Annual Report 2018
Name of Director Name of Entity Position Sow Lin Chiew Capax Trading Sdn Berhad Director Genting Management and Consultancy Services Sdn Bhd Director Sri Highlands Express Sdn Bhd Director Genting Risk Solutions Sdn Bhd Director Genting CDX Singapore Pte Ltd formerly known as Genting International Director Industries (Singapore) Pte Ltd. Genting Bhd (Hongkong) Limited Director Resorts World Limited Director Resorts World Bhd (Hong Kong) Limited Director Genting Power Holdings Limited Director Genting Global Pte Ltd - formerly known as Genting (Singapore) Pte Director Limited Oxalis Limited Director Web Energy Limited Director Genting Power International Limited Director Awana Hotels & Resorts Management Sdn Bhd Director Vista Knowledge Pte Ltd. Director CIMB (Private) Limited Alternate Director Yudhishtran Kanagasabai Cargills Food Co. Ltd. Director Hunters PLC Director Lanka Canneries Ltd. Director Ceylon Tobacco Company PLC Director Millennium Information Technologies Ltd. Director UB Finance Company Ltd. Director Eswaran Brothers (Pvt) Ltd. Director Trevine Fernandopulle National Insurance Trust Fund Director Dutch Lanka Trailer Manufacturers Ltd. Director AMW Capital Leasing and Finance PLC Chairman Joseph Fraser Memorial Hospital Chairman Dilshani Wijyawardana None - Yoke Sun Woon Taurx Pharmaceuticals Ltd. Alternate Director (Alternate Director to Genting Taurx Diagnostic Centre Sdn Bhd Alternate Director Sow Lin Chiew) Lacustrine Limited Director Genting Group Sdn Bhd Director Genting Gaming Solutions Pte Ltd. Director Genting Multimodal Imaging Pte Ltd. Alternate Director Genting Innovation Pte Ltd. Director Resorts World (Singapore) Pte Ltd. Director Genting Management (Singapore) Pte Ltd. Director Genting Laboratory Service Sdn Bhd Director Genting Dementia Centre Sdn Bhd Director DNAE Group Holdings Limited (formerly known as Alternate Director DNA Electronics Limited) Keshav Thakkar None - (Alternate Director to Puneet Bhatia)
Stewardship Annual Report of the Board of Directors on the Affairs of the Bank 145 Union Bank | Annual Report 2018
Annual Report of the Board of Directors on the Affairs of the Bank
19.5 Board Sub-Committees Furthermore, the Chairman, the Board of Directors and the Chief Executive Officer of the Bank In compliance with the Banking Act Direction have made general declarations that there is no financial, business, family or other material/ No. 11 of 2007 on ‘Corporate Governance relevant relationship(s) between themselves as required to be disclosed by the Banking Act for Licensed Commercial Banks in Sri Lanka’ Direction No. 11 of 2007 on ‘Corporate Governance for Licensed Commercial Banks in Sri Lanka’ issued by the Central Bank of Sri Lanka and the issued by the Central Bank of Sri Lanka. Listing Rules of the Colombo Stock Exchange, the Board formed five mandatory Board Sub- 19.9 Directors’ Interest in Shares committees namely, Nomination Committee, The Directors have disclosed to the Board their interests in the shares of the Bank and any Human Resources and Remuneration acquisitions or disposals thereof in compliance with Section 200 of the Companies Act No. 07 of Committee, Integrated Risk Management 2007. None of the Directors held any shares in the Bank as at 31st December 2018. Committee, Audit Committee and Related Party Transactions Review Committee. 20. Related Party Transactions The details of the related party transactions are set out in Note 45 to the Financial Statements The Board of Directors also has voluntarily on pages 258-260. The aggregate value of remuneration/fees paid by the Bank to its Key formed a Credit Committee at the Board Management Personnel (KMPs), including Directors and the aggregate values of the transactions level to assist the Board in the appraisal and of the Bank with KMPs and their close family members and subsidiaries as at 31st December approval of credit proposals above a pre- 2018, are as follows: determined threshold in line with the Bank’s risk appetite. Key Management Personnel* 2018 As a % Bank’s Rs. 000 Regulatory Capital The scope and composition of all of the above Remuneration and other employment benefits 256,465 committees are given on page 111 while the Loans 124,143 0.76 reports of these committees are found on KMPs 124,143 0.76 pages 132-139. Close Family Members - - Deposits 29,705 19.6 Meetings KMPs 22,640 The details of Board meetings and Board Close Family Members 7,065 subcommittee meetings are presented in the ‘Corporate Governance Report’ on page 112 of *Figures include the Executive Director’s remuneration, other employment benefits, loans and deposits. this Annual Report.
Directors 2018 As a % Bank’s 19.7 Directors’ Remuneration Rs.000 Regulatory Capital Details of Directors’ remuneration and other benefits paid in respect of the Bank during the Director Fees 9,583 financial year ended 31st December 2018 are Loans - given in Note 13 to the Financial Statements Directors - on page 202. Close Family Members - Deposits 10,766 19.8 Interests Register/Directors’ Interest Directors 3,902 in Transactions Close Family Members 6,864 In compliance with the Companies Act No. 07 of 2007, the Bank maintains an interest register and the general declarations made by the Transactions With Subsidiaries Directors as per Section 192 (1) and (2) of the Loans* 1,009,974 6.18 Companies Act No. 07 of 2007 of their interests in contracts or proposed contracts have been Repurchased agreements 50,012 0.31 duly recorded in the Interests Register. Details Deposits 73,875 of the transactions disclosed therein are given *This includes Rs. 312,253,068 investment in subordinated debentures of UB Finance Company in this Report as well as on pages 258-260 Limited. under related party transactions.
146 Stewardship Annual Report of the Board of Directors on the Affairs of the Bank Union Bank | Annual Report 2018
During the year ended 31st December 2018, 25. Statutory Payments 30. Risk Management and System of there were no related party transactions, which The Directors, to the best of their knowledge Internal Controls exceeded 10% of the equity, or 5% of the total and belief, are satisfied that all statutory The Bank has an ongoing process in place to assets whichever is lower and the Bank has payments in relation to the Government, identify, evaluate and manage the risks that complied with the requirements of the Listing other regulatory bodies and related to the are faced by the Bank. This process detailed in Rules issued by the Colombo Stock Exchange employees have been paid on a timely basis or the Section on ‘Risk Management’ on pages on Related Party Transactions. where relevant provided for. 90-105 is continuously reviewed by the Board through the Integrated Risk Management 21. Human Resources 26. Compliance with Laws and Committee. Human Resource Practices and Policies of Regulations the Bank are aligned to ensure efficiency, To the best knowledge and belief of the The Board of Directors is satisfied with the effectiveness and productivity of the work Directors, the Group and the Bank have not effectiveness of the system of internal control force and these policies are reviewed engaged in any activity contravening any laws for the year under review and up to the periodically. and regulations. date of approval of the Annual Report and Financial Statements. The Directors’ Statement As at 31st December 2018, 1,266 persons were 27. Donations on Internal Control and the Auditors’ Report in employment of the Bank (2017: 1,269). No donations were made by the Bank during thereon are given on pages 149-151. the year 2018 (2017: Rs. 18,600). 22. Insurance and Indemnity 31. Corporate Governance Pursuant to a decision of the Board, the 28. Going Concern The Board of Directors operates on the firm Bank obtained an Insurance Policy to cover After making necessary inquiries and reviews, belief that sound governance practices Directors’ and Officers’ liability, which extends the Board of Directors has a reasonable are fundamental to earn stakeholder trust to the Bank’s subsidiaries as well. expectation that the Bank possesses adequate which is critical to sustaining performance resources to continue in operation for the and enhancing shareholder value. Thus, in 23. Employee Share Option Plan foreseeable future. For this reason, they the management of the Bank, the Directors In the year 2015, with the approval of the continue to adopt the going concern basis in have placed emphasis on conforming to shareholders, the Bank formulated an preparing the Financial Statements. the best corporate governance practices Employee Share Option Plan (ESOP) for key and procedures, and introduced/improved employees and directors of the Bank and its 29. Auditors appropriate systems and structures to enhance subsidiaries based on the Bank achieving Messrs Ernst & Young, Chartered Accountants risk management measures and to improve certain pre-determined performance criteria. served as the Bank’s Auditors during the year accountability and transparency. A detailed under review. Based on the declaration made report on Corporate Governance is given on During the year 2018, no options were offered by Messrs Ernst & Young and as far as the pages 106-113. to the employees under the ESOP and no Directors are aware, the Auditors do not have options previously offered were vested. any relationship or interest in the Bank or its As required by Section 3(8) (ii) (g) of Direction subsidiaries. No 11 of 2007 of the Banking Act on Corporate The Board of Directors confirms that the Bank Governance for Licensed Commercial Banks or any of its subsidiaries have not, directly or 29.1 Auditors’ Remuneration issued by the Central Bank of Sri Lanka, indirectly provided funds for the ESOP. A sum of Rs. 10.77 Mn (2017: Rs. 11.42 Mn) and the Board of Directors confirms that all the Rs. 12.99 Mn (2017: Rs. 14,42 Mn) were paid findings of the “Factual Findings Reports” 24. Environmental Protection by the Bank and the Group respectively for of auditors issued under “Sri Lanka Related The Directors confirm that to the best of audit related and non-audit services including Services Practice Statement 4400” have their knowledge the Bank has not engaged reimbursement of expenses. been incorporated in the Annual Corporate in any activity, which causes detriment to Governance Report on pages 114-131. the environment. Specific measures taken to 29.2 Re-appointment of Auditors protect the environment are given on pages The retiring Auditor, Messrs Ernst & Young 68-79 of this Annual Report. have expressed their willingness to continue in office and a resolution to reappoint them as the Bank’s Auditor for the ensuing financial year, and authorising the Directors to fix their remuneration will be proposed at the forthcoming Annual General Meeting.
Stewardship Annual Report of the Board of Directors on the Affairs of the Bank 147 Union Bank | Annual Report 2018
Annual Report of the Board of Directors on the Affairs of the Bank
The Directors declare that, 33. ANNUAL GENERAL MEETING The 24th Annual General Meeting will be held at the “Auditorium” of Sri Lanka Foundation at No. (i) the Bank complied with all applicable 100, Sri Lanka Padanama Mawatha, Independence Square, Colombo 07 on 28th March 2019 at laws and regulations in conducting its 2.00 p.m. Notice of the meeting relating to the 24th Annual General Meeting is enclosed at the business and have not engaged in any end of the Annual Report. activity contravening the relevant laws and regulations. Officers responsible for 34. ACKNOWLEDGEMENT OF THE CONTENTS OF THE REPORT ensuring compliance with the provisions As required by Section 168 (1) (k) of the Companies Act No. 07 of 2007, the Board of Directors in various laws and regulations, confirm hereby acknowledges the contents of this Annual Report. level of compliance in each quarter to the Board; For and on behalf of the Board of Directors, (ii) the Directors have declared all material interests in contracts involving the Bank and refrained from voting on matters in which they were materially interested;
(iii) all endeavours have been made to ensure Atul Malik Indrajit Wickramasinghe equitable treatment of shareholders; Chairman Director/Chief Executive Officer
(iv) the business is a going concern; and
(v) they have conducted a review of internal controls covering financial, operational and compliance controls, risk management and have obtained a reasonable assurance Inoka Jayawardhana of their effectiveness and proper Company Secretary adherence.
32. STAKEHOLDER MANAGEMENT AND 26th February 2019. COMMUNICATION The Bank believes that building and maintaining good stakeholder relationships help it to manage and respond to expectations, minimise reputational risk and form strong partnerships, all of which support commercial sustainability. The measures initiated by the Bank to manage its valued stakeholders is given in the Section on ‘Stakeholder Engagement’ on pages 14-16.
148 Stewardship Annual Report of the Board of Directors on the Affairs of the Bank Union Bank | Annual Report 2018
Directors’ Statement on Internal Control over Financial Reporting
Responsibility The Management assists the Board in the emphasis on the scope and quality of In line with the Banking Act, Direction No 11 of implementation of the Board’s policies and audits. The minutes of the BAC meetings 2007, section 3 (8)(ii)(b), the Board of Directors procedures on risk and control by identifying are forwarded to the Board on a periodic present this report on Internal Control over and assessing the risks faced, and in the design basis. Further details of the activities Financial Reporting. operation and monitoring of appropriate undertaken by the BAC of the Bank are internal controls to mitigate these risks. set out in the Audit Committee Report on The Board of Directors (“Board”) is responsible pages 132-134; for the adequacy and effectiveness of the Key Features of the Process Adopted in aa The Integrated Risk Management internal control mechanism in place at Applying in Reviewing the Design and Committee (IRMC) is established to Union Bank of Colombo PLC, (“the Bank”). In Effectiveness of the Internal Control assist and support the Board in assuring considering such adequacy and effectiveness, System Over Financial Reporting that the Risk Management framework the Board recognises that the business of The key processes that had been established is adequate and robust to perform the banking requires reward to be balanced with in assessing the adequacy and effectiveness of oversight function in relation to the risk risk on a managed basis and as such the the system of internal controls with respect to categories of credit, market, liquidity internal control systems are primarily designed financial reporting include the following: and operations risks. All information with a view to highlighting deviations, if any pertaining to the statutory, regulatory and from the limits and indicators which comprise aa Committees had been established to fiduciary developments and requirements, the risk appetite of the Bank. In this light, the assist the Board to ensure the corporate are shared by the committees with Key system of internal controls could only provide objectives, strategies, annual budget as Management; reasonable, but not absolute assurance, well as the policies and business directions aa Operational committees had also been against material misstatement on financial that had been approved by the Board are established with appropriate mandates reporting and records, and against financial implemented effectively and are reflected to ensure effective management and losses or frauds. in the Bank’s operations; supervision of the Bank’s core areas of aa The Internal Audit Division of the Bank business operations. The Board had established an ongoing process checks for compliance with policies and aa In assessing the internal control for identifying, evaluating and managing procedures and assesses the effectiveness system over financial reporting, the significant risks faced by the Bank and of the internal control systems on an Bank continues to review and update mitigates such risks by enhancing the system ongoing basis and highlight significant all procedures and controls that are of internal control over financial reporting as findings in respect of instances of non connected with significant accounts and and when there are changes to the operations - compliance. Audits are carried out to disclosures in the financial statements. and business environment including ensure coverage on all departments and The Bank had processed and procedures compliance with regulatory guidelines. This branches in accordance with the annual to adopt new and revised Sri Lanka ongoing process is regularly reviewed by audit plan approved by the Board Audit accounting standards. The Bank would the Board and accords with the Guidance for Committee (BAC). The frequency of audits continue to improve procedure manuals Directors of Banks on the Directors’ Statement and coverage is determined by the level for incorporating changes to, and on Internal Control issued by the Institute of of risk assessed. The annual audit plan is adopting new Sri Lanka Accounting Chartered Accountants of Sri Lanka. The Board reviewed periodically by the BAC and the standards as appropriate. The Bank had had assessed the internal control over financial plan aligned to suit the changes in the also recognised the need to introduce an reporting taking into account principles for the risk profile of the Bank. Findings from the automated financial reporting process in assessment of internal control system as given Internal Audit are submitted to the BAC for order to comply with the requirements of in that guidance. review at their periodic meetings; recognition, measurement, classification aa The BAC of the Bank reviews gaps in and disclosure of the financial instruments The Board is of the view that the system of internal controls identified by Internal more effectively and efficiently. The internal controls over financial reporting Audit, External Auditors, Regulatory management is currently reviewing in place is sound and adequate to provide Authorities and the Management: options available to automate the financial reasonable assurance regarding the reliability and provides advice and direction on reporting process. The Bank continues of financial reporting, and that the preparation remediation and follows up on corrective to strengthen the processes around of financial statements for external purposes action taken. The BAC also reviews the impairment of Loans and Advances, is in accordance with relevant accounting Internal Audit function with particular identification of related parties and principles and regulatory requirements. financial statement disclosures.
Stewardship Directors’ Statement on Internal Control over Financial Reporting 149 Union Bank | Annual Report 2018
Directors’ Statement on Internal Control over Financial Reporting
aa Further to the adoption of new Sri Lanka Sri Lanka to prepare the interim financial statements continuing the application of LKAS 39 - Accounting Standards comprising SLFRS Financial Instruments: Recognition & Measurement. However, the financial statements for the and LKAS, the Bank further strengthened year ended 31st December 2018 are being presented in line with SLFRS 9. the processes and procedures initially aa The comments made by the External Auditors in connection with internal control system applied to adopt the aforementioned over financial reporting in previous years were reviewed during the year and appropriate accounting standards during the years steps had been taken to rectify them. The recommendations made by the External Auditors based on the feedback received from in 2018 in connection with the internal control system over financial reporting would be the External Auditors, Internal Audit dealt within the next financial year. Department, Regulators and the Board Audit Committee. The Bank would Confirmation continue to further strengthen the Based on the above processes, the Board confirms that the financial reporting system of the processes such as impairment of Loans Bank had been designed to provide a reasonable assurance regarding the reliability of financial & Advances and Financial Statement reporting and the preparation of financial statements for external purposes and had been done Disclosures related to risk management in accordance with Sri Lanka Accounting Standards and regulatory requirements of the Central based on the feedback received from Bank of Sri Lanka. Internal and External Auditors and as per best practices. Review of the Statement by External Auditors aa SLFRS 9 - “Financial Instruments”, became The External Auditors, Messrs Ernst & Young, had reviewed the above Directors Statement on applicable for financial reporting periods Internal Control over Financial Reporting included in the Annual Report of the Bank for the year beginning on or after 1st January 2018. ended 31 December 2018 and reported to the Board that nothing had come to their attention SLFRS 9 posses a significant impact on that causes them to believe that the statement is inconsistent with their understanding of the impairment assessment of financial assets process adopted by the Board in the review of the design and effectiveness of the internal control where by the impairment assessment over financial reporting of the Bank. Their Report on the Statement of Internal Control over approach shifted from an “incurred credit Financial Reporting is given on page 151 of this Annual Report. loss model” applied based on LKAS 39 - “Financial Instruments - Recognition and By order of the Board, Measurement” to an “expected credit loss model”. Further this standard creates a significant impact on the processes adopted for classification of financial instruments which is now driven by the Priyantha Fernando “business model” based on which the Interim Chairman financial instruments are held and the Board Audit Committee contractual cash flow characteristics of the instrument. Giving due regards to the complexities involved with the implementation of this standard the Bank began the implementation Athul Malik journey in 2017 with the assistance of Chairman an external consultant. During the year Bank continued to refine the statistical models used in the computations and the procedures used for data extraction which is essential for the successful implementation of the standard. Despite Indrajit Wickramasinghe Inoka Jayawardhana SLFRS 9 becoming applicable from 1st Chief Executive Officer Company Secretary January 2018 the Bank continued to report its interim financial statements based on Colombo, Sri Lanka LKAS 39, based on the option granted by the Institute of Chartered Accountants of 26th February 2019
150 Stewardship Directors’ Statement on Internal Control over Financial Reporting Union Bank | Annual Report 2018
Assurance Report on Internal Control
APAG/RM/TW Our responsibilities and compliance with SLSAE 3050 (Revised) does not require us SLSAE 3050 (Revised) to consider whether the Statement covers INDEPENDENT ASSURANCE REPORT Our responsibility is to assess whether all risks and controls or to form an opinion TO THE BOARD OF DIRECTORS OF UNION the Statement is both supported by the on the effectiveness of the Bank’s risk and BANK OF COLOMBO PLC documentation prepared by or for directors control procedures. SLSAE 3050 (Revised) and appropriately reflects the process the also does not require us to consider whether Report on the Director’s Statement on directors have adopted in reviewing the the processes described to deal with material Internal Control design and effectiveness of the internal control internal control aspects of any significant We were engaged by the Board of Directors of the Bank. problems disclosed in the annual report will, in of Union Bank of Colombo PLC (“Bank”) to fact, remedy the problems. provide assurance on the Directors’ Statement We conducted our engagement in accordance on Internal Control over Financial Reporting with Sri Lanka Standard on Assurance The procedures selected depend on (“Statement”) included in the annual report for Engagements (SLSAE) 3050 (Revised), our judgement, having regard to our the year ended 31 December 2018. Assurance Report for Banks on Directors’ understanding of the nature of the Bank, the Statement on Internal Control, issued by the event or transaction in respect of which the Management’s responsibility institute of Charted Accountants of Sri Lanka. Statement has been prepared. Management is responsible for the preparation and presentation of the Statement in This Standard required that we plan and We believe that the evidence we have accordance with the “Guidance for Directors perform procedures to obtain limited obtained is sufficient and appropriate to of Banks on the Directors’ Statement on assurance about whether Management provide a basis for our conclusion. Internal Control” issued in compliance with has prepared, in all material respects, the section 3(8)(ii)(b) of the Banking Act Direction Statement on Internal Control. Our conclusion No. 11 of 2007, by the Institute of Chartered Based on the procedures performed, nothing Accountants of Sri Lanka. For purpose of this engagement, we are not has come to our attention that causes us responsible for updating or reissuing any to believe that the Statement included in Our Independence and Quality Control reports, nor have we, in the course of this the annual report is inconsistent with our We have complied with the independence engagement, performed an audit or review of understanding of the process the Board of and other ethical requirement of the Code the financial information. Directors has adopted in the review of the of Ethics for Professional Accountants issued design and effectiveness of internal control by the Institute of Chartered Accountants of Summary of work performed over financial reporting of the Bank. Sri Lanka, which is founded on fundamental We conducted our engagement to assess principles of integrity, objectivity, professional whether the Statement is supported by the competence and due care, confidentiality and documentation prepared by or for directors; professional behaviour. and appropriately reflected the process the directors have adopted in reviewing the The firm applies Sri Lanka Standard on system of internal control over financial 26 February 2019 Quality Control 1 and accordingly maintains reporting of the Bank. a comprehensive system of quality control including documented policies and The procedures performed were limited procedures regarding compliance with ethical primarily to inquiries of bank personnel and requirements, professional standards and the existence of documentation on a sample applicable legal and regulatory requirements. basis that supported the process adopted by the Board of Directors.
Stewardship Assurance Report on Internal Control 151 Union Bank | Annual Report 2018
GRI Content Index
GENERAL DISCLOSURES GRI Topics Description Page Number External Assurance Organisational Profile GRI 102-1 Name of the organisation Inner Back Cover Yes GRI 102-2 Activities, Brands, Products and services 32 Yes GRI 102-3 Location of organisation’s head quarters Inner Back Cover Yes GRI 102-4 Location of operations 8 Yes GRI 102-5 Ownership and Legal form Inner Back Cover Yes GRI 102-6 Markets served 32, 50-51 Yes GRI 102-7 Scale of the organisation 72, 87, 174 Yes GRI 102-8 Information on employees and other workers 72-73 Yes GRI 102-9 Supply chain 78-79 Yes GRI 102-10 Significant changes to the organisation and its supply chain 8 Yes GRI 102-11 Precautionary Principle or approach 12 Yes GRI 102-12 External initiatives 8 Yes GRI 102-13 Membership of associations 78 Yes Strategy GRI 102-14 Statement from senior decision-maker 24-25 Yes GRI 102-15 Key impacts, risks, and opportunities 20-21 Yes Ethics and Integrity GRI 102-16 Values, principles, standards, and norms of behaviour 5, 12 Yes Governance GRI 102-18 Governance structure 107 Yes Stakeholder Engagement GRI 102-40 List of stakeholder groups 14 Yes GRI 102-41 Collective bargaining agreements 72 Yes GRI 102-42 Identifying and selecting stakeholders 16 Yes GRI 102-43 Approach to stakeholder engagement 15 Yes GRI 102-44 Key topics and concerns raised 15 Yes Reporting Practice GRI 102-45 Entities included in the consolidated financial statements 42 Yes GRI 102-46 Defining report content and topic Boundaries 8, 13 Yes GRI 102-47 List of material topics 9-13 Yes GRI 102-48 Restatements of information 8 Yes GRI 102-49 Changes in reporting 9 Yes GRI 102-50 Reporting period 8 Yes GRI 102-51 Date of most recent report 8 Yes GRI 102-52 Reporting cycle 8 Yes GRI 102-53 Contact point for questions regarding the report 13 Yes GRI 102-54 Claims of reporting in accordance with the GRI Standards 8 Yes GRI 102-55 GRI content index 152-153 Yes GRI 102-56 External assurance 8, 154-155 Yes Management Approach GRI 103-1 Explanation of the material topic and its Boundary 9-13 Yes GRI 103-2 The management approach and its components 9-13 Yes GRI 103-3 Evaluation of the management approach 9-13 Yes
152 Stewardship GRI Content Index Union Bank | Annual Report 2018
TOPIC SPECIFIC DISCLOSURES GRI Topics Description Page Number External Assurance Category : Economic Gri 201 - Economic Performance GRI 201-1 Direct economic value generated and distributed 310 Yes GRI 201-2 Financial implications and other risks and opportunities due to climate change 20-21 Yes GRI 201-3 Defined benefit plan obligations and other retirement plans 248-250 Yes Gri 206 - Anti Competitive Behaviour GRI 206-1 Legal actions for anti-competitive behaviour, anti-trust, and monopoly practices 79 Yes Category : Environmental Gri 302 - Energy GRI 302-1 Energy consumption within the organisation 9 Yes Category : Social GRI 401 - Employment GRI 401-1 New employee hires and employee turnover 71-72 Yes GRI 401-2 Benefits provided to full-time employees that are not provided to temporary or part-time 70 Yes employees GRI 402 - Labour/Management Relations GRI 402-1 Minimum notice periods regarding operational changes 12 Yes GRI 403 - Occupational Health And Safety GRI 403-2 Types of injury and rates of injury, occupational diseases, lost days, and absenteeism, and 77 Yes number of work-related fatalities GRI 404 - Training And Education GRI 404-1 Average hours of training per year per employee 75 Yes GRI 404-2 Programmes for upgrading employee skills and transition assistance programs 76 Yes GRI 404-3 Percentage of employees receiving regular performance and career development reviews 74 Yes GRI 405 - Diversity and Equal Opportunity GRI 405-1 Diversity of governance bodies and employees 73 Yes GRI 405-2 Ratio of basic salary and remuneration of women to men 71 Yes GRI 406 - Non Discrimination GRI 406-1 Incidents of discrimination and corrective actions taken 72 Yes GRI 408 - Child Labour GRI 408-1 Operations and suppliers at significant risk for incidents of child labour 72 Yes GRI 409 - Forced Or Compulsory Labour GRI 409-1 Operations and suppliers at significant risk for incidents of forced or compulsory labour 72 Yes GRI 417 - Marketing and Labelling GRI 417-1 Requirements for product and service information and labelling 68 Yes GRI 417-2 Incidents of non-compliance concerning product and service information and labelling 79 Yes GRI 417-3 Incidents of non-compliance concerning marketing communications 79 Yes GRI 418 - Customer Privacy GRI 418-1 Substantiated complaints concerning breaches of customer privacy and losses of customer 79 Yes data GRI 419 - Socio Economic Compliance GRI 419-1 Non-compliance with laws and regulations in the social and economic area 79 Yes
Stewardship GRI Content Index 153 Union Bank | Annual Report 2018
Independent Assurance Report on Sustainability Reporting
Independent Assurance Report to Union particular, the requirements to achieve GRI the requirements of the Global Reporting Bank of Colombo PLC on the Sustainability Standards ‘In accordance’ - Core guideline Initiative, GRI Standards: ‘In accordance’ - Core Reporting Criteria Presented in the Integrated publication, publicly available at GRI’s global guidelines. This report is made solely to the Annual Report- 2018. website at “www.globalreporting.org”. Company in accordance with our engagement letter dated 31 October 2018. We disclaim any Introduction and scope of the engagement Our engagement provides limited assurance assumption of responsibility for any reliance The management of Union Bank of Colombo as well as reasonable assurance. A limited on this report to any person other than the PLC (“the Company”) engaged us to provide assurance engagement is substantially Company or for any purpose other than that an independent assurance on the following less in scope than a reasonable assurance for which it was prepared. In conducting our elements of the sustainability reporting criteria engagement conducted in accordance with engagement, we have complied with the presented in the annual report- 2018 (“the SLSAE-3000 and consequently does not independence requirements of the Code for Report”). enable to obtain assurance that we would Ethics for Professional Accountants issued by become aware of all significant matters that the CASL. aa Reasonable assurance on the information might be identified in a reasonable assurance on financial performance as specified on engagement. Accordingly, we do not express Key assurance procedures page 310 of the Report. an opinion providing reasonable assurance. We planned and performed our procedures to obtain the information and explanations aa Limited assurance on other information Management of the Company’s considered necessary to provide sufficient presented in the Report, prepared in responsibility for the Report evidence to support our limited assurance accordance with the requirements of the The management of the Company is conclusions. Key assurance procedures Global Reporting Initiative GRI Standards: responsible for the preparation of the self- included: ‘In accordance’ – Core guidelines. declaration, the information and statements contained within the Report, and for aa Interviewing relevant the company’s Basis of our work and level of assurance maintaining adequate records and internal personnel to understand the process We performed our procedures to provide controls that are designed to support the for collection, analysis, aggregation and limited assurance in accordance with Sri sustaining reporting presentation of data. Lanka Standard on Assurance Engagements aa Reviewing and validation of the (SLSAE 3000): ‘Assurance Engagements Other process in line with the GRI Sustainability information contained in the Report. than Audits or Reviews of Historical Financial Reporting Guidelines. aa Checking the calculations performed by Information’, issued by the Institute of the Company on a sample basis through Chartered Accountants of Sri Lanka (“CASL”). Ernst & Young’s responsibility recalculation. Our responsibility is to express a conclusion The evaluation criteria used for this limited as to whether we have become aware of assurance engagement are based on the any matter that causes us to believe that the Sustainability Reporting Guidelines (“GRI Report is not prepared in accordance with Guidelines”) and related information in
154 Stewardship Independent Assurance Report on Sustainability Reporting Union Bank | Annual Report 2018
aa Reconciling and agreeing the data on aa Nothing has come to our attention that financial performance are properly causes us to believe that other information derived from the Company’s audited presented in the Report are not fairly financial statements for the year ended 31 presented, in all material respects, December 2018. in accordance with the Company’s aa Comparison of the content of the Report sustainability practices and policies some against the criteria for a Global Reporting of which are derived from Sustainability Initiative, GRI Standards: In accordance’ – Reporting Guideline, GRI Standards- ‘In Core guidelines. accordance’ Core.
Our procedures did not include testing electronic systems used to collect and aggregate the information.
Limitations and considerations Ernst & Young Environmental and social performance data Chartered Accountants are subject to inherent limitations given their nature and the methods used for determining, 26 February 2019 calculating and estimating such data. Colombo
Conclusion Based on the procedures performed, as described above, we conclude that; aa The information on financial performance as specified on page 310 of the Report are properly derived from the audited financial statements of the Company for the year ended 31 December 2018.
Stewardship Independent Assurance Report on Sustainability Reporting 155 Union Bank | Annual Report 2018
Board of Directors
01 02 03 04 05
01 Gaurav Trehan 04 Atul Malik Non Independent Non Executive Director Chairman/ Non Independent Non Executive Director
02 Michael J O’Hanlon 05 Indrajit Wickramasinghe Non Independent Non Executive Director Executive Director/ Chief Executive Officer
03 Sabry Ghouse Independent Non Executive Director
156 Stewardship Board of Directors Union Bank | Annual Report 2018
06 07 08 09 10 11
06 Priyantha Fernando 09 Puneet Bhatia Deputy Chairman/ Independent Non Executive Director Non Independent Non Executive Director
07 Dilshani Wijayawardana 10 Sow Lin Chiew Independent Non Executive Director Non Independent Non Executive Director
08 Trevine Fernandopulle 11 Ranvir Dewan Independent Non Executive Director Non Independent Non Executive Director
Stewardship Board of Directors 157 Union Bank | Annual Report 2018
Profiles of the Board of Directors
Atul Malik Priyantha Fernando Indrajit Wickramasinghe Chairman/ Non Independent Non Executive Deputy Chairman/ Senior Director/ Executive Director/ Chief Executive Officer Director Independent Non Executive Director
Atul Malik, who currently functions as a Senior Priyantha Fernando has more than 37 years Indrajit Wickramasinghe was appointed as Advisor to TPG for their financial services of experience in the banking and finance Director/Chief Executive Officer on the 15th of portfolio, is a senior financial services executive sectors. He was attached to the Central Bank November 2014. He counts for over 29 years with extensive experience and a successful of Sri Lanka serving in senior and diverse of Management experience having worked track record in establishing, expanding and capacities. He was the Deputy Governor in both the financial and consumer sectors managing scale businesses across Asian of the Central Bank in 2010-2011 in charge in both local and multinational companies. developed and emerging markets. of the Financial System Stability and the He holds an MBA from the University of Corporate Service clusters. Mr. Fernando Sri Jayewardenepura and is a Fellow of the Prior to joining TPG in October 2017, he was an has extensive experience and expertise in Chartered Institute of Marketing UK, a Member advisor to General Atlantic from 2015 to 2017, the fields of Banking and Financial Sector of the Association of the Professional Bankers the CEO of Maritime Bank, one of the largest regulation, Information Technology, National and a member of the Oxford Business Alumni, private banks in Vietnam, from 2012 to 2015 Accounting and Statistics, Fund Management, University of Oxford. and a Senior Advisor to Asia Capital & Advisors, Risk Management and Restructuring, Recovery a boutique private equity firm, from 2011 to and stabilisation of financially distressed Prior to his appointment as Director/CEO of 2012. companies. At the Central Bank he was the Union Bank he served as the Chief Operating Chairman of the Financial Stability Committee, Officer of NDB Bank where he was responsible Between 2007 and 2011, he was the Managing Member of the Monetary Policy Committee, for all business areas including Retail Banking, Director/Regional Head Asia-Private & Business Member of the Risk Management Committee Corporate Banking, SME Banking and Project Clients of Deutsche Bank with operations and the Chairman of the National Payment Finance. Prior to that he held positions as covering India, China and Vietnam. During this Council. a Vice President looking after functions period he was also a member of the DB Asia such as HR, Marketing and seven years as Pacific Executive Committee and the Global He was an Ex-Officio Board Member in several Vice President heading Retail Banking. Mr. Private and Business Clients (PBC) Executive regulatory organisations namely, the Securities Wickramasinghe was also a Non-Executive Committee, and was nominated as the Non- and Exchange Commission, the Insurance Director of Eagle Insurance/Aviva NDB Executive Director of DB China Limited. Board of Sri Lanka, the Chairman of the Credit Insurance, NDB Capital Holdings PLC, NDB Information Bureau, Institute of Bankers - Sri Securities (Pvt) Ltd, Development Holdings During his 20 years long career at Citibank Lanka and Board Member at Employees’ Trust (Pvt) Ltd and the Credit Information Bureau of that commenced in 1988 with Citibank India, Fund, Lanka Clear (Pvt) Ltd and Lanka Financial Sri Lanka. Mr. Malik has held a variety of senior roles, Services Bureau. During his career he has the last of which was as the Chief Executive initiated and spearheaded several key projects He currently serves as a Non-Executive Director Officer of Citibank Hong Kong (2004 to 2007), of national importance, especially in the area of the National Asset Management Ltd and UB which is the Bank’s largest retail and business of the advancement of the national payments Finance Company Ltd. banking operations in Asia. He was also a and settlement system. member of Citibank’s Global Consumer Group Management Committee and the Asia Pacific Mr. Fernando has served in a number of Executive Committee. committees at national level covering a range of subjects representing the Central Bank. Mr. Malik holds a Master’s Degree in Business Administration from the Rice University, USA Presently, Mr. Fernando holds directorships (1987) and B Tech Degree from IIT Bombay in Commercial Leasing and Finance PLC, (1985). Taprobane Holdings PLC, Ceylon Leather Company Ltd, Thomas Cook Travels Sri Lanka Pvt Ltd, Imperial Institute of Higher Education and Millennium Information of Technology (Pvt) Ltd.
158 Stewardship Profiles of the Board of Directors Union Bank | Annual Report 2018
In 2006 he was appointed Director Retail Mr. Dewan is a Fellow of the Institute of Sabry Ghouse Independent Non Executive Director Banking Al Rajhi Bank Malaysia by its parent Chartered Accountants in England & Wales Al Rajhi Banking and Investment Corporation, (FCA) and a member of the Canadian Institute Saudi Arabia, to develop a retail banking of Chartered Accountants (CPA, CA). He holds model and set up operations, on their entry a Bachelor of Commerce (Honours) degree Sabry Ghouse was appointed to the Board as into the Malaysian market. This was a first for from the Shriram College of Commerce, Delhi an Independent Non-Executive Director on the most profitable bank among the top 50 University, India. He also serves on the Board of 30th August 2012. His banking career spans banks in the Gulf Cooperation Council (GCC) Shriram City Union Finance Limited, India and over 26 years with leading international Banks. at the time. Under his stewardship the Al is a member of the Executive, Audit and Risk He counts 10 years’ experience serving in Rajhi Bank Malaysia, was able to break even Committees. Mr. Dewan is also a Director of UB overseas markets. in the 4th year with a network of branches Finance Company Limited. throughout Malaysia. He was employed by American Express Bank, Standard Chartered Bank and Al Rajhi Banking Mr. Ghouse was a former Director of the Gaurav Trehan and Investment Corporation of Saudi Arabia, Credit Information Bureau (CRIB) in Sri Lanka Non Independent Non Executive Director and was responsible for the setting up of and holds a Master’s Degree in Business Retail Banking, allied operations and crafting Administration (MBA) from the University of of Strategy at all of these banks to emerge a Western Sydney, Australia. leader in their chosen market. Gaurav Trehan is a Partner of TPG. Mr. Trehan is based in Mumbai. Since joining TPG in He joined American Express Bank Sri Lanka 2004, Mr. Trehan has spent time in TPG’s Hong Ranvir Dewan in 1991 to launch the American Express card Non Independent Non Executive Director Kong and Mumbai offices and has evaluated to the Sri Lankan market which was the first and executed private equity transactions in corporate card to be launched in the country India and Southeast Asia. He serves on the and was responsible for the card issuance Boards of Directors of Jana Capital Limited, and acquisition business in Sri Lanka and the Ranvir Dewan joined TPG Capital in July 2006 Manipal Health Enterprises Pvt. Ltd, Shriram Maldives. Thereafter he moved to Standard and is based in Singapore. He is currently a Properties, Shriram Automall India, Shriram Chartered Bank as Head of Retail Banking. Senior Advisor. From April 2000 to July 2006 General Insurance, ESS KAY Fincorp Ltd., He was seconded by Standard Chartered he was Executive Vice President and Chief Five-Star Business Finance Ltd. and Shriram Bank in 2000 as Regional Head of Consumer Financial Officer of Standard Chartered First Life Insurance. Prior to joining TPG, Mr. Trehan Banking for the Levant Region where he was Bank (formerly Korea First Bank) in Seoul, worked in the Mergers, Acquisitions and responsible for the successful acquisition and Korea. Restructurings Department of Morgan Stanley transition of the Grindlays Bank business, in Menlo Park with a focus on the Technology subsequent to Standard Chartered Bank’s Prior to that Mr. Dewan spent 13 years with Sector. Mr. Trehan received a Bachelor of global acquisition of Grindlays franchise. Citibank Global Consumer Bank and held Science in Mathematics & Applied Science and various senior positions in its international Economics from the University of California, He was recognised by Standard Chartered businesses. In his previous assignment, he Los Angeles. Bank for his contribution to society and was Regional Financial Controller of Citibank’s sustainable business for his contribution to Global Consumer Bank with responsibilities the community for his work with the mentally covering 11 countries in the Asia Pacific challenged Children in Jordan. He was selected region. Mr. Dewan has also held senior for executive leadership programs conducted positions with KPMG in Canada and England by the London Business School, UK and where he specialised in the audits of financial Templeton, Oxford UK. Institutions.
Stewardship Profiles of the Board of Directors 159 Union Bank | Annual Report 2018
Profiles of the Board of Directors
Puneet Bhatia Michael J O’Hanlon Trevine Fernandopulle Non Independent Non Executive Director Non Independent Non Executive Director Independent Non Executive Director
Puneet Bhatia is the Co-Managing Partner Michael J O’Hanlon is a Senior Advisor to Trevine Fernandopulle is a veteran Banker with for TPG Capital Asia and the head of TPG TPG focusing on its financial institution over 38 years of experience in the financial Capital India. He has created and led over investments. He currently is Chairman of the services sector. Prior to being appointed a dozen transactions and invested close board of Roosevelt Management Company, as a director of Union Bank, he served as to $2bn for TPG Capital in India including LLC, an asset manager, and Chairman of the Group Chief Risk Officer/Executive Vice Matrix Laboratories, Vishal Retail, invested the board of Rushmore Loan Management President - Risk of the DFCC Group from 2012 over $500m in the Shriram group in four of Services, LLC, a residential mortgage loan to 2016. During 2009 to 2012, he served as the the group companies, in Manipal Hospitals, originator and servicer. He has served on the Chief Risk Officer at Bank of Ceylon, having Union Bank of Colombo PLC and Jana Capital boards of other TPG portfolio companies initiated the setting up of its Risk Management Ltd and recently in the largest private equity including Shenzhen Development Bank, Korea functions as an Independent Risk Specialist. transaction in India in UPL, Sai Pharma and First Bank and Bank Thai. Until December RR Kabel. He currently serves on the Board of 2005, Mr. O’Hanlon was a Managing Director Mr. Fernandopulle commenced his banking Directors of these companies. at Lehman Brothers where he worked for career in 1978 with HSBC -Sri Lanka, where he over 25 years. Mr. O’Hanlon led the firm’s served for 30 years until his retirement in 2008. Prior to joining TPG in April 2002, Mr. Bhatia commercial and residential mortgage finance During his tenure at HSBC, he had amassed was Chief Executive, Private Equity Group efforts during the late 1980s through 1995. widespread knowledge and exposure to for GE Capital India (“GE Capital”), where In 1996, he became the head of the Financial international banking and risk management he was responsible for conceptualising and Institutions Group and in mid 1999, he moved specialisms; having provided leadership creating its direct and strategic private equity to Japan to head Japanese Investment Banking to numerous functions including Risk investment group. As Chief Executive, he and the Asian Financial Institutions Groups, Management, Foreign Exchange and Treasury, created and handled a portfolio of almost among other roles. Some key projects in International Trade, Corporate Banking and a dozen companies such as TCS, Patni Asia included leading the teams for TPG’s Retail Operations of the Bank and rising to Computers, BirlaSoft, Sierra Atlantic, iGate, investment in Korea First Bank and Lehman the position of Deputy Chief Executive Officer Indus Software and Rediff. He was also Brother’s investment in Aozora Bank. (DCEO) of HSBC Sri Lanka. responsible for consummating some of GE Capital’s joint ventures in India. Prior to this, Mr. Fernandopulle, is a Board member of the Mr. Bhatia was with ICICI Ltd from 1990 to 1995 Sow Lin Chiew National Insurance Trust Fund and also serves in the Project and Corporate Finance group Non Independent Non Executive Director on their Audit, Investment and Remuneration and worked as Senior Analyst with Crosby committees. He serves as a member of the Securities from 1995 to 1996. Board of AMW Capital Leasing and Finance PLC (an Al Futtaim Group Dubai owned company) Mr. Bhatia was born, grew up in and is based Sow Lin Chiew is the Group Controller of and its Audit, Risk and Remuneration in India. He has a B.Com Honours degree from Genting Berhad, the holding company of Vista Committees. He is the Chairman of the Board the Sriram College of Commerce, Delhi and an Knowledge Pte Ltd. She began her career of Trustees of Joseph Frazer Memorial Hospital, MBA from the Indian Institute of Management, with an international accounting firm in Kuala a Past President of Chartered Institute of Calcutta. Lumpur in 1979 and joined Genting Berhad Bankers (Sri Lanka Branch) and, a Founder in 1984. She is a Member of the Malaysian Member/past Vice President of the Association Institute of Certified Public Accountants and of Banking Risk Professionals of Sri Lanka. Mr. the Malaysian Institute of Accountants. Fernandopulle holds a BSc. (Mathematics) from Imperial College, University of London (UOL), an MSc (Statistics) from the London School of Economics, UOL and is also an Associate/ Fellow of the Chartered Institute of Bankers, London.
160 Stewardship Profiles of the Board of Directors Union Bank | Annual Report 2018
Dilshani Wijayawardana Keshav Thakkar Independent Non Executive Director Alternate Director to Puneet Bhatia
Dilshani Wijayawardana is an Attorney-at-Law Keshav Thakkar is an Associate at TPG Capital of the Supreme Court of Sri Lanka. She has India based in Mumbai. Prior to joining TPG obtained her Masters in Law Degree from in 2017, he was part of the private equity the University of Cambridge and has been in team at KKR India. Mr. Thakkar also has prior active commercial law practice since 1996. experience in investment banking having As of date she also appears in primary and worked in Corporate Finance with Lazard India appellate court litigation with President’s and in equity research at Morgan Stanley. Counsel K.Kanag-Isvaran. He is a member of the Institute of Chartered Accountants of India and holds a Master’s Ms. Wijayawardana began her legal career in degree in Commerce from the University of the year 1996 as a Research Assistant to Hon. Mumbai. Justice Mark Fernando and then went on to work as a Legal Executive at Shook Lin & Bok- Advocates and Solicitors, Singapore in the year 1999. She has published many articles on commercial law and is also the co-author of the book ‘Company Law’ published in the year 2014. She has served as a Commissioner at the Securities and Exchange Commission of Sri Lanka. She also served as a member of the Committee appointed for the revision of the Code of Intellectual Property in Sri Lanka and the Advisory Committee appointed for the drafting of the new Securities and Exchange Act.
Yoke Sun Woon Alternate Director to Sow Lin Chiew
Yoke Sun Woon was appointed to the Board as an Alternate Director to Ms. Sow Lin Chiew in January 2015. She is the Senior Vice President – Strategic Investment of Genting Berhad, the holding company of Vista Knowledge Pte Ltd. She has been in the investment banking business for nearly 20 years where she specialises in equity research and investment. She holds a Masters in Economics from University of Malaya in Malaysia.
Stewardship Profiles of the Board of Directors 161 Union Bank | Annual Report 2018
Leadership Team
Indrajit Wickramasinghe Wije Dambawinne Hiranthi de Silva Sri Ganendran Ravi Jayasekera Director/Chief Executive Vice President/ Vice President - Vice President - Vice President - Officer Head of Treasury Wholesale Banking Operations Human Resources
Chaya Jayawardane Inoka Jayawardhana Lasantha Mathupala Malinda Samaratunga Suhen Vanigasooriya Vice President - Assistant Vice President - Assistant Vice President - Chief Financial Officer Chief Risk Officer Retail Banking Head of Legal/Company Head of Information Secretary Technology
162 Stewardship Leadership Team Union Bank | Annual Report 2018
Assistant Vice Presidents
Naveen Anthonypillai Rushira De Silva Thishani Dissanayake Manisha Fernando Assistant Vice President - Assistant Vice President - Assistant Vice President - Assistant Vice President - Head Head of SME Corporate Banking - Marketing of Retail Liability Products & Team Head Alternate Channels
Mahendra Illangasinghe Indika Mendis Malinda Perera Asanga Tennakoon Assistant Vice President/ Assistant Vice President - Assistant Vice President/ Assistant Vice President - Head of Branch Network Treasury Head of Retail Liability Corporate Banking - Sales & Contact Centre Team Head
Stewardship Assistant Vice Presidents 163 Union Bank | Annual Report 2018
Chief Managers
Nalin Ahangama Nipuna Ganegoda Chamara Gomis Darsha Hendahewa Jayanath Kariyakarawana Chief Manager - Chief Manager/Head of Chief Manager/Head of Chief Manager Treasury & Chief Manager - Credit Trade Operations Elite Banking Cards Bank Notes Operation Operations
Saman Kottawatta Ayesha Naotunna Kathirgamathamby Jeewantha Perera Nirosha Perera Chief Manager/Zonal Chief Manager - Finance Nishaaharan Chief Manager - Branch Head of Internal Audit Chief Manager/Zonal Operations/Head of Head, Zone III Head, Zone IV Leasing
Ruchira Perera Shiran Punchihewa Anuruddha Ranasinghe Damith Sumathirathne Sameera Chief Manager - Chief Manager - Business Chief Manager/Zonal Chief Manager - Wijegunawardena Corporate Banking Information Technology Head, Zone II Retail Asset Sales Chief Manager – Head of SME Credit
Dinuke Wijesinghe Chief Manager - Risk
164 Stewardship Chief Managers Union Bank | Annual Report 2018
Senior Managers
Myuravathani Balamurali Dinesh Balendran Lashika Bhareti Rajiv David Kanchana De Silva Senior Manager - Treasury Senior Manager - Senior Manager - Senior Manager Senior Manager - Operations Operational Risk Card Products Marketing Exports & Imports
Kasun De Silva Kolitha De Silva Shihan De Silva Deepal Edirisinghe Ashanthi Fernando Senior Manager/Zonal Senior Manager - Senior Relationship Senior Manager - Senior Relationship Head, Zone I-A Old Moor Street Branch Manager Premises Manager
Chaminda Fernando Minoli Fernando Roshan Fernando Rukmal Fernando Thangavelu Gobinath Senior Manager/ Senior Manager - Senior Manager - Senior Manager - Senior Manager - Zonal Head, Zone I-B Finance Internal Audit Credit Risk Institutional CASA
Stewardship Senior Managers 165 Union Bank | Annual Report 2018
Senior Managers
Osadhi Gunasekara Asintha Gunawardane Mohamed Shazly Hasseen Janaka Iroshan Minesh Jayasekera Senior Manager - Senior Manager - Senior Manager - Senior Manager - Senior Manager - Internal Audit SME Banking Head Office Branch Electronic Banking NRSL Products
Shanmugeswaran Sameera Kakulandara Nirosha Kapurubandara Irani Karunanayake Kaminda Kumarasinghe Jesdharajan Senior Manager - Senior Manager - Senior Manager - Legal Senior Manager - Senior Manager - Nugegoda Branch Product Development Recoveries Kotahena Branch
Deepal Liyanage Sandamali Munasinghe Sailajah Nadarajah Frank Nesarajah Surani Ondatjie Senior Manager - SME Senior Manager - Legal Senior Manager - Senior Manager- Senior Manager - Treasury Pettah Branch Consumer Risk
Rohan Peiris Chandani Perera Dinuk Perera Janithi Perera Mangala Perera Senior Manager - Senior Manager - Process Senior Manager - Senior Senior Manager - Transaction Senior Manager - Branch Operations Control Relationship Manager Processing Operations IT Core Banking
166 Stewardship Senior Managers Union Bank | Annual Report 2018
Shabbir Raheem Menaka Raigambandara Dulin Rajapakse Asanka Ranasinghe Achala Ratnayake Senior Manager - Senior Manager - Senior Manager - Senior Manager - Senior Manager - Card Operations Compliance IT Projects Credit Referrals Finance
Dilan Rodrigo Prashanthi Sabesan Sivashankar Sakthivel Gihan Samarasinghe Nadika Senaratne Senior Manager - Senior Manager - Senior Manager - Finance Senior Manager - Senior Manager - Transaction Banking Sales Organisational Development Bancassurance IT Operations & HR Service Delivery
Dhanushka Sethuhewa Christella Sivapragasam Shehan Uduwara Nilmini Weerasekera Mithila Wickramasinghe Senior Manager - Senior Relationship Head of Retail Recoveries Senior Relationship Manager Senior Manager- Market Risk Manager - Elite Circle - Corporate Banking Operations & Compliance Zone I-B
Dhananjeyan Wijendra Ramani Wijeratne Senior Manager - Senior Manager - Retail Asset Centre Ganemulla Branch
Stewardship Senior Managers 167 Union Bank | Annual Report 2018
Financial Reports
Financial Calendar 169 Independent Auditors’ Report on Financial Statements 170 Statement of Profit or Loss 174 Statement of Comprehensive Income 175 Statement of Financial Position 176 Statement of Changes in Equity 177 Statement of Cash Flows 178 Notes to the Financial Statements 180
Ten Years at a Glance 296 Pillar III Market Disclosures 298 Quarterly Performance of the Bank 309 2018 - Direct Economic Value Generated & Distributed 310 Compliance with Annual Report Disclosure Requirements of Central Bank of Sri Lanka 311 Glossary of Financial Terms 316
168 Union Bank | Annual Report 2018
FINANCIAL CALENDAR
2017 Annual Report and Audited Financial Statements was signed on 27 February 2018 23rd Annual General Meeting held on 28 March 2018 Rs. 0.10 per share Cash Dividend for 2017 paid on 20 March 2018
2018 Colombo Stock Newspapers (as required by CBSL) Exchange English Sinhala Tamil Q1 ended 31 March* 25 April 2018 28 May 2018 28 May 2018 28 May 2018 Q2 ended 30 June* 24 July 2018 30 August 2018 30 August 2018 30 August 2018 Q3 ended 30 September* 25 October 2018 28 November 2018 28 November 2018 28 November 2018 Q4 ended 31 December 28 February 2019 29 March 2019 29 March 2019 29 March 2019
PROPOSED FINANCIAL CALENDAR 2019
2018 Annual Report and Audited Financial Statements to be signed on 26 February 2019 24th Annual General Meeting to be held on 28 March 2019
2019 to be submitted on or before Colombo Stock Newspapers (as required by CBSL) Exchange English Sinhala Tamil Q1 ended 31 March* 15 May 2019 30 May 2019 30 May 2019 30 May 2019 Q2 ended 30 June* 15 August 2019 30 August 2019 30 August 2019 30 August 2019 Q3 ended 30 September* 15 November 2019 29 November 2019 29 November 2019 29 November 2019 Q4 ended 31 December 15 February 2020 31 March 2020 31 March 2020 31 March 2020
* Based on unaudited information 169 Union Bank | Annual Report 2018
Independent Auditors’ Report on Financial Statements
APAG/RM/TW
INDEPENDENT AUDITOR’S REPORT In our opinion, the accompanying financial Key audit matters TO THE SHAREHOLDERS OF UNION BANK OF statements of the Bank and the Group give a Key audit matters are those matters that, in COLOMBO PLC true and fair view of the financial position of our professional judgment, were of most the Bank and the Group as at 31 December significance in our audit of the financial Report on the audit of the consolidated 2018, and of their financial performance statements of the current period. These financial statements and cash flows for the year then ended matters were addressed in the context of in accordance with Sri Lanka Accounting our audit of the financial statements as a Opinion Standards. whole, and in forming our opinion thereon, We have audited the financial statements of and we do not provide a separate opinion Union Bank of Colombo PLC (“the Bank”) and Basis for opinion on these matters. For each matter below, our the consolidated financial statements of the We conducted our audit in accordance description of how our audit addressed the Bank and its subsidiaries (“the Group”), which with Sri Lanka Auditing Standards (SLAuSs). matter is provided in that context. comprise the statement of financial position Our responsibilities under those standards as at 31 December 2018, and the statement are further described in the Auditor’s We have fulfilled the responsibilities of profit or loss, statement of comprehensive responsibilities for the audit of the financial described in the Auditor’s responsibilities income, statement of changes in equity and statements section of our report. We are for the audit of the financial statements statement of cash flows for the year then independent of the Group in accordance with section of our report, including in relation ended, and notes to the financial statements, the Code of Ethics issued by CA Sri Lanka to these matters. Accordingly, our audit including a summary of significant accounting (Code of Ethics) and we have fulfilled our other included the performance of procedures policies. ethical responsibilities in accordance with designed to respond to our assessment of the Code of Ethics. We believe that the audit the risks of material misstatement of the evidence we have obtained is sufficient and financial statements. The results of our appropriate to provide a basis for our opinion. audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial statements.
170 Financial Reports Independent Auditors’ Report on Financial Statements Union Bank | Annual Report 2018
Key audit matter How our audit addressed the key audit matter Impairment allowance for loans and advances Our audit procedures (among others) were designed to obtain sufficient and appropriate to customers including Group’s transition to audit evidences, to assess the reasonableness of the impairment allowance these included the SLFRS 9: following:
We considered the Impairment allowance aa Focusing on the oversight, review and approval of impairment policies by the board audit for loans and advances to customers as a key committee and management, we evaluated the design, implementation of controls over audit matter due to the materiality of the measurement of loans and advances, in the light of the requirements of SLFRS 9. balances, Significant estimates, judgments and assumptions involved along with complex aa We tested the underlying calculations and data used in such calculations of impairment calculations. In addition, given the significant allowances; changes SLFRS 9 required for the basis of estimating the impairment allowance for loans aa For loans and advances to customers individually assessed for impairment: and advances to customers from the date of transition, we also selected the disclosure of - where impairment indicators existed, we evaluated the reasonableness of management’s impact of the transition to the SLFRS 9. estimated future recoveries including the expected future cash flows, discount rates and the valuation of collateral held. We also compared the actual recoveries against previously estimated amounts of future recoveries; As at 31 December 2018, loans and advances - where loans and advances to customers granted to customers with a higher risk of credit to customers, net of impairment amounted loss, we assessed the main criteria used by the management for determining whether an to LKR 82,120 Million representing 61% of the impairment event had occurred and the reasonableness of management estimation of Group’s total assets as detailed in Note 24 to such additional impairment. the Financial Statements. On 1 January 2018, as described in Note 3, the Group transitioned to aa For loans and advances to customers collectively assessed for impairment: the new Sri Lanka Financial Reporting Standard - we tested the completeness, relevance and accuracy of the underlying information 9: Financial Instruments, (SLFRS 9). in loans and advances used in the impairment calculations by agreeing details to the Group’s source documents and information in IT systems and re-performing the calculations. - we also considered reasonableness of macro-economic and other factors used by management in their judgemental overlays for various types of loan portfolios, by comparing them with publicly available data and information sources.
aa We assessed the adequacy of the related financial statement disclosures as set out in notes 24 and 2.4.2.
aa We also assessed the adequacy of the Group’s disclosure on the impact of the initial adoption of SLFRS 9 as set out in note 03.
Financial Reports Independent Auditors’ Report on Financial Statements 171 Union Bank | Annual Report 2018
Independent Auditors’ Report on Financial Statements
Other information included in the Group’s intends to liquidate the Group or to cease aa Obtain an understanding of internal 2018 Annual Report operations, or has no realistic alternative but control relevant to the audit in order Other information consists of the information to do so. to design audit procedures that are included in the Annual Report, other than the appropriate in the circumstances, but financial statements and our auditor’s report Those charged with governance are not for the purpose of expressing an thereon. Management is responsible for the responsible for overseeing the Bank’s and the opinion on the effectiveness of the internal other information. Group’s financial reporting process. controls of the Bank and the Group.
Our opinion on the financial statements does Auditor’s responsibilities for the audit of aa Evaluate the appropriateness of not cover the other information and we do the financial statements accounting policies used and the not express any form of assurance conclusion Our objectives are to obtain reasonable reasonableness of accounting estimates thereon. assurance about whether the financial and related disclosures made by statements as a whole are free from material management. In connection with our audit of the financial misstatement, whether due to fraud or error, statements, our responsibility is to read the and to issue an auditor’s report that includes aa Conclude on the appropriateness of other information and, in doing so, consider our opinion. Reasonable assurance is a high management’s use of the going concern whether the other information is materially level of assurance, but is not a guarantee that basis of accounting and, based on the inconsistent with the financial statements an audit conducted in accordance with SLAuSs audit evidence obtained, whether a or our knowledge obtained in the audit or will always detect a material misstatement material uncertainty exists related to otherwise appears to be materially misstated. when it exists. Misstatements can arise from events or conditions that may cast If, based on the work we have performed, we fraud or error and are considered material if, significant doubt on the Group’s ability conclude that there is a material misstatement individually or in the aggregate, they could to continue as a going concern. If we of this other information, we are required to reasonably be expected to influence the conclude that a material uncertainty exists, report that fact. We have nothing to report in economic decisions of users taken on the basis we are required to draw attention in our this regard. of these financial statements. auditor’s report to the related disclosures in the financial statements or, if such Responsibilities of management and those As part of an audit in accordance with SLAuSs, disclosures are inadequate, to modify our charged with governance for the financial we exercise professional judgment and opinion. Our conclusions are based on the statements maintain professional skepticism throughout audit evidence obtained up to the date Management is responsible for the preparation the audit. We also: of our auditor’s report. However, future of financial statements that give a true and fair events or conditions may cause the Group view in accordance with Sri Lanka Accounting aa Identify and assess the risks of material to cease to continue as a going concern. Standards, and for such internal control as misstatement of the financial statements, management determines is necessary to whether due to fraud or error, design and aa Evaluate the overall presentation, structure enable the preparation of financial statements perform audit procedures responsive to and content of the financial statements, that are free from material misstatement, those risks, and obtain audit evidence including the disclosures, and whether whether due to fraud or error. that is sufficient and appropriate to the financial statements represent the provide a basis for our opinion. The risk underlying transactions and events in a In preparing the financial statements, of not detecting a material misstatement manner that achieves fair presentation. management is responsible for assessing the resulting from fraud is higher than for one Group’s ability to continue as a going concern, resulting from error, as fraud may involve aa Obtain sufficient appropriate audit disclosing, as applicable, matters related to collusion, forgery, intentional omissions, evidence regarding the financial going concern and using the going concern misrepresentations, or the override of information of the entities or business basis of accounting unless management either internal control. activities within the Group to express an
172 Financial Reports Independent Auditors’ Report on Financial Statements Union Bank | Annual Report 2018
opinion on the consolidated financial as appears from our examination, proper statements. We are responsible for the accounting records have been kept by the direction, supervision and performance Bank. of the group audit. We remain solely responsible for our audit opinion. CA Sri Lanka membership number of the engagement partner responsible for signing We communicate with those charged with this independent auditor’s report is 1697. governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 26 February 2019 We also provide those charged with Colombo governance with a statement that we have complied with ethical requirements in accordance with the Code of Ethics regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
Report on Other Legal and Regulatory Requirements As required by section 163 (2) of the Companies Act No. 07 of 2007, we have obtained all the information and explanations that were required for the audit and, as far
Financial Reports Independent Auditors’ Report on Financial Statements 173 Union Bank | Annual Report 2018
Statement of Profit or Loss
BANK GROUP For the year ended 31 December Note 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Gross income 4 13,910,425 11,937,763 16,075,953 13,899,368
Interest income 12,142,268 10,498,284 14,120,894 12,194,010 Less: Interest expenses 8,490,006 7,452,377 9,655,390 8,492,442 Net interest income 5 3,652,262 3,045,907 4,465,504 3,701,568
Fee and commission income 968,008 783,217 1,120,153 972,671 Less: Fee and commission expenses 135,158 109,748 162,578 145,646 Net fee and commission income 6 832,850 673,469 957,575 827,025
Net fair value gains/ (losses) from financial instruments at fair value through profit or loss 7 309,519 - 309,519 - Net gains/ (losses) from trading 7.1 - 428,848 - 428,690 Net gains/(losses) from financial investments 8 173,026 141,531 174,559 143,515 Other operating income 9 317,604 85,883 350,828 160,482 Total operating income 5,285,261 4,375,638 6,257,985 5,261,280
Less: Impairment for loans and other losses 10 342,282 248,929 576,339 377,508 Net operating income 4,942,979 4,126,709 5,681,646 4,883,772
Less: Personnel expenses 11 1,821,782 1,598,410 2,058,923 1,816,442 Depreciation and amortisation 12 382,573 399,545 415,895 428,810 Other expenses 13 1,525,120 1,346,917 1,791,648 1,612,984 Total operating expenses 3,729,475 3,344,872 4,266,466 3,858,236
Results from operating activities 1,213,504 781,837 1,415,180 1,025,536 Share of profit of equity accounted investees, net of tax 29.1 34,614 55,801 - - Profit before value added tax (VAT), nation building tax (NBT) and debt repayment levy (DRL) on financial services 1,248,118 837,638 1,415,180 1,025,536
Less: VAT, NBT and DRL on financial services 14 470,724 303,520 521,775 348,202 Profit before tax 777,394 534,118 893,405 677,334 Less: Tax expense 15 304,846 73,500 358,755 126,205 Profit for the year 472,548 460,618 534,650 551,129
Attributable to: Equity holders of the parent 472,548 460,618 517,750 514,776 Non controlling interest - - 16,900 36,353 Profit for the year 472,548 460,618 534,650 551,129
Earnings per share Earnings per share - Basic 16.1 0.43 0.42 0.47 0.47 Earnings per share - Diluted 16.2 0.43 0.42 0.47 0.47
The Notes to the Financial Statements from pages 180-295 form an integral part of these Financial Statements.
174 Financial Reports Statement of Profit or Loss Union Bank | Annual Report 2018
Statement of Comprehensive Income
BANK GROUP For the year ended 31 December Note 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Profit for the year 472,548 460,618 534,650 551,129
Other comprehensive income that will be reclassified to profit or loss in subsequent periods:
Debt instruments at fair value through other comprehensive income Net change in fair value during the year (840,798) - (840,798) - Changes in allowance for expected credit loss - - - - Reclassification to the income statement 199,740 - 199,740 - Less: Income tax effect on above 179,497 - 179,497 - Net gains/(losses) on financial investments at fair value through other comprehensive income (461,561) - (461,561) -
Available for sale financial assets Gains/ (losses) on re-measuring available for sale financial assets - 781,723 - 795,511 Net amount transferred to profit or loss (available for sale financial assets) - (223,491) - (236,152) Less: Income tax effect on gains/ (losses) on re-measuring available for sale financial assets - (156,305) - (156,305)
Net gains/(losses) on available for sale financial investments - 401,927 - 403,054
Share of other comprehensive income of equity accounted investees, net of tax 29.1 - 538 - - Total items that will be reclassified to the statement of profit or loss (461,561) 402,465 (461,561) 403,054
Other comprehensive income that will not be reclassified to profit or loss in subsequent periods: Actuarial gains/ (losses) on defined benefit plans 38.1.3 (9,051) 7,214 (3,724) 8,184 Revaluation gains/ (losses) on equity instruments at fair value through other comprehensive income 26.4 - - (28,650) - Less: Income tax effect on above 2,534 (2,019) 1,041 (2,291)
Share of other comprehensive income of equity accounted investees, net of tax 29.1 (11,805) 427 - -
Total items that will not be reclassified to the statement of profit or loss (18,322) 5,622 (31,333) 5,893 Other comprehensive income/(loss) for the year, net of taxes (479,883) 408,087 (492,894) 408,947 Total comprehensive income for the year, net of tax (7,335) 868,705 41,756 960,076
Attributable to: Equity holders of the parent (7,335) 868,705 37,867 922,863 Non-controlling interest - - 3,889 37,213 Total comprehensive income for the year, net of tax (7,335) 868,705 41,756 960,076
The Notes to the Financial Statements from pages 180-295 form an integral part of these Financial Statements.
Financial Reports Statement of Comprehensive Income 175 Union Bank | Annual Report 2018
Statement of Financial Position
BANK GROUP As at 31 December Note 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Assets Cash and cash equivalents 19 2,917,866 4,697,738 3,306,393 5,057,422 Balances with Central Bank of Sri Lanka 19.1 4,219,932 3,785,679 4,219,932 3,785,679 Placements with banks 20 3,265,425 716,147 3,265,425 866,690 Reverse repurchased agreements 21 417,146 1,795 950,998 301,297 Derivative financial instruments 22 34,274 2,760 34,274 2,760 Financial investments at fair value through profit or loss 23 2,863,121 - 2,863,121 - Financial investments - held for trading 23 - 5,949,023 - 5,949,023 Financial assets at amortised cost - loans and advances to customers 24 73,749,208 - 82,120,068 - Loans and receivables to other customers 24 - 70,577,923 - 79,220,956 Financial assets at amortised cost - debt and other instruments 25 16,567,940 - 15,942,404 - Other loans and receivables 25.1 - 9,609,639 - 8,674,102 Financial investments - held to maturity 25.2 - 2,546,553 - 2,546,553 Financial investments at fair value through other comprehensive income 26 17,735,959 - 17,787,621 - Financial investments - available for sale 26 - 16,453,207 - 16,604,761 Current tax assets 27 336,167 436,279 336,167 436,284 Investments in real estate 28 - - 118,633 152,914 Investments in subsidiaries 29 835,373 1,262,612 - - Goodwill and intangible assets 30 1,202,532 1,220,999 1,550,544 1,568,398 Property, plant and equipment 31 789,158 888,359 1,013,541 1,058,067 Deferred tax assets 32 115,596 - 517,374 433,728 Other assets 33 870,457 858,695 1,005,213 942,198 Total assets 125,920,154 119,007,408 135,031,708 127,600,832
Liabilities Due to banks 34 9,348,209 17,208,641 9,515,547 17,298,727 Derivative financial instruments 22 71,750 4,867 71,750 4,867 Repurchased agreements 35 17,585,912 10,381,193 17,535,900 10,218,055 Due to customers 36 79,251,073 70,325,594 86,266,123 76,747,977 Other borrowed funds 37 1,234,220 1,224,812 2,921,647 2,968,233 Current tax liabilities 27 - - 188,001 173,207 Deferred tax liabilities 32 - 144,922 1,436 145,278 Other liabilities 38 1,801,642 1,859,682 2,058,270 2,202,772 Total liabilities 109,292,806 101,149,711 118,558,674 109,759,116
Equity Stated capital 39 16,334,782 16,334,782 16,334,782 16,334,782 Share warrants 39.1 65,484 65,484 65,484 65,484 Statutory reserve fund 40 139,883 116,256 157,569 131,519 ESOP reserve 41.3 52,816 35,848 52,816 35,848 Available for sale reserve - 150,570 - 155,377 Fair value through OCI reserve (310,991) - (306,184) - Retained earnings 345,374 1,154,757 (43,734) 714,444 Total equity attributable to equity holders of the bank 16,627,348 17,857,697 16,260,733 17,437,454 Non-controlling interests 42 - - 212,301 404,262 Total equity 16,627,348 17,857,697 16,473,034 17,841,716 Total equity and liabilities 125,920,154 119,007,408 135,031,708 127,600,832
Commitments and contingencies 43.1 34,337,204 26,313,733 34,528,827 26,313,733 Net asset value per share (Rs.) 15.23 16.36 14.90 15.98
The Notes to the Financial Statements from pages 180-295 form an integral part of these Financial Statements.
I certify that these Financial Statements are in compliance with the requirements of the Companies Act No. 07 of 2007.
Malinda Samaratunga Chief Financial Officer
The Board of Directors is responsible for these Financial Statements. Signed for and on behalf of the Board;
Atul Malik Indrajit Wickramasinghe Inoka Jayawardene Chairman Director/Chief Executive Officer Company Secretary
Colombo 26 February 2019
176 Financial Reports Statement of Financial Position Union Bank | Annual Report 2018
Statement of Changes in Equity
BANK Statutory Available Fair value Stated Share Reserve ESOP for Sale through OCI Retained Total For the year ended Capital Warrants Fund Reserve Reserve Reserve Earnings Equity Note Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Balance as at 1 January 2017 16,334,782 65,484 95,439 17,836 (251,895) - 821,568 17,083,214 Total comprehensive income for the year Net profit for the year ------460,618 460,618 Other comprehensive income - - - - 402,465 - 5,622 408,087 Total Comprehensive Income - - - - 402,465 - 466,240 868,705 Transactions with equity holders, recognised directly in equity Change in control 42 ------(3,093) (3,093) Fair value of ESOP 41.3 - - - 18,012 - - - 18,012 Dividends to equity holders ------(109,141) (109,141) Transfers during the year 40 - - 20,817 - - - (20,817) - Balance as at 31 December 2017 16,334,782 65,484 116,256 35,848 150,570 - 1,154,757 17,857,697 Transitional adjustment on the implementation of SLFRS 9 - Bank 3.1.1 - - - - (150,570) 150,570 (952,085) (952,085) Transitional adjustment on the implementation SLFRS 9 - Subsidiaries 3.1.1 ------(403,355) (403,355) Deferred tax on Transitional adjustment 3.1.1 ------224,599 224,599 Restated opening balance as at 1 January 2018 under SLFRS 9 16,334,782 65,484 116,256 35,848 - 150,570 23,916 16,726,856 Total comprehensive income for the year Net profit for the year ------472,548 472,548 Other comprehensive income - - - - - (461,561) (18,322) (479,883) Total Comprehensive Income - - - - - (461,561) 454,226 (7,335) Transactions with equity holders, recognised directly in equity Fair value of ESOP 41.3 - - - 16,968 - - - 16,968 Dividends to equity holders ------(109,141) (109,141) Transfers during the year 40 - - 23,627 - - - (23,627) - Balance as at 31 December 2018 16,334,782 65,484 139,883 52,816 - (310,991) 345,374 16,627,348
GROUP Statutory Available Fair value Non Stated Share Reserve ESOP for Sale through OCI Retained Total Controlling For the year ended Note Capital Warrants Fund Reserve Reserve Reserve Earnings Equity Interest Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Balance as at 1 January 2017 16,334,782 65,484 107,602 17,836 (247,088) - 330,197 16,608,813 356,579 16,965,392 Total comprehensive income for the year Net profit for the year ------514,776 514,776 36,353 551,129 Other comprehensive income - - - - 402,465 - 5,622 408,087 859 408,946 Total Comprehensive Income - - - - 402,465 - 520,398 922,863 37,212 960,075 Transactions with equity holders, recognised directly in equity New share rights issued ------19,628 19,628 Change in control 42 ------(3,093) (3,093) 3,093 - Fair value of ESOP 41.3 - - - 18,012 - - - 18,012 - 18,012 Transfers during the year 40 - - 23,917 - - - (23,917) - - - Dividends to equity holders - - - - - (109,141) (109,141) (12,250) (121,391) Balance as at 31 December 2017 16,334,782 65,484 131,519 35,848 155,377 - 714,444 17,437,454 404,262 17,841,716 Transitional adjustment on the implementation of SLFRS 9 3.2.1 - - - - (155,377) 155,377 (1,347,014) (1,347,014) (146,850) (1,493,864) Deferred tax on Transitional adjustment 3.2.1 ------224,599 224,599 - 224,599 Restated opening balance as at 1 January 2018 under SLFRS 9 16,334,782 65,484 131,519 35,848 - 155,377 (407,971) 16,315,039 257,412 16,572,451 Total comprehensive income for the year Net profit for the year ------517,750 517,750 16,900 534,650 Other comprehensive income - - - - - (461,561) (18,322) (479,883) (13,011) (492,894) Total Comprehensive income - - - - - (461,561) 499,428 37,867 3,889 41,756 Transactions with equity holders, recognised directly in equity Fair value of ESOP 41.3 - - - 16,968 - - - 16,968 - 16,968 Transfers during the year 40 - - 26,050 - - - (26,050) - - - Dividends paid ------(109,141) (109,141) (49,000) (158,141) Balance as at 31 December 2018 16,334,782 65,484 157,569 52,816 - (306,184) (43,734) 16,260,733 212,301 16,473,034
The Notes to the Financial Statements from pages 180-295 form an integral part of these Financial Statements.
Financial Reports Statement of Changes in Equity 177 Union Bank | Annual Report 2018
Statement of Cash Flows
ACCOUNTING POLICY The cash flow statement has been prepared by using ‘The Direct Method’ in accordance with the Sri Lanka Accounting Standard - LKAS 7 (Statement of Cash Flows), whereby gross cash receipts and gross cash payments of operating activities, finance activities and investing activities have been recognised.
Cash and cash equivalents for the purpose of cash flow statement comprise of cash in hand and at banks, placements with banks, reverse repurchased agreements and unfavourable balances with local & foreign banks that are subject to an insignificant risk of change in their value.
BANK GROUP For the year ended Note 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Cash flow from operating activities Interest receipts 11,889,016 10,043,039 13,703,475 11,084,899 Fee and commission receipts 832,850 673,471 957,575 827,027 Interest payments (8,055,095) (6,616,336) (9,164,848) (7,616,916) Receipts from other operating activities 1,393,556 650,496 1,584,492 732,964 Payments on other operating activities (3,750,393) (3,196,926) (4,299,259) (3,720,552) Operating profit before changes in operating assets & liabilities 2,309,934 1,553,743 2,781,435 1,307,422
(Increase)/decrease in operating assets: Balances with Central Bank of Sri Lanka (434,253) (1,297,874) (434,253) (1,297,874) Financial assets at amortised cost - loans and advances to customers / Loans and receivables to other customers (4,278,727) (15,181,731) (4,709,728) (16,288,170) Others (43,274) (199,659) (60,246) (111,782) (4,756,254) (16,679,264) (5,204,227) (17,697,826)
Increase /(decrease) in operating liabilities: Due to banks (127,214) (12,851) (127,214) (12,851) Due to customers 8,423,480 17,787,019 9,024,538 18,496,583 Repurchased agreements 7,227,481 73,167 7,340,608 53,129 Others (181,971) 185,157 (414,073) 33,179 15,341,776 18,032,492 15,823,859 18,570,040
Net cash from/(used in) operating activities before income tax 12,895,457 2,906,972 13,401,067 2,179,636 Retirement benefit obligation paid 38.1.1 (18,836) (12,052) (23,694) (12,688) Income tax paid (27,420) (64,184) (37,722) (84,342) Net cash from operating activities 12,849,201 2,830,736 13,339,651 2,082,606
Cash flow from/(used in) investing activities Dividends received 46,732 12,221 2,303 2,684 Financial investments at fair value through profit or loss 3,100,762 - 3,100,762 - Financial investments - held for trading - (4,555,008) - (4,555,008) Financial investments at fair value through other comprehensive income (1,946,055) - (1,846,163) - Financial investments - available for sale - 568,180 - 591,858 Financial assets at amortised cost - debt and other instruments (4,295,962) - (4,482,627) - Financial investments - held to maturity - (2,386,348) - (2,386,348) Net increase in debt securities - (1,725,538) - (1,725,538) Investment in subsidiaries - (280,432) - - Purchase of property, plant & equipment (143,050) (243,053) (231,317) (272,045) Purchase of intangible assets (62,336) (232,854) (65,454) (231,675) Proceeds from Sale of property, plant & equipment 13,381 16,537 16,284 29,961 Net cash used in investing activities (3,286,528) (8,826,295) (3,506,212) (8,546,111)
Cash flow from/(used in) financing activities Proceeds from shares - - - 19,628 Increase/decrease in borrowings (8,353,520) 6,139,694 (8,633,418) 7,133,795 Dividend paid 17 (109,141) (109,141) (158,141) (121,391) Net cash flow from/(used in) financing activities (8,462,661) 6,030,553 (8,791,559) 7,032,032
Net increase in cash and cash equivalents 1,100,012 34,994 1,041,879 568,527 Cash and cash equivalents at beginning of the year 5,225,418 5,190,479 6,039,341 5,470,814 Cash and cash equivalents at end of the year 6,325,430 5,225,473 7,081,220 6,039,341
Reconciliation of cash and cash equivalents Cash in hand and at banks 19 2,917,866 4,697,738 3,306,393 5,057,422 Placements with banks 3,265,382 716,147 3,266,132 866,690 Due to banks 34 (274,669) (190,207) (442,007) (186,068) Reverse repurchased agreements 416,851 1,795 950,702 301,297 Total cash and cash equivalents at end of the year 6,325,430 5,225,473 7,081,220 6,039,341
The Notes to the Financial Statements from pages 180-295 form an integral part of these Financial Statements.
178 Financial Reports Statement of Cash Flows Union Bank | Annual Report 2018
Reconciliation of liabilities arising from financing activities;
Non cash change For the year ended 31 December 2018 Cash change Foreign exchange 31 December 2018 - Cash flow movement 1 January 2018 Rs.’000 Rs.’000 Rs.’000 Rs.’000
BANK Due to banks 8,941,756 (8,388,448) 121,563 17,208,641 Other borrowed funds 1,234,220 9,408 - 1,224,812 Less : Unfavorable balances with banks (274,669) (84,462) - (190,207) Interest payable (34,480) 109,982 - (144,462) Total 9,866,827 (8,353,520) 121,564 18,098,784
GROUP Due to banks 9,109,094 (8,311,196) 121,563 17,298,727 Other borrowed funds 2,921,647 (46,586) - 2,968,233 Less : Unfavorable balances with banks (442,007) (255,939) - (186,068) Interest payable (203,917) (19,697) - (184,220) Total 11,384,817 (8,633,418) 121,563 19,896,672
Non cash change For the year ended 31 December 2017 Cash change Foreign exchange 31 December 2017 - Cash flow movement 1 January 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
BANK Due to banks 17,208,641 5,044,308 4,089 12,160,244 Other borrowed funds 1,224,812 1,224,812 - Less : Unfavourable balances with banks (190,207) (54,794) - (135,413) Interest payable (144,462) (74,631) - (69,831) Total 18,098,784 6,139,694 4,089 11,955,000
GROUP Due to banks 17,298,727 4,524,441 4,089 12,770,197 Other borrowed funds 2,968,233 2,135,138 - 833,095 Less : Unfavourable balances with banks (186,068) 559,298 - (745,366) Interest payable (184,220) (85,081) - (99,139) Total 19,896,672 7,133,795 4,089 12,758,787
Financial Reports Statement of Cash Flows 179 Union Bank | Annual Report 2018
Notes to the Financial Statements
1. Corporate Information Serandib Capital (Pvt) Limited is included in 2. Basis of Preparation and the Bank’s consolidated financial statements. Significant Accounting Policies 1.1 Reporting Entity Union Bank of Colombo PLC (“Bank”) is a 1.1.2 Parent Entity and Ultimate Controlling 2.1 Basis of Preparation Public Limited Liability Company listed on the Parties Colombo Stock Exchange, incorporated on The Bank’s immediate parent is Culture 2.1.1 Statement of Compliance 2 February 1995 and domiciled in Sri Lanka. Financial Holding Limited and the ultimate The Statement of Profit or Loss, Statement It is a Licensed Commercial Bank regulated holding company is TPG Asia GenPar VI, L.P, of Comprehensive Income, Statement of under the Banking Act No. 30 of 1988 and Both companies are registered in the Cayman Financial Position, Statements of Changes in amendments thereto. The Bank was re- Islands. Equity and Statement of Cash Flows together registered under the Companies Act No. 7 of with Accounting Policies and related notes 2007. The registered office of the Bank is at 1.2 Principal Activities and Nature of (Financial Statements), i.e. Consolidated No. 64, Galle Road, Colombo 03. The ordinary Operations Bank Financial Statements and Separate Financial shares of the Bank have a primary listing on Statements, as at 31 December 2018 and for the Colombo Stock Exchange. Bank the year then ended, have been prepared The Bank provides a comprehensive range of in accordance with Sri Lanka Accounting 1.1.1 Consolidated Financial Statements financial services encompassing accepting Standards (hereafter referred as SLFRS) The Consolidated Financial Statements for the deposits, trade financing, off shore banking, laid down by The Institute of Chartered year ended 31 December 2018 comprise the resident and non-resident foreign currency Accountants of Sri Lanka and in compliance Bank (parent company), the two subsidiaries, operations, wholesale and retail credit, with the requirements of the Companies National Assets Management Limited and UB pawning, project financing, lease financing, Act No. 07 of 2007. The presentation of the Finance Company Limited, and the Special rural credit, internet banking, money Financial Statements is also in compliance with Purpose Entity, Serandib Capital (Pvt) Ltd, remittance facilities, dealing in Government the requirements of the Banking Act No. 30 of (together referred to as the “Group”). Securities and treasury related products and 1988 and Finance Business Act No. 42 of 2011 margin trading. and amendments thereto. National Asset Management Limited was incorporated on 28 September 1990 as Subsidiaries In these financial statements, the Bank and a Limited Liability Company under the UB Finance Company Limited Group has applied SLFRS 9 and SLFRS 15, Companies Act No. 17 of 1982. The Company The principal activities of the company include effective for annual periods beginning on re-registered under the Companies Act No. 07 investment activities such as accepting or after 1 January 2018, for the first time. An of 2007. The registered office of the Company deposits, providing loans, leases, hire explanation of how the transition to SLFRS 9 is at No. 7, Glen Arber Place, Colombo 3. purchases and factoring facilities has affected the reported financial position, financial performance and cash flows of the UB Finance Company Limited is an unquoted National Asset Management Limited Group and the Bank is provided in Note 3 on public limited Company, incorporated and The principal activity of the Company is pages 190-193. domiciled in Sri Lanka. The Company was management of Unit trusts and private incorporated in Sri Lanka on 12 July 1961 portfolios. SLFRS 15 defines principles for recognising under the Companies Ordinance No. 38 of revenue and will be applicable to all contracts 1938 and was re-registered as required under Special Purpose Entity (SPE) with customers. However, interest and fee the provision of the Companies Act No. 7 Serandib Capital (Pvt) Limited is a private income integral to financial instruments and of 2007. The Company is registered with investment company. leases will continue to fall outside the scope the Central Bank of Sri Lanka as a Finance of SLFRS 15 and will be regulated by the other Company under the Finance Companies’ Act There were no significant changes in the applicable standards. The Bank’s assessment No. 78 of 1988. The registered of the Company nature of the principal activities of the Bank has not revealed any significant changes to the is located at No. 10, Daisy Villa Avenue, and the Group during the financial year under existing revenue recognition pattern. Colombo 4. review. 2.1.2 Basis of Measurement Serandib Capital (Pvt) Limited is a private 1.3 Date of Authorisation for Issue The Financial Statements of the Bank and the investment Company formed in 2003. The The Financial Statements of the Group and the Group have been prepared on a historical Bank considers this as a Special Purpose Entity Bank for the year ended 31 December 2018 cost basis, except for derivative financial and due to the combination of activities and were authorised for issue in accordance with instruments, financial instruments at fair value arrangements mentioned in Note 2.3.10. a resolution of the Board of Directors on 26 February 2019.
180 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
through other comprehensive income and aa Statement of Cash Flow providing the December 2017,in the preparation of its other financial assets at fair value through information to the users on the ability of annual Financial Statements. The Bank has not profit and loss that have been measured at the Bank and the Group to generate cash restated comparative information for 2017 for fair value and liabilities for defined benefit and cash equivalents and the needs for financial instruments in the scope of SLFRS 9. obligations are recognised as the present value entities to utilise those cash flows (Refer Therefore, the comparative information for of the defined benefit obligation. Page 178-179) and, 2017 is reported under LKAS 39 and is not aa Notes to the Financial Statements, which comparable to the information presented for 2.1.3 Functional and Presentation Currency comprise of the accounting policies and 2018. Differences arising from the adoption The Financial Statements of the Bank and the other explanatory notes and information of SLFRS 9 have been recognised directly in Group are presented in Sri Lankan Rupees (Refer Pages 180-295). retained earnings as of 1 January 2018 and which is the currency of the primary economic are disclosed in Note 3 to these financial environment in which the Bank and the Group 2.1.6 Materiality and Aggregation statements. operate. Financial information presented in In compliance with Sri Lanka Accounting Sri Lankan Rupees has been rounded to the Standard: LKAS 01 (Presentation of Financial Changes to classification and measurement nearest thousand unless indicated otherwise. Statements), each material class of similar SLFRS 9 requires all financial assets, except items is presented separately in the Financial equity instruments and derivatives, to be 2.1.4 Presentation of Financial Statements Statements. Items of dissimilar nature or assessed based on a combination of the The Bank and the Group present their functions too are presented separately, if they entity’s business model for managing the Statement of Financial Position by grouping are material. assets and the instruments’ contractual cash assets and liabilities by nature and listing flow characteristics. The LKAS 39 measurement in order that reflects relative liquidity and Financial Assets and Financial Liabilities are categories of financial assets (fair value maturity pattern. An analysis regarding offset and the net amount reported is in the through profit or loss (FVPL), available for sale recovery or settlement within 12 months after Statement of Financial Position, only when (AFS), held to maturity, loans and receivables) the reporting date (current) and more than there is a legally enforceable right to offset the have been replaced by: 12 months after the reporting date (non– recognised amounts and there is an intention current) is presented in note 49 to the financial to settle on a net basis, or to realise the assets aa Debt instruments at amortised cost statement. and settle the liabilities simultaneously. aa Debt instruments at fair value through other comprehensive income (FVOCI), with 2.1.5 Responsibility for the Financial Income and expenses are not offset in the gains or losses recycled to profit or loss on Statements Statement of Profit or Loss unless required derecognition “The Board of Directors is responsible for the or permitted by an Accounting Standards or aa Equity instruments at FVOCI, with no preparation and presentation of financial interpretations. recycling of gains or losses o profit or loss statements of the Group and the Bank as per on derecognition Sri Lanka Accounting Standard and Companies 2.1.7 Changes in accounting policies and aa Financial assets at fair value through profit Act No. 07 of 2007. disclosures or loss (FVPL) There were no changes to the accounting These financial statements include; policies and accounting policies adopted are The accounting for financial liabilities remains consistent with those of the previous financial largely the same as it was under LKAS 39. aa The Statement of Profit or Loss and a year, except for the SLFRS 9 related policies Statement of Other Comprehensive mentioned in detail below. The Bank’s classification of its financial Income providing information on the assets and liabilities and quantitative impact performance for the year under review 2.1.7.1. SLFRS 9 Financial Instruments of applying SLFRS 9 as at 1 January 2018 (Refer Pages 174-175). The financial statements of the Bank and the is disclosed in Notes 3 to the Financial aa Statement of Financial Position providing Group have been prepared based on the new Statements. the information on the financial position of accounting policies and methods which have the Bank and the Group as at the year-end been revised in line with the requirements of (Refer Page 176). the SLFRS 9 -Financial Instruments. The Bank aa Statement of Changes in Equity providing complied with LKAS -39, Financial Instruments: the movement in the shareholders’ funds Recognition and measurements up to 31 during the year ended under review for the Bank and the Group (Refer Page 177).
Financial Reports Notes to the Financial Statements 181 Union Bank | Annual Report 2018
Notes to the Financial Statements
Changes to the impairment calculation The Bank’s separate Financial Statements The cost of an acquisition is measured at The adoption of SLFRS 9 has changed the comprise the amalgamation of the Financial fair value of the consideration including Bank’s accounting for loan loss impairments Statements of the Domestic Banking Unit and contingent consideration, given on the date by replacing LKAS 39’s incurred loss approach the Foreign Currency Banking Unit.” of transfer of title. The acquired identifiable with a forward-looking expected credit loss assets, liabilities and contingent liabilities (ECL) approach. SLFRS 9 requires the Bank and 2.2.1 Business Combination and Goodwill are measured at their fair values at the date the Group to record an allowance for ECLs for Business combinations are accounted for using of acquisition. Subsequent to the initial all loans and other debt financial assets not the acquisition method as per the requirement measurement, investments in subsidiaries held at FVPL, together with loan commitments of Sri Lanka Accounting Standards: SLFRS 03 are recognised using the equity method as and financial guarantee contracts. The (Business Combinations). described in Sri Lanka Accounting Standard: allowance is based on the ECLs associated with LKAS 27 (Separate Financial Statements) in the probability of default in the next twelve The Group measure goodwill as the fair value separate financial statements of the Bank. months unless there has been a significant of the consideration transferred including the increase in credit risk since origination. If recognised amount of any non-controlling The total assets and liabilities of the the financial asset meets the definition of interest in the acquiree, less the net recognised Subsidiaries as at the reporting date are purchased or originated credit impaired amount (generally fair value) of the identifiable included in the Consolidated Statement of (POCI), the allowance is based on the change assets acquired and liabilities assumed, all Financial Position. The total profits or losses for in the ECLs over the life of the asset. measured as of the acquisition date. When the the year of the subsidiaries are included in the excess is negative a bargain purchase gain is Consolidated Statement of Profit or Loss. Details of the Bank’s impairment method are recognised immediately in Statement of Profit disclosed in Note 2.4.2. or Loss. The non-controlling interest is presented in the Consolidated Statement of Financial Position 2.1.8 Comparative Information The Group election a transaction by within equity, separately from the equity The accounting policies have been consistently transaction basis whether to measure non- attributable to the equity holders of the Bank. applied by the Bank and the Group with those controlling interest at its fair value, or at Non-controlling interest in the profit or loss of the previous financial year in accordance its proportionate share of the identifiable of the Group is disclosed in the Consolidated with LKAS 01 Presentation of Financial net assets, at the acquisition date. The Statement of Profit or Loss. Statements, except those which had to be consideration transferred does not include changed as a result of application of the SLFRS amounts related to the settlement of pre- Loss of Control 9 and SLFRS 15 which are not comparable existing relationships. Such amounts are Upon the loss of control, the Group de- with the previous year. generally recognised in Statement of Profit or recognises the assets and liabilities of the Loss. subsidiaries, any non-controlling interest and 2.1.9 Rounding the other components of equity related to The amounts in the Financial Statements Transaction costs, other than those associated the subsidiary. Any surplus or deficit arising have been rounded-off to the nearest Rupees with the issue of debt or equity securities, that on the loss of control is recognised in the thousands, except where otherwise indicated the Group incurs in connection with a business statement of changes in equity. If the Group as permitted by the Sri Lanka Accounting combination are expensed as incurred. retains any interest in the previous subsidiary, Standard LKAS 1 on ‘Presentation of Financial then such interest is measured at fair value at Statements’. 2.2.2 Subsidiaries the date that control is lost. Subsequently it is Subsidiaries are the entities that are controlled accounted for as an equity-accounted investee 2.2 Basis of Consolidation by the Bank. The Bank is presumed to control or in accordance with the Group’s accounting “The Consolidated Financial Statements an investee when it is exposed, or has rights, policy for financial instruments depending on comprise the Financial Statements of the to variable returns from its involvement with the level of influence retained. Bank and its Subsidiaries for the year ended the investee and has the ability to affect those 31 December 2018 in terms of the Sri Lanka returns through its power over the investee. The Group did not acquire or dispose any Accounting Standard - SLFRS 10 (Consolidated Subsidiaries during the year ended 31 Financial Statements). The Financial The Financial Statements of subsidiaries are December 2018. Statements of the Bank’s Subsidiaries for the fully consolidated from the date on which purpose of consolidation (including special control is transferred to the Bank and continue All subsidiaries of the Bank have been purpose entity that the Bank consolidates) to be consolidated until the date when such incorporated in Sri Lanka. The information of are prepared for the same reporting year as control ceases. the subsidiaries is given in Note 29. Union Bank of Colombo PLC using consistent accounting policies.
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2.2.3 Special purpose entities continue in business for the foreseeable future. and credit risk. To make the SPPI assessment, Special purpose entities (SPEs) are entities that Furthermore, Board of Directors is not aware the Bank and Group applies judgement and are created to accomplish narrow and well- of any material uncertainties that may cast considers relevant factors such as the currency defined objectives such as the securitisation of significant doubt upon the Group’s ability in which the financial asset is denominated, particular assets, or the execution of a specific to continue as a going concern and they do and the period for which the interest rate is set. borrowing or lending transaction. SPE is not intend either to liquidate or to cease consolidated if, based on an evaluation of the operations of the Group. Therefore, these In contrast, contractual terms that introduce substance of its relationship with the Group Financial Statements continue to be prepared a more than de-minimis exposure to risks or and the SPE’s risks and rewards, the Group on the going concern basis. volatility in the contractual cash flows that are concludes that it controls the SPE. unrelated to a basic lending arrangement do 2.3.2 Classification of Financial Instruments not give rise to contractual cash flows that are 2.2.4 Transactions eliminated on Consolidation The classification of financial instruments solely payments of principal and interest on Intra-group transactions and balances and at initial recognition depends on their the amount outstanding. In such cases, the any unrealised income and expenses arising contractual terms and the business model for financial asset is required to be measured at from intra-group transactions are eliminated managing the instruments. FVPL. in preparing the Consolidated Financial Statement. Unrealised losses are eliminated in 2.3.2.1. Business model assessment 2.3.3 Fair Value of Financial Instruments the same way as unrealised gains; except that The Bank determines its business model at the Fair values of financial assets and financial they are eliminated to the extent that there is level that best reflects how it manages groups liabilities recorded in the Statement of no evidence of impairment. of financial assets to achieve its business Financial Position which cannot be derived objective. from active market, are determined using a 2.3 Significant Accounting Judgments, variety of valuation techniques that include Estimates and Assumptions The Bank’s business model is not assessed on the use of mathematical models. The inputs The preparation of Financial Statements of an instrument-by-instrument basis, but at a to these models are derived from observable the Bank and the Group in conformity with higher level of aggregated portfolios and is market data where possible, but if this is not Sri Lanka Accounting Standards requires based on observable factors such as: available, judgment is required to established management to make judgments, estimates aa How the performance of the business fair values. The valuation of financial and assumptions that affect the application of model and the financial assets held within instruments is described in more detail in Note accounting policies and the reported amounts that business model are evaluated and 48 to the financial statements. of assets, liabilities, income, expenses, the reported to the entity’s key management accompanying disclosures as well as the personnel The Bank and the Group measure fair value disclosure of contingent liabilities. Actual aa The risks that affect the performance of the using the fair value hierarchy that reflects results may differ from these estimates. business model and, in particular, the way the significance of input used in making those risks are managed measurements. The fair value hierarchy is given Estimates and underlying assumptions are aa How managers of the business are in Note 48 to these Financial Statements. reviewed on an ongoing basis. Revisions to compensated accounting estimates are recognised in the aa The expected frequency, value and timing 2.3.4 Impairment Losses period in which the estimate is revised on and of sales are also important aspects of the in any future periods affected. Bank’s assessment 2.3.4.1 Individual Impairment Assessment The Bank and the Group review their The most significant areas of estimation, 2.3.2.2 The Solely Payment of Principal and individually significant loans and receivables uncertainty and critical judgments in applying Interest (SPPI) Test at each reporting date to assess whether accounting policies that have the most As a second step of its classification process an impairment loss should be recorded in significant effect on the amounts recognised in the Bank and Group assesses the contractual the Statement of Profit or Loss. In particular, the Financial Statements of the Bank and the terms of financial to identify whether they management’s judgment is required in the Group are as follows; meet the SPPI test. ‘Principal’ for the purpose estimation of the amount and timing of of this test is defined as the fair value of the future cash flows when determining the 2.3.1 Going Concern financial asset at initial recognition and may impairment loss. These estimates are based on The Board of Directors of the Bank, and its change over the life of the financial asset. assumptions about a number of factors and Group companies, has made an assessment The most significant elements of interest actual results may differ, resulting in future of its ability to continue as a going concern within a lending arrangement are typically changes to the impairment allowance made. and is satisfied that it has the resources to the consideration for the time value of money
Financial Reports Notes to the Financial Statements 183 Union Bank | Annual Report 2018
Notes to the Financial Statements
2.3.4.2 Collective Impairment Assessment Accounting policy applicable period before and loan impairment allowances which will be 1 January 2018 recovered in the foreseeable future. Judgment Accounting policy applicable period from 1 The measurement of impairment losses under is required to determine the amount of January 2018 LKAS 39 on Loans and receivables have been deferred tax assets that can be recognised, The measurement of impairment losses under assessed individually and found not to be based upon the likely timing and level of SLFRS 9 across all categories of financial impaired and all individually insignificant loans future taxable profits, together with future tax assets requires judgement, in particular, and receivables are then assessed collectively planning strategies. the estimation of the amount and timing of by categorising them into, groups of assets future cash flows and collateral values when with similar risk characteristics, to determine Details of the deferred tax assets are disclosed determining impairment losses and the whether a provision should be made due in Note 32 to the financial statement. assessment of a significant increase in credit to incurred loss events for which there is risk. These estimates are driven by a number of objective evidence, but the effects of which 2.3.8 Taxation factors, changes in which can result in different are not yet evident. The collective assessment “The Bank and the Group is subjected to levels of allowances. takes account of data from the loan portfolio income tax and judgement is required to and judgments on the effect of concentrations determine the total provision for current, The Bank’s ECL calculations are outputs of of risks and economic data. deferred and other taxes due to the complex models with a number of underlying uncertainties that exist with respect to the assumptions regarding the choice of variable The impairment loss on loans and receivables interpretation of the applicability of tax laws, inputs and their interdependencies. Elements and other financial assets is disclosed in Note at the time of preparation of these financial of the ECL models that are considered 20, 24.5, 25, 26 to the financial statement. statements. accounting judgements and estimates include: Uncertainties also exist with respect to the 2.3.5 Goodwill and Other Intangible Assets interpretation of complex tax regulations aa The Bank’s criteria for assessing if there The Group estimates the value in use of the and the amount and timing of future taxable has been a significant increase in credit cash generating units (CGU) to which goodwill income. Given the wide range of business risk and so allowances for financial assets and other intangibles has been allocated relationships and the long term nature and should be measured on a Life Time in order to determine whether goodwill is complexity of existing contractual agreements, Expected Credit Loss (LTECL) basis and the impaired. The value in use calculation requires differences arising between actual results and qualitative assessment the entity to estimate the future cash flows the assumptions made, or future changes to aa The segmentation of financial assets when expected to arise from the CGU and a suitable such assumptions, could necessitate future their ECL is assessed on a collective basis discount rate in order to calculate present adjustments to tax income and expense aa Development of ECL models, including the value. amounts that were initially recorded, and various formulas and the choice of inputs deferred tax amounts in the period in which aa Determination of associations between The details on assessment of goodwill the determination is made. macroeconomic scenarios and, economic impairment is given in Note 30 to the Financial inputs, such as unemployment levels Statements. 2.3.9 Defined Benefit Obligation and collateral values, and the effect on The costs of the defined benefit plans and the Probability of Defaults (PDs), Exposure at 2.3.6 Useful lives of Property, Plant and present value of its obligations are determined Defaults (EADs) and Loss Given Defaults Equipment and Intangible Assets using an actuarial valuation. The actuarial (LGDs) The Bank and the Group review the valuation involves making assumptions about aa Selection of forward-looking residual values, useful lives and methods of discount rates, expected rates of return on macroeconomic scenarios and their depreciation of Property, Plant and Equipment assets, future salary increases, mortality rates probability weightings, to derive the and intangible assets at each reporting date. and possible future gratuity increases, if any. economic inputs into the ECL models Judgment of the management is exercised in Due to the long–term nature of this plan, such the estimation of these values, rates, methods estimates are subject to significant uncertainty. The Bank’s policy is to regularly review its and hence those are subject to uncertainty. All assumptions are reviewed at each reporting models in the context of actual loss experience date. and adjust wherever necessary. 2.3.7 Deferred tax assets Deferred tax assets are recognised in respect In determining the appropriate discount rate, of tax losses to the extent that it is probable management considers the interest rates of that future taxable profit will be available Sri Lanka Government Bonds with maturities against which such tax losses can be utilised corresponding to the expected duration of
184 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
the defined benefit obligation. Future salary probable or cannot be reliably measured. differs from the transaction price, the Bank increases are based on expected future Contingent liabilities are not recognised in and Group accounts for the Day 1 profit or inflation rates and expected future salary the Statement of Financial Position but are loss, as described below. When the transaction increase rate of the Bank and the Group. disclosed unless they are remote. price of the instrument differs from the fair value at origination and the fair value is based The mortality rate is based on publicly Details of the Commitment and Contingencies on a valuation technique using only inputs available mortality tables. are disclosed in Note 43 to the financial observable in market transactions, the Bank statement. and Group recognises the difference between Details of the key assumption used in the the transaction price and fair value in net estimates are disclosed in Note 38.1.4 to the 2.4 Significant Accounting Policies trading income. In those cases where fair financial statement“. The significant accounting policies set value is based on models for which some of out below have been applied consistently the inputs are not observable, the difference 2.3.10 Consolidation of Special Purpose to all periods presented in the financial between the transaction price and the fair Entities (SPEs) statements of the Group, unless otherwise value is deferred and is only recognised The Group consolidates those SPEs it controls. indicated. in profit or loss when the inputs become In assessing and determining if the Group observable, or when the instrument is de- controls SPEs, judgments are exercised to 2.4.1 Financial Instruments – Initial recognised. determine the following: whether the activities Recognition, Classification and Subsequent of the SPE are being conducted on behalf Measurement 2.4.1.3 Measurement categories of financial of the Group. The Group’s involvement with assets and liabilities consolidated SPEs is detailed in Note 45.4.3. 2.4.1.1 Date of Recognition Financial assets and liabilities, with the From 1 January 2018, the Bank and Group 2.3.11 Share Based Payments exception of loans and advances to customers classifies all of its financial assets based on The Bank measures the cost of equity settled and balances due to customers, are initially the business model for managing the assets transactions with employees by reference recognised on the trade date, i.e., the date that and the asset’s contractual terms, measured at to the fair value of the equity instruments the Bank becomes a party to the contractual either: at the date at which they are granted. provisions of the instrument. This includes Estimating fair value for share based payment regular way trades: purchases or sales of aa Amortised Cost (AC) transactions requires determination of the financial assets that require delivery of assets aa Fair Value through Other Comprehensive most appropriate valuation model, which is within the time frame generally established Income (FVOCI) dependent on the terms and conditions of the by regulation or convention in the market aa Fair Value through Profit or Loss (FVPL) grant. place. Loans and advances to customers are recognised when funds are transferred to the Before 1 January 2018, the Bank classified This estimate also requires determination of customers’ accounts. The Bank and Group its financial assets as loans and receivables the most appropriate inputs to the valuation recognises balances due to customers when (amortised cost), FVPL, available for sale or model including the expected life of the share funds are transferred to the Bank. held to maturity (amortised cost). Financial option, volatility and making assumptions liabilities are measured at amortised cost or at about them. The assumptions and models 2.4.1.2 Recognition and Initial Measurement of FVPL. used for estimating fair value for share based Financial Instruments payment transactions are disclosed in Note 41 The classification of financial instruments The subsequent measurement of the financial to the Financial Statements. at initial recognition depends on their assets depends on their classification. contractual terms and the business model 2.3.12 Commitment and Contingencies for managing the instruments, as described 2.4.1.4 Classification and Subsequent All discernible risks are accounted for in in Note 2.3.2. Financial instruments are Measurement of Financial Liabilities at fair value determining the amount of all known initially measured at their fair value except through profit or loss liabilities. in the case of financial assets and financial Financial liabilities at fair value through profit liabilities recorded at FVPL, transaction or loss includes financial liabilities held for Contingent liabilities are possible obligations costs are added to, or subtracted from, this trading and financial liabilities designated whose existence will be confirmed only by amount. Trade receivables are measured at upon initial recognition at fair value through uncertain future events or present obligations the transaction price. When the fair value of profit or loss. Gains or losses on liabilities held where the transfer of economic benefit is not financial instruments at initial recognition for trading are recognised in the Statement of Profit or Loss.
Financial Reports Notes to the Financial Statements 185 Union Bank | Annual Report 2018
Notes to the Financial Statements
The Bank and the Group have not designated If there is objective evidence that an as collateral type, past–due status and other any financial liabilities upon initial recognition, impairment loss has been incurred, the relevant factors. at fair value through profit or loss. amount of the loss is measured as the difference between the assets carrying amount Future cash flows on a group of financial 2.4.1.5 Classification and Subsequent and the present value of estimated future cash assets that are collectively evaluated for Measurement of Financial Liabilities at flows (excluding future expected credit losses impairment are estimated on the basis of amortised cost that have not yet been incurred). The carrying historical loss experience for assets with credit Financial liabilities issued by the Group that amount of the asset is reduced through the risk characteristics similar to those in the are not designated as at fair value through use of a true allowance account and the group. Historical loss experience is adjusted profit or loss are classified as liabilities under amount of the loss is recognised in the income on the basis of current observable data to ‘due to banks’, ’repurchased agreements’, ‘due statement. Interest income continues to be reflect the effects of current conditions on to customers’ and ‘other borrowed funds’ accrued on the reduced carrying amount and which the historical loss experience is based as appropriate, where the substance of the is accrued using the rate of interest used to and to remove the effects of conditions in the contractual arrangement results in the Group discount the future cash flows for the purpose historical period that do not exist currently. having an obligation either to deliver cash or of measuring the impairment loss. The interest another financial asset to another entity, or to income is recorded as part of ‘Interest income’. Estimates of changes in future cash flows exchange financial assets or financial liabilities reflect, and are directionally consistent with with another entity, under conditions that Loans together with the associated allowance changes in related observable data from year are potentially unfavourable to the entity or are written off when there is no realistic to year (such as changes in unemployment settling the obligation by delivering variable prospect of future recovery and all collateral rates, gross domestic production - GDP rate, number of entity’s own equity instruments. has been realised or has been transferred to inflation, exchange rate or other factors that The details of financial liabilities measured at the Group. If, in a subsequent year, the amount are indicative of incurred losses in the group amortised cost are given in Note 34-38 to the of the estimated impairment loss increases or and their magnitude). The methodology and financial statements. decreases because of an event occurring after assumptions used for estimating future cash the impairment was recognised, the previously flows are reviewed regularly to reduce any 2.4.2 Impairment of Financial Assets recognised impairment loss is increased or differences between loss estimates and actual reduced by adjusting the allowance account. loss experience. Policy applicable before 1 January 2018 If a future write–off is later recovered, the (i) Financial Assets carried at amortised cost recovery is credited to the ’Impairment on Policy applicable after 1 January 2018 For the financial assets carried at amortised Loans and other losses’. The Bank and the Group recognise the cost, such as Cash and cash equivalent, allowance for expected credit losses for all Balances with Central Bank, Placements with The present value of the estimated future loans and other debt financial assets not held Banks, Reverse repurchased agreements, Loans cash flows is discounted at the financial asset’s at FVPL, together with loan commitments and and receivables customers, other loans and original effective interest rate (EIR). If a loan financial guarantee contracts, in this section receivables, held to maturity investments and has a variable interest rate, the discount rate all referred to as ‘financial instruments’. Equity other financial assets. The Group first assesses for measuring any impairment loss is the most instruments are not subject to impairment individually whether objective evidence of recent EIR. If the Group has reclassified trading under SLFRS 9. impairment exists for financial assets that assets to loans and receivables, the discount are individually significant, or collectively rate for measuring any impairment loss is the The ECL allowance is based on the credit losses for financial assets that are not individually new EIR determined at the reclassification expected to arise over the life of the asset significant. If the Group determines that date. The calculation of the present value (the lifetime expected credit loss or LTECL), no objective evidence of impairment exists of the estimated future cash flows of a unless there has been no significant increase in for an individually assessed financial asset, collateralised financial asset reflects the cash credit risk since origination, in which case, the it includes the asset in a Group of financial flows that may result from foreclosure less allowance is based on the 12 months’ expected assets with similar credit risk characteristics costs for obtaining and selling the collateral, credit loss (12mECL). and collectively assesses them for impairment. whether or not foreclosure is probable. Assets that are individually assessed for The Bank and Group has established a impairment and for which an impairment For the purpose of a collective evaluation policy to perform an assessment, at the loss is, or continues to be, recognised are of impairment, financial assets are grouped end of each reporting period, of whether a not included in a collective assessment of on the basis of the product category that financial instrument’s credit risk has increased impairment. considers similar credit risk characteristics such significantly since initial recognition, by
186 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
considering the change in the risk of default aa EAD : The Exposure at Default is an recorded. The newly recognised loans are occurring over the remaining life of the estimate of the exposure at a future classified as Stage 1 for ECL measurement financial instrument. default date, taking into account expected purposes. changes in the exposure after the Based on the above process, the Bank and reporting date, including repayments of If the modification does not result in cash Group groups its loans into Stage 1, Stage 2, principal and interest, whether scheduled flows that are substantially different, the Stage 3 as described below: by contract or otherwise, expected draw modification does not result in de-recognition. downs on committed facilities, and Based on the change in cash flows discounted aa Stage 1: When loans are first recognised, accrued interest from missed payments. at the original EIR, the Bank and Group records the Bank and Group recognises an a modification gain or loss, to the extent that allowance based on 12 months Expected aa LGD : The Loss Given Default is an estimate an impairment loss has not already been Credit Loss (12mECL). Stage 1 loans also of the loss arising in the case where a recorded. include facilities where the credit risk default occurs at a given time. It is based has improved and the loan has been on the difference between the contractual 2.4.3.2 De-recognition other than for substantial reclassified from Stage 2. Facilities which cash flows due and those that the lender modification are within 30 days or up to one instalment would expect to receive, including from past due are in Stage 1. the realisation of any collateral. The Bank Financial assets aa Stage 2: When a loan has shown a has used the LGD rates published by the A financial asset (or, where applicable, a part significant increase in credit risk since Central Bank of Sri Lanka for retail loans of a financial asset or part of a group of similar origination, the Bank and Group records as the related products have inadequate financial assets) is de-recognised when the an allowance for the Life Time Expected credit history to compute their own LGDs. rights to receive cash flows from the financial Credit Loss (LTECL). Stage 2 loans also asset have expired. The Bank and Group also include facilities, where the credit risk aa Economic Factor Adjustment : de-recognises the financial asset if it has both has improved and the loan has been In its ECL models, the Bank and Group transferred the financial asset and the transfer reclassified from Stage 3. Facilities which relies on a broad range of forward looking qualifies for de-recognition. are within 31 to 90 days or up to two information as economic inputs, such as: instalments past due are in Stage 2. aa GDP growth The Bank and Group has transferred the aa Stage 3: Loans considered credit-impaired. aa Unemployment rates financial asset if, and only if, either: The Bank and Group records an allowance aa Interest rates for the LTECLs. Facilities which are more aa Inflation aa The Bank and Group has transferred its than 90 days or more than two instalments contractual rights to receive cash flows past due are in Stage 3. The inputs and models used for from the financial asset, or calculating ECLs may not always capture aa It retains the rights to the cash flows, For financial assets for which the Bank and all characteristics of the market at the but has assumed an obligation to pay Group has no reasonable expectations of date of the financial statements. To reflect the received cash flows in full without recovering either the entire outstanding this, qualitative adjustments or overlays material delay to a third party under a amount, or a proportion thereof, the gross are occasionally made as temporary ‘pass–through’ arrangement Pass-through carrying amount of the financial asset is adjustments when such differences are arrangements are transactions whereby reduced. This is considered a (partial) de- significantly material. the Bank and Group retains the contractual recognition of the financial asset. rights to receive the cash flows of a 2.4.3 De-recognition of Financial Assets and financial asset (the ‘original asset’), but The calculation of ECLs Financial Liabilities assumes a contractual obligation to pay The mechanics of the ECL calculations are those cash flows to one or more entities outlined below and the key elements are, as 2.4.3.1 De-recognition due to substantial (the ‘eventual recipients’), when all of the follows: modification of terms and conditions following three conditions are met: The Bank and Group de-recognises a financial aa The Bank and Group has no obligation to aa PD : The Probability of Default is an estimate asset, such as a loan to a customer, when the pay amounts to the eventual recipients of the likelihood of default over a given terms and conditions have been renegotiated unless it has collected equivalent amounts time horizon. A default may only happen to the extent that, substantially, it becomes a from the original asset, excluding short- at a certain time over the assessed period, new loan, with the difference recognised as term advances with the right to full if the facility has not been previously de- a de-recognition gain or loss, to the extent recovery of the amount lent plus accrued recognised and is still in the portfolio. that an impairment loss has not already been interest at market rates
Financial Reports Notes to the Financial Statements 187 Union Bank | Annual Report 2018
Notes to the Financial Statements
aa The Bank and Group cannot sell or pledge would be required to pay upon repurchase. If there is no quoted price in an active market, the original asset other than as security to In the case of a written put option on an asset then the Group uses valuation techniques the eventual recipients that is measured at fair value, the extent of the that maximise the use of relevant observable aa The Bank and Group has to remit any cash entity’s continuing involvement is limited to inputs (Level 2) and minimise the use of flows it collects on behalf of the eventual the lower of the fair value of the transferred unobservable inputs (Level 3). The chosen recipients without material delay. asset and the option exercise price. valuation technique incorporates all of the factors that market participants would take In addition, the Bank and Group is not Financial liabilities into account in pricing a transaction. entitled to reinvest such cash flows, except A financial liability is de-recognised when the for investments in cash or cash equivalents obligation under the liability is discharged, The best evidence of the fair value of a including interest earned, during the period cancelled or expires. Where an existing financial instrument at initial recognition is between the collection date and the date of financial liability is replaced by another from normally the transaction price i.e. the fair required remittance to the eventual recipients. the same lender on substantially different value of the consideration given or received. terms, or the terms of an existing liability are If the Group determines that the fair value at A transfer only qualifies for de-recognition if substantially modified, such an exchange or initial recognition differs from the transaction either: modification is treated as a de-recognition price and the fair value is evidenced neither aa The Bank and Group has transferred of the original liability and the recognition by a quoted price in an active market for an substantially all the risks and rewards of of a new liability. The difference between the identical asset or liability (Level 01 valuation) the asset, or carrying value of the original financial liability nor based on a valuation technique that uses aa The Bank and Group has neither and the consideration paid is recognised in only data from observable markets (Level 02 transferred nor retained substantially all profit or loss. valuation), then the financial instrument is the risks and rewards of the asset, but has initially measured at fair value, adjusted to transferred control of the asset 2.4.4 Fair Value Determination and defer the difference between the fair value at Measurement initial recognition and the transaction price. The Bank and Group considers control to Subsequently, that difference is recognised be transferred if and only if, the transferee Determination of fair value in profit or loss on an appropriate basis over has the practical ability to sell the asset in The fair value for financial instruments traded the life of the instrument but no later than its entirety to an unrelated third party and is in active markets at the reporting date is based when the valuation is wholly supported by able to exercise that ability unilaterally and on their quoted market price or dealer price observable market data or the transaction is without imposing additional restrictions on quotations (bid price for long positions and closed out. the transfer. ask price for short positions), without any deduction for transaction costs. Fair values reflect the credit risk of the When the Bank and Group has neither instrument and include adjustments to take transferred nor retained substantially all the Measurement of fair value account of the credit risk of the Group entity risks and rewards and has retained control of ‘Fair value’ is the price that would be received and the counter party where appropriate. Fair the asset, the asset continues to be recognised to sell an asset or paid to transfer a liability value estimates obtained from models are only to the extent of the Bank’s continuing (exit price) in an orderly transaction between adjusted for any other factors, such as liquidity involvement, in which case, the Bank and market participants at the measurement date risk or model uncertainties; to the extent Group also recognises an associated liability. in the principal or, in its absence, the most that the Group believes a third party market The transferred asset and the associated advantageous market to which the Group has participant would take them into account in liability are measured on a basis that reflects access at that date. The fair value of a liability pricing a transaction. the rights and obligations that the Bank and reflects its non-performance risk. Group has retained. Continuing involvement The fair value of a demand deposit is not that takes the form of a guarantee over the When available, the Group measures the fair less than the amount payable on demand, transferred asset is measured at the lower of value of an instrument using the quoted price discounted from the first date on which the the original carrying amount of the asset and in an active market for that instrument (Level amount could be required to be paid. the maximum amount of consideration the 01 valuation). A market is regarded as active Bank and Group could be required to pay. If if transactions for the asset or liability take A fair value measurement of a non-financial continuing involvement takes the form of a place with sufficient frequency and volume asset takes into account a market participant’s written or purchased option (or both) on the to provide pricing information on an ongoing ability to generate economic benefits by using transferred asset, the continuing involvement basis. the asset in its highest and best use or by is measured at the value the Bank and Group
188 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
selling it to another market participant that effective as at 31 December 2018. Accordingly would use the asset in its highest and best use. the accounting standard has not been applied in the preparation of the Financial Statements The Group recognises transfers between levels for the year ended 31 December 2018. of the fair value hierarchy as of the end of the reporting period during which the change has 2.4.6.1 SLFRS 16- Leases occurred. SLFRS 16 sets out the principles for the recognition, measurement, presentation Details of fair value of assets and liabilities and and disclosure of leases for both parties to their inputs based on fair value hierarchy is a contract, i.e. the customer (‘Lessee’] and given in Note 48 to the financial statement. the supplier (‘Lessor’]. SLFRS 16 will replace Sri Lanka Accounting Standard LKAS 17 2.4.5 Foreign Currency Transaction and (Leases) and related interpretations. SLFRS 16 Balances introduces a single accounting model for the All foreign currency transactions are translated lessee, eliminating the present classification of in to the functional currency, which is Sri leases in LKAS 17 as either operating leases or Lankan Rupees, using the exchange rates finance leases. prevailing at the dates of the transactions were attached. The new Standard requires a lessee to: aa recognise assets and liabilities for all leases Monetary assets and liabilities denominated with a term of more than 12 months, in foreign currencies at the reporting date unless the underlying asset is of low value are translated to Sri Lankan Rupees using the aa present depreciation of lease assets spot/ forward foreign exchange rate prevailed separately, from interest on lease liabilities at that date and all differences arising from in the income statement. these activities are taken to “Other operating income” in the Statement of Profit or Loss. SLFRS 16 substantially carries forward the lessor accounting requirement in LKAS 17. Non-monetary items in a foreign currency that Accordingly, a lessor continues to classify its are measured in terms of historical cost are leases as operating lease or finance lease, translated using exchange rate as at the dates and to account for those two types of leases of the initial transactions. Non-monetary items differently in foreign currency measured at fair value are translated using the exchange rates at the date SLFRS 16 will become effective on 1st January when the fair value was determined. 2019. The Bank is currently assessing the impact on the implementation of the above Foreign exchange differences arising on the Standard. settlement or reporting of monetary items at rates different from those which were initially recorded are dealt within the Statement of Profit or Loss. Forward exchange contracts are valued at the forward market rates ruling on the reporting date. Resulting net unrealised gains or losses are dealt with the Statement of Profit or Loss.
2.4.6 Standards issued but not yet effective The following new accounting standard was issued by the Institute of Chartered Accountants in Sri Lanka which is not yet
Financial Reports Notes to the Financial Statements 189 Union Bank | Annual Report 2018
Notes to the Financial Statements
3. Transition Disclosures The following disclosure set out the impact of adopting SLFRS 9 on the statement of financial position, and retained earnings including the effect of replacing LKAS 39 incurred credit loss calculations with SLFRS 9 expected credit losses.
3.1 BANK A reconciliation between the carrying amounts under LKAS 39 to the balances reported under SLFRS 9 as of 1 January 2018:
Assets/ Liabilities Ref. LKAS 39 Re-classification Re-measurement SLFRS 9 Category Amount Category Amount Rs.’000 Rs.’000
Cash and cash equivalents L & R 4,697,738 - - AC 4,697,738 Balances with the Central Bank of Sri Lanka L & R 3,785,679 - - AC 3,785,679 Placements with banks L & R 716,147 - - AC 716,147 Less: Collective Impairment A - - (22) (22) - - - 716,125 Reverse repurchased agreements L & R 1,795 - - AC 1,795 Derivative financial instruments A FVPL 2,760 - - FVPL 2,760 To: Financial investments at fair value through profit or loss - 5,949,023 - FVPL 5,949,023 From: Financial investments - held for trading FVPL 5,949,023 (5,949,023) - - To: Financial assets at amortised cost - loans and advances to customers - 71,493,285 - AC 71,493,285 From: Loans and receivables to other customers L & R 71,493,285 (71,493,285) - - Less: Collective Impairment A (399,916) - (866,060) (1,265,976) Less: Individual Impairment (515,446) - - (515,446) 70,577,923 - - 69,711,863 To : Financial assets at amortised cost - debt and other instruments - 12,156,192 - AC 12,156,192 From : Other loans and receivables L & R 9,609,639 (9,609,639) - - From : Financial investments - held to maturity C HTM 2,546,553 (2,546,553) - - Less : Collective Impairment A - - (38,715) (38,715) - - - 12,117,477 To: Financial investments at fair value through other comprehensive income B - 16,453,207 - FVOCI 16,453,207 From: Financial investments - available for sale AFS 16,453,207 (16,453,207) - - Other liabilities - Non financial liabilities Collective Impairment on commitment A and contingencies - - (47,288) (47,288) Deferred tax assets/ (liabilities) D (144,922) - 224,599 79,676 Investments in subsidiaries - - (403,355) (403,355) Retained Earnings 3.1.1 1,154,757 - (1,130,841) 23,916
A. The adoption of SLFRS 9 has fundamentally changed the Bank’s credit loss impairment method by replacing incurred loss approach based on LKAS 39 with a forward-looking ECL approach. From 1 January 2018, the Bank has been recording the allowance for expected credit losses for all loans and other debt financial assets not held at FVPL, together with commitments and contingencies.
190 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
3. TRANSITION DISCLOSURES (Cont.)
B. As of 1 January 2018, the Bank has assessed its liquidity portfolio which had previously been classified as AFS debt instruments. The Bank concluded that, these instruments are managed within a business model of collecting contractual cash flows and selling the financial assets. Accordingly, the Bank has classified these investments as debt instruments measured at FVOCI.
C. As of 1 January 2018, the Bank did not have any debt instruments that did not meet the SPPI criterion within its held to maturity portfolio. Therefore, it is elected to classify all of these instruments as debt instruments measured at amortised cost.
D. The impact of adopting SLFRS 9 on deferred tax is set out in the Note 32.
3.1.1 The impact of transition to SLFRS 9 on retained earnings:
Retained Earnings Rs. ‘000
Closing balance under LKAS 39 (31 December 2017) 1,154,757 Transitional adjustment on the implementation of SLFRS 9 - Bank (refer note 3.1.2) (952,085) Transitional adjustment on the implementation of SLFRS 9 - Subsidiaries (403,355) Deferred tax on Transitional adjustments - Bank 224,599 Opening balance under SLFRS 9 (1 January 2018) 23,916
3.1.2 Reconciliation of the aggregate opening loan loss provision allowances under LKAS 39 to the expected credit loss provision under SLFRS 9.
Loan loss Expected credit provision under Re-measurement loss under LKAS 39 at SLFRS 9 at 31 December 2017 1 January 2018
Impairment on Financial Assets/ Liabilities Placements with banks - (22) (22) Financial assets at amortised cost - loans and advances to customers (915,362) (866,060) (1,781,421) Financial assets at amortised cost - debt and other instruments - (38,715) (38,715) Commitment and contingencies - (47,288) (47,288) Total (915,362) (952,085) (1,867,446)
3.1.3 Impact on Capital Adequacy Ratio As per the Direction No. 4 of 2018 issued by Central Bank of Sri Lanka on “Adoption of Sri Lanka Accounting Standard – SLFRS 9 Financial Instruments” for the purpose of calculating capital adequacy ratio, Bank shall stagger additional credit loss provision arising from SLFRS 9 at the transition date, 1 January 2018. The Bank has charged only 25% of the first day impact Rs. 282.7 Mn against the Retained Earnings of the Bank for the purpose of calculating capital adequacy ratio as at 31 December 2018. If this was 100% charged, the total Tier I capital ratio and total capital ratio will be declined by 0.99%.
Financial Reports Notes to the Financial Statements 191 Union Bank | Annual Report 2018
Notes to the Financial Statements
3. TRANSITION DISCLOSURES (Cont.)
3.2 GROUP A reconciliation between the carrying amounts under LKAS 39 to the balances reported under SLFRS 9 as of 1 January 2018:
Assets/ Liabilities Ref LKAS 39 Re-classification Re-measurement SLFRS 9 Category Amount Category Amount Rs.’000 Rs.’000
Cash and cash equivalents L & R 5,057,422 - - AC 5,057,422 Balances with the Central Bank of Sri Lanka L & R 3,785,679 - - AC 3,785,679 Placements with banks L & R 866,690 - - AC 866,690 Less: Collective Impairment A - - (22) (22) - - - 866,668 Reverse repurchased agreements L & R 301,297 - - AC 301,297 Derivative financial instruments A FVPL 2,760 - - FVPL 2,760 To: Financial investments at fair value through profit or loss - 5,949,023 - FVPL 5,949,023 From: Financial investments - held for trading FVPL 5,949,023 (5,949,023) - - Financial assets at amortised cost - loans and advances to customers - 80,645,569 - AC 80,645,569 From: Loans and receivables to other customers L & R 80,645,569 (80,645,569) - - Less: Collective Impairment A (732,369) - (1,413,457) (2,145,826) Less: Individual Impairment (692,244) - - (692,244) 79,220,956 - - 77,807,499 To : Financial assets at amortised cost - debt and other instruments - 11,220,655 - AC 11,220,655 From : Other loans and receivables L & R 8,674,102 (8,674,102) - - From : Financial investments - held to maturity C HTM 2,546,553 (2,546,553) - - Less : Collective Impairment A - - (33,096) (33,096) - - - 11,187,559 To: Financial investments at fair value through other comprehensive income B - 16,604,761 - FVOCI 16,604,761 From: Financial investments - available for sale AFS 16,604,761 (16,604,761) - - Other liabilities - Non-financial liabilities Collective Impairment on commitment and contingencies A - - (47,288) (47,288) Deferred tax assets/ (liabilities) D 288,450 - 224,599 513,049 Retained Earnings 3.2.1 714,444 - (1,269,264) (407,971) Non controlling interest 3.2.2 404,262 - (146,850) 257,412
A. The adoption of SLFRS 9 has fundamentally changed the Group’s credit loss impairment method by replacing LKAS 39’s incurred loss approach with a forward-looking ECL approach. From 1 January 2018, the Group has been recording the allowance for expected credit losses for all loans and other debt financial assets not held at FVPL, together with commitments and contingencies.
B. As of 1 January 2018, the Group has assessed its portfolio which had previously been classified as AFS debt instruments. The Group concluded that, these instruments are managed within a business model of collecting contractual cash flows and selling the financial assets. Accordingly, the Group has classified these investments as debt instruments measured at FVOCI.
192 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
3. TRANSITION DISCLOSURES (Cont.)
C. As of 1 January 2018, the Group did not have any debt instruments that did not meet the SPPI criterion within its held to maturity portfolio. Therefore, it elected to classify all of these instruments as debt instruments measured at amortised cost.
D. The impact of adopting SLFRS 9 on deferred tax is set out in the Note 32.
3.2.1 The impact of transition to SLFRS 9 on retained earnings:
Retained Earnings Rs. ‘000
Closing balance under LKAS 39 (31 December 2017) 714,444 Transitional adjustment on the implementation of SLFRS 9 (1,347,014) Deferred tax on Transitional adjustments 224,599 Opening balance under SLFRS 9 (1 January 2018) (407,971)
Non Controlling Interest Rs. ‘000
Closing balance under LKAS 39 (31 December 2017) 404,262 Transitional adjustment on the implementation of SLFRS 9 (146,850) Deferred tax on Transitional adjustments - Opening balance under SLFRS 9 (1 January 2018) 257,412
3.2.2 Reconciliation of the aggregate opening loan loss provision allowances under LKAS 39 to the expected credit loss provision under SLFRS 9.
Loan loss Expected credit provision under Re-measurement loss under LKAS 39 at SLFRS 9 at 31 December 2017 1 January 2018
Impairment on Financial Assets/ Liabilities Placements with banks - (22) (22) Financial assets at amortised cost - loans and advances to customers (1,424,613) (1,413,457) (2,838,071) Financial assets at amortised cost - debt and other instruments - (33,096) (33,096) Commitment and contingencies - (47,288) (47,288) Total (1,424,613) (1,493,863) (2,918,477)
3.2.3 Impact on Capital Adequacy Ratio As per the Direction No. 4 of 2018 issued by Central Bank of Sri Lanka on “Adoption of Sri Lanka Accounting Standard – SLFRS 9 Financial Instruments” for the purpose of calculating capital adequacy ratio, Bank shall stagger additional credit loss provision arising from SLFRS 9 at the transition date, 1 January 2018. The Bank has charged only 25% of the first day impact Rs. 280.6 Mn against the Retained Earnings of the Bank for the purpose of calculating capital adequacy ratio as at 31 December 2018. If this was 100% charged, the total Tier I capital ratio and total capital ratio will be declined by 0.89%.
Financial Reports Notes to the Financial Statements 193 Union Bank | Annual Report 2018
Notes to the Financial Statements
4. GROSS INCOME
ACCOUNTING POLICY Gross income is recognised to the extent that it is probable that the economic benefits will flow to the Bank and the Group and the revenue can be reliably measured. The specific recognition criteria, for each type of gross income, are given under the respective income notes.
BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Interest income (refer Note 5.1) 12,142,268 10,498,284 14,120,894 12,194,010 Fee and commission income (refer Note 6.1) 968,008 783,217 1,120,153 972,671 Net fair value gains/ (losses) from financial instruments at fair value through profit or loss (refer Note 7) 309,519 - 309,519 - Net gains/ (losses) from trading (refer Note 7.1) - 428,848 - 428,690 Net gains from financial investments (refer Note 8) 173,026 141,531 174,559 143,515 Other operating income (refer Note 9) 317,604 85,883 350,828 160,482 Total 13,910,425 11,937,763 16,075,953 13,899,368
5. NET INTEREST INCOME
ACCOUNTING POLICY Under both SLFRS 9 and LKAS 39, interest income and interest expense is recorded using the effective interest rate (EIR) method for all financial instruments measured at amortised cost. Interest income on interest bearing financial assets measured at FVOCI under SLFRS 9, similarly to interest bearing financial assets classified as available for sale or held to maturity under LKAS 39 are also recorded by using the EIR method. The EIR is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset.
The EIR (and therefore, the amortised cost of the asset) is calculated by taking into account any discount or premium on acquisition, fees and costs that are an integral part of the EIR. The Bank recognises interest income and interest expense using a rate of return that represents the best estimate of a constant rate of return over the expected life of the loan. Hence, it recognises the effect of potentially different interest rates charged at various stages, and other characteristics of the product life cycle (including prepayments, penalty interest and charges).
If expectations regarding the cash flows on the financial asset are revised for reasons other than credit risk, the adjustment is booked as a positive or negative adjustment to the carrying amount of the asset in the balance sheet with an increase or reduction in interest income. The adjustment is subsequently amortised through Interest and similar income in the income statement.
The Bank calculates interest income by applying the EIR to the gross carrying amount of financial assets other than credit-impaired assets. When a financial asset becomes credit-impaired (as set out in Note 2.4.2) and is, therefore, regarded as ‘Stage 3’, the Bank calculates interest income by applying the effective interest rate to the net amortised cost of the financial asset for individually impaired Financial assets. For the stage 3 collectively impaired financial assets, bank suspends the accrued interest. If the financial assets cures and is no longer credit-impaired, the Bank reverts to calculating interest income on a gross basis.
BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Interest income (refer Note 5.1 ) 12,142,268 10,498,284 14,120,894 12,194,010 Less: Interest expense (refer Note 5.2 ) 8,490,006 7,452,377 9,655,390 8,492,442 Net interest income 3,652,262 3,045,907 4,465,504 3,701,568
194 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
5. NET INTEREST INCOME (Cont.)
5.1. Interest income BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Reverse repurchase agreements 23,655 18,751 57,334 45,556 Placements with banks 21,289 34,310 233,409 219,682 Financial investments at fair value through profit or loss 139,081 - 139,081 - Financial investments - held for trading - 86,035 - 86,035 Financial assets at amortised cost - loans and advances to customers 9,113,901 - 10,928,765 - Loans and receivables to other customers - 7,685,004 - 9,307,835 Interest income accrued on impaired financial assets 207,652 206,528 234,354 233,230 Financial assets at amortised cost - debt and other instruments 1,023,079 - 909,549 - Other loans and receivables - 529,025 - 363,041 Financial investments - held to maturity - 91,978 - 91,978 Financial investments at fair value through other comprehensive income 1,613,611 - 1,618,402 - Financial investments - available for sale - 1,846,653 - 1,846,653 Total 12,142,268 10,498,284 14,120,894 12,194,010
5.2. Interest expenses BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Due to banks 974,962 799,309 1,047,048 888,196 Repurchased agreements 938,351 926,140 938,351 926,140 Due to customers 6,419,259 5,703,488 7,391,398 6,533,506 Other borrowed funds 157,434 23,440 278,593 144,600 Total 8,490,006 7,452,377 9,655,390 8,492,442
5.3. Net interest income from Sri Lanka Government securities Interest income 2,176,890 2,026,939 2,222,146 2,068,533 Less: Interest expenses 938,351 926,140 938,351 926,140 Net interest income from Sri Lanka Government securities 1,238,539 1,100,799 1,283,795 1,142,393
5.4. Notional Tax Credit on Secondary Market Transactions As per the Section 137 of the Inland Revenue Act no 10 of 2006 and the amendments thereto, a company which derives interest income from the secondary market transactions on Government Securities ( on or after 1 April 2002) would be entitled to a notional tax credit (being one ninth of the net interest income) provided such interest income of the Company for that year of assessment.
Accordingly, the net interest income earned by the Group and the Bank from the secondary market transactions in Government Securities for the period from 1 January 2018 to 31 March 2018, has been grossed up by Rs. 32.2Mn ( 2017 - Rs. 111.2Mn) and Rs. 31.2 Mn ( 2017 - Rs. 110.0 Mn) respectively. Due to the adoption of new Inland Revenue Act 24 of 2017, no notional tax is applicable thereafter.
Financial Reports Notes to the Financial Statements 195 Union Bank | Annual Report 2018
Notes to the Financial Statements
6. NET FEE AND COMMISSION INCOME
ACCOUNTING POLICY The Group earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories:
Fee and Commission Income (i) Fee income earned from services that are provided over a certain period of time Fees earned for the provision of services over a period of time are accrued over that period.
(ii) Fee and Commission Income from Providing Transaction Services Fees arising from negotiating or participating in a negotiation of a transaction for a third party, such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses, are recognised on completion of the underlying transaction.
Fee and Commission Expenses All the fee and commission expenses are expensed as the services are received. Fee and commission expenses are recognised on an accrual basis.
BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Fee and commission income (refer Note 6.1) 968,008 783,217 1,120,153 972,671 Less: Fee and commission expenses (refer Note 6.2) 135,158 109,748 162,578 145,646 Net fee and commission income 832,850 673,469 957,575 827,025
6.1. Fee and commission income BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Loans 133,533 82,053 156,594 108,991 Trade and remittances 201,702 190,083 201,702 190,083 Cards 82,909 37,763 82,909 37,763 Bancassurance 27,755 17,754 27,755 17,754 Factoring 7,511 5,750 30,263 39,549 Fund management - - 77,100 103,832 Deposits related fee 435,188 380,559 435,188 380,559 Guarantees 76,112 62,178 76,112 62,178 Others 3,298 7,077 32,530 31,962 Total 968,008 783,217 1,120,153 972,671
6.2. Fee and commission expenses BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial services 67,263 66,511 94,683 102,409 Cards 42,510 20,686 42,510 20,686 Brokerage 25,385 22,551 25,385 22,551 Total 135,158 109,748 162,578 145,646
196 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
7. NET FAIR VALUE GAINS/ (LOSSES) FROM FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS
ACCOUNTING POLICY Income arising from trading activities include all realised and unrealised gains and losses arising due to changes in fair value and dividend income from “financial investments at fair value through profit or loss”.
BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Fixed Income Securities Net marked to market gain/(loss) (7,246) - (7,246) - Net capital gain 70,612 - 70,612 - Capital gain from government dealing securities 63,366 - 63,366 -
Unit Investments Net marked to market gain/(loss) 182 - 182 - Net capital gain 245,971 - 245,971 - Capital gain from investment in units 246,153 - 246,153 -
Total 309,519 - 309,519 -
7.1 NET GAINS/ (LOSSES) FROM TRADING
ACCOUNTING POLICY Income arising from trading activities include all realised and unrealised gains and losses arising due to changes in fair value and dividend income from financial assets held for trading. BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Fixed Income Securities Net marked to market gain/(loss) - 8,565 - 8,565 Net capital gain - 98,485 - 97,857 Capital gain from government dealing securities - 107,050 - 106,422
Unit Investments Net marked to market gain/(loss) - 3,415 - 3,415 Net capital gain - 318,383 - 318,853 Capital gain from investment in units - 321,798 - 322,268
Total - 428,848 - 428,690
Financial Reports Notes to the Financial Statements 197 Union Bank | Annual Report 2018
Notes to the Financial Statements
8. NET GAINS/ (Losses) FROM FINANCIAL INVESTMENTS
ACCOUNTING POLICY Net gains/(losses) from financial investments include capital gains/(losses) and dividend income on financial investments at fair value through other comprehensive income.
Dividend income is recognised when the Group’s right to receive the payment is established. BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Equities Dividend income 770 700 2,303 2,684 Fixed Income Securities Gain on Government Securities 172,256 140,831 172,256 140,831 Total 173,026 141,531 174,559 143,515
9. OTHER OPERATING INCOME
ACCOUNTING POLICY Income earned on other sources, which are not directly related to the normal operations of the Bank and the Group are recognised as other operating income on accrual basis, such as gains on disposal of property, plant and equipment, gain from investments in real estate and foreign exchange gains/(losses).
Gains/(losses) arising from disposal of property, plant and equipment are recorded after deducting from the proceeds on disposal, the carrying amount of such assets and the related selling expenses.
Foreign exchange gain includes income arising from customer transactions and revaluation of foreign currency assets/ liabilities.
Revenue from the real estate sale is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer.
BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Gain/(loss) on sale of property, plant and equipment 2,600 1,128 3,451 6,296 Foreign exchange gain (refer Note 9.1) 310,486 79,106 310,486 79,106 Income from real estate - - 8,979 18,200 Others 4,518 5,649 27,912 56,880 Total 317,604 85,883 350,828 160,482
9.1 Foreign exchange gain BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Income from customer transactions and revaluation gain 321,222 185,049 321,222 185,049 SWAP transactions (10,736) (105,943) (10,736) (105,943) Total 310,486 79,106 310,486 79,106
198 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
10. IMPAIRMENT for loans and other losses
ACCOUNTING POLICY Policy applicable from 1 January 2018 The Bank and the Group recognise the changes in the impairment allowance for loans and receivables and other financial assets, which are assessed as per the SLFRS 9 - Financial Instruments.
Policy applicable before 1 January 2018 The Bank and the Group recognise the changes in the impairment allowance for loans and receivables, which are assessed as per the LKAS 39 - Financial Instruments: Recognition and Measurement.
The methodology adopted by the Bank and the Group is explained in Note 24.5 to these Financial Statements.
Further, the Group recognises an impairment loss when the carrying amount of a non-financial asset exceeds the estimated recoverable amount from that asset.
BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial assets at amortised cost - loans and advances to customers (refer Note 10.1) 305,407 248,929 543,403 377,464 Financial assets at amortised cost - debt and other instruments (refer Note 10.2) 2,423 - 3,753 - Placements with banks (refer Note 10.3) 727 - 727 - Commitments and contingencies (refer Note 10.4) 32,994 - 51,919 - Goodwill and intangible assets (refer Note 30) 731 - 731 279 Investments in real estate (refer Note 28.1) - - (24,194) (235) Total 342,282 248,929 576,339 377,508
10.1 Financial assets at amortised cost - loans and advances to customers BANK 2018 2017 Stage 1 Stage 2 Stage 3 Charge Collective Collective Individual Collective Total Individual Collective Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Term loans (56,735) 9,800 115,671 81,032 149,768 113,815 30,393 144,207 Overdrafts (6,744) 21,090 55,156 10,589 80,091 56,951 16,522 73,473 Trade finance (181) (866) (3,121) (35,819) (39,987) 9,514 1,332 10,846 Lease and Hire-purchase (1,732) 17,501 6,597 6,180 28,546 (1,842) (2,618) (4,459) Factoring 3,932 - 77,682 233 81,847 33,005 (3,385) 29,620 Pawning 128 1,360 - (4,222) (2,734) - (3,265) (3,265) Credit Cards 7,876 - - - 7,876 - - - Others - - - - - 534 (2,027) (1,493) Total (53,456) 48,885 251,985 57,993 305,407 211,977 36,952 248,929
Financial Reports Notes to the Financial Statements 199 Union Bank | Annual Report 2018
Notes to the Financial Statements
10. IMPAIRMENT for loans and other losses (Cont.)
GROUP 2018 2017 Stage 1 Stage 2 Stage 3 Charge Collective Collective Individual Collective Total Individual Collective Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Term loans (52,520) 12,593 119,745 189,063 268,881 101,387 85,993 187,380 Overdrafts (6,900) 21,090 55,156 10,589 79,935 56,951 16,522 73,473 Trade finance (181) (866) (3,121) (35,819) (39,987) 9,514 1,332 10,846 Lease and Hire-purchase (1,537) 31,084 111,358 (50,067) 90,838 35,840 7,925 43,765 Factoring 3,932 - 180,454 (46,164) 138,222 33,005 33,753 66,758 Pawning 128 1,360 - (4,222) (2,734) - (3,265) (3,265) Credit Cards 7,876 - - - 7,876 - - - Others - - - 372 372 534 (2,027) (1,493) Total (49,202) 65,261 463,592 63,752 543,403 237,231 140,233 377,464
10.2 Financial assets at amortised cost - debt and other instruments
BANK 2018 2017 Collective Impairment Stage 1 Stage 2 Stage 3 Total Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Lease backed trust certificates (3,969) - - (3,969) - Other Financial assets at amortised cost 7,722 (1,330) - 6,392 - Impairment charge/ (reversal) 3,753 (1,330) - 2,423 -
GROUP 2018 2017 Collective Impairment Stage 1 Stage 2 Stage 3 Total Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Lease backed trust certificates (3,969) - - (3,969) - Other Financial assets at amortised cost 7,722 - - 7,722 - Impairment charge/ (reversal) 3,753 - - 3,753 -
10.3 Placements with banks
BANK & GROUP 2018 2017 Collective Impairment Stage 1 Stage 2 Stage 3 Total Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Money market placements 727 - - 727 - Impairment charge/ (reversal) 727 - - 727 -
10.4 Commitments and contingencies
BANK 2018 2017 Collective Impairment Stage 1 Stage 2 Stage 3 Total Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Undrawn loan commitments 19,577 2,530 10,231 32,338 - Other commitments 656 - - 656 - Impairment charge/ (reversal) 20,233 2,530 10,231 32,994 -
200 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
10. IMPAIRMENT for loans and other losses (Cont.)
GROUP 2018 2017 Collective Impairment Stage 1 Stage 2 Stage 3 Total Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Undrawn loan commitments 20,617 2,957 27,689 51,263 - Other commitments 656 - - 656 - Impairment charge/ (reversal) 21,273 2,957 27,689 51,919 -
11. PERSONNEL EXPENSES
ACCOUNTING POLICY Personnel expenses include salaries and bonus, terminal benefit charges, share-based payments and other staff related expenses.
Short term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. The provisions for bonus is recognised if the Bank and the Group has a present legal or constructive obligation to pay this amount,as a result of past services provided by the employee and the obligation can be estimated reliably.
Employees’ Provident Fund and Employees’ Trust Fund Employees are eligible for Employees’ Provident Fund contribution and Employees’ Trust Fund contribution in accordance with the respective statutes and regulations. The Bank and Group contributes 12% and 3% of gross salaries of employees to the Bank’s Employees’ Provident Fund and the Employees’ Trust Fund respectively.
Defined Benefit Plans Contributions to defined benefit plans are recognised in the Statement of Profit or Loss based on an actuarial valuation carried out for the gratuity liability of the Bank and Group in accordance with LKAS 19 - ‘Employee Benefits’.
Share Based Payments Share based payments represent the Bank’s cost on the Employee Share Option Plan, which is more fully described in Note 41 to these Financial Statements.
BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Salary and bonus 1,212,175 1,043,995 1,401,840 1,215,723 Contributions to defined contribution plans 159,699 142,777 184,623 165,947 Contributions to defined benefit plans (refer Note 11.1) 36,253 33,908 42,103 39,065 Share based expenses 30,984 28,836 30,984 28,836 Others (refer Note 11.2) 382,671 348,894 399,373 366,871 Total 1,821,782 1,598,410 2,058,923 1,816,442
11.1 Contributions to defined benefit plans have been made based on the actuarial valuation carried out as at 31 December 2018. Refer Note 38.1 for detailed disclosure and assumptions on the retirement benefit obligation.
11.2 Others include conveyance expenses, staff insurance, training related expenses and amortisation of pre-paid staff cost.
Financial Reports Notes to the Financial Statements 201 Union Bank | Annual Report 2018
Notes to the Financial Statements
12. DEPRECIATION AND AMORTISATION
ACCOUNTING POLICY Depreciation and amortisation are the systematic allocation of a depreciable amount of the property, plant and equipment and intangible assets over its useful life.
BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Amortisation of intangible assets (refer Note 30) 150,825 162,888 152,600 164,680 Depreciation of property, plant and equipment (refer Note 31) 231,748 236,657 263,295 264,130 Total 382,573 399,545 415,895 428,810
13. OTHER EXPENSES
ACCOUNTING POLICY Other expenses are recognised in the Statement of Profit or Loss on the basis of a direct association between the cost incurred and the earning of specific items of income. Provisions in respect of other expenses are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Auditors’ remunerations (refer Note 13.1) 10,769 11,421 12,999 14,423 Directors’ fees and expenses (refer Note 13.2) 9,583 7,381 14,779 12,022 Professional and legal expenses 46,084 40,466 54,680 50,664 Advertising and marketing expenses 107,803 76,262 146,607 113,442 Office administration and establishment expenses 1,139,821 1,015,749 1,283,533 1,169,808 Deposit insurance expenses 61,301 53,574 70,872 61,915 Others (refer Note 13.3) 149,759 142,064 208,178 190,710 Total 1,525,120 1,346,917 1,791,648 1,612,984
13.1 Auditors’ remunerations BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Audit fees 6,558 6,201 8,788 8,326 Audit related fees and expenses 615 263 615 1,140 Non-audit expenses 3,596 4,957 3,596 4,957 Total 10,769 11,421 12,999 14,423
13.2 Director’s emoluments include fees paid to Non Executive Directors. Remuneration paid to Executive Director is included under salary and bonus in Note 11.
13.3 Others include transportation related expenses and other overhead expenses incurred on day to day operations of the Bank and the Group.
202 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
14. VALUE ADDED TAX (VAT), NATION BUILDING TAX (NBT) AND DEBT REPAYMENT LEVY (DRL) ON FINANCIAL SERVICES
ACCOUNTING POLICY
Value Added Tax (VAT) VAT on Financial Services is calculated in accordance with the Value Added Tax (VAT) Act No. 14 of 2002 and subsequent amendments thereto. The base for the computation of value added tax on financial services is the accounting profit before VAT and income tax adjusted for the economic depreciation and emoluments payable to employees including cash benefits, non cash benefits and provision related to terminal benefits. The VAT rate applied in 2018 is 15% (2017 - 15%)
Nation Building Tax (NBT) NBT on Financial Services is calculated in accordance with the Nation Building Tax (NBT) Act No. 09 of 2009 and subsequent amendments thereto. NBT on financial services is calculated based on the value addition used for the purpose of VAT on financial services. The NBT rate applied in 2018 is 2% (2017 - 2%)
Debt Repayment Levy (DRL) DRL on Financial Services is calculated in accordance with the Finance Act No. 35 of 2018 for a period from 1st October 2018 to 31st December 2021. DRL on financial services is calculated based on the total value addition used for the purpose of VAT on financial services. The DRL rate applied in 2018 is 7%.
BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Value added tax on financial services 368,851 267,812 411,658 307,045 Nation building tax on financial services 49,180 35,708 54,850 41,157 Debt repayment levy on financial services 52,693 - 55,267 - Total 470,724 303,520 521,775 348,202
15. TAX EXPENSE
ACCOUNTING POLICY As per the Sri Lanka Accounting Standard - LKAS 12 - ‘Income Taxes’, the tax expense/ income is the aggregate amount included in determination of profits or loss for the year in respect of income tax and deferred tax. The tax expense/income is recorded in the Statement of Profit or Loss except to the extent it relates to items recognised directly in Equity or Statement of Comprehensive Income , in which case it is recognised in Other Comprehensive Income.
Provision for the taxation is based on the profit for the year adjusted for taxation purpose in accordance with the provisions of the Inland Revenue Act No 10 of 2006 and the amendments thereto.
The components of income tax expense for the years ended 31 December 2018 and 2017 are;
BANK GROUP For the year ended 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Current tax expense 158,763 4,369 181,132 31,734 Deferred tax charge/ (credit) 146,083 69,131 177,623 94,471 Total 304,846 73,500 358,755 126,205
Effective tax rate 41.0% 15.4% 40.2% 18.6%
Financial Reports Notes to the Financial Statements 203 Union Bank | Annual Report 2018
Notes to the Financial Statements
15. TAX EXPENSE (Cont.)
15.1 Reconciliation of accounting profit to income tax expense
BANK GROUP For the year ended 31 December 2018 2017 2018 2017 % Rs.’000 % Rs.’000 % Rs.’000 % Rs.’000
Profit before tax 777,394 534,118 893,405 677,334 Share of profit of equity accounted investees, net of tax (34,614) (55,801) - - Adjusted profit before taxes 742,780 478,317 893,405 677,334 Tax using the corporate tax rate 28.0% 207,978 28.0% 133,929 28.0% 250,153 28.0% 189,697 Add: Disallowable Expenses 49.3% 366,509 55.0% 262,951 81.3% 726,192 41.4% 280,638 Less: Tax Deductible Expenses (23.2%) (172,418) (39.9%) (190,513) (56.8%) (507,771) (32.6%) (220,492) Less: Tax Exempt Income (8.8%) (65,125) (41.7%) (199,647) (8.9%) (79,256) (30.0%) (202,873) Adjustment for leasing 0.6% 4,085 0.0% - 0.5% 4,085 0.0% - Adjusted profit/ (loss) for tax purposes 45.9% 341,029 1.4% 6,720 44.0% 393,403 6.9% 46,970 Tax losses utilised (24.5%) (182,266) (0.5%) (2,351) (23.8%) (212,272) (2.3%) (15,236) Taxable profit for the year 21.4% 158,763 0.9% 4,369 20.3% 181,132 4.7% 31,734 (Over)/ under provision in respect of previous year ------Deferred tax charge/(credit) (refer Note 32) 19.7% 146,083 14.5% 69,131 19.9% 177,623 13.9% 94,471 Taxation for the year 41.1% 304,846 15.4% 73,500 40.2% 358,755 18.6% 126,205
15.1.1 Applicable rates of tax
For the year ended 31 December 2018 2017
Income tax on Union Bank of Colombo PLC 28% 28% Income tax on UB Finance Company Limited 28% 28% Income tax on National Asset Management Limited (NAMAL) Profits from Unit trust business 10% 10% Others 28% 28% Income tax on Serandib Capital (Pvt) Limited 28% 28%
15.2 The deferred tax (credit)/charge in the Statement of Profit or Loss and Statement of Comprehensive Income
BANK For the year ended 31 December 2018 Deferred Deferred Statement of Other Retained Tax Tax Profit Comprehensive Earnings Assets Liabilities or Loss Income Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Depreciation allowances for tax purpose - 431,475 (11,741) - - Impairment Allowance 355,488 - (18,913) - (224,599) Carry forward losses - - 190,288 - - Revaluation of financial investments at fair value through other comprehensive income 124,167 - - (179,496) - Actuarial gains/ (losses) on defined benefit plan liability 7,499 - - (2,507) - Other temporary differences 59,918 - (13,551) - - Total 547,072 431,475 146,083 (182,003) (224,599)
204 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
15. TAX EXPENSE (Cont.)
For the year ended 31 December 2017 Deferred Deferred Other Tax Tax Statement of Comprehensive Assets Liabilities Profit or Loss Income Rs.’000 Rs.’000 Rs.’000 Rs.’000
Depreciation allowances for tax purpose - 443,216 88,110 - Collective impairment Allowance 111,976 - (9,010) - Carry forward losses 190,288 - 4,225 - Revaluation of financial investments - available for sale - 55,329 - 156,305 Actuarial gains/ (losses) on defined benefit plan liability 4,991 - - 2,019 Other temporary differences 46,366 - (14,194) - Total 353,621 498,545 69,131 158,324
GROUP For the year ended 31 December 2018 Deferred Deferred Other Tax Tax Statement of Comprehensive Retained Assets Liabilities Profit or Loss Income Earnings Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Depreciation allowances for tax purpose - 560,249 114,580 - - Impairment Allowance 373,676 - (34,847) - (224,599) Carry forward losses 507,390 - 109,872 - - Re-measurement of financial investments - at fair value through other comprehensive income 124,167 - - (179,496) - Actuarial gains/ (losses) on defined benefit plan liability 5,760 - - (1,016) - Other temporary differences 65,194 - (11,982) - - Total 1,076,187 560,249 177,623 (180,512) (224,599)
For the year ended 31 December 2017 Deferred Deferred Other Tax Tax Statement of Comprehensive Assets Liabilities Profit or Loss Income Rs.’000 Rs.’000 Rs.’000 Rs.’000
Depreciation allowances for tax purpose - 445,669 89,824 - Collective impairment Allowance 114,230 - (11,263) - Carry forward losses 617,262 - 36,524 - Re-measurement of financial investments - available for sale - 55,329 - 156,305 Actuarial gains/ (losses) on defined benefit plan liability 4,744 - - 2,291 Other temporary differences 53,212 - (20,614) - Total 789,448 500,998 94,471 158,596
Financial Reports Notes to the Financial Statements 205 Union Bank | Annual Report 2018
Notes to the Financial Statements
16. EARNINGS PER SHARE (EPS)
ACCOUNTING POLICY The Bank and the Group presents basic and diluted earnings per share data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share warrants issued and employee share ownership plans as required by the Sri Lanka Accounting Standard No. 33 (LKAS 33) - ‘Earnings per Share’:
16.1 Earnings per share - Basic BANK GROUP For the year ended 31 December 2018 2017 2018 2017
Net profit attributable to ordinary shareholders (Rs.’000) 472,548 460,618 517,750 514,776
Weighted average number of ordinary shares (refer Note 16.1.1) 1,091,406 1,091,406 1,091,406 1,091,406 Basic earnings per ordinary share (Rs.) 0.43 0.42 0.47 0.47
16.1.1 Weighted Average Number of Ordinary shares for Basic EPS
BANK & GROUP 2018 2017 Outstanding Weighted Outstanding Weighted Average Average ’000 ’000 ’000 ’000
Number of shares held as at 1 January 1,091,406 1,091,406 1,091,406 1,091,406 Add: Number of shares issued - - - - Number of shares held as at 31 December 1,091,406 1,091,406 1,091,406 1,091,406
16.2 Earnings per share - Diluted Diluted Earnings per Share (Diluted EPS) as at the reporting date was calculated by dividing the profit attributable to equity holders of the Bank by the weighted average number of ordinary shares outstanding during the year, after adjusting for the effects of all potentially dilutive weighted average number of ordinary shares that would be issued on the conversion of all the dilutive ESOPs into ordinary shares.
BANK GROUP For the year ended 31 December 2018 2017 2018 2017
Net profit attributable to ordinary shareholders (Rs.’000) 472,548 460,618 517,750 514,776
Weighted average number of ordinary shares (refer Note 16.2.1) 1,091,729 1,092,798 1,091,729 1,092,798 Diluted earnings per ordinary share (Rs.) 0.43 0.42 0.47 0.47
206 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
16. EARNINGS PER SHARE (EPS) (Cont.)
16.2.1 Weighted Average Number of Ordinary shares for Diluted EPS
BANK & GROUP For the year ended 31 December 2018 2017 ’000 ’000
Number of ordinary shares used as denominator for Basic EPS (refer Note 16.1.1) 1,091,406 1,091,406 Effect of dilution : Add: Weighted average number of potential ordinary shares outstanding under warrant 218,281 218,281 Add: Weighted average number of potential ordinary shares outstanding under ESOP 12,124 12,124 Less: Weighted average number of potential ordinary shares that would have been issued at average market price (230,082) (229,013) Number of shares held as at 31 December 1,091,729 1,092,798
17. DIVIDEND PAID AND PROPOSED
ACCOUNTING POLICY Interim and final dividend are recognised and accrued at the time the dividend is declared and approved by the Board of Directors and is in accordance with the Companies Act No 7 of 2007.
Dividend paid during the year 2017 Gross Dividend Dividend Tax Net Dividend
Out of dividend received - free of tax (Rs.’000) 12,221 - 12,221 Out of normal profit (Rs.’000) 96,920 9,692 87,228 Dividend paid (Rs.’000) 109,141 9,692 99,449 Dividend per ordinary share (Rs.) 0.10 0.09
Financial Reports Notes to the Financial Statements 207 Union Bank | Annual Report 2018
Notes to the Financial Statements
18. MEASUREMENT OF FINANCIAL INSTRUMENTS Financial instruments in the Statement of Financial Position are measured on an ongoing basis either at fair value or at amortised cost. The summary of significant accounting policies describes how each category of financial instruments is measured and how income and expenses including fair value gains and losses, are recognised. The following table analyses the carrying amounts of the financial instruments by category as defined in Sri Lanka Accounting Standards - SLFRS 9 : Financial Instruments under headings of the Statement of Financial Position.
BANK Fair Value Fair Value Amortised Through P&L Through OCI cost Total As at 31 December 2018 Rs.’000 Rs.’000 Rs.’000 Rs.’000
ASSETS Cash and cash equivalents - - 2,917,866 2,917,866 Balances with Central Bank of Sri Lanka - - 4,219,932 4,219,932 Placements with banks - - 3,265,425 3,265,425 Reverse repurchased agreements - - 417,146 417,146 Derivative financial instruments 34,274 - - 34,274 Financial investments at fair value through profit or loss 2,863,121 - - 2,863,121 Financial assets at amortised cost - loans and advances to customers - - 73,749,208 73,749,208 Financial assets at amortised cost - debt and other instruments - - 16,567,940 16,567,940 Financial investments at fair value through other comprehensive income - 17,735,959 - 17,735,959 Other financial assets - - 153,865 153,865 Total financial assets 2,897,395 17,735,959 101,291,382 121,924,735
Fair Value Amortised Through P&L cost Total Rs.’000 Rs.’000 Rs.’000
LIABILITIES Due to banks - 9,348,209 9,348,209 Derivative financial instruments 71,750 - 71,750 Repurchased agreements - 17,585,912 17,585,912 Due to customers - 79,251,073 79,251,073 Other borrowed funds - 1,234,220 1,234,220 Other financial liabilities - 972,330 972,330 Total financial liabilities 71,750 108,391,744 108,463,494
208 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
18. MEASUREMENT OF FINANCIAL INSTRUMENTS (Cont.)
BANK As at 31 December 2017 Held for Held to Loans and Available Trading Maturity Receivables for sale Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
ASSETS Cash and cash equivalents - - 4,697,738 - 4,697,738 Balances with Central Bank of Sri Lanka - - 3,785,679 - 3,785,679 Placements with banks - - 716,147 - 716,147 Reverse repurchased agreements - - 1,795 - 1,795 Derivative financialinstruments 2,760 - - - 2,760 Financial investments - held for trading 5,949,023 - - - 5,949,023 Loans and receivables to other customers - - 70,577,923 - 70,577,923 Other loans and receivables - - 9,609,639 - 9,609,639 Financial investments - available for sale - - - 16,453,207 16,453,207 Financial investments - held to maturity - 2,546,553 - - 2,546,553 Other financial assets - - 133,308 - 133,308 Total financial assets 5,951,783 2,546,553 89,522,229 16,453,207 114,473,772
Held for Amortised Trading cost Total Rs.’000 Rs.’000 Rs.’000
LIABILITIES Due to banks - 17,208,641 17,208,641 Derivative financial instruments 4,867 - 4,867 Repurchased agreements - 10,381,193 10,381,193 Due to customers - 70,325,594 70,325,594 Other borrowed funds - 1,224,812 1,224,812 Other financial liabilities - 1,402,968 1,402,968 Total financial liabilities 4,867 100,543,208 100,548,075
GROUP As at 31 December 2018 Fair Value Fair Value Amortised Through P&L Through OCI Cost Total Rs.’000 Rs.’000 Rs.’000 Rs.’000
ASSETS Cash and cash equivalents - - 3,306,393 3,306,393 Balances with Central Bank of Sri Lanka - - 4,219,932 4,219,932 Placements with banks - - 3,265,425 3,265,425 Reverse repurchased agreements - - 950,998 950,998 Derivative financial instruments 34,274 - - 34,274 Financial investments at fair value through profit or loss 2,863,121 - - 2,863,121 Financial assets at amortised cost - loans and advances to customers - - 82,120,068 82,120,068 Financial assets at amortised cost - debt and other instruments - - 15,942,404 15,942,404 Financial investments at fair value through other comprehensive income - 17,787,621 - 17,787,621 Other financial assets - - 235,267 235,267 Total financial assets 2,897,395 17,787,621 110,040,484 130,725,500
Financial Reports Notes to the Financial Statements 209 Union Bank | Annual Report 2018
Notes to the Financial Statements
18. MEASUREMENT OF FINANCIAL INSTRUMENTS (Cont.)
Fair Value Amortised Through P&L cost Total Rs.’000 Rs.’000 Rs.’000
LIABILITIES Due to banks - 9,515,547 9,515,547 Derivative financial instruments 71,750 - 71,750 Repurchased agreements - 17,535,900 17,535,900 Due to customers - 86,266,123 86,266,123 Other borrowed funds - 2,921,647 2,921,647 Other financial liabilities - 1,046,167 1,046,167 Total financial liabilities 71,750 117,285,384 117,357,134
GROUP As at 31 December 2017 Held for Held to Loans and Available Trading Maturity Receivables for sale Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
ASSETS Cash and cash equivalents - - 5,057,422 - 5,057,422 Balances with Central Bank of Sri Lanka - - 3,785,679 - 3,785,679 Placements with banks - - 866,690 - 866,690 Reverse repurchased agreements - - 301,297 - 301,297 Derivative financialinstruments 2,760 - - - 2,760 Financial investments - held for trading 5,949,023 - - - 5,949,023 Loans and receivables to other customers - - 79,220,956 - 79,220,956 Other loans and receivables - - 8,674,102 - 8,674,102 Financial investments - available for sale - - - 16,604,761 16,604,761 Financial investments - held to maturity - 2,546,553 - - 2,546,553 Other financial assets - - 199,925 - 199,925 Total financial assets 5,951,783 2,546,553 98,106,071 16,604,761 123,209,168
Held for Amortised Trading cost Total Rs.’000 Rs.’000 Rs.’000
LIABILITIES Due to banks - 17,298,727 17,298,727 Derivative financial instruments 4,867 - 4,867 Repurchased agreements - 10,218,055 10,218,055 Due to customers - 76,747,977 76,747,977 Other borrowed funds - 2,968,233 2,968,233 Other financial liabilities - 1,562,527 1,562,527 Total financial liabilities 4,867 108,795,519 108,800,386
210 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
19. CASH AND CASH EQUIVALENTS
ACCOUNTING POLICY Cash and cash equivalents for the purpose of reporting in the Statement of Financial Position, comprise of cash in hand and balances with banks. The balances of the cash in hand are recorded at book value and the balances with banks are carried at amortised cost in the Statement of Financial Position.
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Local currency in hand 2,065,971 1,835,535 2,240,313 1,836,249 Foreign currency in hand 81,409 16,935 81,409 16,935 Balances with local banks - 833 214,185 359,803 Balances with foreign banks 770,486 2,844,435 770,486 2,844,435 Total 2,917,866 4,697,738 3,306,393 5,057,422
19.1 BALANCES WITH CENTRAL BANK OF SRI LANKA
ACCOUNTING POLICY Balances with Central Bank of Sri Lanka include the cash balance that is required as per the provisions of section 93 of the Monetary Law Act.
The minimum cash reserve requirement on rupee deposit liabilities was 7.5% until 16 November 2018 thereafter is 6.0% until 31 December 2018 (2017 - 7.5%).
There is no reserve requirement for the foreign currency deposit liabilities of the Bank.
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Statutory balances with Central Bank of Sri Lanka 4,219,932 3,785,679 4,219,932 3,785,679
20. PLACEMENTS WITH BANKS
ACCOUNTING POLICY Placements with Banks net of impairment allowance includes money at call and short term investments that are subject to an insignificant risk of changes in the fair value, and are used by the Bank and the Group in the management of its short term commitments.
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Placements Within Sri Lanka 429,936 306,988 429,936 457,531 Outside Sri Lanka 2,836,238 409,159 2,836,238 409,159 Total 3,266,174 716,147 3,266,174 866,690 Less: Impairment (749) - (749) - Net Carrying Value 3,265,425 716,147 3,265,425 866,690
Financial Reports Notes to the Financial Statements 211 Union Bank | Annual Report 2018
Notes to the Financial Statements
20. PLACEMENTS WITH BANKS (Cont.)
20.1 The below table shows the stage wise classification of placements and the impairment allowance;
BANK & GROUP As at 31 December 2018 Stage 1 Stage 2 Stage 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000
Placements 3,266,174 - - 3,266,174
Less: Impairment allowance for placements Opening balance as at 1 January 22 - - 22 Charge to statement of profit or loss 727 - - 727 Net write-off during the year - - - - Closing balance as at 31 December 749 - - 749 Net Carrying Value 3,265,425 - - 3,265,425
21. REVERSE REPURCHASED AGREEMENTS
ACCOUNTING POLICY Securities purchased under agreements to resell at a specified future date are not recognised in the Statement of Financial Position. The consideration paid, including accrued interest, is recorded in the Statement of Financial Position net of impairment allowance, within “reverse repurchase agreements”, reflecting the transaction’s economic substance as a loan by the Bank and the Group. The difference between the purchase and resale prices is recorded in net interest income and is accrued over the life of the agreement using the Effective Interest Rate (EIR).
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Due from banks - - 533,852 163,138 Due from customers 417,146 1,795 417,146 138,159 Total 417,146 1,795 950,998 301,297 Less: Impairment - - - - Net Carrying Value 417,146 1,795 950,998 301,297
21.1 The below table shows the stage wise classification of reverse repurchased agreements; BANK As at 31 December 2018 Stage 1 Stage 2 Stage 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000
Reverse repurchased agreements on government securities 417,146 - - 417,146 Total 417,146 - - 417,146
GROUP As at 31 December 2018 Stage 1 Stage 2 Stage 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000
Reverse repurchased agreements on government securities 950,998 - - 950,998 Total 950,998 - - 950,998
212 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
22. DERIVATIVE FINANCIAL INSTRUMENTS
ACCOUNTING POLICY Derivatives are financial instruments that derive their fair value in response to changes in interest rates, financial instrument prices, commodity prices, foreign exchange rates, credit risk and indices. The Bank uses derivatives such as forward foreign exchange contracts and currency swaps.
Bank has not designated any derivatives as hedging instruments and has not followed hedge accounting as at the reporting date. All derivatives are initially recognised and subsequently measured at fair value, with all revaluation gains or losses recognised in the Statement of Profit or Loss under “Other operating income” (Note 9).
Derivatives are recorded at fair value and carried as assets when their fair value is positive and as liabilities when their fair value is negative. Fair value is determined using the forward market rates ruling on the reporting date.
The table below shows the fair values of derivative financial instruments, recorded as assets or liabilities.
BANK & GROUP As at 31 December 2018 2017 Assets Liabilities Assets Liabilities Rs.’000 Rs.’000 Rs.’000 Rs.’000
Forward foreign exchange contracts - Sales 416 47,884 758 772 - Purchases 7,107 466 1,034 681 Currency SWAPS - Sales - 23,400 - - - Purchases 26,751 - 968 3,414 Total 34,274 71,750 2,760 4,867
23. FINANCIAL INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS
ACCOUNTING POLICY
Policy applicable from 1 January 2018 The Bank classifies financial assets or financial liabilities as fair value through profit or loss when they have been purchased or issued primarily for short-term profit making through trading activities or form part of a portfolio of financial instruments that are managed together, for which there is evidence of a recent pattern of short-term profit taking. Held-for-trading assets and liabilities are recorded and measured in the statement of financial position at fair value. Changes in fair value are recognised in “ net fair value gains/(losses) from financial instrument at fair value through profit or loss”, (Note 7).
The Group evaluates its financial assets held for trading, other than derivatives, to determine whether the intention to sell them in the near term is still appropriate. When the Group is unable to trade these financial assets due to inactive markets and management’s intention to sell them in the foreseeable future significantly changes, the Group may elect to reclassify these financial assets.
Financial Reports Notes to the Financial Statements 213 Union Bank | Annual Report 2018
Notes to the Financial Statements
23. FINANCIAL INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS (Cont.)
Policy applicable before 1 January 2018 A financial asset is classified as fair value through profit or loss if it is held for trading or is designated at fair value through profit or loss.
Financial assets are classified as held for trading if they are acquired principally for the purpose of selling or repurchasing in the near term or holds as a part of a portfolio that is managed together for short term profit or position taking. Financial assets held for trading are recorded in the Statement of Financial Position at fair value. Changes in fair value are recognised in “Net gain from trading” (Note 7.1). Interest income is recorded in “Interest income” (Note 5) and dividend income are recorded in “Net gain from trading” (Note 7.1) according to the terms of the contract, or when the right to receive the payment is been established.
Included in this classification are government securities and investment in units that have been acquired principally for the purpose of selling or repurchasing in the near term. BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Sri Lanka Government securities (refer Note 23.1) 1,858,458 - 1,858,458 - Investment in units (refer Note 23.2) 1,004,663 - 1,004,663 - Total 2,863,121 - 2,863,121 -
FINANCIAL INVESTMENTS - HELD FOR TRADING BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Sri Lanka Government securities (refer Note 23.1) - 1,696,945 - 1,696,945 Investment in units (refer Note 23.2) - 4,252,078 - 4,252,078 Total - 5,949,023 - 5,949,023
23.1 Sri Lanka Government securities
BANK & GROUP 2018 2017 Year of Cost of Fair Cost of Fair Maturity Investment Value Investment Value Rs.’000 Rs.’000 Rs.’000 Rs.’000
2018 - - 298 298 2019 363,646 364,780 - - 2020 - - 297,606 302,957 2021 925,196 925,827 772,127 794,726 2023 102,817 101,950 263,313 269,308 2024 - - 157,252 167,636 2025 - - 50,110 51,946 2026 465,480 465,901 - - 2027 - - 108,618 110,074 Total 1,857,139 1,858,458 1,649,324 1,696,945
214 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
23. FINANCIAL INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS (Cont.)
23.2 Investment in Units BANK & GROUP As at 31 December 2018 2017 No of Cost Market No of Cost Market units Value units Value ’000 Rs.’000 Rs.’000 ’000 Rs.’000 Rs.’000
NAMAL High Yield Fund - - - 165,033 2,977,426 2,980,423 Capital Alliance Investment Grade Fund 25,534 401,754 401,885 38,495 539,794 539,794 Capital Alliance Gilt Fund - - - 55,042 614,047 618,544 Guardian Acuity Money Market Fund - - - 7,390 113,283 113,317 Capital Alliance High Yield Fund 10,040 200,738 200,790 - - - Capital Alliance Income Fund 24,960 401,846 401,988 - - - Total 1,004,338 1,004,663 4,244,550 4,252,078
24. FINANCIAL ASSETS AT AMORTISED COST - LOANS AND ADVANCES to customers
ACCOUNTING POLICY
Policy applicable from 1 January 2018 Bank only measures Loans and advances to customers and other financial investments at amortised cost if both of the following conditions are met: aa The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows aa The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.
Policy applicable before 1 January 2018 Loans and receivables include non–derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: aa Those that the Bank and the Group intends to sell immediately or in the near term and those that the Bank and the Group, upon initial recognition, designates as at fair value through profit or loss. aa Those that the Bank and the Group, upon initial recognition, designates as available for sale. aa Those for which the Bank and the Group may not recover substantially all of its initial investment through contractual cash flows, other than because of credit deterioration.
After initial measurement, the loans and receivables are subsequently measured at amortised cost using the effective interest rate (EIR), less allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in ‘Interest income’ and the losses arising from impairment are recognised in ‘Impairment for loans and other losses’ in the Statement of Profit or Loss.
Write-offs The Bank’s accounting policy under SLFRS 9 remains the same as it was under LKAS 39. Loans and the related impairment allowance accounts are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security.
Rescheduled Loan Facilities This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, any impairment is measured using the original EIR as calculated before the modification of terms and the loan is no longer considered past due.
Financial Reports Notes to the Financial Statements 215 Union Bank | Annual Report 2018
Notes to the Financial Statements
24. FINANCIAL ASSETS AT AMORTISED COST - LOANS AND ADVANCES to customers (Cont.)
Collateral Valuation To the extent possible, the Bank and the Group uses active market data for valuing financial assets, held as collateral. Other financial assets which do not have readily determinable market value are valued using models. Non-financial collateral such as real estate is valued based on data provided by third parties such as independent valuers, audited financial statements and other independent sources.
FINANCIAL ASSETS AT AMORTISED COST - LOANS AND ADVANCES to customers BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Gross loans and receivables (refer Note 24.1) 75,787,035 - 85,452,541 - Less: Individual impairment (refer Note 24.5.1) (719,126) - (1,107,531) - Collective impairment (refer Note 24.5.1) (1,318,701) - (2,224,942) - Net loans and receivables 73,749,208 - 82,120,068 -
Loans and receivables to other customers BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Gross loans and receivables (refer Note 24.1) - 71,493,285 - 80,645,569 Less: Individual impairment (refer Note 24.5.1) - (515,446) - (692,244) Collective impairment (refer Note 24.5.1) - (399,916) - (732,369) Net loans and receivables - 70,577,923 - 79,220,956
24.1 Loans and Receivables to customers - By Product
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Term loans 47,016,716 42,604,832 48,712,251 44,235,792 Overdrafts 12,038,457 11,897,400 11,985,176 11,893,231 Trade finance 13,256,959 13,350,946 13,256,959 13,350,946 Lease and hire purchase 1,192,136 1,614,104 7,199,578 7,170,123 Factoring 725,547 521,601 2,543,911 2,248,966 Pawning 459,792 680,156 508,288 680,156 Credit Cards 243,428 - 243,428 - Staff loans 854,000 824,246 854,000 824,308 Others - - 148,950 242,047 Gross loans and receivables 75,787,035 71,493,285 85,452,541 80,645,569
216 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
24. FINANCIAL ASSETS AT AMORTISED COST - LOANS AND ADVANCES to customers (Cont.)
24.1.1 Stage-wise classification of gross loans and receivables - By product
BANK As at 31 December 2018 Stage 1 Stage 2 Stage 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000
Term loans 43,968,693 593,368 2,454,655 47,016,716 Overdrafts 9,277,048 1,569,795 1,191,614 12,038,457 Trade finance 7,407,034 5,385,586 464,339 13,256,959 Lease and Hire-purchase 734,807 345,378 111,951 1,192,136 Factoring 558,677 - 166,870 725,547 Pawning 398,916 42,140 18,736 459,792 Credit Cards 243,428 - - 243,428 Staff loans 854,000 - - 854,000 Total 63,442,603 7,936,267 4,408,165 75,787,035
GROUP As at 31 December 2018 Stage 1 Stage 2 Stage 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000
Term loans 44,310,148 953,632 3,448,471 48,712,251 Overdrafts 9,223,767 1,569,795 1,191,614 11,985,176 Trade finance 7,407,034 5,385,586 464,339 13,256,959 Lease and Hire-purchase 3,392,345 2,204,816 1,602,417 7,199,578 Factoring 1,975,279 17,198 551,434 2,543,911 Pawning 447,412 42,140 18,736 508,288 Credit Cards 243,428 - - 243,428 Staff loans 854,000 - - 854,000 Others - - 148,950 148,950 Total 67,853,413 10,173,167 7,425,961 85,452,541
24.1.2 Changes in the gross carrying amount of Loans and receivables
Term Loans BANK GROUP Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Gross carrying amount 1 January 2018 39,416,060 797,659 2,391,113 42,604,832 39,720,569 1,193,177 3,322,046 44,235,792 New assets originated or purchased 26,421,782 385,220 516,446 27,323,448 27,062,631 385,220 516,446 27,964,297 Assets de-recognised or repaid (21,484,191) (581,227) (842,820) (22,908,238) (21,624,709) (935,901) (923,901) (23,484,511) Transfers to Stage 1 330,052 (118,757) (211,295) - 376,176 (161,202) (214,974) - Transfers to Stage 2 (162,180) 181,079 (18,899) - (582,450) 580,654 1,796 - Transfers to Stage 3 (552,708) (70,606) 623,314 - (641,946) (108,316) 750,262 - Amounts written off (122) - (3,204) (3,326) (122) - (3,204) (3,326) Gross carrying amount 31 December 2018 43,968,693 593,368 2,454,655 47,016,716 44,310,148 953,632 3,448,471 48,712,251
Financial Reports Notes to the Financial Statements 217 Union Bank | Annual Report 2018
Notes to the Financial Statements
24. FINANCIAL ASSETS AT AMORTISED COST - LOANS AND ADVANCES to customers (Cont.)
Overdrafts BANK GROUP Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Gross carrying amount 1 January 2018 9,693,464 1,123,206 1,080,730 11,897,400 9,689,295 1,123,206 1,080,730 11,893,231 New assets originated or purchased 3,079,358 1,130,323 154,045 4,363,726 3,030,246 1,130,323 154,045 4,314,614 Assets de-recognised or repaid (3,128,686) (777,295) (278,815) (4,184,796) (3,128,686) (777,295) (278,815) (4,184,796) Transfers to Stage 1 1,015,085 (869,657) (145,428) - 1,015,085 (869,657) (145,428) - Transfers to Stage 2 (1,045,869) 1,057,042 (11,173) - (1,045,869) 1,057,042 (11,173) - Transfers to Stage 3 (336,304) (93,824) 430,128 - (336,304) (93,824) 430,128 - Amounts written off - - (37,873) (37,873) - - (37,873) (37,873) Gross carrying amount 31 December 2018 9,277,048 1,569,795 1,191,614 12,038,457 9,223,767 1,569,795 1,191,614 11,985,176
Trade Finance BANK GROUP Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Gross carrying amount 1 January 2018 8,924,264 3,429,011 997,671 13,350,946 8,924,264 3,429,011 997,671 13,350,946 New assets originated or purchased 7,389,693 5,385,587 404,949 13,180,229 7,389,693 5,385,587 404,949 13,180,229 Assets de-recognised or repaid (8,906,923) (3,410,491) (955,966) (13,273,380) (8,906,923) (3,410,491) (955,966) (13,273,380) Transfers to Stage 1 ------Transfers to Stage 2 ------Transfers to Stage 3 - (18,521) 18,521 - - (18,521) 18,521 - Amounts written off - - (836) (836) - - (836) (836) Gross carrying amount 31 December 2018 7,407,034 5,385,586 464,339 13,256,959 7,407,034 5,385,586 464,339 13,256,959
Leases & Hire purchases BANK GROUP Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Gross carrying amount 1 January 2018 1,330,019 163,759 120,326 1,614,104 4,083,763 2,083,697 1,002,663 7,170,123 New assets originated or purchased 85,326 94,297 5,775 185,398 2,710,420 94,296 5,775 2,810,491 Assets de-recognised or repaid (496,318) (74,778) (29,377) (600,473) (1,519,177) (960,461) (294,505) (2,774,143) Transfers to Stage 1 54,477 (48,412) (6,065) - 333,948 (291,780) (42,168) - Transfers to Stage 2 (224,175) 225,725 (1,550) - (1,619,833) 1,667,895 (48,062) - Transfers to Stage 3 (14,522) (15,213) 29,735 - (596,776) (388,831) 985,607 - Amounts written off - - (6,893) (6,893) - - (6,893) (6,893) Gross carrying amount 31 December 2018 734,807 345,378 111,951 1,192,136 3,392,345 2,204,816 1,602,417 7,199,578
Factoring BANK GROUP Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Gross carrying amount 1 January 2018 378,406 - 143,195 521,601 2,105,771 - 143,195 2,248,966 New assets originated or purchased 306,705 3,090 95,380 405,175 1,868,005 3,090 95,381 1,966,476 Assets derecognised or repaid (158,266) (16,711) (26,252) (201,229) (2,030,329) 487 358,311 (1,671,531) Transfers to Stage 1 45,453 - (45,453) - 45,453 - (45,453) - Transfers to Stage 2 (13,621) 13,621 - - (13,621) 13,621 - - Transfers to Stage 3 ------Gross carrying amount 31 December 2018 558,677 - 166,870 725,547 1,975,279 17,198 551,434 2,543,911
218 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
24. FINANCIAL ASSETS AT AMORTISED COST - LOANS AND ADVANCES to customers (Cont.)
24.2 Loans and advances to customers - By Currency BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Sri Lanka Rupee 62,206,290 59,717,367 71,871,796 68,869,651 United States Dollar 13,495,254 11,728,804 13,495,254 11,728,804 Euro 81,231 35,861 81,231 35,861 Others 4,260 11,253 4,260 11,253 Gross loans and receivables 75,787,035 71,493,285 85,452,541 80,645,569
24.3 Loans and advances to customers - By Industry BANK As at 31 December 2018 2017 % Rs.’000 % Rs.’000
Agriculture and fishing 11% 8,134,775 10% 7,305,226 Manufacturing 13% 10,205,176 12% 8,289,795 Tourism 3% 2,593,363 5% 3,487,135 Transport 0% 49,381 0% 158,373 Construction 5% 4,051,299 6% 4,047,719 Traders 23% 17,578,284 24% 17,113,900 New economy 0% 146,570 0% 188,027 Financial and business services 12% 9,396,402 15% 10,782,237 Infrastructure 1% 774,853 0% 172,338 Other services 13% 9,980,598 5% 3,486,897 Other customers including pawning 17% 12,876,334 23% 16,461,638 Gross loans and receivables 100% 75,787,035 100% 71,493,285
GROUP As at 31 December 2018 2017 % Rs.’000 % Rs.’000
Agriculture and fishing 10% 8,764,031 10% 7,826,380 Manufacturing 13% 10,934,601 11% 8,805,741 Tourism 4% 2,991,738 5% 3,783,136 Transport 1% 653,985 1% 672,472 Construction 5% 4,662,292 6% 4,631,362 Traders 24% 20,573,844 25% 20,053,226 New economy 0% 253,395 0% 282,213 Financial and business services 11% 9,270,588 13% 10,677,303 Infrastructure 1% 800,634 0% 206,605 Other services 12% 10,076,856 5% 3,651,104 Other customers including pawning 19% 16,470,577 24% 20,056,027 Gross loans and receivables 100% 85,452,541 100% 80,645,569
Financial Reports Notes to the Financial Statements 219 Union Bank | Annual Report 2018
Notes to the Financial Statements
24. FINANCIAL ASSETS AT AMORTISED COST - LOANS AND ADVANCES to customers (Cont.)
24.4 Lease and Hire Purchase Receivables Assets leased to customers which transfer substantially all the risk and rewards associated with ownership other than legal title, are classified as finance leases. Amounts receivables under finance leases are classified as lease and hire purchase receivables and presented within loans and receivables to customers in the statement of financial positions, after deducting of unearned lease income and impairment.
Impairment on lease and hire-purchase receivables are given in Note 24.5 to the financial statements.
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
24.4.1 Lease Receivable Total lease rentals receivable 1,407,783 1,948,717 9,909,734 9,528,633 Unearned lease income (238,723) (365,371) (2,776,576) (2,454,874) Gross lease receivable 1,169,060 1,583,346 7,143,158 7,073,759 Less: Impairment allowance for lease receivable (69,912) (49,503) (505,097) (150,521) Net lease receivables 1,099,148 1,533,843 6,638,061 6,923,238
Gross lease receivable within one year (refer Note 24.4.1.1) 82,008 485,224 1,750,048 2,113,809 Gross lease receivable after one year (refer Note 24.4.1.2) 1,087,052 1,098,122 5,393,110 4,959,950 Total Gross lease receivable 1,169,060 1,583,346 7,143,158 7,073,759
24.4.1.1 Gross lease receivable within one year As at 31 December Total lease receivable within one year 103,684 656,128 3,008,469 3,142,641 Unearned lease income (21,676) (170,904) (1,258,421) (1,028,832) Gross lease receivable 82,008 485,224 1,750,048 2,113,809 Less: Impairment allowance for lease receivable (5,017) (12,749) (126,526) (49,529) Net lease receivables 76,991 472,475 1,623,522 2,064,280
24.4.1.2 Gross lease receivable after one year As at 31 December Total lease receivable after one year 1,304,099 1,292,589 6,901,265 6,385,991 Unearned lease income (217,047) (194,467) (1,508,155) (1,426,041) Gross lease receivable 1,087,052 1,098,122 5,393,110 4,959,950 Less: Impairment allowance for lease receivable (64,895) (25,425) (378,572) (100,993) Net lease receivables 1,022,157 1,072,697 5,014,538 4,858,957
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
24.4.2 Hire purchase receivables Total hire purchase receivable 27,168 39,738 60,714 108,907 Unearned hire purchase income (4,092) (8,980) (4,294) (12,543) Gross hire purchase receivable 23,076 30,758 56,420 96,364 Less: Impairment Allowance for hire purchase receivable (10,518) (9,274) (13,656) (22,256) Net hire purchase receivables 12,558 21,484 42,764 74,108
Gross hire purchase receivable within one year (refer Note 24.4.2.1) 21,315 28,517 54,659 87,821 Gross hire purchase receivable after one year (refer Note 24.4.2.2) 1,761 2,241 1,761 8,543 Total Gross hire purchase receivable 23,076 30,758 56,420 96,364
220 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
24. FINANCIAL ASSETS AT AMORTISED COST - LOANS AND ADVANCES to customers (Cont.)
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
24.4.2.1 Gross hire purchase receivable within one year Total hire purchase receivable within one year 25,338 37,407 58,884 99,847 Unearned hire purchase income (4,023) (8,890) (4,225) (12,026) Gross hire purchase receivable 21,315 28,517 54,659 87,821 Less: Impairment Allowance for hire purchase receivable (9,686) (11,550) (12,824) (20,485) Net hire purchase receivables 11,629 16,968 41,835 67,337
24.4.2.2 Gross hire purchase receivable after one year Total hire purchase receivable after one year 1,830 2,331 1,830 9,060 Unearned hire purchase income (69) (90) (69) (517) Gross hire purchase receivable 1,761 2,241 1,761 8,543 Less: Impairment Allowance for hire purchase receivable (832) (809) (832) (1,771) Net hire purchase receivables 929 1,432 929 6,772
24.5 Allowance for Impairment Charges for Loans and Receivables
ACCOUNTING POLICY
Individual Impairment The Group considers objective evidence of impairment for loans and advances to customers at both individual asset and collective level. All individually significant loans and advances to customers and held to maturity investments are first assessed for Individual impairment. All individually significant loans and advances to customers found not to be individually impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Assets that are individually assessed for impairment and for which an impairment loss is recognised are not included in a collective assessment of impairment. Loans and advances to customers that are not individually significant are collectively assessed for impairment by grouping together loans and advances to customers with similar risk characteristics. If there is an objective evidence that an impairment loss has been incurred, impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at original effective interest rate of the asset. If the loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. If the Group has reclassified trading assets to loans and receivables, the discount rate for measuring any impairment loss is the new effective interest rate which is determined at the date of reclassification. The impairment allowances on individually significant accounts are reviewed more regularly when circumstances require. This normally encompasses re-assessment of the enforceability of any collateral held and the timing and amount of actual and anticipated receipts. Individually assessed impairment allowances are only released when there is a reasonable and objective evidence of a reduction in the established loss estimate. Interest on impaired assets continues to be recognised through the unwinding of the discount.
The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from the foreclosure less costs of obtaining and selling the collateral, whether or not foreclosure is probable. The methodology and the assumptions used for estimating future cash flows are reviewed regularly to reduce any difference between loss estimates and actual loss experience.
The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the statement of profit or loss. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows, for the purpose of measuring the impairment loss and recorded as part of ‘interest income’.
Financial Reports Notes to the Financial Statements 221 Union Bank | Annual Report 2018
Notes to the Financial Statements
24. FINANCIAL ASSETS AT AMORTISED COST - LOANS AND ADVANCES to customers (Cont.)
Collective Impairment
Policy applicable from 1 January 2018 For the purpose of collective evaluation of impairment, financial assets are grouped on a basis, which takes into consideration credit risk characteristics such as asset type, past due status and other relevant factors.
The Bank has been recording the allowance for expected credit losses (ECL) for all loans and receivables. The ECL allowance is based on the credit losses expected to arise over the life of the asset (the lifetime expected credit loss or LTECL), unless there has been no significant increase in credit risk since origination, in which case, the allowance is based on the 12 months’ expected credit loss (12mECL) as outlined in Note 2.4.2). The Bank’s policies for determining if there has been a significant increase in credit risk are set out in Note 2.4.2.
Details of impairment losses on financial assets carried at amortised cost are given in Note 2.4.2 to the financial statements. Bank ceases the recognition of interest income on assets which are collectively impaired, when the overdue position is more than 90 days or 3 months.
Policy applicable before 1 January 2018 For the purpose of collective evaluation of impairment, financial assets are grouped on a basis, which takes into consideration credit risk characteristics such as asset type, past due status and other relevant factors.
Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on which, the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently.
Estimates of changes in future cash flows reflect and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, commodity prices, payment status, or other factors that are indicative of incurred losses in the Group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between estimated loss and actual loss experience.
Details of impairment losses on financial assets carried at amortised cost are given in Note 2.4.2 to the financial statements. Bank ceases the recognition of interest income on assets which are collectively impaired, when the overdue position is more than 90 days or 3 months.
24.5.1 Stage movements in allowance for impairment
BANK 2018 Stage 1 Stage 2 Stage 3 Total Collective Collective Individual Collective Individual Collective Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Opening balance as at 1 January 659,080 40,224 515,446 566,672 515,446 1,265,976 Charge/(reversal) to statement of profit or loss (53,456) 48,885 251,985 57,993 251,985 53,422 Write-offs during the year (122) - (48,305) (575) (48,305) (697) Closing Balance as at 31 December 605,502 89,109 719,126 624,090 719,126 1,318,701
Group 2018 Stage 1 Stage 2 Stage 3 Total Collective Collective Individual Collective Individual Collective Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Opening balance as at 1 January 715,492 122,434 692,244 1,307,900 692,244 2,145,826 Charge/(reversal) to statement of profit or loss (49,202) 65,261 463,592 63,752 463,592 79,811 Write-offs during the year (122) - (48,305) (573) (48,305) (695) Closing Balance as at 31 December 666,168 187,695 1,107,531 1,371,079 1,107,531 2,224,942
222 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
24. FINANCIAL ASSETS AT AMORTISED COST - LOANS AND ADVANCES to customers (Cont.)
Applicable from 1 January 2018
24.5.2 Movements in Allowance for Impairment Charges - By Product
BANK - 2018 Term Loans Overdrafts Trade Lease & Factoring Others Total finance Hire Purchases Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Stage 1 Opening balance as at 1 January 2018 567,587 76,931 409 7,924 5,166 1,063 659,080 Charge/(reversal) to statement of profit or loss (56,735) (6,744) (181) (1,732) 3,932 8,004 (53,456) Net write-off during the year (122) - - - - - (122) Closing balance as at 31 December 2018 510,730 70,187 228 6,192 9,098 9,067 605,502
Stage 2 Opening balance as at 1 January 2018 12,945 20,576 2,283 4,420 - - 40,224 Charge/(reversal) to statement of profit or loss 9,800 21,090 (866) 17,501 - 1,360 48,885 Net write-off during the year ------Closing balance as at 31 December 2018 22,745 41,666 1,417 21,921 - 1,360 89,109
Stage 3 Opening balance as at 1 January 2018 551,969 367,317 103,159 46,433 7,533 5,707 1,082,118 Charge/(reversal) to statement of profit or loss 196,703 65,745 (38,940) 12,777 77,915 (4,222) 309,978 Net write-off during the year (3,207) (37,873) (836) (6,893) - (71) (48,880) Closing balance as at 31 December 2018 745,465 395,189 63,383 52,317 85,448 1,414 1,343,216
Total Opening balance as at 1 January 2018 1,132,501 464,824 105,851 58,777 12,699 6,770 1,781,422 Charge/(reversal) to statement of profit or loss 149,768 80,091 (39,987) 28,546 81,847 5,142 305,407 Net write-off during the year (3,329) (37,873) (836) (6,893) - (71) (49,002) Closing balance as at 31 December 2018 1,278,940 507,042 65,028 80,430 94,546 11,841 2,037,827
GROUP - 2018 Term Loans Overdrafts Trade Lease & Factoring Others Total finance Hire Purchases Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Stage 1 Opening balance as at 1 January 2018 579,187 76,916 409 52,751 5,166 1,063 715,392 Charge/(reversal) to statement of profit or loss (52,520) (6,900) (181) (1,537) 3,932 8,004 (49,202) Net write-off during the year (122) - - - - - (122) Closing balance as at 31 December 2018 526,545 70,016 228 51,214 9,098 9,067 666,168
Stage 2 Opening balance as at 1 January 2018 26,468 20,576 2,283 73,107 - - 122,434 Charge/(reversal) to statement of profit or loss 12,593 21,090 (866) 31,084 - 1,360 65,261 Net write-off during the year ------Closing balance as at 31 December 2018 39,061 41,666 1,417 104,191 - 1,360 187,695
Financial Reports Notes to the Financial Statements 223 Union Bank | Annual Report 2018
Notes to the Financial Statements
24. FINANCIAL ASSETS AT AMORTISED COST - LOANS AND ADVANCES to customers (Cont.)
GROUP - 2018 (Cont.) Term Loans Overdrafts Trade Lease & Factoring Others Total finance Hire Purchases Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Stage 3 Opening balance as at 1 January 2018 855,532 367,317 103,159 331,027 193,544 149,665 2,000,244 Charge/(reversal) to statement of profit or loss 308,808 65,745 (38,940) 61,291 134,290 (3,850) 527,344 Net write-off during the year (3,204) (37,873) (836) (6,894) - (71) (48,878) Closing balance as at 31 December 2018 1,161,036 395,189 63,383 385,424 327,834 145,744 2,478,610
Total Opening balance as at 1 January 2018 1,461,087 464,809 105,851 456,885 198,710 150,728 2,838,070 Charge/(reversal) to statement of profit or loss 268,881 79,935 (39,987) 90,838 138,222 5,514 543,403 Net write-off during the year (3,326) (37,873) (836) (6,894) - (71) (49,000) Closing balance as at 31 December 2018 1,726,642 506,871 65,028 540,829 336,932 156,171 3,332,473
Applicable before 1 January 2018
24.5.3 Movements in Allowance for Impairment Charges - By Product
BANK - 2017 Loans & Lease & Pawning Total Receivables Hire Purchases
Opening balance as at 1 January 2017 608,902 55,073 7,231 671,206 Charge/(reversal) to statement of profit or loss 256,653 (4,459) (3,265) 248,929 Net write-off during the year (4,615) (82) (76) (4,773) Closing balance as at 31 December 2017 860,940 50,532 3,890 915,362
GROUP - 2017 Loans & Lease & Pawning Total Receivables Hire Purchases
Opening balance as at 1 January 2018 230,795 935,224 7,231 1,173,250 Charge/(reversal) to statement of profit or loss 43,765 336,964 (3,265) 377,464 Net write-off during the year (101,783) (24,242) (76) (126,101) Closing balance as at 31 December 2018 172,777 1,247,946 3,890 1,424,613
224 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
25. FINANCIAL ASSETS AT AMORTISED COST - DEBT AND OTHER INSTRUMENTS
ACCOUNTING POLICY Debt and other instruments are measured at amortised cost using the effective interest rate (EIR), less allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in ‘Interest income’ and the losses arising from impairment are recognised in ‘Impairment for loans and other losses’ in the Statement of Profit or Loss.
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Investment in deep discounted bond (refer Note 25.1.1) 2,889,971 - - - Fixed deposits - - 2,572,399 - Sri Lanka development bond 3,364,089 - 3,364,089 - Investment in debentures (refer Note 25.1.2) 2,517,279 - 2,205,026 - Lease backed trust certificates (refer Note 25.1.3) 94,258 - 94,258 - Sri Lanka Government securities (refer Note 25.2.1) 7,743,480 - 7,743,480 - Total 16,609,077 - 15,979,252 - Less: Impairment (refer Note 25.4) (41,137) - (36,848) - Net carrying value 16,567,940 - 15,942,404 -
25.1 OTHER LOANS AND RECEIVABLES
ACCOUNTING POLICY Loans and receivables are measured at amortised cost using the effective interest rate (EIR), less allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in ‘Interest income’ and the losses arising from impairment are recognised in ‘Impairment for loans and other losses’ in the Statement of Profit or Loss.
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Investment in deep discounted bond (refer Note 25.1.1) - 2,778,818 - - Fixed deposits - - - 2,120,773 Sri Lanka development bond - 3,891,440 - 3,891,440 Investment in debentures (refer Note 25.1.2) - 2,679,825 - 2,402,333 Lease backed trust certificates (refer Note 25.1.3) - 259,556 - 259,556 Total - 9,609,639 - 8,674,102
25.2 FINANCIAL INVESTMENTS - HELD TO MATURITY
ACCOUNTING POLICY Financial investments under held to maturity are non-derivative financial assets with fixed or determinable payments and fixed maturities, which the Bank or the Group has the intention and ability to hold till maturity.
After the initial recognition, held to maturity financial investments are subsequently measured at amortised cost using the effective interest rate (EIR), less impairment.
Financial Reports Notes to the Financial Statements 225 Union Bank | Annual Report 2018
Notes to the Financial Statements
25. FINANCIAL ASSETS AT AMORTISED COST - DEBT AND OTHER INSTRUMENTS
Amortised cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the EIR. The amortisation is included in ‘Interest income’ in the Statement of Profit or Loss. The losses arising from impairment of such investments are recognised in the Statement of Profit or Loss under ‘Impairment for loans and other losses’. If the Bank and the Group were to sell or reclassify more than an insignificant amount of held to maturity investments before maturity other than in certain specific circumstances permitted in the LKAS 39 (Financial Instruments: Recognition and Measurement), the entire category would be tainted and would have to be reclassified as available for sale. Furthermore, the Bank and the Group would be prohibited from classifying any as financial asset as “held to maturity” for the following two years.
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Senior debentures - 67,691 - 67,691 Sri Lanka Government securities (refer Note 25.2.1) - 2,478,862 - 2,478,862 Total - 2,546,553 - 2,546,553
25.1.1 Investment in deep discounted bond BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Serandib Capital (Pvt) Ltd. 2,889,971 2,778,818 - -
The Bank invested in a deep discounted bond issued by Serandib Capital (Pvt) Ltd. and guaranteed by a local commercial bank on 1 August 2003. The investment was Rs. 1,578Mn settled by transferring a part of the Bank’s portfolio at its book value of Rs. 978Mn and balance in cash. The face value of the bond amounts to Rs. 3,458Mn and will mature on 1 August 2023. It is recorded at cost plus a proportion of the discount over the period to maturity based on its implicit rate of return of 4%.
25.1.2 Investment in debentures
BANK As at 31 December 2018 2017 No. of Carrying No. of Carrying Debentures Value Debentures Value 000 Rs.’000 000 Rs.’000
Senior Debentures Commercial Leasing & Finance PLC 5,000 548,884 5,000 548,884 DFCC Bank PLC 8,663 922,164 10,163 1,084,783 Pan Asia Banking Corporation PLC 3,715 381,096 3,715 381,096 Hayleys PLC 1,000 101,048 1,000 100,975 LB Finance PLC 2,500 251,834 2,500 251,834 Total Senior Debentures 2,205,026 2,367,572
Subordinated Debenture UB Finance Company Ltd. 3,000 312,253 3,000 312,253 Total Subordinated Debenture 312,253 312,253
Total 2,517,279 2,679,825
226 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
25. FINANCIAL ASSETS AT AMORTISED COST - DEBT AND OTHER INSTRUMENTS (Cont.)
25.1.2 Investment in debentures contd.
GROUP As at 31 December 2018 2017 No. of Carrying No. of Carrying Debentures Value Debentures Value 000 Rs.’000 000 Rs.’000
Senior Debentures Commercial Leasing & Finance PLC 5,000 548,884 5,000 548,884 DFCC Bank PLC 8,663 922,164 10,163 1,084,783 Pan Asia Banking Corporation PLC 3,715 381,096 3,715 381,096 Nation Trust Bank PLC - - 50 5,675 National Development Bank PLC - - 100 10,329 Hayleys PLC 1,000 101,048 1,000 100,975 Senkadagala Finance PLC - - 180 18,757 LB Finance PLC 2,500 251,834 2,500 251,834 Total 2,205,026 2,402,333
25.1.3 Lease backed trust certificates BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Peoples Leasing & Company PLC 58,003 143,287 58,003 143,287 Commercial Credit PLC 36,255 116,269 36,255 116,269 Total 94,258 259,556 94,258 259,556
25.2.1 Sri Lanka Government securities
BANK & GROUP As at 31 December 2018 2017 Amortised Fair Amortised Fair Year of Maturity Cost value Cost value Rs.000 Rs.000 Rs.000 Rs.000
2018 - - 2,089,182 2,083,116 2019 7,032,763 6,928,332 389,680 382,257 2020 710,717 683,645 - - Total 7,743,480 7,611,977 2,478,862 2,465,373
Financial Reports Notes to the Financial Statements 227 Union Bank | Annual Report 2018
Notes to the Financial Statements
25. FINANCIAL ASSETS AT AMORTISED COST - DEBT AND OTHER INSTRUMENTS (Cont.)
25.3 Stage-Wise Classification - Debt and Other Instruments
2018 BANK Deep Sri Lanka Investment Lease Sri Lanka Total discounted development in debentures backed trust Government bond bond certificates Securities Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Stage 1 2,889,971 3,364,089 2,205,026 94,258 7,743,480 16,296,824 Stage 2 - - 312,253 - - 312,253 Stage 3 ------Total 2,889,971 3,364,089 2,517,279 94,258 7,743,480 16,609,077
2018 GROUP Fixed Sri Lanka Investment Lease Sri Lanka Total Deposits development in debentures backed trust Government bond certificates Securities Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Stage 1 2,572,399 3,364,089 2,205,026 94,258 7,743,480 15,979,252 Stage 2 ------Stage 3 ------Total 2,572,399 3,364,089 2,205,026 94,258 7,743,480 15,979,252
25.4 Impairment Allowance on Financial Assets at Amortised Cost - Debt and Other Instruments
2018 BANK Deep Sri Lanka Investment Lease Total discounted development in debentures backed trust bond bond certificates Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Stage 1 Opening balance as at 1 January 2018 265 23,461 2,558 6,811 33,095 Charge/(reversal) to statement of profit or loss (10) 7,814 (82) (3,969) 3,753 Net write-off during the year - - - - - Closing balance as at 31 December 2018 255 31,275 2,476 2,842 36,848
Stage 2 Opening balance as at 1 January 2018 - - 5,619 - 5,619 Charge/(reversal) to statement of profit or loss - - (1,330) - (1,330) Net write-off during the year - - - - - Closing balance as at 31 December 2018 - - 4,289 - 4,289
Stage 3 Opening balance as at 1 January 2018 - - - - - Charge/(reversal) to statement of profit or loss - - - - - Net write-off during the year - - - - - Closing balance as at 31 December 2018 - - - - -
Total Opening balance as at 1 January 2018 265 23,461 8,177 6,811 38,714 Charge/(reversal) to statement of profit or loss (10) 7,814 (1,412) (3,969) 2,423 Net write-off during the year - - - - - Closing balance as at 31 December 2018 255 31,275 6,765 2,842 41,137
228 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
25. FINANCIAL ASSETS AT AMORTISED COST - DEBT AND OTHER INSTRUMENTS (Cont.)
2018 GROUP Fixed Sri Lanka investment in Lease backed Total Deposits development debentures trust bond certificates Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Stage 1 Opening balance as at 1 January 2018 265 23,461 2,558 6,811 33,095 Charge/(reversal) to statement of profit or loss (10) 7,814 (82) (3,969) 3,753 Net write-off during the year - - - - - Closing balance as at 31 December 2018 255 31,275 2,476 2,842 36,848
Stage 2 Opening balance as at 1 January 2018 - - - - - Charge/(reversal) to statement of profit or loss - - - - - Net write-off during the year - - - - - Closing balance as at 31 December 2018 - - - - -
Stage 3 Opening balance as at 1 January 2018 - - - - - Charge/(reversal) to statement of profit or loss - - - - - Net write-off during the year - - - - - Closing balance as at 31 December 2018 - - - - -
Total Opening balance as at 1 January 2018 265 23,461 2,558 6,811 33,095 Charge/(reversal) to statement of profit or loss (10) 7,814 (82) (3,969) 3,753 Net write-off during the year - - - - - Closing balance as at 31 December 2018 255 31,275 2,476 2,842 36,848
26. FINANCIAL INVESTMENTS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
ACCOUNTING POLICY
Policy applicable from 1 January 2018 Debt Instruments The Bank applies the new category under SLRS 9 of debt instruments measured at FVOCI when both of the following conditions are met: aa The instrument is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets aa The contractual terms of the financial asset meet the SPPI test
These instruments largely comprise assets that had previously been classified as financial investments available for sale under LKAS 39. FVOCI debt instruments are subsequently measured at fair value with gains and losses arising due to changes in fair value recognised in OCI. Interest income and foreign exchange gains and losses are recognised in profit or loss in the same manner as for financial assets measured at amortised cost. The ECL calculation for Debt instruments at FVOCI is explained in Note 2.4.2. Where the Bank holds more than one investment in the same security, they are deemed to be disposed of on a first–in first–out basis. On de-recognition, cumulative gains or losses previously recognised in OCI are reclassified from OCI to profit or loss.
Equity Instruments On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in the investment’s fair value OCI. This election is made on an investment by investment basis.
Financial Reports Notes to the Financial Statements 229 Union Bank | Annual Report 2018
Notes to the Financial Statements
26. FINANCIAL INVESTMENTS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (Cont.)
Policy applicable before 1 January 2018 Financial investments available for sale includes equity and debt securities. Equity investments classified as available for sale are those which are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are intended to be held for an indefinite period of time and may be sold in response to needs for liquidity or in response to changes in the market conditions. The Bank and Group has not designated any loans or receivables as available for sale.
After initial measurement, available for sale financial investments are subsequently measured at fair value.
Unrealised gains and losses are recognised directly in equity through “Statement of Comprehensive Income” in the ‘Available for sale reserve’. When the investment is disposed of, the cumulative gain or loss previously recognised in equity is recognised in the Statement of Profit or Loss in ‘Net gains/(losses) from financial investments’. Dividends earned whilst holding ‘Available for sale financial investments’ are recognised in the Statement of Profit or Loss under ‘Net gains/(losses) from financial investments’ when the right to receive the payment has been established. The losses arising from impairment of such investments are recognised in the Statement of Profit or Loss in ‘Impairment for loans and other losses’ and are removed from the ‘available for sale reserve’. BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Sri Lanka Government securities (refer Note 26.1) 17,734,429 - 17,734,429 - Equity securities Quoted (refer Note 26.2) - - 28,203 - Unquoted (refer Note 26.3) 1,530 - 1,731 - Investment in unit trusts (refer Note 26.5) - - 23,258 - Total 17,735,959 - 17,787,621 - Less: Impairment - - - - Net Carrying Value 17,735,959 - 17,787,621 -
FINANCIAL INVESTMENTS - AVAILABLE FOR SALE BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Sri Lanka Government securities (refer Note 26.1) - 16,451,677 - 16,451,677 Equity securities Quoted (refer Note 26.2) - - - 40,959 Unquoted (refer Note 26.3) - 1,530 - 17,625 Investment in unit trusts (refer Note 26.5) - - - 94,500 Total - 16,453,207 - 16,604,761
230 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
26. FINANCIAL INVESTMENTS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (Cont.)
26.1 Sri Lanka Government securities
BANK & GROUP As at 31 December 2018 2017 Cost of Fair Cost of Fair Year of Investment Value Investment Value Maturity Rs.’000 Rs.’000 Rs.’000 Rs.’000
2018 - - 7,704,025 7,834,900 2019 5,905,989 5,869,874 4,677,189 4,966,013 2020 1,217,719 1,190,668 396,277 403,942 2021 6,847,082 6,651,638 1,387,546 1,426,769 2022 604,244 586,962 711,302 770,997 2023 1,817,955 1,752,498 424,669 435,106 2024 1,045,115 988,551 153,066 167,636 2025 409,435 390,013 47,677 51,946 2026 224,118 207,067 374,810 394,368 2028 106,228 97,158 - - Total 18,177,885 17,734,429 15,876,561 16,451,677
26.2 Equity securities - quoted investments GROUP As at 31 December 2018 2017 No. of Cost of Market No. of Cost of Market Shares Investment Value Shares Investment Value 000 Rs.’000 Rs.’000 000 Rs.’000 Rs.’000
Seylan Bank PLC 37 3,991 2,856 36 3,991 3,115 Seylan Bank PLC - Non Voting 48 3,050 2,157 47 3,050 2,607 Dialog Axiata PLC 702 9,479 7,091 702 9,479 9,129 Commercial Bank of Ceylon PLC - Non Voting 28 3,269 2,699 28 3,269 2,933 Tokyo Cement PLC - Non Voting 150 10,602 3,780 150 10,602 9,900 Hatton National Bank PLC 25 5,576 5,390 25 5,576 6,225 Access Engineering PLC 300 7,644 4,230 300 7,644 7,050 Total 43,611 28,203 43,611 40,959 Less : Mark to market adjustment (15,408) (2,652) Net carrying value 28,203 40,959
26.3 Equity securities - Unquoted investments
BANK 2018 2017 No. of Cost of Market No. of Cost of Market Shares Investment Value Shares Investment Value 000 Rs.’000 Rs.’000 000 Rs.’000 Rs.’000
Lanka Financial Service Bureau Limited 100 1,000 1,000 100 1,000 1,000 Lanka Clear Private Limited 50 500 500 50 500 500 Credit Information Bureau 0.3 30 30 0.3 30 30 Total 1,530 1,530 1,530 1,530 Less : Mark to market adjustment - - - - Net carrying value 1,530 1,530
Unquoted equity securities categories under financial investments at fair value through other comprehensive income/available for sale are recorded at cost since it is the most reasonable value available to represent the market value of these investments as at the reporting date.
Financial Reports Notes to the Financial Statements 231 Union Bank | Annual Report 2018
Notes to the Financial Statements
26. FINANCIAL INVESTMENTS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (Cont.)
26.3 Equity securities - Unquoted investments
GROUP
2018 2017 No. of Cost of Market No. of Cost of Market Shares Investment Value Shares Investment Value 000 Rs.’000 Rs.’000 000 Rs.’000 Rs.’000
Lanka Financial Service Bureau Limited 100 1,000 1,000 100 1,000 1,000 Lanka Clear Private Limited 50 500 500 50 500 500 Credit Information Bureau 0.3 31 31 0.3 31 31 Samson Reclaim Rubbers Limited - - - 100 2,500 15,894 Finance House Consotium Private Limited 20 200 200 20 200 200 1,731 1,731 4,231 17,625 Less : Mark to market adjustment - 13,394 Total 1,731 17,625
The market value for the said investment has been valued based on the internally developed valuation model approved by the Board of Directors. Based on a internal assessment carried out by the Board of Directors, the carrying value of Rs. 15,894,000/- has been written-off during the year 2018.
26.4 Movements in fair value adjustment of equity securities at fair value through other comprehensive income
GROUP 2018 2017 Unquoted Quoted Total Unquoted Quoted Total Equity Equity Equity Equity securities securities securities securities Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Opening balance as at 1 January 13,394 (2,652) 10,742 13,394 (5,189) 8,205 Change to statement of other comprehensive income (15,894) (12,756) (28,650) - 2,537 2,537 Charge/ (reversal) to OCI - (12,756) (12,756) - 2,537 2,537 Net write-off during the year (15,894) - (15,894) - - - Closing balance as at 31 December (2,500) (15,408) (17,908) 13,394 (2,652) 10,742
26.5 Investment in Units GROUP As at 31 December 2018 2017 No. of Cost of Market No. of Cost of Market Shares Investment Value Shares Investment Value ’000 Rs.’000 Rs.’000 ’000 Rs.’000 Rs.’000
NAMAL Money Market Fund - - - 67 695 728 NAMAL High Yield Fund 1,166 22,922 23,258 5,193 93,693 93,772 Total 22,922 23,258 94,388 94,500
232 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
27. CURRENT TAX ASSET/ LIABILITIES
ACCOUNTING POLICY Current tax assets and liabilities consist of amounts expected to be recovered from or paid to the taxation authorities in respect of the current year and any adjustments to tax payable in respect of prior years. The tax rates and tax laws used to compute the amount are those that are enacted or substantially enacted by the reporting date.
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Current tax assets 336,167 436,279 336,167 436,284
Current tax liabilities - - 188,001 173,207
28. INVESTMENTS IN REAL ESTATE
ACCOUNTING POLICY Property acquired or being constructed for sale in the ordinary course of business, rather than to be held for rental or capital appreciation, is held as a real estate property and is measured at the lower of cost and net realisable value.
Cost includes; aa Freehold rights for land aa Amounts paid to constructors for developments aa Borrowing costs, planning and design costs, costs of site preparation, professional fees for legal services, property transfer taxes, construction overheads and other related costs.
Non refundable commissions paid to sales or marketing agents on the sale of real estate units are expensed when paid. Net realisable value is the estimated selling price in the ordinary course of the business, based on market prices at the reporting date and discounted for the time value of money if material, less costs to completion and the estimated costs of sale. The cost of real estate property recognised in profit or loss on disposal is determined with reference to the specific costs incurred on the property sold and an allocation of any non-specific costs based on the relative size of the property sold.
GROUP As at 31 December 2018 2017 Rs.’000 Rs.’000
Land 47,549 106,780 Housing projects 14,601 14,601 Other projects 177,838 384,034 Total 239,988 505,415 Less: Impairment (121,355) (352,501) Net carrying value 118,633 152,914
28.1 Impairment on investments in real estate
GROUP As at 31 December 2018 2017 Rs.’000 Rs.’000
Opening balance as at 1 January 352,501 352,736 Charge/ (Write back) to statement of profit or loss (24,194) (235) Net write-off/ disposals during the year (206,952) - Closing balance as at 31 December 121,355 352,501
Financial Reports Notes to the Financial Statements 233 Union Bank | Annual Report 2018
Notes to the Financial Statements
29. INVESTMENTS IN SUBSIDIARIES
ACCOUNTING POLICY The cost of an acquisition is measured at fair value of the consideration including contingent consideration, given on the date of transfer of title. The acquired identifiable assets, liabilities and contingent liabilities are measured at their fair values at the date of acquisition. Subsequent to the initial measurement, investment in subsidiaries are recognise using the equity method in separate financial statements of the Bank.
Bank As at 31 December 2018 2017 Percentage Equity Cost Percentage Equity Cost Subsidiary Name Holding Basis Holding Basis % Rs.’000 Rs.’000 % Rs.’000 Rs.’000
National Asset Management Ltd. (refer Note 29.1.1) 51.00 270,363 331,500 51.00 332,564 331,500 UB Finance Company Ltd. (refer Note 29.1.2) 73.31 565,010 841,297 73.31 930,048 841,297 Total 835,373 1,172,797 1,262,612 1,172,797
29.1 Movement of equity accounted investee As at 31 December 2018 2017 Rs.’000 Rs.’000
Balance brought forward 89,815 47,663 Current year share of profit (net of tax) 34,614 55,801 Other comprehensive income (net of tax) To be reclassified to profit or loss - 538 Not to be reclassified to profit or loss (11,805) 427 Change in control - (3,093) Less: Dividends received (45,962) (11,521) Impact of adopting SLFRS 9 (403,355) - Impairment on Brand value (731) - Total share of equity accounted investees retained profits (337,424) 89,815
Total share of equity accounted investees retained profits (337,424) 89,815 Cost of equity accounted investees 1,172,797 1,172,797 Total carrying amount of investments in equity accounted investees 835,373 1,262,612
234 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
29. INVESTMENTS IN SUBSIDIARIES (Cont.)
29.1.1 National Asset Management Ltd. As at 31 December 2018 2017 Rs.’000 Rs.’000
Percentage of ownership interest 51.00% 51.00%
Balance brought forward 1,064 (3,004) Current year share of profit (net of tax) (909) 14,775 Other comprehensive income (net of tax) To be reclassified to profit or loss - 698 Not to be reclassified to profit or loss (14,599) 116 Less: Dividends received (45,962) (11,521) Impairment on Brand value (731) - Total share of equity accounted investees retained profits (61,137) 1,064
Total share of equity accounted investees retained profits (61,137) 1,064 Cost of equity accounted investees 331,500 331,500 Total carrying amount of investments in equity accounted investees 270,363 332,564
29.1.2 UB Finance Company Ltd. As at 31 December 2018 2017 Rs.’000 Rs.’000
Percentage of ownership interest 73.31% 73.31%
Balance brought forward 88,751 50,667 Current year share of profit (net of tax) 35,523 41,026 To be reclassified to profit or loss - (160) Not to be reclassified to profit or loss 2,794 311 Change in control - (3,093) Less: Dividends received - - Transitional adjustment on the implementation of SLFRS 9 (403,355) - Total share of equity accounted investees retained profits (276,287) 88,751
Total share of equity accounted investees retained profits (276,287) 88,751 Cost of equity accounted investees 841,297 841,297 Total carrying amount of investments in equity accounted investees 565,010 930,048
Financial Reports Notes to the Financial Statements 235 Union Bank | Annual Report 2018
Notes to the Financial Statements
29. INVESTMENTS IN SUBSIDIARIES (Cont.)
29.2 Summarised financial information of subsidiaries 2018 2017 National National UB Finance Asset UB Finance Asset Company Management Company Management Limited Limited Limited Limited Rs.’000 Rs.’000 Rs.’000 Rs.’000
For the year ended 31 December Net operating income 570,516 85,323 546,000 126,167 Less: Operating expenses 456,533 75,396 424,241 92,672 Profit before taxes 111,408 9,927 121,759 33,495 Less: Tax expense (including VAT , NBT and DRL on financial services) 62,952 1,830 59,758 2,115 Profit after tax 48,456 8,097 62,001 31,381 Total comprehensive income 52,266 (20,528) 62,230 32,976
As at 31 December Financial assets at amortised cost - loans and advances to customers 9,066,604 - 9,264,595 - Financial investments at fair value through other comprehensive income 201 51,461 201 56,853 Property, plant and equipments and intangible assets 212,500 21,400 154,047 23,842 Other assets 112,555 21,567 61,889 21,735 Total assets 10,820,583 112,689 11,270,537 238,745
Due to customers 7,092,629 - 7,066,476 - Other borrowed funds 2,644,120 - 2,673,069 - Other liabilities 250,026 6,602 331,226 11,987 Total liabilities 10,215,310 8,290 10,167,325 14,578 Total equity 605,273 103,639 1,103,212 224,167
29.3 Capital requirement of UB Finance Company Limited UB Finance Company Limited is yet to comply with the minimum core capital and capital adequacy requirements set out in the Direction No.02 of 2017 and Direction No. 03 of 2018 of Finance Business Act as of 31 December 2018. As a result, the Central Bank of Sri Lanka had issued a letter dated 23 January 2019 imposing temporary cap on balance sheet growth of UB Finance Co. Limited until the required capital and capital adequacy ratios are met.
The management of the company has sought an extension of time until 30 June 2019 from the Central Bank to meet the said capital requirements as they are currently evaluating the options available to enhance the capital.
However, Group capital and capital adequacy ratios are currently above the required threshold.
236 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
30. GOODWILL AND INTANGIBLE ASSETS
ACCOUNTING POLICY
Basis of Recognition An intangible asset is recognised if it is probable that the future economic benefits that are attributable to the asset will flow to the Bank and the Group and the cost of the asset can be measured reliably. An intangible asset is initially measured at cost. The cost of intangible assets acquired in a business combination is the fair value as at the date of acquisition.
(i) Goodwill Goodwill that arises upon the acquisition of subsidiaries is included in intangible assets as initial recognition in accordance LKAS 38, subsequently the goodwill is assessed for impairment.
(ii) Computer Software Software acquired by the Bank and the Group is stated at cost less accumulated amortisation and accumulated impairment losses. Expenditure on internally developed software is recognised as an asset when the Bank and the Group is able to demonstrate its intention and ability to complete the development and use the software in a manner that will generate future economic benefits and can reliably measure the costs to complete the development. The capitalised costs of internally developed software include all costs directly attributable to developing the software and capitalised borrowing costs, and are amortised over its useful life. Internally developed software is stated at capitalised cost less accumulated amortisation and impairment. Subsequent expenditure on software assets are capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.
Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful life of the software, from the date that it is available for use since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset.
Computer software is amortised over 10 Years of estimated useful lives on a straight line basis.
(iii) Other Intangible Assets Other intangible assets consist of brand value, asset management and advisory intangible, licenses and related infrastructure. Other intangible assets are initially recognised when they are separable or arise from contractual or other legal rights, the cost can be measured reliably and, in the case of intangible assets not acquired in a business combination, where it is probable that future economic benefits attributable to the assets will flow from their use. The value of intangible assets which are acquired in a business combination is generally determined using income approach methodologies such as the discounted cash flow method.
Subsequent Measurement These other intangible assets are with an indefinite useful life which shall not be amortised, is required to test for impairment by comparing its recoverable amount with its carrying amount on annually or whenever there is an indication that these intangible assets may be impaired. Accordingly, these other intangible assets are measured at cost less accumulated impairment losses.
De-recognition of Intangible Assets The carrying amount of an item of intangible asset is de-recognised on disposal or when no future economic benefits are expected from its use. The gain or loss arising from de-recognition of an item of intangible asset is included in the Statement of Profit or Loss when the item is de-recognised.
Financial Reports Notes to the Financial Statements 237 Union Bank | Annual Report 2018
Notes to the Financial Statements
30. GOODWILL AND INTANGIBLE ASSETS (Cont.)
BANK 2018 2017 Software Software Computer under Computer under Software Development Total Software Development Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Cost Opening balance as at 1 January 1,642,212 71,545 1,713,757 1,439,866 41,038 1,480,904 Additions 129,613 2,745 132,358 141,286 91,568 232,854 Transfers 52,610 (52,610) - 61,062 (61,062) - Closing balance as at 31 December 1,824,435 21,680 1,846,115 1,642,214 71,544 1,713,758
Less: Amortisation Opening balance as at 1 January 492,758 - 492,758 329,871 - 329,871 Charge for the year 150,825 - 150,825 162,888 - 162,888 Closing balance as at 31 December 643,583 - 643,583 492,759 - 492,759 Net book value as at 31 December 1,180,852 21,680 1,202,532 1,149,455 71,544 1,220,999
GROUP Software Asset Mgt. Licenses and Computer under Brand & Advisory related Goodwill Software Development Value Intangible Infrastructure Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
2018 Cost Opening balance as at 1 January 113,031 1,680,632 71,545 10,169 118,947 136,001 2,130,325 Additions - 132,732 2,745 - - - 135,477 Transfers - 52,610 (52,610) - - - - Closing balance as at 31 December 113,031 1,865,974 21,680 10,169 118,947 136,001 2,265,802
Less: Amortisation Opening balance as at 1 January - 523,001 - 1,441 22,468 14,738 561,648 Charge for the year 152,600 - - - - 152,600 Closing balance as at 31 December - 675,601 - 1,441 22,468 14,738 714,248
Less: Impairment charge - - - 279 731 - 1,010
Net book value as at 31 December 113,031 1,190,373 21,680 8,449 95,748 121,263 1,550,544
2017 Cost Opening balance as at 1 January 113,031 1,479,463 41,039 10,169 118,947 136,001 1,898,650 Additions - 141,357 90,318 - - - 231,675 Transfers - 59,812 (59,812) - - - - Closing balance as at 31 December 113,031 1,680,632 71,545 10,169 118,947 136,001 2,130,325
Less: Amortisation Opening balance as at 1 January - 358,321 - 1,441 22,468 14,738 396,968 Charge for the year - 164,680 - - - - 164,680 Closing balance as at 31 December - 523,001 - 1,441 22,468 14,738 561,648
Less: Impairment charge - - - (279) - - (279)
Net book value as at 31 December 113,031 1,157,631 71,545 8,449 96,479 121,263 1,568,398
238 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
30. GOODWILL AND INTANGIBLE ASSETS (Cont.)
Impairment testing Methods used to assess the recoverability of intangible assets;
Intangible Asset Method Used
Goodwill Free Cash Flow to Equity (FCFE) Brand value Free Cash Flow to Equity (FCFE) Asset management and advisory intangibles Customer list Licensing and other infrastructure Income approach
Rates used by the Bank (assumptions); 2018 Goodwill Brand Value License and related Infrastructure
Discount rate 16.7% 16.7% 16.6% Terminal growth rate 2.5% 2.5% 2.5%
2017 Goodwill Brand Value License and related Infrastructure
Discount rate 15.4% 15.4% 15.2% Terminal growth rate 2.5% 2.5% 2.5%
The calculation of the above are sensitive to discount rates, budgeted income/cash flows, terminal growth rates used to extrapolate cash flows beyond the budgeted period, market rates.
31. PROPERTY, PLANT AND EQUIPMENT
ACCOUNTING POLICY Property, plant and equipment are tangible items that are held for use in the production or supply of goods or services, for rental to others or for administrative purposes and are expected to be used for more than one period.
Basis of Recognition Property, plant and equipment are recognised if it is probable that future economic benefits associated with the asset will flow to the Bank and the Group and the cost of the asset can be measured reliably in accordance with LKAS 16 “Property, plant and equipment”.
Measurement Property, plant and equipment is stated at cost, net of accumulated depreciation and accumulated impairment losses if any. Initially property, plant and equipment are measured at its cost. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that computer equipment.
When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.
Subsequent costs The cost of replacing a part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within that part will flow to the Bank and the Group and its cost can be measured reliably. The carrying amount of the replaced part is de-recognised. The costs of day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred.
Financial Reports Notes to the Financial Statements 239 Union Bank | Annual Report 2018
Notes to the Financial Statements
31. PROPERTY, PLANT AND EQUIPMENT (Cont.)
De-recognition The carrying amount of an item of property, plant and equipment is de-recognised on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss arising from the de-recognition of an item of property, plant and equipment which is calculated as the difference between the carrying amount and the net disposal proceeds is included in “Other operating income” in the Statement of Profit or Loss in the year the asset is de-recognised. When replacement costs are recognised in the carrying amount of an item of property, plant and equipment, the remaining carrying amount of the replaced part is de-recognised. Major inspection costs are capitalised at each such capitalisation, the remaining carrying amount of the previous cost of inspections is de-recognised.
Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Land is not depreciated. The depreciation charges are determined separately for each significant part of an item of Property, plant and equipment and commence to depreciate when it is available for use. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale or the date that the asset is de-recognised. Depreciation doesn’t cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated.
Assets category Estimated useful lives
Building 40 Years Leasehold improvements 5 – 10 Years Computer, equipment and generators 6 – 15 Years Furniture and fittings 5 – 8 Years Motor vehicles 4 – 10 Years
The asset’s residual value, useful life and method of depreciation are reviewed at each reporting date and adjusted prospectively, as changes in accounting estimates.
BANK Leasehold Computers & Furniture & Motor Work in Total Improvements Equipment Fittings Vehicle Progress Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
2018 Cost Opening balance as at 1 January 621,411 1,242,079 364,084 48,059 11,524 2,287,157 Additions 17,667 95,985 21,745 1,129 6,804 143,330 Disposals (25,005) (3,761) (7,094) (9,495) - (45,355) Transfers 1,763 4,642 - - (6,405) - Closing balance as at 31 December 615,836 1,338,945 378,735 39,693 11,923 2,385,132
Less: Accumulated depreciation Opening balance as at 1 January 478,758 734,652 163,230 22,160 - 1,398,800 Charge for the year 56,523 131,371 39,989 3,865 - 231,748 Disposals (21,431) (3,018) (4,339) (5,786) - (34,574) Closing balance as at 31 December 513,850 863,005 198,880 20,239 - 1,595,974 Net book value as at 31 December 101,986 475,940 179,855 19,454 11,923 789,158
240 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
31. PROPERTY, PLANT AND EQUIPMENT (Cont.)
BANK Leasehold Computers & Furniture & Motor Work in Total Improvements Equipment Fittings Vehicle Progress Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
2017 Cost Opening balance as at 1 January 585,152 1,092,562 306,065 52,673 75,298 2,111,750 Additions 27,824 108,923 64,330 - 41,976 243,053 Disposals (29,782) (8,197) (23,178) (4,615) (1,874) (67,646) Transfers 38,218 48,792 16,866 - (103,876) - Closing balance as at 31 December 621,412 1,242,080 364,083 48,058 11,524 2,287,157
Less: Accumulated depreciation Opening balance as at 1 January 441,190 612,396 141,248 19,545 - 1,214,379 Charge for the year 64,121 130,310 36,833 5,393 - 236,657 Disposals (26,553) (8,055) (14,851) (2,779) - (52,238) Closing balance as at 31 December 478,758 734,651 163,230 22,159 - 1,398,798 Net book value as at 31 December 142,654 507,429 200,853 25,899 11,524 888,359
GROUP Land and Leasehold Computers & Furniture & Motor Work in Total Buildings Properties Equipment Fittings Vehicle Progress Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
2018 Cost Opening balance as at 1 January 51,923 674,575 1,286,911 459,873 94,579 11,524 2,579,385 Additions - 13,920 101,340 37,134 72,400 6,804 231,598 Disposals - (20,603) (3,697) (6,449) (25,029) - (55,778) Transfers - 1,763 4,642 - - (6,405) - Closing balance as at 31 December 51,923 669,655 1,389,196 490,558 141,950 11,923 2,755,205
Less: Accumulated depreciation Opening balance as at 1 January 7,261 497,900 765,412 207,473 43,268 - 1,521,314 Charge for the year 666 62,457 139,552 50,235 10,385 - 263,295 Disposals - (21,431) (3,039) (4,326) (14,149) - (42,945) Closing balance as at 31 December 7,927 538,926 901,925 253,382 39,504 - 1,741,664 Net book value as at 31 December 43,996 130,729 487,271 237,176 102,446 11,923 1,013,541
Financial Reports Notes to the Financial Statements 241 Union Bank | Annual Report 2018
Notes to the Financial Statements
31. PROPERTY, PLANT AND EQUIPMENT (Cont.)
GROUP Land and Leasehold Computers & Furniture & Motor Work in Total Buildings Properties Equipment Fittings Vehicle Progress Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
2017 Cost Opening balance as at 1 January 56,096 637,098 1,126,812 405,158 102,439 75,300 2,402,903 Additions - 24,638 120,719 76,962 7,751 41,975 272,045 Disposals (4,173) (25,381) (9,412) (39,114) (15,610) (1,874) (95,564) Transfers - 38,218 48,792 16,866 - (103,876) - Closing balance as at 31 December 51,923 674,573 1,286,911 459,872 94,580 11,525 2,579,384
Less: Accumulated depreciation Opening balance as at 1 January 7,156 454,389 636,533 189,101 41,904 - 1,329,083 Charge for the year 105 70,063 137,589 45,699 10,674 - 264,130 Disposals - (26,551) (8,710) (27,326) (9,310) - (71,896) Closing balance as at 31 December 7,261 497,901 765,412 207,474 43,268 - 1,521,317 Net book value as at 31 December 44,662 176,673 521,499 252,398 51,312 11,525 1,058,067
31.1 Cost of fully depreciated property, plant, equipment and intangible assets The initial cost of fully depreciated property, plant and equipment as at 31 December 2017, which are as follows:
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Leasehold improvements 371,589 321,494 391,727 321,494 Computers and equipment 443,531 331,960 461,451 338,697 Furniture and fittings 54,189 46,854 67,909 51,503 Motor vehicle 1,639 448 2,723 6,982 Intangible assets - - 9,249 9,249 Total 870,948 700,756 933,059 727,925
31.2 Temporarily Idle Property, Plant and Equipment - Bank & Group There were no property, plant and equipment idle from active use as at the reporting date (2017: NIL)
31.3 Property, Plant and Equipment Retired from Active Use - Bank & Group There were no property, plant and equipment retired from active use as at the reporting date (2017: NIL)
31.4 Title Restriction on Property, Plant and Equipment – Group There were no restriction on the title of property, plant and equipment as at the reporting date (2017: NIL).
31.5 Property, Plant and Equipment Pledged as Security for Liabilities - Bank & Group There were no items of property, plant and equipment pledged as securities for liabilities (2017: NIL)
31.6 Compensation from Third Parties for Items of Property, Plant and Equipment - Bank & Group There were no compensation received during the year from third parties for items of property, plant and equipment that were impaired, lost or given up (2017: NIL)
242 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
32. DEFERRED TAXATION
ACCOUNTING POLICY Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised except: aa Where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss aa In respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. The rates applicable as at reporting date are given in Note 15 to the financial statements.
Deferred tax relating to items recognised directly in equity are also recognised in equity and not in the Statement of Profit or Loss. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Deferred tax assets 115,596 - 517,374 433,728
Deferred tax liabilities - 144,922 1,436 145,278
Deferred tax assets/ (liabilities) movement Balance as at 31 December 2017 (144,922) - 288,450 - Transitional adjustment on the implementation of SLFRS 9 224,599 - 224,599 - Restated opening balance as at 1 January 79,677 82,534 513,049 541,518 Deferred tax (charged)/reversed to the Statement of Profit or Loss (146,083) (69,131) (177,623) (94,471) Deferred tax (charged)/reversed to the Statement of Other Comprehensive Income 182,003 (158,325) 180,512 (158,596) Balance as at 31 December 115,596 (144,922) 515,938 288,450
Financial Reports Notes to the Financial Statements 243 Union Bank | Annual Report 2018
Notes to the Financial Statements
32. DEFERRED TAXATION (Cont.)
32.1 Statement of Profit or Loss BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Deferred tax assets Carry forward losses - 190,288 507,390 617,262 Retirement benefit obligation 32,158 27,282 37,435 34,128 Impairment allowance 355,488 111,976 373,676 114,230 Share based payments 27,759 19,084 27,759 19,084 Total 415,405 348,630 946,260 784,704
Deferred tax liability Accelerated depreciation allowance for tax purposes (Property, plant and equipment) (359,612) (358,812) (394,540) (376,403) Accelerated depreciation allowance for tax purposes (Lease rental receivable) (71,863) (84,404) (165,709) (69,266) Total (431,475) (443,216) (560,249) (445,669)
32.2 Other Comprehensive Income BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Deferred tax assets/ (liabilities) Actuarial gains/ (losses) on defined benefit plan liability 7,499 4,991 5,760 4,744 Gains / (losses) on re-measuring available for sale financial assets 124,167 (55,329) 124,167 (55,329) Total 131,666 (50,338) 129,927 (50,585)
33. OTHER ASSETS
ACCOUNTING POLICY The Bank and the Group classify all their other assets as ‘Other financial assets’ and ‘Other non financial assets’.
Refundable deposits are carried at the fair value. Advances and pre-payments are amortised during the period in which they are utilised and are carried at cost less provision for impairment.
Staff loans are granted below market interest rates. When the transaction price differs from the fair value of other observable current market transactions in the same instrument, or based on a valuation technique whose variables include only data from observable markets, the Bank and the Group recognise the difference between the transaction price and fair value (a ‘Day 1’ profit or loss) in the Statement of Profit or Loss over the tenor of the financial instrument using the EIR method.
The Day 1 difference is classified as ‘Pre-paid staff cost’ and is amortised over the loan period by using the EIR. The staff loans are subsequently measured at amortised costs.
244 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
33. OTHER ASSETS (Cont.)
Other financial assets and other non financial assets included under other assets:
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Other financial assets Refundable deposits 17,385 23,037 88,319 57,836 Other debtors* 136,480 110,271 146,948 142,089 Total other financial assets 153,865 133,308 235,267 199,925
Other non financial assets Advances 81,491 166,531 87,916 166,532 Pre-paid expenses 261,346 225,109 261,346 225,109 Pre-paid staff cost (refer Note 33.1) 299,375 275,024 299,375 277,948 Pre-paid lease rental 3,383 11 3,383 11 Others** 78,253 64,893 125,182 78,854 Total other non financial assets 723,848 731,568 777,202 748,454
Less : Provision for other assets (7,256) (6,181) (7,256) (6,181) Total 870,457 858,695 1,005,213 942,198
*Other debtors mainly consists of senior citizen interest refund recoverable from Government. **Others consist of stocks such as stationeries, three wheelers, gift stocks and other sundry receivables.
33.1 Pre-paid staff cost BANK GROUP 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Balance as at 1st January 275,023 205,957 275,023 205,957 Add : Adjustments for new grants and settlements 54,709 97,472 54,709 103,320 Less : Charge to personnel expenses (30,357) (28,405) (30,357) (31,329) Balance as at 31 December 299,375 275,024 299,375 277,948
34. DUE TO BANKS
ACCOUNTING POLICY Bank borrowings include refinance borrowings, call money and term borrowings. Subsequent to initial recognition, these are measured at their amortised cost using the effective interest rate method. Amortised cost is calculated by taking in to account any discount or premium on the issue and cost that are an integral part of the EIR. The EIR amortisation is included in ‘Interest expenses’ in the Statement of Profit or Loss.
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Local bank borrowings 3,595,887 13,829,476 3,595,887 13,923,701 Foreign bank borrowings 4,855,912 2,520,092 4,855,912 2,520,092 Refinance borrowings 215,288 135,200 215,288 135,200 Unfavourable balances with banks 274,669 190,207 442,007 186,068 Deposits 406,453 533,666 406,453 533,666 Total 9,348,209 17,208,641 9,515,547 17,298,727
Financial Reports Notes to the Financial Statements 245 Union Bank | Annual Report 2018
Notes to the Financial Statements
35. REPURCHASED AGREEMENTS
ACCOUNTING POLICY Securities sold under agreements to repurchase at a specified future date are not de-recognised from the Statement of Financial Position as the Bank and the Group retains substantially all of the risks and rewards of ownership. The corresponding cash received is recognised in the Statement of Financial Position as an asset and a corresponding obligation to return it with accrued interest, as ‘securities sold under repurchase agreements’, reflecting the transaction’s economic substance as a loan to the Bank and the Group. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of agreement using the effective interest rate.
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Due to banks Treasury products 14,640,919 6,257,543 14,640,919 6,257,543
Due to customers Treasury products 2,944,993 3,715,047 2,894,981 3,551,909 Debentures - 408,603 - 408,603 Total 17,585,912 10,381,193 17,535,900 10,218,055
36. DUE TO CUSTOMERS
ACCOUNTING POLICY Due to customers include non-interest bearing deposits, savings deposits, fixed deposits, certificate of deposits and margin deposits. Subsequent to initial recognition, deposits are measured at their amortised cost using the effective interest rate method, which are recognised in the Statement of Profit or Loss under ‘Interest expenses’. BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
At amortised cost (refer Note 36.1) 79,251,073 70,325,594 86,266,123 76,747,977
36.1 Due to customers - By product Demand deposits 4,043,155 3,258,456 4,043,024 3,258,286 Savings deposits 14,676,341 13,051,413 14,614,739 12,421,713 Fixed deposits 58,048,059 51,392,313 65,124,842 58,444,566 Other deposits 2,483,518 2,623,412 2,483,518 2,623,412 Total 79,251,073 70,325,594 86,266,123 76,747,977
36.1.1 Due to customers - Local currency deposits Demand deposits 3,634,418 3,080,341 3,634,287 3,080,171 Savings deposits 11,784,873 11,495,645 11,723,271 10,865,945 Fixed deposits 49,275,332 43,806,062 56,352,115 50,858,315 Other deposits 2,483,518 2,623,412 2,483,518 2,623,412 Total local currency deposits 67,178,141 61,005,460 74,193,191 67,427,843
36.1.2 Due to customers - Foreign currency deposits Demand deposits 408,737 178,115 408,737 178,115 Savings deposits 2,891,468 1,555,768 2,891,468 1,555,768 Fixed deposits 8,772,727 7,586,251 8,772,727 7,586,251 Total foreign currency deposits 12,072,932 9,320,134 12,072,932 9,320,134 Total 79,251,073 70,325,594 86,266,123 76,747,977
246 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
36. DUE TO CUSTOMERS (Cont.)
36.1.2.1 Foreign currency deposits - By currency BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
United States Dollar 11,168,853 8,519,819 11,168,853 8,519,819 Great Britain Pounds 438,076 450,304 438,076 450,304 Euro 215,816 182,142 215,816 182,142 Australian Dollar 246,558 166,376 246,558 166,376 Others 3,629 1,493 3,629 1,493 Total 12,072,932 9,320,134 12,072,932 9,320,134
36.2 Due to customers - By province BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Central 2,136,781 1,651,190 2,222,765 1,743,913 Eastern 491,209 415,379 495,965 417,908 North Central 661,279 802,724 663,674 811,218 North Western 3,274,786 2,971,659 3,319,070 3,046,135 Northern 1,833,435 1,454,763 1,833,435 1,454,763 Sabaragamuwa 1,213,672 1,342,213 1,223,046 1,369,731 Southern 3,010,884 2,965,592 3,134,237 3,121,549 Uva 489,176 345,066 489,176 345,067 Western 66,139,851 58,377,008 72,884,755 64,437,693 Total 79,251,073 70,325,594 86,266,123 76,747,977
37. OTHER BORROWED FUNDS
ACCOUNTING POLICY Other borrowed funds include borrowings from non banking institutions. Subsequent to initial recognition, these are measured at their amortised cost using the EIR method, which are recognised in the Statement of Profit or Loss under ‘Interest expenses’.
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Borrowings from non banking institutions 1,234,220 1,224,812 2,921,647 2,968,233
Financial Reports Notes to the Financial Statements 247 Union Bank | Annual Report 2018
Notes to the Financial Statements
38. OTHER LIABILITIES
ACCOUNTING POLICY Other liabilities include other financial liabilities and other non financial liabilities. These liabilities are recorded at amounts expected to be payable at the reporting date. BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Other financial liabilities Payable on usance bills 663,057 1,163,689 663,057 1,163,689 Other creditors* 309,273 239,279 383,110 398,838 Total 972,330 1,402,968 1,046,167 1,562,527
Other non-financial liabilities Accrued expenses 102,840 54,366 140,752 84,143 Retirement benefit obligation (refer Note 38.1) 141,729 115,264 160,310 138,176 Impairment on commitments and contingencies (refer Note 43.1.2) 80,282 - 99,207 - Other payables** 504,461 287,084 611,834 417,926 Total 829,312 456,714 1,012,103 640,245 Total other liabilities 1,801,642 1,859,682 2,058,270 2,202,772
*Other creditors include amount payable to suppliers and other miscellaneous financial payables. ** Other payables include bonus payable, deferred commission income, deferred Bancassurance commissions and other miscellaneous non-financial payables.
38.1 Retirement benefit obligation GRI 201-3
ACCOUNTING POLICY A defined benefit plan is a post-employment benefit plan other than a defined contribution plan as defined in LKAS 19 (Employee Benefit).
In compliance with the Gratuity Act No. 12 of 1983 provision is made in the accounts from the first year of service for gratuity payable to employees who joined to the Bank and the Group.
An actuarial valuation is carried out annually to ascertain the full liability under the fund, and this is stated under ‘Other liabilities’ in the Statement of Financial Position.
The Bank determines the interest expense on the defined benefit liability by applying the discount rate used to measure the defined benefit liability at the beginning of the annual period to the defined benefit liability at the end of the annual period.
The discount rate is the yield at the reporting date on government bonds that have maturity dates approximating to the terms of the Bank’s and the Group’s obligations.
The demographic assumptions underlying the valuation are retirement age, early withdrawals from service and retirement on medical grounds etc.
Recognition of actuarial gains and losses The Bank recognises the total actuarial gains and losses that arise in calculating the Bank’s obligation with respect to the plan in Other Comprehensive Income during the period in which it occurs.
Expected return on asset Expected return on asset is zero as the plan is not pre funded.
Funding arrangement The gratuity liability is not externally funded.
248 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
38. OTHER LIABILITIES (Cont.)
38.1.1 The movement of the retirement benefit obligation BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Defined benefit obligation as at 1 January 115,264 100,622 138,176 119,983 Profit or Loss (refer Note 38.1.2) 36,253 33,908 42,103 39,065 Other Comprehensive Income (refer Note 38.1.3) 9,051 (7,214) 3,724 (8,184) Contribution made for retirement benefit obligation 160,567 127,316 184,004 150,864 Payments made during the year (18,836) (12,052) (23,697) (12,688) Defined benefit obligation as at 31 December 141,729 115,264 160,310 138,176
38.1.2 Net benefit expense (recognised in profit or loss) Current service cost 24,035 20,968 28,055 25,109 Interest cost on benefit obligation 12,218 12,940 14,048 13,956 Total amount recognised for the year 36,253 33,908 42,103 39,065
38.1.3 Due to assumption change (recognised in OCI profit or loss) BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
(Gains)/losses due to assumption change Financial assumptions (635) (202) 423 (22) Demographic assumptions - - - - Experience loss/(gain) arising during the year 9,686 (7,012) 3,301 (8,162) Total amount recognised for the year 9,051 (7,214) 3,724 (8,184)
38.1.4 The principal assumptions used in determining defined benefit obligation BANK GROUP
2018 2017 2018 2017
Financial assumptions Discount rate 12.30% 10.60% 11.5% - 12.5% 10.6% Future salary increment rate 10.40% 8.70% 10.0% - 10.5% 8.7%
Demographic assumptions Retirement age 55 Years 55 Years Maturity profile 12.6 Years 12.6 Years Mortality table GA 1983 GA 1983
38.1.5 Messers Piyal S. Goonathileke and Associates, a firm of professional actuaries has carried out an independent actuarial valuation of the defined benefit plan and accordingly compatible assumptions have been used in determining the cost of defined benefits.
Financial Reports Notes to the Financial Statements 249 Union Bank | Annual Report 2018
Notes to the Financial Statements
38. OTHER LIABILITIES (Cont.)
38.1.6 The following table demonstrates the sensitivity to a reasonably possible change in the key assumptions employed with all other variables held constant in the employment benefit liability measurement.
Increase/ Increase/ Sensitivity effect on employment benefit (decrease) (decrease) obligation increase/ in discount in salary (decrease) in the liability rate increment rate Bank Group 2018 2017 2018 2017 % % Rs.’000 Rs.’000 Rs.’000 Rs.’000
1% (12,743) (11,391) (12,325) (13,099) (-1%) 15,555 13,294 15,111 13,876 1% 15,235 13,035 14,766 13,598 (-1%) (12,693) (11,370) (12,244) (13,081)
38.1.7 The expected benefit payout in the future years for retirement benefit obligation BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Within 12 months 10,274 5,821 15,151 7,283 Between 2 and 5 years 99,834 76,221 108,098 81,356 More than 5 years 292,154 238,274 295,630 254,671
39. STATED CAPITAL In accordance with section 58 of Companies Act No 7 of 2007, which became effective from 3 May 2007, share capital and share premium have been classified as stated capital.
BANK GROUP As at 31 December 2018 2017 2018 2017
Ordinary shares Value (Rs.’000) 16,334,782 16,334,782 16,334,782 16,334,782 Number of shares - ‘000 1,091,406 1,091,406 1,091,406 1,091,406
39.1 Share warrants BANK GROUP As at 31 December 2018 2017 2018 2017
Share warrants (Rs.’000) 65,484 65,484 65,484 65,484
During the financial year ended 31 December 2014, the Bank had issued 218,281,250 warrants to be exercised within a period of 6 years at a price of Rs.16 per warrant.
250 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
40. STATUTORY RESERVE FUND
Bank The statutory reserve fund is maintained as per the requirements under section 20 (1) of the Banking Act No. 30 of 1988. Accordingly, the fund is built up by allocating a sum equivalent to not less than 5% of the profit after tax, but before declaring any dividend or any profits that are transferred to elsewhere until the reserve is equal to 50% of the Bank’s stated capital and thereafter a further sum equivalent to 2% of such profit until the amount of said reserve fund is equal to the stated capital of the Bank.
The balance in the statutory reserve fund will be used only for the purposes specified in the section 20 (2) of the Banking Act No. 30 of 1988.
UB Finance Company Ltd. 5% of the profits after tax is transferred to the reserve fund as required by the section 3b (i) of the Central Bank Direction No. 01 of 2003.
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
As at 1 January 116,256 95,439 131,519 107,602 Transferred from retained earnings 23,627 20,817 26,050 23,917 As at 31 December 139,883 116,256 157,569 131,519
41. SHARE BASED PAYMENT TRANSACTIONS - EMPLOYEE SHARE OPTION PLAN (ESOP) On 1 December 2015 the Bank established three share option plans that entitles employees to purchase shares of the Bank. The first tranche of employee share grants were issued to employees at the grade of Vice President and above. The ESOP provides employees an option to purchase shares of the Bank at the given exercise price once these vest as per the rules of the plan. Share options vest in two ways. 50% of the share options vest based on time over a 5 year period. The balance 50% of options vest annually over a 5 year period provided that the Bank achieves the pre-set performance targets. Thereby ensuring that these long term incentives are linked to the Bank’s performance. If an employee leaves the Bank, before the service criteria is met they are not entitled to any of share based payments.
Equity settled transactions The fair value of equity settled share based payment awards granted to employees from the grant date is recognised as an expense under personnel expenses, with a corresponding increase in equity, over the period in which the service and performance conditions are fulfilled.
The cumulative expense recognised for equity settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Bank’s best estimate of the number of equity instruments that will ultimately vest. The expense or credit in the Statement of Profit or Loss for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.
Service and non market performance conditions are taken into account when determining the grant date fair value of awards, but the likelihood of the conditions being met is assessed as part of the Bank’s best estimate of the number of equity instruments that will ultimately vest. Market performance conditions are reflected within the grant date fair value. Any other conditions attached to an award, but without an associated service requirement, are considered to be non vesting conditions.
No expense is recognised for awards that do not ultimately vest because non market performance and/or service conditions have not been met. Where awards includes a market or non vesting conditions, the transactions are treated as vested irrespective of whether the market or non vesting conditions are satisfied, provided that all other performance and/or service conditions are satisfied.
When the terms of an equity settled award are modified, the minimum expense recognised is the grant date fair value of the unmodified award, provided the original terms of the award are met. An additional expense measured as at the date of modification is recognised for any modification that increases the total fair value of the share based payment transaction, or is otherwise beneficial to the employee. Where an award is cancelled by the Bank, any remaining element of the fair value of the award is expensed immediately through profit or loss.
Financial Reports Notes to the Financial Statements 251 Union Bank | Annual Report 2018
Notes to the Financial Statements
41. SHARE BASED PAYMENT TRANSACTIONS - EMPLOYEE SHARE OPTION PLAN (ESOP) (Cont.)
Cash-settled transactions A liability is recognised for the fair value of cash settled transactions. The fair value is measured initially and at each reporting date up to and including the settlement date, with changes in fair value recognised in employee benefits expense. The fair value of the liability is expensed over the period until the vesting date with recognition of a corresponding liability. The fair value is determined using a binomial model.
The recognition and measurement of the ESOP are in accordance with the SLFRS 2 Share-based Payment.
The dilutive effect of outstanding options are reflected as additional share dilution in the computation of diluted earnings per share are given in Note 16.2 to the Financial Statements.
41.1 Inputs and assumptions used to determine the fair value of share option plan are given below: 2018 2017
Fair value at measurement date (Rs. ‘000) 142,379 138,770 Share price (Rs.) 11.00 13.20 Exercise price (Rs.) 21.95 21.95 Expected volatility 23.37% 21.97% Option life (expected weighted average life) 5 Years 5 Years Risk free interest rate (based on government bonds) 11.20% 8.90%
Total expense arising from share-based payment transactions are recorded in note 41.3 to the financial statements.
41.2 Weighted average exercise prices of, and movements in, share options during the year.
2018 2017 Number of Weighted Number of Weighted options Average options Average Exercise Price Exercise Price ’000 Rs. ’000 Rs.
Outstanding as at 1 January 12,124 21.95 12,124 21.95 Granted during the year - - - - Exercised during the year - - - - Expired during the year - - - - Outstanding as at 31 December 12,124 21.95 12,124 21.95
41.3 Movement during the year BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Balance as at 1 January 68,156 39,320 68,156 39,320 Transfer to stated capital - - - - Equity settled charge for the year 16,968 18,012 16,968 18,012 Liability settled charge for the year 14,016 10,824 14,016 10,824 Balance as at 31 December 99,140 68,156 99,140 68,156
Break-up of the balance : Equity Component 52,816 35,848 52,816 35,848 Liability Component 46,324 32,308 46,324 32,308 Balance as at 31 December 99,140 68,158 99,140 68,158
252 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
42. Non Controlling Interests (NCI)
ACCOUNTING POLICY Non-controlling interests represent the portion of profit and loss and net assets of subsidiaries not owned directly or indirectly by the Bank. Any losses applicable to the non-controlling interests are allocated against the interests of the non-controlling interests even if this resulting in a deficit balance. Acquisitions of non-controlling interests are accounted for using the parent entity extension method, whereby the difference between the consideration and the fair value of the share of net assets acquired is recognised as equity. Therefore no goodwill is recognised as a result of such transactions. UB Finance National Company Asset Limited Management Limited Total Rs.’000 Rs.’000 Rs.’000
2018 % of Ownership interest held by NCI 26.69% 49.00%
Balance as at 31 December 2017 294,419 109,842 404,262 Transitional adjustment on the implementation of SLFRS 9 (146,850) - (146,850) Restated opening balance as at 1 January 2018 under SLFRS 9 147,569 109,842 257,412 Profit for the year 12,933 3,967 16,900 Other comprehensive income, net of tax 1,017 (14,026) (13,011) Dividends to equity holders - (49,000) (49,000) Balance as at 31 December 2018 161,519 50,783 212,301
2017 % of Ownership interest held by NCI 26.69% 49.00%
Balance as at 1 January 2017 250,646 105,933 356,579 Profit for the year 20,977 15,376 36,353 Other comprehensive income, net of tax 78 782 859 Subscribed to share right issued 19,627 - 19,628 Change in control 3,093 - 3,093 Dividends to equity holders - (12,250) (12,250) Balance as at 31 December 2017 294,421 109,841 404,262
43. COMMITMENTS, CONTINGENT LIABILITIES AND LEASING ARRANGEMENTS
ACCOUNTING POLICY Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is not probable or cannot be reliably measured in accordance with the Sri Lanka Accounting Standard – LKAS 37 on ‘Provision, Contingent Liabilities and Contingent Assets’.
To meet the financial needs of customers, the Bank enters into various irrevocable commitments and contingent liabilities. These consist of guarantees, letters of credit and other undrawn commitments to lend. Letters of credit and acceptances commit the Bank to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods. They carry a similar credit risk to loans. Operating lease commitments of the Bank (as a lessor and as a lessee) and pending legal claims against the Bank too form part of commitments of the Bank. Contingent liabilities are not recognised in the Statement of Financial Position but are disclosed unless they are remote. But these contingent liabilities do contain credit risk and are therefore form part of the overall risk of the Bank and the Group.
Financial Reports Notes to the Financial Statements 253 Union Bank | Annual Report 2018
Notes to the Financial Statements
43. COMMITMENTS, CONTINGENT LIABILITIES AND LEASING ARRANGEMENTS (Cont.)
In the normal course of business, the Bank entered in to various irrevocable commitments and incurred certain contingent liabilities. These consists of guarantees, letters of credit and other undrawn commitments to lend.
Though these obligations may not be recognised on the Statement of Financial Position, they do contain credit risk and are therefore part of the overall risk of the Bank.
No material losses are anticipated as a result of these transactions.
43.1 Commitments and Contingencies BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Commitments Undrawn loan commitments 13,556,190 12,641,698 13,653,381 12,641,698
Contingencies Guarantees 8,048,011 5,983,556 8,048,011 5,983,556 Letters of credit 1,961,053 2,991,693 1,961,053 2,991,693 Forward contracts 5,741,729 790,496 5,741,729 790,496 Cheque pending for realisation 887,413 788,861 887,413 788,861 Spot contracts 540,168 567,036 540,168 567,036 Acceptances 758,373 784,138 758,373 784,138 Forward Bonds - 108,368 - 108,368 Other contingent items 2,844,267 1,657,888 2,938,699 1,657,888 Total 20,781,014 13,672,036 20,875,446 13,672,036
Total commitments contingencies 34,337,204 26,313,733 34,528,827 26,313,733
43.1.1 Stage movements in commitments and contingencies 2018 BANK Stage 1 Stage 2 Stage 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000
Undrawn loan commitments 9,574,961 3,522,917 458,312 13,556,190 Other commitments and contingencies 13,611,704 - - 13,611,704 Total 23,186,665 3,522,917 458,312 27,167,894
2018 GROUP Stage 1 Stage 2 Stage 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000
Undrawn loan commitments 9,580,300 3,525,108 547,972 13,653,380 Other contingencies 13,706,136 - - 13,706,136 Total 23,286,436 3,525,108 547,972 27,359,516
254 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
43. COMMITMENTS, CONTINGENT LIABILITIES AND LEASING ARRANGEMENTS (Cont.)
43.1.2 Stage movements in allowance for impairment
2018 BANK Stage 1 Stage 2 Stage 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000
Undrawn loan commitments Opening balance 21,351 344 25,128 46,823 Charge to statement of profit or loss 19,577 2,530 10,231 32,338 Net write-off during the year - - - - Closing balance 40,928 2,874 35,359 79,161
Other contingencies Opening balance 465 - - 465 Charge to statement of profit or loss 656 - - 656 Net write-off during the year - - - - Closing balance 1,121 - - 1,121
Total Opening balance 21,816 344 25,128 47,288 Charge to statement of profit or loss 20,233 2,530 10,231 32,994 Net write-off during the year - - - - Closing balance 42,049 2,874 35,359 80,282
2018 GROUP Stage 1 Stage 2 Stage 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000
Undrawn loan commitments Opening balance 21,351 344 25,128 46,823 Charge to statement of profit or loss 20,617 2,956 27,690 51,263 Net write-off during the year - - - - Closing balance 41,968 3,300 52,818 98,086
Other contingencies Opening balance 465 - - 465 Charge to statement of profit or loss 656 - - 656 Net write-off during the year - - - - Closing balance 1,121 - - 1,121
Total Opening balance 21,816 344 25,128 47,288 Charge to statement of profit or loss 21,273 2,956 27,690 51,919 Net write-off during the year - - - - Closing balance 43,089 3,300 52,818 99,207
Financial Reports Notes to the Financial Statements 255 Union Bank | Annual Report 2018
Notes to the Financial Statements
43. COMMITMENTS, CONTINGENT LIABILITIES AND LEASING ARRANGEMENTS (Cont.)
43.2 Capital commitments BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Approved and contracted for New branches/ relocations and refurbishments of branches - 23,880 - 23,880 Capital commitments for new system implementation and others 80,245 40,473 80,245 40,473 Total 80,245 64,353 80,245 64,353
Approved but not contracted for New branches/ relocations and refurbishments of branches 43,034 143,340 43,034 143,340 Capital commitments for new system implementation and others 639,677 51,525 639,677 51,525 Total 682,711 194,865 682,711 194,865
Total capital commitments 762,956 259,218 762,956 259,218
43.3 Lease arrangements
Operating lease commitments - Bank as lessee The Bank & Group have entered into operating leases for premises. These leases generally have a fixed term with no renewal option. There are no restrictions placed upon the lessee by entering in to these leases. Future minimum lease payments under non cancellable operating leases as at 31 December are as follows; BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Within one year 139,350 195,023 172,458 229,792 After one year to five years 386,850 544,224 516,563 701,495 More than five years 31,317 114,167 50,051 135,536 Total 557,517 853,414 739,071 1,066,823
43.4 Litigations against the Bank and the Group Litigation is a common occurrence in the banking industry due to the nature of the business undertaken. The bank has established and legal protocol for dealing with such legal claims. Once professional advice has been obtained on the certainty of the outcome and the amount of damages reasonable estimated, the Bank makes adjustments to account for any adverse effect which the claims may have on its financial standing. The Bank is of the opinion that litigation which is currently pending will not have a material impact on the reported financial results or the future operations of the Bank.
Court actions have been initiated by third parties in District court, to claim the title of the property which has been mortgaged to the Bank by the present owners who are our customers for several facilities granted. The status of the legal cases are summarised below.
43.4.1 BANK Legal Status Case No
Trial 11745/L, 2053/L, 223/13 M (Civil), 2321/L, 22/2011 SC CHC, 518/2014 MR CHC, 2346/L, 2632/15 SPL, 0134/2018 CA (PHC), 1992/L, 30656/M, 0405/P, 389/16 SC., (HC) CALA, 0200/2016 MR, 2054/L, 473/P, 0496/2016 MR, 34/2017 DLM, 0007/2016 Claim, 0091/2015 (F), 28736/L, 0051/2017 CO, 0098/2017 SC Appeal, 162/L, 0593/2018 MR, 0002/2018 Claim, 2135/L, 2136/L, 0169/2016 (F), 0993/SPL, 0013/2016 SC (CHC), WP/HCCA/COL 138/2018 LA, WP/HCCA/COL 146/2018 LA, WP/ HCCA/COL 147/2018 LA, 0098/2018 CO, 5898/M, Appeals filed by customers to obtain enjoining orders to stay 0506/2017 MR, 0628/2017 MR the auction of property mortgaged.
256 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
43. COMMITMENTS, CONTINGENT LIABILITIES AND LEASING ARRANGEMENTS (Cont.)
43.4.2 UB Finance Company Limited a. Cases filed against the Company over the repossession of vehicles and loan facilities in District court Colombo Court Case No
DC - Colombo DSP/222/10, DMR/836/16 DC - Kandy DMR/2814/15 b. Actions filed against the Company regarding Joint Venture Projects over the construction matters, advance payments, possession of project properties and unpaid bills. Court Case No
Commercial HC - Colombo HC/Civil/177/10 DC - Colombo DMR/1608/14, DMR/1609/14, DMR/1610/14, DMR/3020/15 DC - Gampaha 4107/11/M c. Cases filed against the Company over the Fixed Deposit matters and Unpaid Deposits. Court Case No
MC - Colombo B/4004/14, B/4005/14 DC - Colombo DTS/279/08 Commercial HC - Colombo HC/503/15, CHC/533/15, CHC/535/15, CHC/534/15, CHC/536/15 d. Actions filed against the Company with respect to mortgaged property, court orders, title of property. Court Case No
District Courts DSP/0266/12, DLM/164/16, e. Cases Filed Against the Company by the employees Court Case No
MC - Fort 76305, 76306, 76308 LT - Case 2/512/2015, 8/641/12 HC CA(Writ)/377/13 (Appeal Case), CA(Writ)/413/13 Labour Arbitration 3540A Supreme Court SC/SPL/LA/26/2014
Tax Assessments Tax assessments against group entity - National Asset Management Limited (NAMAL) Assessment to the value of Rs. 7.4 Mn on income tax on expenses attributable to exempt income (relating to Y/A 2015/16) received by the Company are outstanding and have been duly appealed.
The Group is of the view that the above assessment will not have any material impact on the financial statements.
Financial Reports Notes to the Financial Statements 257 Union Bank | Annual Report 2018
Notes to the Financial Statements
44. ASSETS PLEDGE
Face value As at 31 December 2018 2017 Rs.’000 Rs.’000
Nature of Assets Nature of Liability BANK Government treasury Bills Repurchased Agreements 18,795,468 11,101,432 and bonds Financial investments at fair value through profit or loss/held for trading 600,000 2,300,500 Financial investments at fair value through other comprehensive income/ 9,789,958 8,751,432 available for sale Financial assets at amortised cost - debt and other instruments/held to maturity 8,405,510 49,500 Debentures Repurchased Agreements - 463,500
GROUP Government treasury Bills Repurchased Agreements 18,736,968 10,921,929 and bonds Financial investments at fair value through profit or loss/held for trading 600,000 2,300,500 Financial investments at fair value through other comprehensive income/ 9,731,458 8,571,929 available for sale Financial assets at amortised cost - debt and other instruments/held to maturity 8,405,510 49,500 Debentures Repurchased Agreements - 463,500 Lease Receivables Other Borrowed funds 1,907,322 2,278,690 Factoring Receivables Over Draft 535,723 750,000
45. RELATED PARTY DISCLOSURES The Bank carries out transactions in the ordinary course of business on an arm’s length basis at commercial rates with related parties who are defined as LKAS 24 “Related Party Disclosures”.
The pricing applicable to such transactions is based on the assessment of risk and pricing model of the Bank and is comparable with what is applied to transactions between the Bank and its unrelated customers.
45.1 Parent and Ultimate controlling party The Bank’s immediate parent is Culture Financial Holding Limited and the ultimate holding company during the financial year is TPG Asia GenPar VI, L.P. Both companies are registered in the Cayman Islands.
45.2 Transactions with Key Management Personnel (KMPs) KMPs are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank. Accordingly, the Bank’s KMP include the Board of Directors of the Bank and key employees of the Bank holding directorships in subsidiary companies of the Bank.
45.2.1 Compensation of Key Management Personnel 2018 2017 Rs.’000 Rs.’000
Short term employee benefits 63,713 60,810 Post employment benefits 6,013 5,555 Other long term benefits 7,539 5,343 Directors’ fees and expenses 9,583 7,381 Total 86,848 79,089
258 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
45. RELATED PARTY DISCLOSURES (Cont.)
45.2.2 ESOP granted to KMPs 2018 2017 ’000 ’000
Number of options exercised during the year - - Number of options remaining as at 31 December 7,644 7,644
In addition to the above, the Bank has also provided non-cash benefits such as vehicles, insurance for Key Management Personnel in line with the approved benefit plan of the Bank.
45.3 Transactions, arrangements and agreements involving KMPs and their Close Family Members (CFMs) CFMs of a KMPs are those family members who may be expected to influence by, that KMP in their dealing with the entity. They may include KMPs’ domestic partner and children, children of KMPs’ domestic partner and dependants of the KMP or the KMPs’ domestic partner.
45.3.1 Transactions with Key Management Personnel and their Close Family Members of the Bank The following table provides the aggregate amount of transactions, which have been executed with key management personnel for the financial year.
2018 2017 Items in the Statement of Financial Position Closing Maximum Closing Maximum Balance Balance Balance Balance Rs.’000 Rs.’000 Rs.’000 Rs.’000
Assets Financial assets at amortised cost - loans and advances to customers 12,646 14,422 - - Loans and receivables to other customers - - 14,579 15,913
Liabilities Due to customers 22,315 25,937 13,363 13,406
Items in the Statement of Profit or Loss 2018 2017 Rs.’000 Rs.’000
Interest income 662 657 Interest expense 1,696 365
Financial Reports Notes to the Financial Statements 259 Union Bank | Annual Report 2018
Notes to the Financial Statements
45.4 Transactions with other related parties The following table shows the outstanding balance and the corresponding interest during the year.
45.4.1Transactions with subsidiaries 2018 2017 Items in the Statement of Financial Position Closing Maximum Closing Maximum Balance Balance Balance Balance Rs.’000 Rs.’000 Rs.’000 Rs.’000
Assets Financial assets at amortised cost - loans and advances to customers 697,721 745,182 - - Loans and receivables to other customers - - 621,562 890,457 Financial assets at amortised cost - debt and other instruments 312,253 312,253 - - Other loans and receivables - - 312,253 360,343 Investments in subsidiaries 280,432 280,432 280,432 280,432 Property, plant and equipment 5,111 5,111 5,111 5,111 Other assets - - 121 121
Liabilities Due to customers 73,875 73,875 538,608 550,276 Repurchased agreements 50,012 50,012 163,138 163,138
Items in the Statement of Profit or Loss 2018 2017 Rs.’000 Rs.’000
Interest income 140,396 145,859 Interest expense 28,751 22,632 Rent income - 4,872 Dividend received 45,962 11,521
Terms and conditions of transactions with related parties The above-mentioned outstanding balances arose from the ordinary course of business. The interest rates charged to and by related parties are at normal commercial rates.
45.4.2 Transactions with the Bank’s Private Provident Fund The Employees’ Private Provident Fund of the Bank is managed by a Committee of Trustees appointed by the members. The Bank has contributed a sum of Rs. 232.6 Mn to the Fund for the year ended 31 December 2018 (2017- Rs.114.2Mn). Fund has invested a sum of Rs. 497 Mn with the bank as at 31 December 2018 (2017 : 405 Mn). During the year, bank has incurred sum of Rs 14.7 Mn ( 2017 : 25.9 Mn) as interest expense.
45.4.3 Transactions with the Serandib Capital Limited Balance Income/ Balance Income/ as at Expense as at Expense 31-Dec-18 during 2018 31-Dec-17 during 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Deep discounted bond 2,889,971 111,153 2,778,818 177,894 Deposits 3,704 1,374 105,485 16,057 Agency fee - 2,377 - 639
45.4.4 Transactions with immediate parent 2018 2017 Rs.’000 Rs.’000
Dividend paid 69,614 69,905
260 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
46. SEGMENT INFORMATION An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses. The Bank’s activities have been segregated in to four different segments (Corporate, SME, Retail and Treasury) based on the business activities that each unit is engaged for the purpose of reviewing the operating results of the Group as well as to make decisions about resource allocation.
The management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment.
Corporate Treasury SME Retail Other Group Total Companies 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Interest income 4,101,481 3,373,374 1,262,498 2,373,679 3,531,927 2,945,176 3,061,133 1,605,180 2,163,855 1,896,601 14,120,894 12,194,010 Inter-segment interest income - - 1,557,741 - - - 2,665,441 4,182,709 - - 4,223,182 4,182,709 Total interest income 4,101,481 3,373,374 2,820,239 2,373,679 3,531,927 2,945,176 5,726,574 5,787,889 2,163,855 1,896,601 18,344,076 16,376,719 Interest expense 1,086,651 936,322 1,739,355 1,175,011 1,029,809 948,922 4,634,936 4,368,222 1,164,641 1,063,965 9,655,390 8,492,442 Inter-segment interest expense 2,437,619 1,917,213 - 919,198 1,785,563 1,346,298 - - - - 4,223,501 4,182,709 Total interest expense 3,524,270 2,853,535 1,739,355 2,094,209 2,815,371 2,295,220 4,634,936 4,368,222 1,164,641 1,063,965 13,878,572 12,675,151 Net interest income 577,211 519,839 1,080,884 279,470 716,556 649,957 1,091,638 1,419,667 999,215 832,635 4,465,504 3,701,568 Total other income 213,754 164,068 757,283 605,791 446,305 363,969 268,814 190,393 106,326 235,491 1,792,482 1,559,712 Total net income 790,965 683,907 1,838,167 885,261 1,162,861 1,013,925 1,360,452 1,610,060 1,105,541 1,068,127 6,257,985 5,261,280
Less : Impairment 41,073 12,008 - - 390,439 221,227 10,950 15,693 133,877 128,580 576,339 377,508 Depreciation & amortisation 10,153 63,836 55,955 64,236 91,501 135,736 222,218 135,736 36,069 29,266 415,895 428,810 Other expenses 334,490 422,838 464,622 388,581 926,047 948,097 1,676,082 1,187,039 449,329 482,871 3,850,571 3,429,426 Segmental results 405,248 185,225 1,317,589 432,443 (245,125) (291,135) (548,797) 271,591 486,265 427,412 1,415,180 1,025,536 Less: VAT, NBT and DRL on financialservices 521,775 348,202 Less: taxation 358,755 126,205 Profitafter taxation 534,650 551,129
Other information Segment assets 35,406,353 32,628,443 37,210,326 28,872,071 25,384,702 27,824,893 14,460,465 18,547,363 18,128,094 15,289,387 130,589,939 123,162,157 Unallocated assets 4,441,768 4,438,675 Consolidated total assets 135,031,708 127,600,832
Segment liabilities 13,715,836 14,254,252 27,340,775 27,492,849 11,540,011 9,321,555 52,078,882 44,770,964 11,635,464 11,398,239 116,310,968 107,237,859 Unallocated liabilities 2,247,696 2,521,257 Consolidated total liabilities 118,558,664 109,759,116
Cash flow from operating activities 5,201,723 461,019 12,088,573 596,751 7,647,478 683,483 8,946,923 1,085,336 (20,545,046) (743,984) 13,339,651 2,082,606 Cash flow from investing activities (77,729) (120,662) (3,275,162) (8,242,680) (114,276) (178,888) (133,693) (284,064) 94,648 280,183 (3,506,212) (8,546,111) Cash flow from financing activities - - (8,462,660) 6,034,643 - - - - (328,897) 997,389 (8,791,559) 7,032,032
Inter segment transactions are accounted for at fair market prices.
Income taxes are not allocated to operating segments. Other expenses which cannot be directly identified have been apportioned using a reasonable basis among the segments.
Financial Reports Notes to the Financial Statements 261 Union Bank | Annual Report 2018
Notes to the Financial Statements
47. EVENTS AFTER THE REPORTING PERIOD No circumstances have arisen since the reporting date which would require adjustments to, or disclosure in the Financial Statements.
48. FAIR VALUE OF ASSETS AND LIABILITIES
48.1 Assets and liabilities recorded at fair value
Derivative financial instruments Derivative products are forward foreign exchange contracts which are valued using a valuation technique with market-observable inputs . The most frequently applied valuation techniques include forward pricing models. The model incorporates various inputs including foreign exchange spot and forward premiums.
Financial investments at fair value through profit or loss/ Financial assets - held for trading Financial investments held for trading, which primarily consist of Government debt securities, quoted equities and investments in units are measured at fair value.
Government debt securities are valued using yield curves published by the Central Bank of Sri Lanka. For quoted equities and investments in units are valued using market price in active markets as at the reporting date.
Financial investments at fair value through other comprehensive income / Financial investments – Available for Sale Financial investments at fair value through other comprehensive income / Financial investments – Available for Sale , which primarily consist of quoted and unquoted equities, and investment in units and Government debt securities.
Government debt securities are valued using yield curves published by the Central Bank of Sri Lanka. Investment in units and quoted equities are valued using market prices in the active markets at the reporting date.
For all financial instruments where fair values are determined by referring to externally quoted prices or observable pricing inputs, independent price determination or validation is obtained. In an inactive market, direct observation of a traded price may not be possible. In these circumstances, the Bank uses alternative market information to validate the financial instrument’s fair value, with greater weight given to information that is considered to be more relevant and reliable.
Fair values are determined according to the following hierarchy: Level 1 – quoted market price (unadjusted) financial instruments with quoted prices in active markets.
Level 2 – valuation technique using observable inputs: financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments are valued using models where all significant inputs are observable.
Level 3 – valuation technique with significant unobservable inputs: This category includes all instruments valued using valuation techniques where one or more significant inputs are unobservable.
262 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
48. FAIR VALUE OF ASSETS AND LIABILITIES (Cont.)
BANK
As at 31 December 2018 Level 1 Level 2 Level 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial assets measured at fair value
Derivative financial instruments Forward foreign exchange contracts - 7,523 - 7,523 Currency SWAPs - 26,751 - 26,751
Financial investments at fair value through profit or loss Sri Lanka Government securities 1,858,458 - - 1,858,458 Investment in units 1,004,663 - - 1,004,663
Financial investments at fair value through other comprehensive income Sri Lanka Government securities 17,734,429 - - 17,734,429 Equity Securities - unquoted - - 1,530 1,530 Total financial assets measured at fair value 20,597,550 34,274 1,530 20,633,354
Financial liabilities measured at fair value Derivative financial instruments Forward foreign exchange contracts - 48,350 - 48,350 Currency SWAP - 23,401 - 23,401 Total financial liabilities measured at fair value - 71,751 - 71,751
As at 31 December 2017 Level 1 Level 2 Level 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial assets measured at fair value
Derivative financial instruments Forward foreign exchange contracts - 1,792 - 1,792 Currency SWAP - 968 - 968
Financial investments - held for trading Sri Lanka Government securities 1,696,945 - - 1,696,945 Investment in units 4,252,078 - - 4,252,078
Financial investments - available for sale Sri Lanka Government securities 16,451,677 - - 16,451,677 Equity Securities - unquoted - - 1,530 1,530 Total financial assets measured at fair value 22,400,700 2,760 1,530 22,404,990
Financial liabilities measured at fair value
Derivative financial instruments Forward foreign exchange contracts - 1,453 - 1,453 Currency SWAP - 3,414 - 3,414 Total financial liabilities measured at fair value - 4,867 - 4,867
Financial Reports Notes to the Financial Statements 263 Union Bank | Annual Report 2018
Notes to the Financial Statements
48. FAIR VALUE OF ASSETS AND LIABILITIES (Cont.)
GROUP
As at 31 December 2018 Level 1 Level 2 Level 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial assets measured at fair value
Derivative financial instruments Forward foreign exchange contracts - 7,523 - 7,523 Currency SWAP - 26,751 - 26,751
Financial investments at fair value through profit or loss Sri Lanka Government securities 1,858,458 - - 1,858,458 Investment in units 1,004,663 - - 1,004,663
Financial investments at fair value through other comprehensive income Sri Lanka Government securities 17,734,429 - - 17,734,429 Equity securities - Quoted 28,203 - - 28,203 Equity securities - Unquoted - - 1,731 1,731 Investment in units 23,258 - - 23,258 Total financial assets measured at fair value 20,649,011 34,274 1,731 20,685,016
Financial liabilities measured at fair value
Derivative financial instruments Forward foreign exchange contracts - 48,350 - 48,350 Currency SWAP - 23,401 - 23,401 Total financial liabilities measured at fair value - 71,751 - 71,751
As at 31 December 2017 Level 1 Level 2 Level 3 Total Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial assets measured at fair value
Derivative financial instruments Forward foreign exchange contracts - 1,793 - 1,793 Currency SWAP - 968 - 968
Financial investments - held for trading Sri Lanka Government securities 1,696,945 - - 1,696,945 Investment in units 4,252,078 - - 4,252,078
Financial investments - available for sale Sri Lanka Government securities 16,451,677 - - 16,451,677 Equity securities - Quoted 40,959 - - 40,959 Equity securities - Unquoted - - 17,625 17,625 Investment in units 94,500 - - 94,500 Total financial assets measured at fair value 22,536,158 2,760 17,625 22,556,544
Financial liabilities measured at fair value
Derivative financial instruments Forward foreign exchange contracts - 1,453 - 1,453 Currency SWAP - 3,414 - 3,414 Total financial liabilities measured at fair value - 4,867 - 4,867
264 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
48. FAIR VALUE OF ASSETS AND LIABILITIES (Cont.)
48.1.1 Level 3 Fair value measurement a. Reconciliation of Level 3 fair value hierarchy BANK GROUP 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Balance at 01 January 1,530 1,530 17,625 17,625 Gains/(losses) in Other Comprehensive Income - - (15,894) - Balance at 31 December 1,530 1,530 1,731 17,625 b. Unobservable inputs used in measuring fair value The table below sets out information about significant unobservable inputs used at 31 December 2018 in measuring financial instruments categorised as Level 3 in the fair value hierarchy,
Investment in unquoted equity shares
BANK Fair value Fair value Valuation As at 31 December 2018 2017 Technique Rs.’000 Rs.’000
Credit Information Bureau 1,530 1,530 At Cost*
GROUP Fair value Fair value Valuation Significant As at 31 December 2018 2017 Technique Unobservable Rs.’000 Rs.’000 Inputs
Samson Reclaim Rubbers Limited - 15,894 Price to book value per Audited financial share of similar quoted statements of the company and private Company company discount rate Credit Information Bureau 1,530 1,530 At Cost* Finance House Consortium (Pvt) Ltd. 200 200 At Cost*
*Unquoted available for sale equity securities are recorded at cost since it is the most reasonable value available to represent the market value of these investments as at the reporting date.
Financial Reports Notes to the Financial Statements 265 Union Bank | Annual Report 2018
Notes to the Financial Statements
48. FAIR VALUE OF ASSETS AND LIABILITIES (Cont.)
48.2 Fair value of financial assets and liabilities not carried at fair value
Financial assets at amortised cost - loans and advances The financial assets at amortised cost - loans and advances to customers comprise of both fixed rate loans and floating rate loans. Majority of the floating rate loans can be re-priced in a predetermined frequency, while for fixed rate loans, the loan contract allows the Bank to change the contracted rate if there is a material difference between the contracted rate and the market rate. The carrying value of floating rate loans generally approximates the fair value due to the effect of re-pricing while the fair value of loans and receivables to customers with a residual maturity of less than one year generally approximates the carrying value, subject to any significant movement in credit spreads.
The estimated fair value of loans and receivables with a residual maturity of more than one year, is the present value of future cash flows expected to be received from such financial assets are calculated based on interest rates at the reporting date for similar types of loans and receivables.
Financial assets at amortised cost - debt and other instruments / Other Loans and receivables Financial assets at amortised cost - debt and other instruments / Other Loans and receivables consist of debenture investments, Sri Lanka development bonds, fixed deposits and lease backed certificates which are subsequently measured at amortised cost. Fair value of these financial assets are valued using discounted cash flow technique. Inputs in to the valuation techniques includes interest rates, repayment period and current market rates.
Financial investment - held to maturity Financial investments held to maturity which primarily comprise of Government debt securities and debenture investments, are subsequently measured at amortised cost. Fair value of Government debt securities are valued using yield curves published by the Central Bank of Sri Lanka. Debenture investment is valued using discounted technique using observable market inputs such as interest rates and remaining maturity period.
Due to customers The fair value of customer deposits which are repayable on demand or have a remaining contractual maturity of less than one year, approximates to the carrying value of such deposits. The fair value of customer deposits with a contractual maturity of more than one year, is estimated as the present value of future cash flows expected from such deposits calculated based on interest rates at the reporting date for similar types of deposits.
For financial assets and financial liabilities that have short term maturity, it is assumed that carrying amounts approximates their fair value. This assumption is applied for following assets and liabilities which are short-term maturity or re-price to current market rates.
Assets Liabilities
> Cash and cash equivalents > Due to banks > Balances with Central Bank of Sri Lanka > Repurchased agreements > Placements with banks > Other financial liabilities > Reverse repurchased agreements > Other financial assets
266 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
48. FAIR VALUE OF ASSETS AND LIABILITIES (Cont.)
Under the table the fair values may be different from the actual amounts that will be received / paid on the settlement or maturity of the asset or liability. These do not include the fair values of non financial assets and non financial liabilities.
BANK As at 31 December 2018 Fair Value Carrying Level 1 Level 2 Level 3 Total Value Value Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial assets Financial assets at amortised cost - loans and advances to customers - 73,629,090 - 73,629,090 73,749,207 Financial assets at amortised cost - debt and other instruments 7,611,977 8,865,597 - 16,477,574 16,567,940 Total 7,611,977 82,494,687 - 90,106,664 90,317,147
Financial liabilities Due to customers - 75,990,919 - 75,990,919 79,251,073 Other borrowed funds - 1,234,220 - 1,234,220 1,234,220 Total - 77,225,139 - 77,225,139 80,485,293
As at 31 December 2017 Fair Value Carrying Level 1 Level 2 Level 3 Total Value Value Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial assets Loans and receivables to other customers - 70,123,930 - 70,123,930 70,577,923 Other loans and receivables - 9,609,639 - 9,609,639 9,609,639 Financial investments - held to maturity 2,465,373 67,691 - 2,533,064 2,546,553 Total 2,465,373 79,801,260 - 82,266,633 82,734,115
Financial liabilities Due to customers - 68,036,801 - 68,036,801 70,325,594 Other borrowed funds - 1,224,812 - 1,224,812 1,224,812 Total - 69,261,613 - 69,261,613 71,550,406
Financial Reports Notes to the Financial Statements 267 Union Bank | Annual Report 2018
Notes to the Financial Statements
48. FAIR VALUE OF ASSETS AND LIABILITIES (Cont.)
48.2 Fair value of financial assets and liabilities not carried at fair value contd.
GROUP As at 31 December 2018 Fair Value Carrying Level 1 Level 2 Level 3 Total Value Value Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial assets Financial assets at amortised cost - loans and advances to customers - 82,645,440 - 82,645,440 82,120,066 Financial assets at amortised cost - debt and other instruments 7,611,977 8,198,924 - 15,810,901 15,942,404 Total 7,611,977 90,844,364 - 98,456,341 98,062,470
Financial liabilities Due to customers - 82,867,944 - 82,867,944 86,266,123 Other borrowed funds - 2,921,647 - 2,921,647 2,921,647 Total - 85,789,591 - 85,789,591 89,187,770
GROUP As at 31 December 2017 Fair Value Carrying Level 1 Level 2 Level 3 Total Value Value Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial assets Loans and receivables to other customers - 78,478,328 - 78,478,328 79,220,956 Other loans and receivables - 8,674,102 - 8,674,102 8,674,102 Financial investments - held to maturity 2,465,373 67,691 - 2,533,064 2,546,553 Total 2,465,373 87,220,121 - 89,685,494 90,441,611
Financial liabilities Due to customers - 75,115,759 - 75,115,759 76,747,977 Other borrowed funds - 2,968,233 - 2,968,233 2,968,233 Total - 78,083,992 - 78,083,992 79,716,210
268 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
49. MATURITY ANALYSIS OF ASSETS and LIABILITIES
49.1 BANK As at 31 December 2018 2017 Within After Total Within After Total 12 months 12 months 12 months 12 months Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Assets Cash and cash equivalents 2,917,866 - 2,917,866 4,697,738 - 4,697,738 Balances with Central Bank of Sri Lanka - 4,219,932 4,219,932 - 3,785,679 3,785,679 Placements with banks 3,265,425 - 3,265,425 716,147 - 716,147 Reverse repurchased agreements 417,146 - 417,146 1,795 - 1,795 Derivative financial instruments 34,274 - 34,274 2,760 - 2,760 Financial investments at fair value through profit or loss 1,427,210 1,435,911 2,863,121 - - - Financial investments - held for trading - - - 4,291,432 1,657,591 5,949,023 Financial assets at amortised cost - loans and advances to customers 48,767,534 24,981,674 73,749,208 - - - Loans and receivables to other customers - - - 48,109,779 22,468,144 70,577,923 Financial assets at amortised cost - Debt and other instruments 8,699,654 7,868,286 16,567,940 Other loans and receivables - - - 1,168,627 8,441,012 9,609,639 Financial investments - held to maturity - - - 2,165,776 380,777 2,546,553 Financial investments at fair value through other comprehensive income 6,194,335 11,541,624 17,735,959 - - - Financial investments - available for sale - - - 8,138,524 8,314,683 16,453,207 Current tax asset 336,167 - 336,167 436,279 - 436,279 Investments in subsidiaries - 835,373 835,373 - 1,262,612 1,262,612 Goodwill and intangible assets - 1,202,532 1,202,532 - 1,220,999 1,220,999 Property, plant and equipment - 789,158 789,158 - 888,359 888,359 Deferred tax assets - 115,596 115,596 - - - Other assets 460,288 410,169 870,457 430,720 427,975 858,695 Total assets 72,519,899 53,400,255 125,920,154 70,159,577 48,847,831 119,007,408
Liabilities Due to banks 9,183,446 164,763 9,348,209 17,110,815 97,826 17,208,641 Derivative financial instruments 71,750 - 71,750 4,867 - 4,867 Repurchased agreements 17,585,912 - 17,585,912 10,381,193 - 10,381,193 Due to customers 76,522,389 2,728,684 79,251,073 67,325,790 2,999,804 70,325,594 Other borrowed funds 22,872 1,211,348 1,234,220 22,196 1,202,616 1,224,812 Current tax liabilities ------Deferred tax liabilities - - - 144,923 - 144,922 Other liabilities 1,435,819 365,823 1,801,642 1,682,565 177,115 1,859,682 Total liabilities 104,822,188 4,470,618 109,292,806 96,672,349 4,477,361 101,149,711 Maturity Gap (32,302,289) 48,929,637 16,627,348 (26,512,773) 44,370,470 17,857,697 Cumulative Gap (32,302,289) 16,627,348 (26,512,773) 17,857,697
Financial Reports Notes to the Financial Statements 269 Union Bank | Annual Report 2018
Notes to the Financial Statements
49. MATURITY ANALYSIS OF ASSETS and LIABILITIES (Cont.)
49.2 GROUP As at 31 December 2018 2017 Within After Total Within After Total 12 months 12 months 12 months 12 months Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Assets Cash and cash equivalents 3,306,393 - 3,306,393 5,057,422 - 5,057,422 Balances with Central Bank of Sri Lanka - 4,219,932 4,219,932 - 3,785,679 3,785,679 Placements with banks 3,265,425 - 3,265,425 866,690 - 866,690 Reverse repurchased agreements 950,998 - 950,998 301,297 - 301,297 Derivative financial instruments 34,274 - 34,274 2,760 - 2,760 Financial investments at fair value through profit or loss 1,427,210 1,435,911 2,863,121 - - - Financial investments - held for trading - - - 4,291,432 1,657,591 5,949,023 Financial assets at amortised cost - loans and advances to customers 53,561,655 28,558,413 82,120,068 - - - Loans and receivables to other customers - - - 51,476,012 27,744,944 79,220,956 Financial assets at amortised cost - debt and other instruments 8,957,167 6,985,237 15,942,404 - - - Other loans and receivables - - - 1,068,627 7,605,475 8,674,102 Financial investments - held to maturity - - - 2,165,776 380,777 2,546,553 Financial investments at fair value through other comprehensive income 6,194,335 11,593,286 17,787,621 - - - Financial investments - available for sale - - - 8,289,877 8,314,884 16,604,761 Current tax assets 336,167 - 336,167 436,284 - 436,284 Investments in real estate 118,633 - 118,633 152,914 - 152,914 Goodwill and intangible assets - 1,550,544 1,550,544 - 1,568,398 1,568,398 Property, plant and equipment - 1,013,541 1,013,541 - 1,058,067 1,058,067 Deferred tax assets - 517,374 517,374 - 433,728 433,728 Other assets 489,529 515,684 1,005,213 502,995 439,203 942,198 Total assets 78,641,786 56,389,922 135,031,708 74,612,086 52,988,746 127,600,832
Liabilities Due to banks 9,350,784 164,763 9,515,547 17,200,901 97,826 17,298,727 Derivative financial instruments 71,750 - 71,750 4,867 - 4,867 Repurchased agreements 17,535,900 - 17,535,900 10,218,055 - 10,218,055 Due to customers 79,979,773 6,286,350 86,266,123 71,399,430 5,348,547 76,747,977 Other borrowed funds 1,046,942 1,874,705 2,921,647 769,509 2,198,724 2,968,233 Current tax liabilities 188,001 - 188,001 173,207 - 173,207 Deferred tax liabilities - 1,436 1,436 145,278 - 145,278 Other liabilities 1,701,061 357,209 2,058,270 1,868,610 334,162 2,202,772 Total liabilities 109,874,211 8,684,463 118,558,674 101,779,857 7,979,259 109,759,116 Maturity Gap (31,232,425) 47,705,459 16,473,034 (27,167,771) 45,009,487 17,841,716 Cumulative Gap (31,232,425) 16,473,034 (27,167,771) 17,841,716
270 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
50. RISK MANAGEMENT
50.1 Introduction Risk is inherent in the Bank’s activities, but is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities.
Effective capital and risk management is fundamental to the business activities of Union Bank. It is managed in terms of regulatory capital. The enhanced minimum capital and liquidity requirements are defined under Pillar I of Basel II namely credit, market and operational risk are linked to regulatory capital, whilst other risks under Pillar II namely, concentration risk reputational risk, strategic risk, compliance risk, interest rate risk in the banking books, credit concentration risk and liquidity risk are linked to internal capital, which both put together is termed as economic capital.
The business risks such as changes in the environment, technology and industry are primarily addressed through the Bank’s strategic planning process. Industry specific changes are also reviewed and presented on a need basis by the credit risk management unit and are tabled at the Executive Risk Management Committee.
Risk management structure The Board of Directors is responsible for the overall capital and risk management approach and for approving the risk management strategies and principles.
A Board appointed supervisory committee called “Integrated Risk Management Committee (IRMC)” has the responsibility to monitor and oversee the overall risk process within the Bank.
The IRMC has the overall responsibility for the development of the risk strategy and implementing principles, frameworks, policies and limits. IRMC is also responsible for managing risks and monitoring risk levels and reports on quarterly basis to the Board.
The Risk Management Department (RMD) is responsible for implementing and maintaining risk related procedures to ensure an independent control process is maintained. The unit works closely with the IRMC to ensure that procedures are compliant with the overall framework.
The RMD is also responsible for monitoring compliance with risk principles, policies and limits across the Bank. This unit ensures the complete capture of the risks in risk measurement and reporting systems. Exceptions are reported on daily/ monthly/ quarterly basis, where necessary, to the IRMC or its sub committees, and the relevant actions are taken to address exceptions and any areas of weakness.
The Bank’s policy is that risk management processes throughout the Bank are audited annually by the internal audit function, which examines both the adequacy of the procedures and the Bank’s compliance with the procedures. Internal audit discusses the results of all assessments with management, and reports its findings and recommendations to the Board Audit Committee.
Risk measurement and reporting systems Monitoring and controlling risks is primarily performed based on limits established by the Bank. These limits reflect the business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept, with additional emphasis on selected industries. In addition, the Bank’s policy is to measure and monitor the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities.
Information compiled from all the businesses is examined and processed in order to analyse, control and identify risks on a timely basis. This information is presented and explained to the Board of Directors and Risk Committees. These reports include aggregate credit exposures, credit concentration, operational risk, market risk, liquidity ratios and stress tests. On a quarterly basis, detailed reporting of industry, customer and geographic risks takes place. Senior management assesses the appropriateness of the allowance for credit losses on a monthly basis. The Board receives a comprehensive risk report once a quarter which is designed to provide all the necessary information to assess and conclude on the risks of the Bank.
Financial Reports Notes to the Financial Statements 271 Union Bank | Annual Report 2018
Notes to the Financial Statements
50. RISK MANAGEMENT (Cont.)
All risk related policy/frameworks including a well documented Integrated Risk Management Framework are uploaded in the Bank’s Intranet which are being viewed by all staff at all levels for a comprehensive understanding of the Bank’s risk appetite and the overall risk management of the Bank.
Briefings are also given to other relevant members of the Bank on the utilisation of market limits, proprietary investments and liquidity, plus any other risk developments.
Risk mitigation As part of its overall risk management, the Bank uses various processes and instruments to manage exposures resulting from credit risks, changes in interest rates, foreign currencies, equity risks, and exposures arising from transactions.
The Bank actively uses collateral to reduce its credit risks.
Excessive risk concentration In order to avoid excessive concentrations of risk, the Bank’s policies and procedures include specific guidelines, including concentration limits to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly.
50.2 Credit risk Credit risk is the risk of financial loss for the Bank if a borrower or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Bank’s loans and receivables to customers/other banks and investments in debt securities.
In addition to the credit risk from direct funding exposure, the Bank would also be exposed to indirect liabilities such as Letter of credit, guarantees etc which would carry credit risk.
The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counter parties and industry concentrations, and by monitoring exposures in relation to such limits.
The Bank has established a credit quality review process to provide early identification of possible changes in the creditworthiness of borrowers, including regular collateral revisions. Bank uses a risk rating process to rate the borrowers according to its risk profile. The credit quality review process aims to allow the Bank to assess the potential loss as a result of the risks to which it is exposed and take corrective action.
A structured and standardised credit approval process is in place including a procedure for credit appraisal and borrower risks rating. credit authority lies with the Board of Directors, Board Credit Committee, Executive Credit Committee and members of the management as per the assigned limits on delegated credit authority. All credit facilities are required to be reviewed by the Relationship Mangers/ Branch Managers annually. Also Bank’s borrower risk rating system forms an integral part of the evaluation of credit proposals and assists the approval authorities to assess the creditworthiness of the borrowers. Bank’s systems for credit evaluation and decision making are independent from collateralisation albeit collateral helps to mitigate credit risk.
The risk management department reviews credit facilities before and after sanctioning of facilities. Under pre-sanction evaluation, RMD independently reviews credit facilities and adds its recommendation where risk is considered acceptable. This independent review covers all new facilities or one-off / temporary facilities for existing lines over an approved threshold. Further corporate and mid market clients are respectively operated from a pre-approved positive list/dynamic list of customers. In the event any customers are to be entertained outside this list, then those names would have to be cleared by risk. Similarly the SME clients are managed from a client segmentation framework. Its Criteria are pre-approved and the risk is priced accordingly.
In the post sanctioning review of credit facilities, the Loans Review Manager (LRM) reviews among other things, the disbursements, perfection of collateral and repayments are in accordance with the terms of approval. A separate loan review policy approved by the Board of Directors is in place.
272 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
50. RISK MANAGEMENT (Cont.)
Impairment assessment The methodology of the impairment assessment has explained in the Note 2.4.2 under summary of significant accounting policies.
Credit–related commitments risks The Bank makes available to its customers guarantees that may require that the Bank makes payments on their behalf and enters into commitments to extend credit lines to secure customer’s liquidity needs. Letters of credit and guarantees commit the Bank to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods or contract financing. Such commitments risks are mitigated by collateral cover, regular review of unfunded limits and exposures similar to review of funded limits and exposures.
Collateral and other credit enhancements The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are in place covering the acceptability and valuation of each type of collateral.
The main types of collateral obtained are as follows: aa For securities lending and reverse repurchase transactions, cash or securities aa For commercial lending, charges over real estate properties, inventory and trade receivables etc aa For retail lending, mortgages over residential properties etc
The Bank also obtains guarantees from parent companies for loans to their subsidiaries.
Management monitors the market value of collateral, and will request additional collateral in accordance with the underlying agreement.
It is the Bank’s policy to dispose of repossessed properties in an orderly fashion. The proceeds are used to reduce or repay the outstanding claim. In general, the Bank does not occupy repossessed properties for business use.
The Bank also makes use of netting agreements with borrowers with whom a significant volume of transactions are undertaken.
Although on Statement of Financial Position netting arrangements may significantly reduce credit risk, it should be noted that: aa Credit risk is eliminated only to the extent that amounts due to the same borrower will be settled after the assets are realised that the documentation are legally enforceable
Financial Reports Notes to the Financial Statements 273 Union Bank | Annual Report 2018
Notes to the Financial Statements
50. RISK MANAGEMENT (Cont.)
50.2.1 Maximum and net exposure to credit risk by class of financial assets
BANK
Fair value of collateral and credit enhancements held Maximum Net As at 31 December 2018 exposure to Documentary Stocks, Fixed, Foreign Stock in Immovable Trust Leasing and Movable Other Gold Exposure credit risk Bills Bonds, Savings and Currency Trade Property Certificates Hire Property Securities (Excluding Debentures, other Deposits Plant and Purchase Export Bills Life Policies Deposits Machinery Agreements purchased) Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Placements with banks 3,265,425 ------3,265,425 Reverse repurchased agreements 417,146 ------417,146 - - Derivative financial instruments 34,274 ------34,274 Financial investments at fair value through profit or loss 2,863,121 ------2,863,121 Financial assets at amortised cost - loans and advances to customers 75,787,035 13,147,784 178,615 9,036,508 441,454 536,084 17,716,953 - 1,195,318 353,662 8,103,826 1,136,794 23,940,037 Financial assets at amortised cost - debt and other instruments 16,567,940 - 5,407,250 - - - - 94,258 - - - - 11,066,432 Financial investments at fair value through other comprehensive income 17,735,959 ------17,735,959 Other financial assets 153,865 ------153,865 Total financial assets 116,824,765 13,147,784 5,585,865 9,036,508 441,454 536,084 17,716,953 94,258 1,195,318 353,662 8,520,972 1,136,794 59,059,113
Fair value of collateral and credit enhancements held Maximum Net As at 31 December 2017 exposure to Documentary Stocks, Fixed, Foreign Stock in Immovable Trust Leasing and Movable Other Gold Exposure credit risk Bills Bonds, Savings and Currency Trade Property Certificates Hire Property Securities (Excluding Debentures, other Deposits Plant and Purchase Export Bills Life Policies Deposits Machinery Agreements purchased) Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Placements with banks 716,147 ------716,147 Reverse repurchased agreements 1,795 ------1,795 - - Derivative financialinstruments 2,760 ------2,760 Financial investments - held for trading 5,949,023 ------5,949,023 Loans and receivables to other customers 71,493,285 5,908,340 137,893 5,764,185 29,597 539,123 12,994,648 - 1,506,922 472,971 9,404,647 667,952 34,067,007 Other loans and receivables 9,609,639 - 5,458,643 - - - - 259,556 - - - - 3,891,440 Financial investments - available for sale 16,453,207 ------16,453,207 Financial investments – held to maturity 2,546,553 - 67,691 ------2,478,862 Other financialassets 133,308 ------133,308 Total financial assets 106,905,717 5,908,340 5,664,227 5,764,185 29,597 539,123 12,994,648 259,556 1,506,922 472,971 9,406,442 667,952 63,691,754
274 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
50. RISK MANAGEMENT (Cont.)
GROUP
Fair value of collateral and credit enhancements held Maximum Net As at 31 December 2018 exposure to Documentary Stocks, Fixed, Foreign Stock in Immovable Trust Leasing and Movable Other Gold Exposure credit risk Bills Bonds, Savings and Currency Trade Property Certificates Hire Property Securities (Excluding Debentures, other Deposits Plant and Purchase Export Bills Life Policies Deposits Machinery Agreements purchased) Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Placements with banks 3,265,425 ------3,265,425 Reverse repurchased agreements 950,998 ------950,998 - - Derivative financial instruments 34,274 ------34,274 Financial investments at fair value through profit or loss 2,863,121 ------2,863,121 Financial assets at amortised cost - loans and advances to customers 85,452,541 13,147,784 178,615 9,336,565 441,454 536,084 17,319,782 - 8,346,573 353,662 9,202,298 1,185,448 25,404,277 Financial assets at amortised cost - debt and other instruments 15,942,404 - 5,407,250 257,513 - - - 94,258 - - - - 10,183,382 Financial investments at fair value through other comprehensive income 17,787,621 ------17,787,621 Other financial assets 235,267 ------235,267 Total financial assets 126,531,651 13,147,784 5,585,865 9,594,078 441,454 536,084 17,319,782 94,258 8,346,573 353,662 10,153,296 1,185,448 59,773,367
Fair value of collateral and credit enhancements held Maximum Net As at 31 December 2017 exposure to Documentary Stocks, Fixed, Foreign Stock in Immovable Trust Leasing and Movable Other Gold Exposure credit risk Bills Bonds, Savings and Currency Trade Property Certificates Hire Property Securities (Excluding Debentures, other Deposits Plant and Purchase Export Bills Life Policies Deposits Machinery Agreements purchased) Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Placements with banks 866,690 ------866,690 Reverse repurchased agreements 301,297 ------301,297 - - Derivative financialinstruments 2,760 ------2,760 Financial investments - held for trading 5,949,023 ------5,949,023 Loans and receivables to other customers 80,645,569 5,908,340 137,893 6,202,694 29,597 539,123 13,356,285 - 7,047,870 472,971 11,707,554 667,952 34,575,290 Other loans and receivables 8,674,102 - 4,488,344 - - - - 259,556 - - - - 3,926,202 Financial investments - available for sale 16,604,761 ------16,604,761 Financial investments – held to maturity 2,546,553 - 67,691 ------2,478,862 Other financialassets 199,925 ------44,883 - 155,042 Total financial assets 115,790,680 5,908,340 4,693,928 6,202,694 29,597 539,123 13,356,285 259,556 7,047,870 472,971 12,053,734 667,952 64,558,630
Financial Reports Notes to the Financial Statements 275 Union Bank | Annual Report 2018
Notes to the Financial Statements
50. RISK MANAGEMENT (Cont.)
50.2.2 Credit quality by class of financial assets The Bank manages the credit quality of financial assets using internal credit ratings. It is the Bank’s policy to maintain accurate and consistent risk ratings across the credit portfolio. This facilitates focused management of the applicable risks and the comparison of credit exposures across all lines of business and geographic regions. All internal ratings are rechecked at several approval levels within the Bank via business heads, zonal units, risk management unit, credit department; and also reviewed post fact by the loan review manager. The Bank has a comprehensive, fully automated loan origination system for credit approval process including risk rating modules and risk ratings for new facilities and annual reviews are derived using this system. The tables below show the credit quality for all financial assets exposed to credit risk, based on the Bank’s internal credit rating systems.
BANK As at 31 December 2018 Neither Past due but not impaired Individually Total past due Less than 3-6 6-12 Over 12 impaired nor 3 months months months months impaired Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Cash and cash equivalents 2,917,866 - - - - - 2,917,866 Balances with Central Bank of Sri Lanka 4,219,932 - - - - - 4,219,932 Placements with banks 3,266,174 - - - - - 3,266,174 Reverse repurchased agreements 417,146 - - - - - 417,146 Derivative financial instruments 34,274 - - - - - 34,274 Financial investments at fair value through profit or loss 2,863,121 - - - - - 2,863,121 Financial assets at amortised cost - loans and advances to customers 59,959,173 11,888,261 78,797 205,268 884,611 2,770,925 75,787,035 Financial assets at amortised cost - debt and other instruments 16,609,077 - - - - - 16,609,077 Financial investments at fair value through other comprehensive income 17,735,959 - - - - - 17,735,959 Other financial assets 153,866 - - - - - 153,866 Total financial assets 108,134,701 11,888,261 78,797 205,268 884,611 2,770,925 123,962,560
As at 31 December 2017 Neither Past due but not impaired Individually Total past due Less than 3-6 6-12 Over 12 impaired nor 3 months months months months impaired Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Cash and cash equivalents 4,697,738 - - - - - 4,697,738 Balances with Central Bank of Sri Lanka 3,785,679 - - - - - 3,785,679 Placements with banks 716,147 - - - - - 716,147 Reverse repurchased agreements 1,795 - - - - - 1,795 Derivative financialinstruments 2,760 - - - - - 2,760 Financial investments -held for trading 5,949,023 - - - - - 5,949,023 Loans and receivables to other customers (Gross) 60,408,602 7,470,331 87,951 132,975 743,798 2,649,628 71,493,285 Other loans and receivables 9,609,639 - - - - - 9,609,639 Financial investments – available for sale 16,453,207 - - - - - 16,453,207 Financial investments – held to maturity 2,546,553 - - - - - 2,546,553 Other financialassets 133,308 - - - - - 133,308 Total financial assets 104,304,451 7,470,331 87,951 132,975 743,798 2,649,628 115,389,134
276 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
50. RISK MANAGEMENT (Cont.)
GROUP As at 31 December 2018 Neither Past due but not impaired Individually Total past due Less than 3-6 6-12 Over 12 impaired nor 3 months months months months impaired Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Cash and cash equivalents 3,306,393 - - - - - 3,306,393 Balances with Central Bank of Sri Lanka 4,219,932 - - - - - 4,219,932 Placements with banks 3,265,425 - - - - - 3,265,425 Reverse repurchased agreements 950,998 - - - - - 950,998 Derivative financial instruments 34,274 - - - - - 34,274 Financial investments at fair value through profit or loss 2,863,121 - - - - - 2,863,121 Financial assets at amortised cost - loans and advances to customers 63,075,069 15,698,129 824,294 538,603 1,763,530 3,552,916 85,452,541 Financial assets at amortised cost - debt and other instruments 15,979,252 - - - - - 15,979,252 Financial investments at fair value through other comprehensive income 17,787,621 - - - - - 17,787,621 Other financial assets 235,267 - - - - - 235,267 Total financial assets 111,717,352 15,698,129 824,294 538,603 1,763,530 3,552,916 134,094,824
As at 31 December 2017 Neither Past due but not impaired Individually Total past due Less than 3-6 6-12 Over 12 impaired nor 3 months months months months impaired Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Cash and cash equivalents 5,057,422 - - - - - 5,057,422 Balances with Central Bank of Sri Lanka 3,785,679 - - - - - 3,785,679 Placements with banks 866,690 - - - - - 866,690 Reverse repurchased agreements 301,297 - - - - - 301,297 Derivative financialinstruments 2,760 - - - - - 2,760 Financial investments - held for trading 5,949,023 - - - - - 5,949,023 Loans and receivables to other customers (Gross) 63,700,799 11,080,928 792,567 529,015 1,483,301 3,058,959 80,645,569 Other loans and receivables 8,674,102 - - - - - 8,674,102 Financial investments - available for sale 16,604,761 - - - - - 16,604,761 Financial investments - held to maturity 2,546,553 - - - - - 2,546,553 Other financialassets 199,925 - - - - - 199,925 Total financial assets 107,689,011 11,080,928 792,567 529,015 1,483,301 3,058,959 124,633,781
Financial Reports Notes to the Financial Statements 277 Union Bank | Annual Report 2018
Notes to the Financial Statements
50. RISK MANAGEMENT (Cont.)
50.2.3 Risk rating
Corporate & SME
2018 2017
5% 4% 12% 6% 10% 3%
17% 14% 22% 27%
38% 42%
Lowest Credit Risk Lowest Credit Risk Very Low Credit Risk Very Low Credit Risk Low Credit Risk Low Credit Risk Average Credit Risk Average Credit Risk Moderate Credit Risk Moderate Credit Risk Other Other
Retail
2018 2017
11% 7% 12% 18% 2% 2% 7% 6%
13% 8%
24% 26%
32% 32%
Minimal Credit Risk Minimal Credit Risk Lowest Credit Risk Lowest Credit Risk Lower Credit Risk Lower Credit Risk Low Credit Risk Low Credit Risk Moderate Credit Risk Moderate Credit Risk Average Credit Risk Average Credit Risk Other Credit Risk Other Credit Risk
278 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
50. RISK MANAGEMENT (Cont.)
50.2.4 Analysis of risk concentration The Group’s concentrations of risk are managed by client/counterparty, by geographical region and by industry sector. Risk is monitored and managed against Board approved limits for industry sector and individual/group exposures.
The following table shows the risk concentration by industry for the components of the Statement of Financial Position.
BANK As at 31 December 2018 Financial Government Consumer Retail and Construction Manufacturing Service Total Services Wholesale Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial Assets Cash and cash equivalents 2,917,866 ------2,917,866 Balances with Central Bank of Sri Lanka - 4,219,932 - - - - - 4,219,932 Placements with banks 3,265,425 ------3,265,425 Reverse repurchased agreements 417,146 ------417,146 Derivative financial instruments 34,274 ------34,274 Financial investments at fair value through profit or loss 1,004,663 1,858,458 - - - - - 2,863,121 Financial assets at amortised cost - loans and advances to customers 10,456,066 - 14,159,818 18,953,615 5,282,187 10,980,315 13,917,207 73,749,208 Financial assets at amortised cost - debt and other instruments 5,460,371 11,107,569 - - - - - 16,567,940 Other loans and receivables ------Financial investments at fair value through other comprehensive income 1,530 17,734,429 - - - - - 17,735,959 Other financial assets ------153,865 153,865 Total 23,557,340 34,920,388 14,159,818 18,953,615 5,282,187 10,980,315 14,071,072 121,924,735
As at 31 December 2017 Financial Government Consumer Retail and Construction Manufacturing Service Total Services Wholesale Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial Assets Cash and cash equivalents 4,697,738 ------4,697,738 Balances with Central Bank of Sri Lanka - 3,785,679 - - - - - 3,785,679 Placements with banks 716,147 ------716,147 Reverse repurchased agreements 1,795 ------1,795 Derivative financialinstruments 2,760 ------2,760 Financial investments -held for trading 4,252,078 1,696,945 - - - - - 5,949,023 Loans and receivables to other customers 10,488,823 - 16,309,721 16,746,800 4,558,468 15,436,813 7,037,298 70,577,923 Other loans and receivables 5,718,198 3,891,440 - - - - - 9,609,639 Financial investments - available for sale 1,530 16,451,677 - - - - - 16,453,207 Financial investments - held to maturity 67,691 2,478,862 - - - - - 2,546,553 Other financialassets ------133,308 133,308 Total 25,946,760 28,304,603 16,309,721 16,746,800 4,558,468 15,436,813 7,170,606 114,473,772
Financial Reports Notes to the Financial Statements 279 Union Bank | Annual Report 2018
Notes to the Financial Statements
50. RISK MANAGEMENT (Cont.)
GROUP As at 31 December 2018 Financial Government Consumer Retail and Construction Manufacturing Service Total Services Wholesale Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial Assets Cash and cash equivalents 3,306,393 ------3,306,393 Balances with Central Bank of Sri Lanka - 4,219,932 - - - - - 4,219,932 Placements with banks 3,265,425 ------3,265,425 Reverse repurchased agreements 950,998 ------950,998 Derivative financial instruments 34,274 ------34,274 Financial investments at fair value through profit or loss 1,004,663 1,858,458 - - - - - 2,863,121 Financial assets at amortised cost - loans and advances to customers 10,260,671 - 17,948,343 21,574,377 5,839,289 11,618,476 14,878,912 82,120,068 Financial assets at amortised cost - debt and other instruments 4,834,835 11,107,569 - - - - - 15,942,404 Financial investments at fair value through other comprehensive income 38,090 17,734,429 - - 8,010 - 7,092 17,787,621 Other financial assets 81,401 - - - - - 153,866 235,267 Total 23,776,749 34,920,388 17,948,343 21,574,377 5,847,299 11,618,476 15,039,867 130,725,499
As at 31 December 2017 Financial Government Consumer Retail and Construction Manufacturing Service Total Services Wholesale Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial Assets Cash and cash equivalents 5,057,422 ------5,057,422 Balances with Central Bank of Sri Lanka - 3,785,679 - - - - - 3,785,679 Placements with banks 866,690 ------866,690 Reverse repurchased agreements 301,297 ------301,297 Derivative financialinstruments 2,760 ------2,760 Financial investments - held for trading 4,252,078 1,696,945 - - - - - 5,949,023 Loans and receivables to other customers 13,799,286 - 16,309,721 19,532,933 5,111,693 15,925,870 8,541,453 79,220,956 Other loans and receivables 4,782,662 3,891,440 - - - - - 8,674,102 Financial investments – available for sale 153,084 16,451,677 - - - - - 16,604,761 Financial investments – held to maturity 67,691 2,478,862 - - - - - 2,546,553 Other financialassets 44,883 - - - - - 155,042 199,925 Total 29,327,853 28,304,603 16,309,721 19,532,933 5,111,693 15,925,870 8,696,495 123,209,168
280 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
50. RISK MANAGEMENT (Cont.)
50.2.5 Concentration by Location Concentration by location for loans and advances is measured based on the location of the customer center that granted the facility, which has a high correlation with the location of the borrower except for loans granted by the Foreign Currency Banking Unit (FCBU). Concentration of loans and advances by location is given below.
BANK As at 31 December 2018 % 2017 % Rs.’000 Rs.’000
Central 1,656,359 2% 1,761,445 2% Eastern 321,867 0% 322,313 0% North Central 517,918 1% 871,404 1% North Western 2,236,092 3% 2,223,182 3% Northern 1,075,525 1% 1,119,324 2% Sabaragamuwa 1,952,161 3% 2,172,043 3% Southern 3,906,801 5% 4,404,819 6% Uva 475,255 1% 415,516 1% Western 61,607,230 84% 57,287,877 82% Total 73,749,208 100% 70,577,923 100%
Group As at 31 December 2018 % 2017 % Rs.’000 Rs.’000
Central 2,291,831 3% 2,433,792 3% Eastern 521,436 1% 511,011 1% North Central 976,504 1% 1,284,261 2% North Western 2,841,642 3% 2,941,344 4% Northern 1,075,525 1% 1,112,175 1% Sabaragamuwa 2,488,599 3% 2,764,753 3% Southern 5,600,915 7% 6,115,937 8% Uva 475,255 1% 412,862 1% Western 65,848,361 80% 61,644,821 77% Total 82,120,068 100% 79,220,956 100%
50.2.6 Commitments and guarantees To meet the financial needs of customers, the Bank enters into various irrevocable commitments and contingent liabilities. Even though these obligations may not be recognised on the statement of financial position, they do contain credit risk and are therefore part of the overall risk of the Bank.
The maximum exposure to credit risk relating to a financial guarantee is the maximum amount the Bank could have to pay if the guarantee is called upon. The maximum exposure to credit risk relating to a loan commitment is the full amount of the commitment. In both cases, the maximum risk exposure is significantly greater than the amount recognised as a liability in the statement of financial position.
Financial Reports Notes to the Financial Statements 281 Union Bank | Annual Report 2018
Notes to the Financial Statements
50. RISK MANAGEMENT (Cont.)
50.2.6 Commitments and guarantees contd. Following table shows the Bank’s and Group’s maximum credit risk exposure to commitment and contingencies
BANK GROUP As at 31 December 2018 2017 2018 2017 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Undrawn loan commitments 13,556,190 12,641,697 13,653,381 12,641,697 Guarantees 8,048,011 5,983,556 8,048,011 5,983,556 Letters of credit 1,961,053 2,991,693 1,961,053 2,991,693 Forward Contracts 5,741,729 898,864 5,741,729 898,864 Cheque pending for realisation 887,413 788,861 887,413 788,861 Spot Contracts 540,168 567,036 540,168 567,036 Acceptances 758,373 784,138 758,373 784,138 Other contingent items 2,844,267 1,657,888 2,938,699 1,657,888 Total 34,337,204 26,313,733 34,528,827 26,313,733
50.3 Liquidity risk Liquidity risk in simple terms is the risk of a bank’s inability to meet its commitments as and when due. In addition to being satisfied with the adequacy of liquid funds to meet its day today commitments. It is managed by Assets and Liability Committee (ALCO) using various statistical analysis using both current and stressed scenarios. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, and adopted a policy of managing assets with liquidity consistently through ALCO. The Bank has developed internal control processes and contingency funding plans for managing liquidity risk. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required.
50.3.1 Liquidity risk management Liquidity measurement is a difficult task and measured through stock and flow approaches.
(a) Stock approach – Under the stock approach, liquidity is measured in terms of key ratios which portray the liquidity stored in the balance sheet. (b) Flow approach – Banks should prepare a statement of maturities of assets and liabilities placing all cash inflows and outflows in the time bands according to the residual time to maturity 2018 2017 % %
Year End 21.7 21.3 Maximum 23.3 23.0 Minimum 20.5 20.8 Average 21.4 21.5
BANK GROUP 2018 2017 2018 2017 % % % %
Advances to deposits ratio 95.6 101.7 99.1 105.1 Net loans to assets 58.6 59.3 60.8 62.1
282 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
50. RISK MANAGEMENT (Cont.)
50.3.2 Analysis of financial assets and liabilities by remaining contractual maturities The table below summarises the maturity profile of the undiscounted cash flows of the Bank’s financial assets and liabilities as at 31 December. Repayments which are subject to notice are treated as if notice were to be given immediately. However, the Bank expects that many customers will not request repayments on the earliest date it could be required to pay and the table does not reflect the expected cash flows indicated by its deposit retention history.
BANK As at 31 December 2018 On demand Less than 3 to 12 1 to 5 Over 3 months months years 5 years Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial Assets Cash and cash equivalents 2,917,866 - - - - 2,917,866 Balances with Central Bank of Sri Lanka - - - - 4,219,932 4,219,932 Placements with banks - 3,265,425 - - - 3,265,425 Reverse repurchased agreements - 418,152 - - - 418,152 Derivative financial instruments - 6,740 27,534 - - 34,274 Financial investments at fair value through profit or loss - 1,043,590 436,708 1,371,031 605,250 3,456,579 Financial assets at amortised cost - loans and advances to customers 12,142,359 29,697,865 10,484,886 24,846,530 7,728,103 84,899,743 Financial assets at amortised cost - debt and other instruments - 2,191,733 8,099,052 5,089,077 3,458,109 18,837,971 Financial investments at fair value through other comprehensive income - 252,281 6,831,532 12,680,129 1,567,524 21,331,466 Other financial assets - 127,611 10,449 15,543 263 153,866 Total undiscounted financial assets 15,060,225 37,003,396 25,890,161 44,002,310 17,579,181 139,535,273
Financial Liabilities Due to banks - 6,413,883 2,979,166 164,763 - 9,557,812 Derivative financial instruments - 45,550 26,200 - - 71,750 Repurchased agreements - 17,061,903 537,353 - - 17,599,256 Due to customers 20,733,220 7,788,645 5,561,944 48,017,028 - 82,100,837 Other borrowed funds - - - 1,654,120 - 1,654,120 Other financial liabilities - 918,466 63,843 70,303 - 1,052,612 Total undiscounted financial liabilities 20,733,220 32,228,447 9,168,506 49,906,214 - 112,036,387 Net undiscounted financial assets/(liabilities) (5,672,995) 4,774,949 16,721,655 (5,903,904) 17,579,181 27,498,886 Cumulative gap (5,672,995) (898,046) 15,823,609 9,919,705 27,498,886
Financial Reports Notes to the Financial Statements 283 Union Bank | Annual Report 2018
Notes to the Financial Statements
50. RISK MANAGEMENT (Cont.)
50.3.2 Analysis of financial assets and liabilities by remaining contractual maturities contd.
BANK As at 31 December 2017 On demand Trading Less than 3 to 12 1 to 5 Over derivatives 3 months months years 5 years Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial Assets Cash and cash equivalents 4,697,738 - - - - - 4,697,738 Balances with Central Bank of Sri Lanka - - - - - 3,785,679 3,785,679 Placements with banks - - 716,147 - - - 716,147 Reverse repurchased agreements - - 1,795 - - - 1,795 Derivative financialinstruments - 2,760 - - - - 2,760 Financial investments - held for trading - - 4,270,725 83,091 1,595,406 499,822 6,449,044 Loans and receivables to other customers 15,959,643 - 28,713,680 9,919,073 23,604,945 5,934,766 84,132,107 Other loans and receivables - - 136,206 702,415 7,065,174 3,458,109 11,361,904 Financial investments - available for sale - - 858,575 8,125,183 8,609,789 1,183,467 18,777,014 Financial investments - held to maturity - - 125,210 2,292,601 408,787 - 2,826,598 Other financial assets - - 103,593 10,484 19,231 - 133,308 Total undiscounted financial assets 20,657,381 2,760 34,925,931 21,132,847 41,303,332 14,861,843 132,884,094
Financial Liabilities Due to banks - - 12,431,333 4,949,797 1,300,441 - 18,681,571 Derivative financialinstruments - 4,867 - - - - 4,867 Repurchased agreements - - 9,939,380 486,564 - - 10,425,944 Due to customers 20,697,715 - 30,032,995 22,240,264 4,850,496 - 77,821,470 Other borrowed funds - - - 22,196 1,202,616 - 1,224,812 Other financial liabilities - - 1,216,009 173,275 13,684 - 1,402,968 Total undiscounted financial liabilities 20,697,715 4,867 53,619,717 27,872,096 7,367,237 - 109,561,632 Net undiscounted financial assets/(liabilities) (40,334) (2,107) (18,693,786) (6,739,249) 33,936,095 14,861,843 23,322,462 Cumulative gap (40,334) (42,441) (18,736,227) (25,475,476) 8,460,619 23,322,462
284 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
50. RISK MANAGEMENT (Cont.)
50.3.2 Analysis of financial assets and liabilities by remaining contractual maturities contd.
GROUP As at 31 December 2018 On demand Less than 3 to 12 1 to 5 Over 3 months months years 5 years Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial Assets Cash and cash equivalents 3,306,393 - - - - 3,306,393 Balances with Central Bank of Sri Lanka - - - - 4,219,932 4,219,932 Placements with banks - 3,265,425 - - - 3,265,425 Reverse repurchased agreements 583,864 368,140 - - - 952,004 Derivative financial instruments - 6,740 27,534 - - 34,274 Financial investments at fair value through profit or loss - 1,043,590 436,708 1,371,031 605,250 3,456,579 Financial assets at amortised cost - loans and advances to customers 12,088,635 32,432,473 13,201,170 31,515,496 8,071,965 97,309,739 Financial assets at amortised cost - debt and other instruments - 2,449,246 8,099,052 4,206,028 3,458,109 18,212,435 Financial investments at fair value through other comprehensive income - 252,281 6,831,532 12,680,129 1,619,186 21,383,128 Other financial assets - 137,089 30,326 55,014 12,838 235,267 Total undiscounted financial assets 15,978,892 39,954,983 28,626,322 49,827,698 17,987,280 152,375,175
Financial Liabilities Due to banks 167,338 6,413,883 2,979,166 164,763 - 9,725,150 Derivative Financial Instruments - 45,550 26,200 - - 71,750 Repurchased agreements - 17,011,891 537,353 - - 17,549,244 Due to customers 20,671,401 9,500,135 7,947,080 52,069,114 - 90,187,730 Other borrowed funds (690) 576,724 872,660 2,366,537 - 3,815,231 Other financial liabilities - 906,915 68,949 70,303 - 1,046,167 Total undiscounted financial liabilities 20,838,049 34,455,098 12,431,408 54,670,717 - 122,395,272 Net undiscounted financial assets/(liabilities) (4,859,157) 5,499,885 16,194,914 (4,843,019) 17,987,280 29,979,903 Cumulative gap (4,859,157) 640,728 16,835,642 11,992,623 29,979,903
Financial Reports Notes to the Financial Statements 285 Union Bank | Annual Report 2018
Notes to the Financial Statements
50. RISK MANAGEMENT (Cont.)
50.3.2 Analysis of financial assets and liabilities by remaining contractual maturities contd.
GROUP As at 31 December 2017 On demand Trading Less than 3 to 12 1 to 5 Over derivatives 3 months months years 5 years Total Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial Assets Cash and cash equivalents 5,057,318 - - - - - 5,057,318 Balances with Central Bank of Sri Lanka - - - - - 3,785,679 3,785,679 Placements with banks - - 860,435 - - - 860,435 Reverse repurchased agreements - - 301,297 - - - 301,297 Derivative financialinstruments - 2,760 - - - - 2,760 Financial investments-held for trading - - 4,270,725 83,091 1,595,406 499,822 6,449,044 Loans and receivables to other customers 15,338,081 - 30,585,531 12,690,652 29,749,872 7,059,910 95,424,046 Other loans and receivables 2,120,773 - 136,206 702,415 7,065,174 367,038 10,391,606 Financial investments – available for sale - - 858,575 8,125,183 8,609,789 1,183,668 18,777,215 Financial investments – held to maturity - - 125,210 2,292,601 408,787 - 2,826,598 Other financial assets - - 103,593 55,367 19,231 - 178,191 Total undiscounted financial assets 22,516,172 2,760 37,241,572 23,949,309 47,448,259 12,896,117 144,054,189
Financial Liabilities Due to banks 90,057 - 12,431,333 4,949,797 1,300,441 - 18,771,628 Derivative Financial Instruments - 4,867 - - - - 4,867 Repurchased agreements - - 9,776,241 486,564 - - 10,262,805 Due to customers 20,053,622 - 30,032,995 22,240,264 4,850,496 - 77,177,377 Other borrowed funds - - - 70,638 2,897,595 - 2,968,233 Other financial liabilities - - 1,354,306 192,981 15,240 - 1,562,527 Total undiscounted financial liabilities 20,143,679 4,867 53,594,875 27,940,244 9,063,772 - 110,747,437 Net undiscounted financial assets/(liabilities) 2,372,493 (2,107) (16,353,303) (3,990,935) 38,384,487 12,896,117 33,306,750 Cumulative gap 2,372,493 2,370,386 (13,982,917) (17,973,852) 20,410,635 33,306,750
286 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
50. RISK MANAGEMENT (Cont.)
50.3.3 Contractual Maturities of Commitments and Contingencies The table below shows the contractual expiry by maturity of the Bank’s contingent liabilities and commitments.
Each undrawn loan commitment is included in the time band containing the earliest date it can be drawn down.
For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called.
BANK As at 31 December 2018 Total On demand Less than 3 to 12 1 to 5 Over 5 3 months months years years Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Commitments Undrawn OD 3,400,648 3,400,648 - - - - Commitments for unutilised facilities 10,155,542 10,155,542 - - - - Total 13,556,190 13,556,190 - - - -
Contingent Liabilities Acceptances 758,373 392,077 364,273 2,023 - - Guarantees 8,048,011 1,578,091 2,237,709 3,276,771 954,891 549 Documentary credit 1,961,053 351,041 1,447,474 162,538 - - Forward contracts 5,741,729 - 5,595,643 146,086 - - Spot contracts 540,168 - 540,168 - - - Cheques pending for realisation 887,413 887,413 - - - - Other contingent items 2,844,267 744,930 1,956,128 81,625 61,583 - Total 20,781,014 3,953,552 12,141,395 3,669,043 1,016,474 549
Total commitments and contingent liabilities 34,337,204 17,509,742 12,141,395 3,669,043 1,016,474 549
As at 31 December 2017 Total On demand Less than 3 to 12 1 to 5 Over 5 3 months months years years Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Commitments Undrawn OD 3,464,164 3,464,164 - - - - Commitments for unutilised facilities 9,177,534 9,177,534 - - - - Total 12,641,698 12,641,698 - - - -
Contingent Liabilities Acceptances 784,138 389,128 341,160 53,850 - - Guarantees 5,983,556 1,311,405 2,152,950 1,980,192 499,591 39,417 Documentary credit 2,991,693 329,698 2,340,624 321,371 - - Forward contracts 790,496 - 790,496 - - - Forward bonds 108,368 - 108,368 - - - Spot contracts 567,036 - 567,036 - - - Cheques pending for realisation 788,861 788,861 - - - - Other contingent items 1,657,888 758,321 740,293 75,521 83,753 - Total 13,672,036 3,577,413 7,040,927 2,430,934 583,344 39,417
Total commitments and contingent liabilities 26,313,733 16,219,211 7,040,927 2,430,934 583,344 39,417
Financial Reports Notes to the Financial Statements 287 Union Bank | Annual Report 2018
Notes to the Financial Statements
50. RISK MANAGEMENT (Cont.)
50.3.3 Contractual Maturities of Commitments and Contingencies contd.
GROUP As at 31 December 2018 Total On demand Less than 3 to 12 1 to 5 Over 5 3 months months years years Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Commitments Undrawn OD 3,497,839 3,400,648 97,191 - - - Commitments for unutilised facilities 10,155,542 10,155,542 - - - - Total 13,653,381 13,556,190 97,191 - - -
Contingent Liabilities Acceptances 758,373 392,077 364,273 2,023 - - Guarantees 8,048,011 1,578,091 2,237,709 3,276,771 954,891 549 Documentary credit 1,961,053 351,041 1,447,474 162,538 - - Forward contracts 5,741,729 - 5,595,643 146,086 - - Spot contracts 540,168 - 540,168 - - - Cheques pending for realisation 887,413 887,413 - - - - Other contingent items 2,938,699 744,930 1,956,128 176,058 61,583 - Total 20,875,446 3,953,552 12,141,395 3,763,476 1,016,474 549
Total commitments and contingent liabilities 34,528,827 17,509,742 12,238,586 3,763,476 1,016,474 549
As at 31 December 2017 Total On demand Less than 3 to 12 1 to 5 Over 5 3 months months years years Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Commitments Undrawn OD 3,464,164 3,464,264 - - - - Commitments for unutilised facilities 9,177,534 9,177,534 - - - - Total 12,641,698 12,641,798 - - - -
Contingent Liabilities Acceptances 784,138 389,128 341,160 53,850 - - Guarantees 5,983,556 1,311,405 2,152,950 1,980,192 499,591 39,417 Documentary credit 2,991,693 329,698 2,340,624 321,371 - - Forward contracts 790,496 - 790,496 - - - Forward bonds 108,368 - 108,368 - - - Spot contracts 567,036 - 567,036 - - - Cheques pending for realisation 788,861 788,861 - - - - Other contingent items 1,657,888 758,321 740,293 75,521 83,753 - Total 13,672,036 3,577,413 7,040,927 2,430,934 583,344 39,417
Total commitments and contingent liabilities 26,313,733 16,219,211 7,040,927 2,430,934 583,344 39,417
288 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
50. RISK MANAGEMENT (Cont.)
50.4 Market risk Market risk is defined as the risk of losses in on or off balance sheet positions arising from movements in market price. The market risk comprises of interest rate risk, foreign exchange risk, equity price risk and commodity price risk. Other risks such as volatility risk and basis risk are integral parts of these risk types. The Bank classifies exposures to market risk into either trading or non trading portfolios and manages each of those portfolios separately. The market risk for the trading portfolio is marked to market on a daily basis. Non–trading positions are managed and monitored using other sensitivity analyses on a monthly basis.
50.4.1 Market risk – trading (including financial assets and financial liabilities designated at fair value through profit or loss) The trading book is marked to market on a daily basis by the Treasury Mid Office (TMO) who’s independent from Treasury front office and is reporting to the Chief Risk Officer. Various Board approved limits pertain to Market Risk also monitored on a daily basis by TMO.
50.5 Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments impacting the Statement of Profit or Loss and the economic value of equity. The Board has established limits on the non–trading interest rate gaps for stipulated periods.
The sensitivity of the income statement is the effect of the assumed changes in interest rates on the profit or loss for a year. The total sensitivity of equity is based on the assumption that there are parallel shifts in the yield curve.
50.5.1 Interest rate sensitivity analysis The following table demonstrates the sensitivity of the Bank’s profit before tax to reasonable possible changes in interest rate with all other variables held constant.
2018 Increase/(Decrease) in basis points Sensitivity of effect on Profit/(Loss)
Rate sensitive assets 100 / (100) 648Mn/(648Mn) Rate sensitive liabilities 100 / (100) (748Mn)/748Mn Net effect (100Mn)/100Mn
2017 Increase/(Decrease) in basis points Sensitivity of effect on Profit/(Loss)
Rate sensitive assets 100 / (100) 514Mn / (514Mn) Rate sensitive liabilities 100 / (100) (572Mn) / 572Mn Net effect (58Mn) / 58Mn
Financial Reports Notes to the Financial Statements 289 Union Bank | Annual Report 2018
Notes to the Financial Statements
50. RISK MANAGEMENT (Cont.)
50.5.2 Interest rate risk exposure The table below analyses the Bank’s interest rate risk exposure on financial assets and financial liabilities. The Bank’s financial assets and financial liabilities are included at carrying amount and categorised by the earlier of contractual re–pricing or maturity dates.
BANK As at 31 December 2018 Carrying Interest Sensitive Non Amount Less than 3 to 12 1 to 5 Over 5 interest 3 months months years years Sensitive Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial Assets Cash and cash equivalents 2,917,866 - - - - 2,917,866 Balances with Central Bank of Sri Lanka 4,219,932 - - - - 4,219,932 Placements with banks 3,265,425 3,265,425 - - - - Reverse repurchased agreements 417,146 417,146 - - - - Derivative financial instruments 34,274 - - - - 34,274 Financial investments at fair value through profit or loss 2,863,121 83,815 338,732 991,525 444,386 1,004,663 Financial assets at amortised cost - loans and advances to customers 73,749,208 40,538,095 8,871,438 16,768,672 7,571,003 - Financial assets at amortised cost - debt and other instruments 16,567,940 1,713,233 6,986,422 7,868,286 - - Financial investments at fair value through other comprehensive income 17,735,959 356,011 5,838,324 10,235,230 1,304,863 1,530 Other financial assets 153,865 - - - - 153,865 Total 121,924,735 46,373,723 22,034,916 35,863,713 9,320,252 8,332,131
Financial Liabilities Due to banks 9,348,209 6,257,092 2,926,354 164,763 - - Derivative financial instruments 71,750 - - - - 71,750 Repurchased agreements 17,585,912 17,059,785 526,127 - - - Due to customers 79,251,073 47,840,709 24,638,526 2,728,684 - 4,043,154 Other borrowed funds 1,234,220 - - 1,234,220 - - Other financial liabilities 972,330 - - - - 972,330 Total 108,463,494 71,157,586 28,091,007 4,127,667 - 5,087,234 Interest rate sensitivity gap 13,461,241 (24,783,863) (6,056,091) 31,736,046 9,320,252 3,244,897
290 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
50. RISK MANAGEMENT (Cont.)
BANK As at 31 December 2017 Carrying Interest Sensitive Non Amount Less than 3 to 12 1 to 5 Over 5 interest 3 months months years years Sensitive Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial Assets Cash and cash equivalents 4,697,738 - - - - 4,697,738 Balances with Central Bank of Sri Lanka 3,785,679 - - - - 3,785,679 Placements with banks 716,147 716,147 - - - - Reverse repurchased agreements 1,795 1,795 - - - - Derivative financialinstruments 2,760 - - - - 2,760 Financial investments-held for trading 5,949,023 39,056 298 1,233,078 424,513 4,252,078 Loans and receivables to other customers 70,577,923 39,686,513 8,423,266 16,943,469 5,524,675 Other loans and receivables 9,609,639 372,860 695,767 8,541,012 - - Financial investments – available for sale 16,453,207 959,921 7,178,603 7,306,010 1,007,143 1,530 Financial investments – held to maturity 2,546,553 89,639 2,076,137 380,777 - - Other financialassets 133,308 - - - - 133,308 Total 114,473,772 41,865,931 18,374,071 34,404,346 6,956,331 12,873,093
Financial Liabilities Due to banks 17,208,641 12,391,519 4,719,296 97,826 - - Derivative financialinstruments 4,867 - - - - 4,867 Repurchased agreements 10,381,193 9,912,838 468,355 - - - Due to customers 70,325,594 43,673,516 20,393,818 2,999,804 - 3,258,456 Other borrowed funds 1,224,812 22,196 - 1,202,616 - - Other financialliabilities 1,402,968 - - - - 1,402,968 Total 100,548,075 66,000,069 25,581,469 4,300,246 - 4,666,291 Interest rate sensitivity gap 13,925,697 (24,134,138) (7,207,398) 30,104,100 6,956,331 8,206,802
Financial Reports Notes to the Financial Statements 291 Union Bank | Annual Report 2018
Notes to the Financial Statements
50. RISK MANAGEMENT (Cont.)
GROUP As at 31 December 2018 Carrying Interest Sensitive Non Amount Less than 3 to 12 1 to 5 Over 5 interest 3 months months years years Sensitive Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial Assets Cash and cash equivalents 3,306,393 - - - - 3,306,393 Balances with Central Bank of Sri Lanka 4,219,932 - - - - 4,219,932 Placements with banks 3,265,425 3,265,425 - - - - Reverse repurchased agreements 950,998 950,998 - - - - Derivative financial instruments 34,274 - - - - 34,274 Financial investments at fair value through profit or loss 2,863,121 83,815 338,732 991,525 444,386 1,004,663 Financial assets at amortised cost - loans and advances to customers 82,120,068 40,758,956 12,024,736 21,369,390 7,966,986 18,925 Financial assets at amortised cost - debt and other instruments 15,942,404 1,970,746 6,986,422 6,985,236 - - Financial investments at fair value through other comprehensive income 17,787,621 356,011 5,838,324 10,235,230 1,356,324 1,731 Other financial assets 235,267 - - - - 235,267 Total 130,725,500 47,385,948 25,188,214 39,581,381 9,767,696 8,821,185
Financial Liabilities Due to banks 9,515,547 6,424,430 2,926,354 164,763 - - Derivative financial instruments 71,750 - - - - 71,750 Repurchased agreements 17,535,900 17,009,773 526,127 - - - Due to customers 86,266,123 49,336,899 26,599,720 6,241,734 44,616 4,043,154 Other borrowed funds 2,921,647 1,398,704 93,332 1,326,520 - 103,091 Other financial liabilities 1,046,168 - - - - 1,046,168 Total 117,357,135 74,169,807 30,145,533 7,733,017 44,616 5,264,162 Interest rate sensitivity gap 13,368,365 (26,783,859) (4,957,319) 31,848,364 9,723,080 3,557,023
292 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
50. RISK MANAGEMENT (Cont.)
GROUP As at 31 December 2017 Carrying Interest Sensitive Non Amount Less than 3 to 12 1 to 5 Over 5 interest 3 months months years years Sensitive Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Financial Assets Cash and cash equivalents 5,057,422 359,684 - - - 4,697,738 Balances with Central Bank of Sri Lanka 3,785,679 - - - - 3,785,679 Placements with banks 866,690 866,690 - - - - Reverse repurchased agreements 301,297 301,297 - - - - Derivative financialinstruments 2,760 - - - - 2,760 Financial investments - held for trading 5,949,023 39,056 298 1,233,078 424,513 4,252,078 Loans and receivables to other customers 79,220,956 39,642,806 11,764,991 21,462,551 6,350,608 - Other loans and receivables 8,674,102 372,861 730,528 7,570,713 - - Financial investments - available for sale 16,604,761 1,111,274 7,178,603 7,306,010 1,007,143 1,731 Financial investments - held to maturity 2,546,553 89,639 2,076,137 380,777 - - Other financialassets 199,925 - 34,799 - - 165,126 Total 123,209,168 42,783,307 21,785,356 37,953,129 7,782,264 12,905,112
Financial Liabilities Due to banks 17,298,727 12,481,576 4,719,296 97,826 - 29 Derivative financialinstruments 4,867 - - - - 4,867 Repurchased agreements 10,218,055 9,749,700 468,355 - - - Due to customers 76,747,977 44,305,438 23,835,536 5,348,547 - 3,258,456 Other borrowed funds 2,968,233 1,444,997 386,920 1,096,558 - 39,758 Other financialliabilities 1,562,527 - - - - 1,562,527 Total 108,800,386 67,981,711 29,410,107 6,542,931 - 4,865,637 Interest rate sensitivity gap 14,408,782 (25,198,404) (7,624,751) 31,410,198 7,782,264 8,039,475
50.6 Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Board has set limits on positions by currency. In accordance with the Bank’s policy, positions are monitored on a daily basis and hedging strategies are used to ensure positions are maintained with established limits. Following table illustrate the changes to the Bank’s capital adequacy ratio (CAR) due to the volatility in the exchange rates.
50.6.1 Adjusted CAR for the possible exchange rate movements
2018 Revised CAR After Stress Testing If Exchange Rate Current Scenario 1 Scenario 2 Scenario 3 5% 10% 15%
Bank Tier 1 Ratio Moves down by 17.41% 17.41% 17.42% 17.42% Total CAR Moves down by 17.41% 17.41% 17.42% 17.42% Bank Tier 1 Ratio Moves up by 17.41% 17.41% 17.40% 17.40% Total CAR Moves up by 17.41% 17.41% 17.40% 17.40%
Financial Reports Notes to the Financial Statements 293 Union Bank | Annual Report 2018
Notes to the Financial Statements
50. RISK MANAGEMENT (Cont.)
2017 Revised CAR After Stress Testing If Exchange Rate Current Scenario 1 Scenario 2 Scenario 3 5% 10% 15%
Bank Tier 1 Ratio Moves down by 18.85% 18.85% 18.85% 18.86% Total CAR Moves down by 18.85% 18.85% 18.85% 18.86% Bank Tier 1 Ratio Moves up by 18.85% 18.85% 18.85% 18.84% Total CAR Moves up by 18.85% 18.85% 18.84% 18.84%
50.6.2 Foreign currency sensitivity The following table demonstrates the maximum impact in Statement of Profit or Loss for the maximum usage if the allowable net open position limit
Changes in Net open Net open Effect Foreign position position on profit currency (Before currency (After currency rate sensitivity) sensitivity)
2018 5%/(5%) 192Mn 202Mn/182Mn (10Mn)/10Mn 2017 5%/(5%) 72Mn 76Mn/68Mn (4Mn)/ 4Mn
50.7 Equity price risk Equity price risk is the risk that the fair value of equities decreases as the result of changes in the level of equity indices and individual stocks.
50.8 Country risk Country risk is the risk that an occurrence within the country could have an adverse effect on the Group directly by impairing the value of the Group or indirectly through an obligor’s inability to meet its obligations to the Group.
Generally, these occurrences relate, but are not limited to sovereign events as defaults or restructuring; political events such as contested elections, restrictions on currency movements, non market currency convertibility, regional currency conflicts, economic contagion from other events such as sovereign default issues or regional turmoil, banking and currency crisis and natural disasters.
50.8.1 Geographical analysis
BANK & GROUP As at 31 December 2018 Asia Europe America Australia Middle East Total
Balances with foreign banks 120,566 29,000 611,962 5,079 3,879 770,486 Placements with banks - - 2,836,238 - - 2,836,238 Total 120,566 29,000 3,448,200 5,079 3,879 3,606,724
As at 31 December 2017 Asia Europe America Australia Middle East Total
Balances with foreign banks 33,878 448,099 2,201,540 160,076 842 2,844,435 Placements with banks - - 409,159 - - 409,159 Total 33,878 448,099 2,610,699 160,076 842 3,253,594
Except for the above, the Bank does not carry any other financial asset or financial liability outside Sri Lanka.
294 Financial Reports Notes to the Financial Statements Union Bank | Annual Report 2018
51. Capital
The Bank maintains adequate capital base to cover risks inherent in the business and is meeting the capital adequacy requirements of the local banking supervisor, Central Bank of Sri Lanka. The adequacy of the Bank’s capital is monitored using the rules and ratio established by the Basel Committee on Banking supervision.
51.1 Capital management The Bank’s capital management objectives can be summarised as follows; aa Maintain sufficient capital to meet minimum regulatory capital requirements. aa Hold sufficient capital to support the Bank’s risk appetite. aa Provide additional capital to business segment of the Bank to achieve the overall strategic objectives.
51.2 Regulatory capital The Central Bank of Sri Lanka (CBSL) sets and monitors capital requirements for licensed commercial banks in Sri Lanka based on the BASEL framework. Accordingly, commercial banks in Sri Lanka need to maintain minimum capital adequacy ratios as specified in the CBSL guidelines. The Bank is well above the minimum requirements.
Bank As at 31 December 2018 2017 Actual Required Actual Required
Common Equity Tier 1 (CET1) Capital (Rs. ‘000) 15,031,473 N/A 15,357,209 N/A Tier 1 Capital (Rs. ‘000) 15,031,473 N/A 15,357,209 N/A Total Capital (Rs. ‘000) 15,031,473 N/A 15,357,209 N/A
Risk Weighted Assets (Rs. ‘000) 86,356,645 N/A 81,454,631 N/A Common Equity Tier 1 Capital Ratio (%) 17.41% 6.38% 18.85% 7.25% Tier 1 Capital Ratio (%) 17.41% 11.88% 18.85% 11.25% Total Capital Ratio (%) 17.41% 11.88% 18.85% 11.25%
Group As at 31 December 2018 2017 Actual Required Actual Required
Common Equity Tier 1 (CET1) Capital (Rs. ‘000) 15,557,644 N/A 16,332,655 N/A Tier 1 Capital (Rs. ‘000) 15,557,644 N/A 16,332,655 N/A Total Capital (Rs. ‘000) 15,557,644 N/A 16,332,655 N/A
Risk Weighted Assets (Rs. ‘000) 94,471,678 N/A 90,300,332 N/A Common Equity Tier 1 Capital Ratio (%) 16.47% 6.38% 18.09% 7.25% Tier 1 Capital Ratio (%) 16.47% 11.88% 18.09% 11.25% Total Capital Ratio (%) 16.47% 11.88% 18.09% 11.25%
Financial Reports Notes to the Financial Statements 295 Union Bank | Annual Report 2018
Ten Years at a Glance
2018* 2017 2016 2015 2014 2013 2012 2011 2010 2009 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Operating Results Gross income 13,910,425 11,937,763 8,545,874 5,005,441 4,546,418 4,792,752 3,924,168 2,523,139 2,078,120 2,052,704 Interest income 12,142,268 10,498,284 7,223,211 4,155,484 3,972,062 4,129,391 3,444,114 2,083,742 1,771,977 1,855,784 Interest expense 8,490,006 7,452,377 4,716,433 2,133,782 2,209,487 2,973,676 2,211,053 1,102,215 997,841 1,392,873 Net interest income 3,652,262 3,045,907 2,506,778 2,021,702 1,762,575 1,155,715 1,233,061 981,527 774,135 462,911 Non interest income 1,768,157 1,439,479 1,322,663 849,957 574,356 663,361 480,055 413,064 306,144 196,920 Share of profit of equity accounted investees, net of tax 34,614 55,801 76,696 43,069 ------Operating expenses (Including impairment & VAT) 4,677,639 4,007,069 3,470,201 2,679,483 2,276,128 1,715,108 1,250,141 943,348 772,287 525,848 Profit/ (loss) before taxation 777,394 534,118 435,936 235,246 60,803 103,967 462,975 451,244 307,992 133,983 Income tax 304,846 73,500 (15,244) 13,296 3,715 (8,747) 149,331 143,550 158,195 71,842 Profit/ (loss) after income tax 472,548 460,618 451,180 221,950 57,088 112,714 313,644 307,693 149,797 62,141
Assets Cash & balances with Central Bank 7,137,798 8,483,417 4,994,490 2,811,325 2,408,572 2,134,479 2,325,987 1,887,571 1,092,432 1,396,635 Placement with banks 3,265,425 716,147 2,819,628 284,078 73,995 314,545 1,601,622 1,951,978 943,349 - Reverse repurchased agreements 417,146 1,795 2,137 1,513,425 10,543,106 1,349,743 601,313 245,127 1,852,605 - Derivative financial instruments 34,274 2,760 15,412 13,481 4,150 1,458 - 148 1,275 - Financial investments at fair value through profit or loss 2,863,121 ------Financial investments - held for trading - 5,949,023 1,346,932 8,463,807 2,584,471 989,206 431,054 149,622 161,206 - Financial assets at amortised cost - loans and advances to customers 73,749,208 ------Loans and receivables to other customers - 70,577,923 55,438,415 40,095,332 25,944,570 23,461,925 20,024,729 17,292,929 9,919,465 - Financial assets at amortised cost - debt and other instruments 16,567,940 ------Other loans and receivables - 9,609,639 7,747,231 5,721,549 2,470,115 2,375,111 - - - - Financial investments - held to maturity - 2,546,553 140,231 140,529 140,027 1,736,728 2,285,290 2,197,453 2,112,995 - Financial investments at fair value through other comprehensive income 17,735,959 ------Financial investments - available for sale - 16,453,207 16,520,365 8,356,130 1,647,686 139,556 - - - - Current tax asset 336,167 436,279 268,456 208,404 149,448 94,515 - - - 39,182 Investments in subsidiaries 835,373 1,262,612 940,027 883,378 892,364 892,364 912,364 912,382 - - Goodwill and intangible assets 1,202,532 1,220,999 1,151,033 1,118,200 951,750 53,951 39,996 10,671 4,025 - Property, plant & equipment 789,158 888,359 897,371 913,814 754,548 1,025,088 614,441 465,108 235,670 201,581 Deferred tax asset 115,596 - 82,534 ------Investment securities ------4,795,821 Sri Lanka government securities ------1,632,054 1,006,065 2,434,527 - Bills of exchange ------330,735 Net loans and advances ------7,189,590 Other assets 870,457 858,695 644,247 475,909 430,318 442,293 354,025 272,269 212,907 352,606 Total 125,920,154 119,007,408 93,008,509 70,999,361 48,995,120 35,010,962 30,822,875 26,391,323 18,970,456 14,306,150
Liabilities Due to banks 9,348,209 17,208,641 12,160,244 6,945,249 2,090,588 163,448 911,898 380,999 320,825 11,963,996 Derivative financial instruments 71,750 4,867 3,976 2,860 - 2,058 2,058 1,913 - 92,397 Repurchased agreements 17,585,912 10,381,193 10,256,670 8,242,551 1,116,489 129,450 499,495 128,289 81,785 - Due to customers 79,251,073 70,325,594 51,841,372 37,652,508 27,808,891 28,339,687 23,142,802 19,754,597 13,442,439 - Other borrowed funds 1,234,220 1,224,812 ------Current tax liabilities - - - - - 36,134 36,134 21,535 - - Deferred tax liabilities - 144,922 - 30,089 25,284 23,964 37,155 19,661 5,884 - Other liabilities 1,801,642 1,859,682 1,663,033 1,212,916 1,203,584 897,127 730,329 885,386 538,351 650,983 Total liabilities 109,292,806 101,149,711 75,925,295 54,086,172 32,244,837 29,553,677 25,359,871 21,192,379 14,414,048 12,707,375
Shareholder’s funds Stated capital 16,334,782 16,334,782 16,334,782 16,334,782 16,334,782 4,979,791 4,979,791 4,979,791 4,604,791 1,813,170 Share warrants 65,484 65,484 65,484 65,484 65,484 - - - - - Reserves 227,082 1,457,431 682,951 512,923 350,018 477,494 483,213 219,153 (48,385) (214,396) Total equity 16,627,348 17,857,697 17,083,214 16,913,189 16,750,284 5,457,285 5,463,004 5,198,944 4,556,406 1,598,774 Total 125,920,154 119,007,408 93,008,509 70,999,362 48,995,121 35,010,962 30,822,875 26,391,323 18,970,453 14,306,149
Share information Earnings per share 0.43 0.42 0.41 0.20 0.10 0.30 0.90 0.90 0.60 0.40
* 2018 Figures are computed based on SLFRS 9.
296 Financial Reports Ten Years at a Glance Union Bank | Annual Report 2018
2018* 2017 2016 2015 2014 2013 2012 2011 2010 2009 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Operating Results Gross income 13,910,425 11,937,763 8,545,874 5,005,441 4,546,418 4,792,752 3,924,168 2,523,139 2,078,120 2,052,704 Interest income 12,142,268 10,498,284 7,223,211 4,155,484 3,972,062 4,129,391 3,444,114 2,083,742 1,771,977 1,855,784 Interest expense 8,490,006 7,452,377 4,716,433 2,133,782 2,209,487 2,973,676 2,211,053 1,102,215 997,841 1,392,873 Net interest income 3,652,262 3,045,907 2,506,778 2,021,702 1,762,575 1,155,715 1,233,061 981,527 774,135 462,911 Non interest income 1,768,157 1,439,479 1,322,663 849,957 574,356 663,361 480,055 413,064 306,144 196,920 Share of profit of equity accounted investees, net of tax 34,614 55,801 76,696 43,069 ------Operating expenses (Including impairment & VAT) 4,677,639 4,007,069 3,470,201 2,679,483 2,276,128 1,715,108 1,250,141 943,348 772,287 525,848 Profit/ (loss) before taxation 777,394 534,118 435,936 235,246 60,803 103,967 462,975 451,244 307,992 133,983 Income tax 304,846 73,500 (15,244) 13,296 3,715 (8,747) 149,331 143,550 158,195 71,842 Profit/ (loss) after income tax 472,548 460,618 451,180 221,950 57,088 112,714 313,644 307,693 149,797 62,141
Assets Cash & balances with Central Bank 7,137,798 8,483,417 4,994,490 2,811,325 2,408,572 2,134,479 2,325,987 1,887,571 1,092,432 1,396,635 Placement with banks 3,265,425 716,147 2,819,628 284,078 73,995 314,545 1,601,622 1,951,978 943,349 - Reverse repurchased agreements 417,146 1,795 2,137 1,513,425 10,543,106 1,349,743 601,313 245,127 1,852,605 - Derivative financial instruments 34,274 2,760 15,412 13,481 4,150 1,458 - 148 1,275 - Financial investments at fair value through profit or loss 2,863,121 ------Financial investments - held for trading - 5,949,023 1,346,932 8,463,807 2,584,471 989,206 431,054 149,622 161,206 - Financial assets at amortised cost - loans and advances to customers 73,749,208 ------Loans and receivables to other customers - 70,577,923 55,438,415 40,095,332 25,944,570 23,461,925 20,024,729 17,292,929 9,919,465 - Financial assets at amortised cost - debt and other instruments 16,567,940 ------Other loans and receivables - 9,609,639 7,747,231 5,721,549 2,470,115 2,375,111 - - - - Financial investments - held to maturity - 2,546,553 140,231 140,529 140,027 1,736,728 2,285,290 2,197,453 2,112,995 - Financial investments at fair value through other comprehensive income 17,735,959 ------Financial investments - available for sale - 16,453,207 16,520,365 8,356,130 1,647,686 139,556 - - - - Current tax asset 336,167 436,279 268,456 208,404 149,448 94,515 - - - 39,182 Investments in subsidiaries 835,373 1,262,612 940,027 883,378 892,364 892,364 912,364 912,382 - - Goodwill and intangible assets 1,202,532 1,220,999 1,151,033 1,118,200 951,750 53,951 39,996 10,671 4,025 - Property, plant & equipment 789,158 888,359 897,371 913,814 754,548 1,025,088 614,441 465,108 235,670 201,581 Deferred tax asset 115,596 - 82,534 ------Investment securities ------4,795,821 Sri Lanka government securities ------1,632,054 1,006,065 2,434,527 - Bills of exchange ------330,735 Net loans and advances ------7,189,590 Other assets 870,457 858,695 644,247 475,909 430,318 442,293 354,025 272,269 212,907 352,606 Total 125,920,154 119,007,408 93,008,509 70,999,361 48,995,120 35,010,962 30,822,875 26,391,323 18,970,456 14,306,150
Liabilities Due to banks 9,348,209 17,208,641 12,160,244 6,945,249 2,090,588 163,448 911,898 380,999 320,825 11,963,996 Derivative financial instruments 71,750 4,867 3,976 2,860 - 2,058 2,058 1,913 - 92,397 Repurchased agreements 17,585,912 10,381,193 10,256,670 8,242,551 1,116,489 129,450 499,495 128,289 81,785 - Due to customers 79,251,073 70,325,594 51,841,372 37,652,508 27,808,891 28,339,687 23,142,802 19,754,597 13,442,439 - Other borrowed funds 1,234,220 1,224,812 ------Current tax liabilities - - - - - 36,134 36,134 21,535 - - Deferred tax liabilities - 144,922 - 30,089 25,284 23,964 37,155 19,661 5,884 - Other liabilities 1,801,642 1,859,682 1,663,033 1,212,916 1,203,584 897,127 730,329 885,386 538,351 650,983 Total liabilities 109,292,806 101,149,711 75,925,295 54,086,172 32,244,837 29,553,677 25,359,871 21,192,379 14,414,048 12,707,375
Shareholder’s funds Stated capital 16,334,782 16,334,782 16,334,782 16,334,782 16,334,782 4,979,791 4,979,791 4,979,791 4,604,791 1,813,170 Share warrants 65,484 65,484 65,484 65,484 65,484 - - - - - Reserves 227,082 1,457,431 682,951 512,923 350,018 477,494 483,213 219,153 (48,385) (214,396) Total equity 16,627,348 17,857,697 17,083,214 16,913,189 16,750,284 5,457,285 5,463,004 5,198,944 4,556,406 1,598,774 Total 125,920,154 119,007,408 93,008,509 70,999,362 48,995,121 35,010,962 30,822,875 26,391,323 18,970,453 14,306,149
Share information Earnings per share 0.43 0.42 0.41 0.20 0.10 0.30 0.90 0.90 0.60 0.40
* 2018 Figures are computed based on SLFRS 9.
Financial Reports Ten Years at a Glance 297 Union Bank | Annual Report 2018
Pillar III Market Disclosures
Key Regulatory Ratios-Capital and Liquidity
As at 31 December BANK GROUP 2018 2017 2018 2017
Regulatory Capital (LKR ‘000) Common Equity Tier 1 15,031,473 15,357,209 15,557,644 16,332,655 Tier 1 Capital 15,031,473 15,357,209 15,557,644 16,332,655 Total Capital 15,031,473 15,357,209 15,557,644 16,332,655
Regulatory Capital Ratios (%) Common Equity Tier 1 Capital Ratio (Minimum Requirement - 2018- 6.375% & 2017 - 5.75%) 17.41% 18.85% 16.47% 18.09% Tier 1 Capital Ratio (Minimum Requirement - 2018 - 7.875% & 2017 - 7.25%) 17.41% 18.85% 16.47% 18.09% Total Capital Ratio (Minimum Requirement - 2018 - 11.875% & 2017 - 11.25%) 17.41% 18.85% 16.47% 18.09%
Regulatory Liquidity Statutory Liquid Assets Domestic Banking Unit (LKR’000) 18,006,765 16,953,184 Off-Shore Banking Unit (USD’000) 12,791 12,168 Statutory Liquid Assets Ratio % (Minimum Requirement-20%) Domestic Banking Unit (%) 21.77% 21.27% Off -Shore Banking Unit (%) 21.14% 21.13% Liquidity Coverage Ratio (%) (Minimum Requirement - 2018 - 90% & 2017 - 80%) Rupee 335.43% 160.14% All Currency 131.50% 83.02%
298 Financial Reports Pillar III Market Disclosures Union Bank | Annual Report 2018
Basel III Computation of Capital Ratio
As at 31 December 2018 2017 BANK GROUP BANK GROUP Rs.’000 Rs.’000 Rs.’000 Rs.’000
Common Equity Tier I (CETI) Capital after adjustments 15,031,473 15,557,644 15,357,209 16,332,655 Total Common Equity Tier I (CET1) Capital 17,324,907 17,624,126 17,957,003 18,189,503 Equity capital or stated capital/assigned capital 16,334,782 16,334,782 16,334,782 16,334,782 Reserve fund 139,882 157,569 116,255 131,519 Published retained earnings/(Accumulated retained losses) 1,193,505 798,077 1,159,782 714,443 Published accumulated other comprehensive income (OCI) (461,562) (461,562) 244,852 245,368 General and other disclosed reserves 118,300 118,300 101,332 101,332 Unpublished current year’s profit/(loss) and gains reflected in OCI - - - - Ordinary shares issued by consolidated banking and financial subsidiaries of the Bank and held by third parties - 676,960 - 662,060 Total Adjustments to CET1 Capital 2,293,434 2,066,482 2,599,794 1,856,848 Goodwill (net) - 113,031 - 113,031 Other intangible assets (net) 1,202,533 1,437,513 1,220,999 1,455,367 Deferred tax assets (net) 115,596 515,938 - 288,450 Shortfall of the cumulative impairment to specific provisions - - 72,632 - Significant investments in the capital of financial institutions where the Bank owns more than 10 per cent of the issued ordinary share capital of the entity 975,305 - 1,306,163 -
Additional Tier 1 (AT1) Capital after adjustments - - - - Total Additional Tier 1 (ATI) Capital - - - - Qualifying Additional Tier 1 Capital Instruments - - - - Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties - - - - Total adjustments to AT1 Capital - - - - Investment in own shares - - - - Regulatory adjustments applied to AT1 due to insufficient Tier 2 capital to cover adjustments - - - -
Tier 2 Capital after Adjustments - - - - Total Tier 2 Capital - - - - Qualifying Tier 2 Capital Instruments - - - - Revaluation gains - - - - Loan loss provisions - - - - Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties - - - - Total Adjustments to Tier 2 - - - - Investment in own shares - - - - Reciprocal cross holdings in Tier 2 capital instruments - - - - CET1 Capital 15,031,473 15,557,644 15,357,209 16,332,655 Total Tier 1 Capital 15,031,473 15,557,644 15,357,209 16,332,655 Total Capital 15,031,473 15,557,644 15,357,209 16,332,655
Financial Reports Pillar III Market Disclosures 299 Union Bank | Annual Report 2018
Pillar III Market Disclosures
Basel III Computation of Capital Ratio (Cont.)
As at 31 December 2018 2017 BANK GROUP BANK GROUP Rs.’000 Rs.’000 Rs.’000 Rs.’000
Total Risk Weighted Assets (RWA) 86,356,645 94,471,678 81,454,631 90,300,332
RWAs for Credit Risk 74,058,959 80,939,633 64,377,014 71,018,733 RWAs for Market Risk 6,992,096 7,051,323 12,398,293 12,632,642 RWAs for Operational Risk 5,305,589 6,480,721 4,679,324 6,648,957 CET1 Capital Ratio (including Capital Conservation Buffer, Countercyclical Capital Buffer & Surcharge on D-SIBs)(%) 17.41% 16.47% 18.85% 18.09% of which : Capital Conservation Buffer (%) 1.88% 1.88% 1.25% 1.25% of which : Countercyclical Buffer (%) - - - - of which : Capital Surcharge on D-SIBs (%) N/A N/A N/A N/A Total Tier 1 Capital Ratio (%) 17.41% 16.47% 18.85% 18.09% Total Capital Ratio (including Capital Conservation Buffer, Countercyclical Capital Buffer & Surcharge on D-SIBs)(%) 17.41% 16.47% 18.85% 18.09% of which : Capital Conservation Buffer (%) 1.88% 1.88% 1.25% 1.25% of which : Countercyclical Buffer (%) - - - - of which : Capital Surcharge on D-SIBs (%) N/A N/A N/A N/A
300 Financial Reports Pillar III Market Disclosures Union Bank | Annual Report 2018
Basel III Computation of Liquidity Coverage Ratio - bank
As at 31 December 2018 2017 Total Total Total Total Un-weighted Weighted Un-weighted Weighted Value Value Value Value Rs.’000 Rs.’000 Rs.’000 Rs.’000
Total stock of High -Quality Liquid Assets (HQLA) 11,392,892 12,762,762 25,436,389 10,491,612 Total Adjusted Level 1A Assets 11,392,892 11,392,892 24,817,846 10,574,856 Level 1 Assets 12,762,762 12,762,762 9,965,850 9,965,850 Total Adjusted Level 2A Assets - - 618,544 525,762 Level 2A Assets - - 618,544 525,762 Total Adjusted Level 2B Assets - - - - Level 2B Assets - - - - Total Cash Outflows 121,975,905 20,943,895 113,281,336 24,186,020 Deposits 51,600,198 5,151,164 46,370,678 4,637,068 Unsecured wholesale funding 29,701,572 13,996,571 32,304,044 18,400,185 Secured funding transactions - - - - Undrawn portion of committed (irrevocable) facilities and other contingent funding obligations 40,599,182 1,721,207 34,604,508 1,146,661 Additional requirements 74,953 74,953 2,106 2,106 Total Cash inflows 19,374,109 11,238,548 18,751,724 11,548,664 Maturing secured lending transactions backed by collateral 1,942,955 1,942,949 192,686 192,678 Committed facilities - - - - Other inflows by counterparty which are maturing within 30 days 16,660,667 9,295,599 18,556,193 11,355,986 Operational deposits 770,487 - 2,845 - Other cash inflows - - - - Liquidity Coverage Ratio,(%)(Stock of High Quality Liquid Assets/ Total Net Cash Outflows over the Next 30 Calender Days)*100 131.50% 83.02%
Financial Reports Pillar III Market Disclosures 301 Union Bank | Annual Report 2018
Pillar III Market Disclosures
Main Features of Regulatory Capital Instruments
As at 31 December 2018 BANK GROUP Rs.’000 Rs.’000
Description of the Capital Instrument - - Issuer - - Unique identifier - - Governing law(s) of the instrument - - Original date of issuance - - Par value of instrument - - Perpetual or dated - - Original maturity date, if applicable - - Amount recognised in regulatory capital 15,031,473* 15,557,644 Accounting classification (equity/liability) Equity Equity Issuer Call subject to prior supervisory approval - - Optional call date, contingent call dates and redemption amount - - Subsequent call dates, if applicable - - Coupons/Dividends - - Fixed or floating dividend/coupon - - Coupon rate and any related index - - Non-cumulative or cumulative - - Convertible or Non-Convertible - - If convertible, conversion trigger (s) - - If convertible, fully or partially - - If convertible, mandatory or optional - - If convertible, conversion rate - -
Note : * Tier 1 & Tier 2 Instruments not yet issued.
Current and Future Capital Requirement Overview of capital planning and assessment process The capital management plan of the Bank is integrated with the Bank’s rolling strategic plan and the Internal Capital Adequacy Assessment Process (ICAAP). In the planning process, the Bank is actively realigning portfolios to optimise capital utilisation. Material risk exposures in line with strategic plan Strategic plan is sensitive to stability of external variables such as GDP, interest rates, exchange rate and also tax regulations. Current and future capital needs, anticipated capital The Bank is sufficiently capitalised and does not see a capital requirement for the expenditure and desirable capital level foreseeable future to comply with the minimum capital requirement of Rs. 20 Bn commencing 31.12.2020. Internal and external capital sources The primary source of capital is through the internally generated capital. In addition, during the financial year ended 31 December 2014, the Bank had issued 218,281,250 warrants to the main shareholder to be exercised within a period of 6 years at a price of Rs.16 per warrant. Right issue or a debenture issue could also be an option. Assessment of the adequacy of Bank’s capital commensurate Management monitors capital adequacy ratios on a regular basis and ensure that it with all material risks and other capital needs in relation to operates well above the regulatory limit and the Bank is sufficiently capitalised to cover the its current and future activities. General contingency plan Basel III minimum capital ratios. for dealing with divergences and unexpected events such as raising additional capital, restricting business activities or Currently the Bank is adequately capitalised. In an unlikely event of capital requirement the using risk mitigation techniques. above mentioned sources can be used.
302 Financial Reports Pillar III Market Disclosures Union Bank | Annual Report 2018
Credit Risk under Standardised Approach - Credit Risk Exposures and Credit Risk Mitigation (CRM) Effects
As at 31 December 2018 BANK Exposures before Exposures post (CCF) RWA and Credit Conversion Factor and RWA Density (CCF) and CRM CRM Asset Classes On-Balance Off-Balance On-Balance Off-Balance RWA RWA Sheet Amount Sheet Amount Sheet Amount Sheet Amount Density Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 %
Claims on Central Government and Central Bank of Sri Lanka 32,567,888 - 32,567,888 - - - Claims on Foreign Sovereigns and their Central Banks ------Claims on Public Sector Entities ------Claims on Official Entities and Multilateral Development Banks ------Claims on Banks Exposures 5,274,476 - 5,274,476 - 3,289,541 62% Claims on financial institutions 12,093,080 923,320 12,093,080 226,685 9,011,253 73% Claims on corporates 18,245,664 13,079,259 18,245,664 997,655 19,137,340 99% Retail claims 31,782,470 21,097,579 25,499,176 4,480,413 25,853,104 86% Claims secured by residential property 6,826,420 - 6,826,420 - 4,731,953 69% Claims secured by commercial real estate 6,469,800 - 6,469,800 - 6,469,800 100% Non-Performing Assets (NPAs) 1,879,235 - 1,879,235 - 2,302,620 123% Higher-risk categories 160,068 - 160,068 - 400,169 250% Cash items and other assets 6,083,475 - 4,974,370 - 2,863,179 58% Total 121,382,576 35,100,158 113,990,177 5,704,753 74,058,959 65%
Financial Reports Pillar III Market Disclosures 303 Union Bank | Annual Report 2018
Pillar III Market Disclosures
Credit Risk under Standardised Approach - Credit Risk Exposures and Credit Risk Mitigation (CRM) Effects (Cont.)
As at 31 December 2018 Group Exposures before Exposures post CCF RWA and Credit Conversion Factor and RWA Density (CCF) and CRM CRM Asset Classes On-Balance Off-Balance On-Balance Off-Balance RWA RWA Sheet Amount Sheet Amount Sheet Amount Sheet Amount Density Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 %
Claims on Central Government and Central Bank of Sri Lanka 33,101,740 - 33,101,740 - - - Claims on Foreign Sovereigns and their Central Banks ------Claims on Public Sector Entities ------Claims on Official Entities and Multilateral Development Banks ------Claims on Banks Exposures 5,480,830 - 5,480,830 - 3,351,340 61% Claims on financial institutions 11,645,359 923,320 11,645,359 226,685 9,037,393 78% Claims on corporates 18,261,558 13,079,259 18,261,558 997,655 19,153,234 105% Retail claims 39,718,534 21,097,579 33,435,240 4,480,413 31,768,325 95% Claims secured by residential property 6,826,420 - 6,826,420 - 4,731,953 69% Claims secured by commercial real estate 6,588,432 - 6,588,432 - 6,588,432 100% Non-Performing Assets (NPAs) 2,707,013 - 2,707,013 - 3,052,972 113% Higher-risk categories ------Cash items and other assets 6,965,632 - 5,382,546 - 3,255,984 60% Total 131,295,518 35,100,158 123,429,138 5,704,753 80,939,633 66%
Note : (i) NPAs-As per Banking Act Directions on Classification of loans and advances, income recognition and provisioning. (ii)RWA Density-Total RWA/Exposures post CCF and CRM
304 Financial Reports Pillar III Market Disclosures Union Bank | Annual Report 2018
Credit Risk under Standardised Approach : Exposures by Asset Classes and Risk Weights
As at 31 December 2018 BANK Post CCF & CRM Risk Weight 0% 20% 50% 75% 100% 150% >150% Total Credit Exposures Amount Asset Classes Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Claims on Central Government and Central Bank of Sri Lanka 32,567,888 ------32,567,888 Claims on Foreign Sovereigns and their Central Banks ------Claims on Public Sector Entities (PSEs) ------Claims on Official Entities and Multilateral Development Banks(MDBs) ------Claims on Banks Exposures - 2,248,624 372,071 - 2,653,781 - - 5,274,476 claims on financial institutions - 45,892 6,543,595 - 5,730,278 - - 12,319,765 Claims on corporates - 100,000 51,958 - 19,091,361 - - 19,243,319 Retail claims 6,837 98,718 - 16,136,836 13,737,198 - - 29,979,589 Claims secured by residential property - - 4,188,935 - 2,637,486 - - 6,826,421 Claims secured by commercial real estate - - - - 6,469,800 - - 6,469,800 Non-Performing Assets (NPAs) - - 88,063 - 856,339 934,833 - 1,879,235 Higher-risk categories ------160,068 160,068 Cash items and other assets 2,065,970 56,526 - - 2,851,873 - - 4,974,369 Total 34,640,695 2,549,760 11,244,622 16,136,836 54,028,116 934,833 160,068 119,694,930
As at 31 December 2018 GROUP Post CCF & CRM Risk Weight 0% 20% 50% 75% 100% 150% >150% Total Credit Exposures Amount Asset Classes Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Claims on Central Government and Central Bank of Sri Lanka 33,101,740 ------33,101,740 Claims on Foreign Sovereigns and their Central Banks ------Claims on Public Sector Entities (PSEs) ------Claims on Official Entities and Multilateral Development Banks(MDBs) ------Claims on Banks Exposures - 2,386,551 440,498 - 2,653,781 - - 5,480,830 Claims on financial institutions - 45,892 5,845,874 - 5,730,278 250,000 - 11,872,044 Claims on corporates - 100,000 51,958 - 19,107,255 - - 19,259,213 Retail claims 55,939 98,718 - 24,023,797 13,737,198 - - 37,915,652 Claims secured by residential property - - 4,188,935 - 2,637,486 - - 6,826,421 Claims secured by commercial real estate - - - - 6,588,432 - - 6,588,432 Non-Performing Assets (NPAs) - - 242,914 - 1,529,266 934,833 - 2,707,013 Higher-risk categories ------Cash items and other assets 2,081,342 56,526 - - 3,244,678 - - 5,382,546 Total 35,239,021 2,687,687 10,770,179 24,023,797 55,228,374 1,184,833 - 129,133,891
Financial Reports Pillar III Market Disclosures 305 Union Bank | Annual Report 2018
Pillar III Market Disclosures
Market Risk under Standardised Measurement Method
As at 31 December 2018 Risk Weighted Assets BANK GROUP Rs.’000 Rs.’000
(a) RWA for Interest Rate Risk 568,867 568,867 General Interest Rate Risk 568,867 568,867 (I) Net Long or Short Position 568,867 568,867 (II) Horizontal Disallowance - - (iii) Vertical Disallowance - - (iv) Options - - Specific Interest Rate Risk - - (b) RWA for Equity 238,607 245,641 (i) General Equity Risk 119,304 122,073 (ii) Specific Equity Risk 119,304 123,568 (C) RWA for Foreign Exchange & Gold 22,837 22,837 Capital Charge for Market Risk [(a)+(b)+ (c)] * CAR 6,992,096 7,051,323
306 Financial Reports Pillar III Market Disclosures Union Bank | Annual Report 2018
Operational Risk under Basic Indicator Approach/The Standardised Approach/The Alternative Standardised Approach
As at 31 December 2018 BANK GROUP Capital Fixed Gross Income Capital Gross Income Charge Factor Change Factor Factor 1st Year 2nd Year 3rd Year 1st Year 2nd Year 3rd Year Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
The Basic Indicator Approach 15% 3,428,422 4,068,517 5,103,835 15% 4,297,517 4,990,216 6,103,980 The Standardised Approach Corporate finance 18% - - - - 18% - - - Trading and sales 18% - - - - 18% - - - Payment and settlement 18% - - - - 18% - - - Agency services 15% - - - - 15% - - - Asset management 12% - - - - 12% - - - Retail brokerage 12% - - - - 12% - - - Retail banking 12% - - - - 12% - - - Commercial banking 15% - - - - 15% - - - The Alternative Standardised Approach Corporate finance 18% - - - - 18% - - - Trading and sales 18% - - - - 18% - - - Payment and settlement 18% - - - - 18% - - - Agency services 15% - - - - 15% - - - Asset management 12% - - - - 12% - - - Retail brokerage 12% - - - - 12% - - - Retail banking 12% 0.035 - - - 12% - - - Commercial banking 15% 0.035 - - - 15% - - - Capital Charges for Operational Risk The Basic Indicator Approach 630,039 769,586 The Standardised Approach The Alternative Standardised Approach Risk-Weighted Amount for Operational Risk The Basic Indicator Approach 5,305,589 6,480,721 The Standardised Approach The Alternative Standardised Approach
Financial Reports Pillar III Market Disclosures 307 Union Bank | Annual Report 2018
Pillar III Market Disclosures
Difference between Accounting and Regulatory Scopes and Mapping of Financial Statement Categories with Regulatory Risk Categories-Bank
As at 31 December 2018 a b c d e Carrying Values Carrying Subject to Subject to Not subject as Reported Values under Credit Market to Capital in Published Scope of Risk Risk Requirements Financial Regulatory Framework Framework or Subject Statements Reporting to Deduction from Capital Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Assets 125,920,154 126,698,519 113,990,177 2,800,681 9,570,237 Cash and cash equivalents 2,917,866 2,927,339 2,927,339 - - Balances with Central Bank of Sri Lanka 4,219,932 4,219,932 4,219,932 - - Placements with banks 3,265,425 3,266,132 3,266,132 - - Reverse repurchased agreements 417,146 416,851 416,851 - - Derivative financial instruments 34,274 - - - - Financial investments at fair value through profit or loss 2,863,121 2,800,681 - 2,800,681 Financial assets at amortised cost - loans and advances to customers 73,749,208 74,305,478 66,913,079 - 7,392,399 Financial assets at amortised cost - debt and other instruments 16,567,940 16,248,154 15,948,154 - 300,000 Financial investments at fair value through other comprehensive income 17,735,959 17,379,161 17,379,161 - - Current tax assets 336,167 - - - - Investments in real estate - - - - - Investments in subsidiaries 835,373 1,172,797 160,068 - 675,305 Goodwill and intangible assets 1,202,532 1,202,532 - - 1,202,533 Property, plant and equipment 789,158 789,158 789,158 - - Deferred tax assets 115,596 - - - - Other assets 870,457 1,970,303 1,970,303 - - Liabilities 109,292,806 109,300,040 - - - Due to Banks 9,348,209 8,620,501 - - - Derivative financial instruments 71,750 - - - - Repurchased agreements 17,585,912 - - - - Due to other customers 79,251,073 77,308,759 - - - Other borrowings 1,234,220 18,998,362 - - - Current tax liabilities - - - - - Deferred tax liabilities - - - - - Other liabilities 1,801,642 4,372,418 - - - Off -balance sheet liabilities 34,337,204 35,100,158 34,368,311 - 731,847 Guarantees 6,100,621 6,100,621 5,707,701 - 392,920 Performance bonds 1,947,390 1,947,390 1,739,045 - 208,345 Letter of credits 1,961,053 1,961,053 1,830,470 - 130,583 Other contingent items 7,027,708 7,027,708 7,027,708 - - Undrawn loan commitments 13,556,190 13,556,190 13,556,190 - - Other commitments 3,744,241 4,507,196 4,507,197 - - Equity Stated capital 16,334,782 16,334,782 - - - Share warrants 65,484 65,484 - - - Statutory reserve fund 139,883 95,439 - - - ESOP reserve 52,816 52,816 - - - Fair value reserve (310,991) - - - - Retained earnings 345,374 849,958 - - - Total equity attributable to equity holders of the Bank 16,627,348 17,398,479 - - - Total equity and liabilities 125,920,154 126,698,519 - - -
Note : The reasons for more than 1% variances between (a) and (b) are SLFRS related adjustments on the carrying value reported in Published Financial Statements.
308 Financial Reports Pillar III Market Disclosures Union Bank | Annual Report 2018
Quarterly Performance of the Bank
2018 Quarter 1 Quarter 2 Quarter 3 Quarter 4
For the Quarter ended (Rs.’000) Net Interest Income 853,458 934,596 936,783 927,426 Non Interest Income 417,590 369,685 418,846 426,878 Less: Impairment for Loans and Other Losses 109,012 49,391 55,559 128,320 Total Operating Expenses 938,088 960,696 944,538 886,156 Profit Before Value Added Tax (VAT), Nation Building Tax (NBT) and Debt Repayment Levy (DRL) on Financial Services 246,162 312,180 362,937 326,840 Share of Profit of equity accounted investees, net of tax 22,214 17,985 7,405 (12,990) Profit After Tax 130,222 122,857 136,753 82,718
As at the Quarter ended (Rs.’000) Total Assets 114,947,456 114,353,921 122,375,270 125,920,154 Financial assets at amortised cost-loans and advances to customers 70,736,407 72,241,052 71,646,673 73,749,208 Due to customers 69,038,207 69,823,542 76,142,710 79,251,073 Total equity attributable to equity holders of the Bank 17,797,592 17,867,421 17,910,421 16,627,348
Regulatory Capital Adequacy (%) Common Equity Tier 1 Capital Ratio (Minimum Requirement - 6.375%) 19.87% 19.36% 17.56% 17.41% Tier 1 Capital Ratio (Minimum Requirement - 7.875%) 19.87% 19.36% 17.56% 17.41% Total Capital Ratio (Minimum Requirement - 11.875%) 19.87% 19.36% 17.56% 17.41%
Asset Quality (%) Gross Non Performing Advances Ratio, % (net of interest suspense) 3.01% 3.18% 3.57% 3.68% Net Non Performing Advances, % (net of interest suspense and provision) 1.92% 2.07% 2.39% 2.51%
Regulatory Liquidity (%) Statutory Liquid Assets, Ratio (Minimum Requirement, 20%) Domestic Banking Unit 21.27% 20.71% 21.64% 21.77% Foreign currency Banking Unit 21.93% 21.16% 20.99% 21.14%
Profitability (Annualised) (%) Interest Margin (%) 2.92% 3.06% 3.01% 2.98% Return on Assets (before tax) (%) 0.50% 0.61% 0.66% 0.63% Return on Equity (after tax) (%) 2.92% 2.83% 2.91% 2.74%
Ordinary share information (Rs.) Market Value - Closing price 12.80 12.70 10.80 11.00 High 14.30 15.80 12.90 12.90 Low 12.70 12.10 10.80 10.70
Financial Reports Quarterly Performance of the Bank 309 Union Bank | Annual Report 2018
GRI 201-1 2018 - Direct Economic Value Generated & Distributed
For the year ended 31st December 2018 2017 Rs.’000 Rs.’000
Direct Economic Value Generated Interest Income 12,142,268 10,498,284 Net Fee Commission Income 832,850 673,469 Net fair value gains/ (losses) from financial instruments at fair value through profit or loss 309,519 - Net Gain/(loss) from Trading - 428,848 Other Operating Income 490,630 227,414 Total 13,775,267 11,828,015
Less: Economic Value Distributed To Depositors & Lender as a interest 8,490,006 7,452,377 To Employees as Emoluments - Salary, bonus & contribution plans 1,408,127 1,219,680 - Benefits 413,655 377,730 To providers of Suppliers & Services 1,024,421 956,765 Total 11,336,209 10,006,552
Less: To Government as Taxation VAT on Financial Services 368,851 267,812 NBT on Financial Services 49,180 35,708 Debt repayment Levy on Financial Services 52,693 - Crop Insurance Levy 4,426 4,875 Stamp duty & Other Local Taxes 434,971 331,705 Deposit Insurance premium to Central Bank of Sri Lanka 61,301 53,574 Total 971,422 693,673
Economic Value Retained 1,467,636 1,127,790
Economic Value Distributed - 2018 Economic Value Distributed - 2017
7.40% 0.50% 5.98% 0.50% 8.32% 8.94%
14.80% 14.94%
68.98% 69.64%
To Depositors & Lender as a interest To Depositors & Lender as a interest To Employees as Emoluments To Employees as Emoluments To providers of Suppliers & Services To providers of Suppliers & Services To Government as Taxation To Government as Taxation To Central Bank of Sri Lanka as Deposit Insurance To Central Bank of Sri Lanka as Deposit Insurance premium premium
310 Financial Reports 2018 - Direct Economic Value Generated & Distributed Union Bank | Annual Report 2018
Compliance with Annual Report Disclosure Requirements of Central Bank of Sri Lanka
Compliance with Annual Report Disclosure Requirements of Central Bank of Sri Lanka Given below is the state of compliance with the Disclosure requirements specified by the Central Bank of Sri Lanka for the preparation of Annual Financial Statements of Licensed Commercial Banks.
1. Information about the significance of financial instruments for financial position and performance 1.1 Statement of Financial Position 1.1.1 Disclosures on categories of financial assets and financial liabilities 1.1.2 Other disclosures Note 18 (i) Special disclosures about financial assets and financial liabilities designated to be measured at fair value N/A through profit or loss, including disclosures about credit risk and market risk, changes in fair values attributable to these risks and the methods of measurement. (ii) Reclassifications of financial instruments from one category to another. Note 3 (iii) Information about financial assets pledged as collateral and about financial or non-financial assets held as Note 44 collateral. (iv) Reconciliation of the impairment allowance account for credit losses by class of financial assets. Note 24.5.2 (v) Information about compound financial instruments with multiple embedded derivatives. N/A (vi) Breaches of terms of loan agreements. N/A 1.2 Statement of Comprehensive Income 1.2.1 Disclosures on items of income, expense, gains and losses Note 4,5,6,7,8,9,10,11,12 & 13 1.2.2 Other disclosures: (i) Total interest income and total interest expense for those financial instruments that are not measured at fair Note 5 value through profit and loss. (ii) Fee income and expense. Note 6 (iii) Amount of impairment losses by class of financial assets. Note 10 (iv) Interest income on impaired financial assets. Note 5.1 1.3 Other disclosures 1.3.1 Accounting policies for financial instruments Note 2.3.2, 2.3.3, 2.3.4, 2.4.1, 2.4.2, 2.4.3, 2.4.4, 2.1.7.1 & 19-26 1.3.2 Financial liabilities designated as at FVTPL (i) If a bank is presenting the effects of changes in that financial liability’s credit risk in other comprehensive income (OCI): (a) Any transfers of the cumulative gain/loss within equity during the period, including the reasons for the transfers; (b) If the liability is de-recognised during the period, then the amount (if any) presented in OCI that was N/A realised at de-recognition; (c) Detailed description of the methodologies used to determine whether presenting the effects of changes in a liability’s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss; and
(ii) Detailed description, if the effects of changes in a liability’s credit risk are presented in profit or loss.
Financial Reports Compliance with Annual Report Disclosure Requirements of Central Bank of Sri Lanka 311 Union Bank | Annual Report 2018
Compliance with Annual Report Disclosure Requirements of Central Bank of Sri Lanka
1.3.3 Investments in equity instruments designated as at FVOCI (i) Details of equity instruments that have been designated as at FVOCI and the reasons for the designation; (ii) Fair value of each investment at the reporting date; (iii) Dividends recognised during the period, separately for investments de-recognised during the reporting period and those held at the reporting date; (iv) Any transfers of the cumulative gain or loss within equity during the period and the reasons for those N/A transfers; (v) If investments in equity instruments measured at FVOCI are de-recognised during the reporting period, (a) reasons for disposing of the investments; (b) fair value of the investments at the date of de-recognition; and (c) the cumulative gain or loss on disposal. 1.3.4 Reclassifications of financial assets (i) For all reclassifications of financial assets in the current or previous reporting period: (a) date of reclassification; (b) detailed explanation of the change in the business model and a qualitative description of its effect on the financial statements; and (c) the amount reclassified into and out of each category. (ii) For reclassifications from FVTPL to amortised cost or FVOCI: Note 3 (a) the effective interest rate (EIR) determined on the date of reclassification; and (b) the interest revenue recognised. (iii) For reclassifications from FVOCI to amortised cost, or from FVTPL to amortised cost or FVOCI: (a) the fair value of the financial assets at the reporting date; and (b) the fair value gain or loss that would have been recognised in profit or loss or OCI during the reporting period if the financial assets had not been reclassified. 1.3.5 Information on hedge accounting N/A 1.3.6 Information about the fair values of each class of financial asset and financial liability, along with: (i) Comparable carrying amounts. Note 48 (ii) Description of how fair value was determined. Note 48 (iii) The level of inputs used in determining fair value. Note 48 (iv) Reconciliation of movements between levels of fair value measurement hierarchy, additional disclosures for Note 48 financial instruments for which fair value is determined using level 3 inputs. (v) Information if fair value cannot be reliably measured. N/A 2. Information about the nature and extent of risks arising from financial instruments 2.1. Qualitative disclosures 2.1.1. Risk exposures for each type of financial instrument Note 50 - Risk Management 2.1.2. Management’s objectives, policies, and processes for managing those risks Note 50.1 - Risk Management 2.1.3. Changes from the prior period Risk Management 2.2 Quantitative disclosures 2.2.1. Summary of quantitative data about exposure to each risk at the reporting date. Note 50 - Risk Management
312 Financial Reports Compliance with Annual Report Disclosure Requirements of Central Bank of Sri Lanka Union Bank | Annual Report 2018
2.2.2 Disclosures about credit risk, liquidity risk, market risk, operational risk, interest rate risk and how these risks are managed. (i) Credit Risk (a) Maximum amount of exposure (before deducting the value of collateral), information about credit quality of financial assets that are neither past due nor impaired and information about credit quality of financial assets. (b) For financial assets that are past due or impaired, disclosures on age, factors considered in determining as impaired and the description of collateral on each class of financial asset. (c) Information about collateral or other credit enhancements obtained or called. (d) Credit risk management practices: aa Information about credit risk management practices and how they relate to the recognition and measurement of expected credit losses (ECL), including the methods, assumptions and information used to measure ECL. aa Quantitative and qualitative information to evaluate the amounts in the financial statements arising from ECL, including changes and the reasons for those changes. aa How the bank determines whether the credit risk of financial instruments has increased significantly since initial recognition, including whether and how financial instruments are considered to have Note 50.2 - Risk low credit risk, including the classes of financial instruments to which the low credit risk exception Management has been applied; and the presumption that financial assets with contractual payments more than 30 days past due have a significant increase in credit risk has been rebutted; aa The bank’s definitions of default for different financial instruments, including the reasons for selecting those definitions; aa How instruments are grouped if ECL are measured on a collective basis; aa How the bank determines that financial assets are credit-impaired; aa The bank’s write-off policy, including the indicators that there is no reasonable expectation of recovery; and aa How the modification requirements have been applied, including how the bank determines whether the credit risk of a financial asset that has been modified while subject to a lifetime ECL allowance has improved to the extent that the loss allowance reverts to being measured at an amount equal to 12-month ECL and monitors the extent to which the loss allowance on those assets subsequently reverts to being measured at an amount equal to lifetime ECL. (e) ECL calculations aa Basis of the inputs, assumptions and the estimation techniques used when, - estimating 12-month and lifetime ECL; - determining whether the credit risk of financial instruments has increased significantly since initial recognition; and - determining whether financial assets are credit-impaired. aa How forward-looking information has been incorporated into the determination of ECL, including the use of macro-economic information; and aa changes in estimation techniques or significant assumptions made during the reporting period and the reasons for those changes. Note 2.4.2 (f) Amounts arising from ECL aa Provide reconciliation for each class of financial instrument [Financial assets measured at AC, Financial assets mandatorily measured at FVOCI, Loan commitments when there is an obligation to extend credit (except those measured at fair value through profit or loss), Financial guarantee contracts (except those measured at Fair Value through profit or loss), Lease receivables within the scope of LKAS 17: Leases, Contract assets within the scope of SLFRS 15: Revenue from contracts with customers etc…] of the opening balance to the closing balance of the impairment loss allowance. aa Explain the reasons for changes in the loss allowances in the reconciliation.
Financial Reports Compliance with Annual Report Disclosure Requirements of Central Bank of Sri Lanka 313 Union Bank | Annual Report 2018
Compliance with Annual Report Disclosure Requirements of Central Bank of Sri Lanka
(g) Collaterals aa Amount that best represents the bank’s maximum exposure to credit risk at the reporting date, without taking account of any collateral held or other credit enhancements; aa Narrative description of collateral held as security and other credit enhancements (except for lease receivables), including: - discussion on the nature and quality of the collaterals held; - explanation of any significant changes in quality as a result of a deterioration or changes in the bank’s collateral policies during the reporting period; - information about financial instruments for which the bank has not recognised a loss allowance Note 50.2 because of the collateral; - quantitative information about the collateral held as security and other credit enhancements; - information about the fair value of the collateral and other credit enhancements, or to quantify the exact value of the collateral that was included in calculation of ECL. (h) Written-off assets aa Contractual amount outstanding of financial assets written off during the reporting period that are still subject to enforcement activity. (i) For other disclosures, refer Pillar III disclosures of the Banking Act Directions No. 01 of 2016 on Capital Market disclosures - page 315 Requirements under Basel III for Licensed Banks. (ii) Liquidity Risk (a) A maturity analysis of financial assets and liabilities. Note 50.3 - Risk Management (b) Description of approach to risk management. Note 50.3 - Risk Management (c) For other disclosures, refer Pillar III disclosures of the Banking Act Directions No. 01 of 2016 on Capital Market disclosures - page 315 Requirements under Basel III for Licensed Banks. (iii) Market Risk Note 50.4 (a) A sensitivity analysis of each type of market risk to which the entity is exposed. N/A (b) Additional information, if the sensitivity analysis is not representative of the entity’s risk exposure. (c) For other disclosures, refer Pillar III disclosures of the Banking Act Directions No. 01 of 2016 on Capital Requirements under Basel III for Licensed Banks. Note 50 and (iv) Operational Risk Market disclosures For other disclosures, refer Pillar III disclosures of the Banking Act Directions No. 01 of 2016 on Capital - Page 315 Requirements under Basel III for Licensed Banks. (v) Equity risk in the banking book (a) Qualitative disclosures aa Differentiation between holdings on which capital gains are expected and those taken under other objectives including for relationship and strategic reasons. aa Discussion of important policies covering the valuation and accounting of equity holdings in the banking book. (b) Quantitative disclosures N/A aa Value disclosed in the statement of financial position of investments, as well as the fair value of those investments; for quoted securities, a comparison to publicly quoted share values where the share price is materially different from fair value. aa The types and nature of investments aa The cumulative realised gains/(losses) arising from sales and liquidations in the reporting period.
314 Financial Reports Compliance with Annual Report Disclosure Requirements of Central Bank of Sri Lanka Union Bank | Annual Report 2018
(vi) Interest rate risk in the banking book (a) Qualitative disclosures aa Nature of interest rate risk in the banking book (IRRBB) and key assumptions (b) Quantitative disclosures Note 50.5 - Risk aa The increase/ (decline) in earnings or economic value (or relevant measure used by management) for Management upward and downward rate shocks according to management’s method for measuring IRRBB, broken down by currency (as relevant). 2.2.3 Information on concentrations of risk Risk Management 3. Market Disclosures 3.1 Regulatory Requirements on Capital and Liquidity (i) Key regulatory ratios-capital and liquidity Page 298 (ii) Basel III computation of capital ratios Page 299 (iii) Basel III computation of Liquidity Coverage Ratio Page 301 (iv) Main features of regulatory capital instruments Page 302 3.2 Risk Weighted Assets (RWA) (i) Summary discussion on adequacy/meeting current and future capital requirements Page 302 (ii) Credit Risk under Standardised Approach: Credit Risk Exposures and Credit Risk Mitigation (CRM) Effects Page 303, 304 (iii) Credit Risk under Standardised Approach: exposures by asset classes and risk weights Page 305 (iv) Market Risk under Standardised Measurement Method Page 306 (v) Operational Risk under Basic Indicator Approach/ The Standardised Approach/ The Alternative Page 307 Standardised Approach 3.3 Linkages Between Financial Statements & Regulatory Exposures (i) Differences between accounting and regulatory scopes and mapping of Financial Statement categories Page 308 with regulatory risk categories – Bank only (ii) Explanations of differences between accounting and regulatory exposure amounts Page 308
Financial Reports Compliance with Annual Report Disclosure Requirements of Central Bank of Sri Lanka 315 Union Bank | Annual Report 2018
Glossary of Financial Terms
goal is to evaluate, monitor and approve Capital Conservation Buffers (CCBs) A practices relating to risk due to imbalances in These are mandatory capital buffers that banks the capital structure. should build up during normal times (i.e. Acceptances outside the period of stress) which can be The signature on a bill of exchange indicates Among the factors considered are liquidity risk, drawn down during a stressed period. that the person on whom it is drawn accepts interest rate risk, operational risk and external the conditions of the bill. In other words a bill events that may affect the Bank’s forecast and Capital Gain (Capital ProFIt) of exchange that has been accepted. strategic balance-sheet allocations. The gain on the disposal of an asset calculated by deducting the cost of the asset from the Accounting Policies Assets pledge proceeds received on its disposal. The specific principles, bases, conventions, Asset used as collateral for a loan. A pledged rules and practices adopted by an entity asset is transferred to the lender from the Capital Reserves in preparing and presenting Financial borrower to secure the debt. Ownership of the Capital Reserves consist of revaluation reserves Statements. asset remains with the borrower during the arising from revaluation of properties owned loan period. by the Bank and Reserve Fund set aside for Accrual Basis specific purposes defined under the Banking Recognition of the effects of transactions Available For Sale (AFS) Financial Act, No 30 of 1988 and shall not be reduced and other events when they occur without Assets or impaired without the approval of the waiting for receipt or payment of cash or its A debt or equity security that is purchased Monetary Board. equivalents. with the intent of selling before it reaches maturity, or selling prior to a lengthy time Cash Equivalents Actuarial Gain/Loss period in the event the security does not have Short-term highly liquid investments that are Gain or Loss arising from the difference a maturity. readily convertible to known amounts of cash between estimates and actual experience in a and which subject to an insignificant risk of Company’s Pension Plan. changes in value. B Amortisation Cash Flow Hedge The systematic allocation of the depreciable Bills of Collection A cash flow hedge is a hedge of the exposure amount of an intangible asset over its useful A bill of exchange drawn by an exporter to the variability in cash flows that (i) is life. usually at a team, on an importer overseas and attributable to a particular risk associated with brought by the exporter to his bank with a a recognised asset or liability (such as all or Amortised Cost request to collect the proceeds. some future interest payments on variable rate The amount at which the financial asset debt) or a highly probable forecast transaction of financial liability is measured at initial Basel III and (ii) could affect profit or loss. recognition minus principal repayments, plus The BCBS issued the Basel III rules text, which or minus the cumulative amortisation using presents the details of strengthened global Cash Generating Unit (CGU) the effective interest rate method of any regulatory standards on Bank capital adequacy The smallest group of assets that difference between that initial amount and the and liquidity. independently generates cash flow and the maturity amount, and minus any reduction cash flow is largely independent of the cash (directly or through the use if an allowance Basis Point (BP) flows generated by other assets. account) for impairment or in collectability. One hundredth of a percentage point, i.e., 100bp equals 1%, used in quoting movements Collective Impairment Amounts Due to Customers in interest rates, security yields, etc. The measurement of impairment losses under Money deposited by account holders. Such SLFRS 9 across all categories of financial assets funds are recorded as liabilities. C requires judgment, in particular, the estimation of the amount and timing of future cash Associates Capital Adequacy Ratio flows and collateral values when determining An entity, including an unincorporated entity The percentage of risk-adjusted assets impairment losses and the assessment of such as a partnership, over which the investor supported by capital as defined under the a significant increase in credit risk. These has significant influence and that is neither a framework of risk- based capital standards estimates are driven by a number of factors, subsidiary nor an interest in a joint venture. developed by the Bank for International changes in which can result in different levels Settlement (BIS) and as modified to suit local of allowances. Asset and Liability Committee (ALCO) requirements by the Central Bank of Sri Lanka. A risk-management committee in a bank that generally comprises the senior-management levels of the institution. The ALCO’s primary
316 Supplementary Information Glossary of Financial Terms Union Bank | Annual Report 2018
Commercial Paper (‘CP’) Country Risk Defined Benefit Obligation An unsecured, short-term debt instrument The risk that a foreign government will The costs of the defined benefit plans and the issued by a corporation, typically for the not satisfy its obligations or obstructs the present value of its obligations are determined financing of accounts receivable, inventories remittance of funds by debtors, either for using an actuarial valuation. The actuarial and meeting short-term liabilities. The debt financial reasons (transfer risk) or for other valuation involves making assumptions about is usually issued at a discount, reflecting reasons (political risk). discount rates, expected rates of return on prevailing market interest rates. assets, future salary increases, mortality rates Credit Rating and possible future gratuity increases, if any. Commitments An evaluation of a corporate ability to repay Credit facilities approved but not yet utilised its obligations or likelihood of not defaulting Delinquency by the clients at the date of Statement of carried out by an independent rating agency. A debt or other financial obligation is Financial Position. considered to be in a state of delinquency Credit Risk when payments are overdue. Loans and Contingencies Credit risk or default risk is most simply advances are considered to be delinquent A condition or situation existing at the date of defined as the potential that a borrower or when consecutive payments are missed. Also the Statement of Financial Position where the counter party will fail to meet its obligations in known as ‘Arrears’. outcome will be confirmed only by occurrence accordance with agreed terms and conditions. or non-occurrence of one or more future Depreciation events. Credit Risk Mitigation The systematic allocation of the depreciable A technique to reduce the credit risk amount of an asset over its useful life. Control associated with an exposure by application Control is the power over an investee, of credit risk mitigants such as collateral, De-recognition exposure, or rights, to variable returns from its guarantee and credit protection. Removal of a previously recognised financial involvement with the investee, and the ability asset or financial liability from an entity’s to use its powers over the investee to affect the Currency Risk statement of financial position. amount of the investor’s returns. The risk that the fair value or future cash flows of a financial instrument will fluctuate because Derivatives Corporate Governance of changes in foreign exchange rates. A derivative is a financial instrument or other The process by which corporate entities contract, the value of which changes in are governed. It is concerned with the Currency SWAPs response to some underlying variable (e.g., an way in which power is exercised over The simultaneous purchase of an amount of interest rate). the management and direction of entity, a currency for spot settlement and the sale the supervision of executive actions and of the same amount of the same currency for Discount Rate accountability to owners and others. forward settlement. A rate used to place a current value on future cash flows. It is needed to reflect the fact that Correspondent Bank Customer Deposits money has a time value. A bank in a foreign country that offers banking Money deposited by account holders. Such facilities to the customers of a bank in another funds are recorded as liabilities. Dividend Cover country. Profit after tax divided by gross Dividend. This ratio measures the number of times dividend D Cost Method is covered by the current year’s distributable A method of accounting whereby the profits. Dealing Securities investment is recorded at cost. The Income These are marketable securities acquired and Statement reflects income from the investment Dividend Yield held with the intention to resale over a short only to the extent that the investor receives Dividend earned per share as a percentage of period of time. distributions from accumulated net profits of its market value. the investee arising subsequent to the date of Deferred Taxation acquisition. Documentary Letters of Credit (LCs) Sum set aside in the Financial Statements Commercial letters of credit provided for that may become payable/ receivable in Cost to Income Ratio payment by a bank to the name beneficiary a financial year other than the current Operating expenses excluding impairment usually the seller of merchandise, against financial year. It arises because of temporary for loans and receivables and other losses as a delivery of documents specified in the credit. differences between tax rules and accounting percentage of total operating income. conventions.
Supplementary Information Glossary of Financial Terms 317 Union Bank | Annual Report 2018
Glossary of Financial Terms
aa The segmentation of financial assets when Financial Asset E their ECL is assessed on a collective basis. Any asset that is cash, an equity instrument of aa Development of ECL models, including the another entity or a contractual right to receive Earnings Per Ordinary Share (EPS) various formulas and the choice of inputs. cash or another financial asset from another Profit attributable to ordinary shareholders aa Determination of associations between entity. divided by the weighted average number of macroeconomic scenarios and, economic ordinary shares in issue. inputs, such as unemployment levels Financial Guarantee Contract and collateral values, and the effect on A Financial Guarantee Contract is a contract Economic Value Added (EVA) Probability of Defaults (PDs), Exposure at that requires the issuer to make specified A measure of productivity which takes into Defaults (EADs) and Loss Given Defaults payments to reimburse the holder for a loss consideration cost of total invested equity. (LGDs). it incurs because a specified debtor fails to make payment when due in accordance Effective Interest Rate (EIR) Exposure with the original or modified terms of a debt Rate that exactly discounts estimated future A claim, contingent claim or position which instrument. cash payments or receipts through the carries a risk of financial loss. expected life of the financial instruments or Fair Value Through Profit or Loss when appropriate a shorter period to the ESOP (Employee Share Option Plan) A financial assets/liability: Acquired/incurred net carrying amount of the financial asset or A method of giving employees shares in the principally for the purpose of selling or financial liability. business for which they work. repurchasing it in the near term, part of a portfolio of identified financial instruments Effective Tax Rate (ETR) that are managed together and for which there Provision for taxation including deferred tax F is evidence of a recent actual pattern of profit divide by the profit before taxation. taking or derivative (except for a derivative Fair Value that is a financial guarantee contract). Equity Instrument Fair Value is the amount for which an asset An equity instrument is any contract that could be exchanged or liability settled Financial Instrument evidences a residual interest in the assets of an between a knowledgeable willing parties in an Financial Instrument is any contract that entity after deducting all of its liabilities. arm’s length transaction. gives rise to a financial asset of one entity and
a financial liability or equity instrument of Equity Risk Fair Value Adjustment another entity. The risk arising from positions, either long or An adjustment to the fair value of a financial short, in equities or equity-based instruments, instrument which is determined using a Financial Liability which create exposure to a change in valuation technique (level 2 and level 3) to A contractual obligation to deliver cash or the market price of the equities or equity include additional factors that would be another financial asset to another entity or to instruments. considered by a market participant that are exchange financial assets or financial liabilities not incorporated within the valuation model. with another entity under conditions that are Equity Method potentially unfavourable to the entity. This is a method of accounting whereby the Fair value through other investment is initially recognised at cost and comprehensive income (FVOCI) Forward Exchange Contract adjusted thereafter for the post-acquisition Financial assets are classified and measured Agreement between two parties to exchange changes in the investor’s share of net assets at fair value through other comprehensive one currency for another at a future date at a of the investee. The profit and loss of investor income if they are held in a business model rate agreed upon today. includes the investor’s share of the profit or the whose objective is achieved by both collecting loss of the investee. contractual cash flows and selling financial Foreign Exchange Profit assets. Profit earn on foreign currency transactions Expected Credit Loss (ECL) arising from the difference in foreign exchange Expected credit loss is outputs of complex Finance Lease rates between the transaction/last date of models with a number of underlying A contract whereby a lessor conveys to the the Statement of Financial Position and the assumptions regarding the choice of variable lessee the right to use an asset for rent over settlement/date of the Statement of Financial inputs and their interdependencies. Elements and agreed period of time which is sufficient Position. Also arises from trading in foreign of the ECL models that are considered to amortise the capital outlay of the lessor. currencies. accounting judgments and estimates include, The lessor retains ownership of the asset but transfers substantially all the risks and rewards Firm Commitment aa The Bank’s criteria for assessing if there of ownership to the lessee. A Firm Commitment is a binding agreement has been a significant increase in credit for the exchange of a specified quantity of risk and so allowances for financial assets resources at a specified price on a specified should be measured on a Life Time future date or dates. Expected Credit Loss (LTECL) basis.
318 Supplementary Information Glossary of Financial Terms Union Bank | Annual Report 2018
High Quality Liquid Assets (HQLA) Interest Rate SWAP G Assets that can be easily and immediately Arrangement whereby one party exchanges converted into cash at little or no loss of value, one set of interest payments for another. Gearing can be readily sold or used as collateral to Long term borrowings divided by the total obtain funds in a range of stress scenarios, Interest Spread funds available for shareholders. and are unencumbered, i.e., without legal, This represents the difference between the regulatory or operational impediments. average interest rate earned and the average Global Reporting Initiative (GRI) interest rate paid on funds. The GRI is an international independent Historical Cost standards organization that helps businesses, Historical cost is the original nominal value of Investment Securities governments, and other organizations an economic item. Securities acquired and held for yield or capital understand and communicate their impacts on growth purposes and are usually held to issues such as climate change, human rights, maturity. and corruption. GRI promotes sustainability I reporting as a way for organizations to Integrated Reporting become more sustainable and contribute to Impairment A methodology of reporting an organisation’s sustainable development. This occurs when recoverable amount of an strategy, governance, financial performance asset is less than its carrying amount. and prospects in relation to the creation of Gross Dividend value over the short, medium and long term The portion of profits distributed to the Impairment Charges for Loan Losses in its economic, social and environmental shareholders including the tax withheld. Amounts set aside against possible losses on context. loans, receivables and other credit facilities as Group a result of such facilities becoming partly or A group is a parent and all its subsidiaries and wholly uncollectible. K associates. Impairment Allowances Key Management Personnel Guarantees Management’s best estimate of losses incurred Key Management Personnel are those A promise made by a third party (Guarantor), in the loan portfolios at the reporting date. persons having authority and responsibility who is not a party to a contract between for planning, directing and controlling the two others, that the guarantor will be liable Individual Impairment activities of the entity, directly or indirectly, if the guarantee fails to fulfill the contractual Reviewing individually significant loans and including any Director (whether Executive or obligations. receivables at each reporting date to assess otherwise) of that entity and key employees whether an impairment loss should be who are holding directorships in subsidiary recorded in the Statement of Profit or Loss. In companies and other key employees who H particular, management’s judgment is required meet the criteria mentioned above. in the estimation of the amount and timing Hedging of future cash flows when determining the A strategy under which transactions are L impairment loss. effected with the aim of providing cover against the risk of unfavourable price LCR Definition Intangible Asset movements (Interest Rate, Prices and With the introduction of Basel III rules on An identifiable non-monetary asset without Commodities, etc.). Liquidity Risk Management LCR has been physical substance held for use in the identified as a key policy measured to further production / supply of goods / services or for Held for Trading strengthen the liquidity risk management to rental to others or for administrative purposes. Debt and equity investments that are promote a more resilient banking sector. purchased with the intent of selling them Interest Margin within a short period of time (usually less than LCR is expected to improve the banking Net interest income expressed as a percentage one year). sector’s ability to absorb shocks arising from of interest earning assets. financial and economic stress, thus, reducing Held To Maturity (HTM) Financial the risk of spillover from the financial sector to Interest Rate Risk Assets the real economy. The risk that the fair value or future cash flows Held to maturity investments are non- of a financial instrument will fluctuate because derivative financial assets with fixed or LCR represents the Ratio of Stock of high of changes in market interest rates. determinable payments and a fixed maturity quality liquid assets available to total net cash that an entity has the positive intention and outflows over next 30 calendar days. ability to hold to maturity.
Supplementary Information Glossary of Financial Terms 319 Union Bank | Annual Report 2018
Glossary of Financial Terms
Level 1 – Quoted Market Price Market Risk Non-controlling Interest Financial instruments with quoted prices for This refers to the possibility of loss arising from Non-controlling interest is the equity in identical instruments in active markets. changes in the value of a financial instrument a subsidiary not attributable, directly or as a result of changes in market variables such indirectly to a parent. Level 2 – Valuation Technique Using as interest rates, exchange rates, credit spreads Observable Inputs and other asset prices. Non-Performing Loans Cover (NPL Financial instruments with quoted prices for Cover) similar instruments in active markets or quoted Materiality Cumulative loan provision as a percentage of prices for identical or similar instruments in The relative significance of a transaction or total non-performing loans (net of interest in inactive markets and financial instruments an event, the omission or misstatement of suspense). valued using models where all significant which could influence the decisions of users of inputs are observable. Financial Statements. O Level 3 –Valuation Technique with Minority Interest Operational Risk Significant Unobservable Inputs The interest of individual shareholders, in a Operational risk refers to the losses arising Financial instruments valued using valuation company more than 50% of which is owned by from fraud, negligence, oversight, human techniques where one or more significant a holding company. error, process errors, system failures, external inputs are unobservable. events, etc. N Liquid Assets Assets that are held in cash or in a form that P Net Asset Value Per Share can be converted to cash readily, such as Shareholders’ Funds excluding preference deposits with other banks, Bills of Exchange Parent shares if any, divided by the number of and Treasury Bills and Bonds. A parent is an entity that has one or more ordinary shares in issue. subsidiaries. Liquidity Risk Net-Interest Income (NII) The risk that an entity will encounter difficulty Past Due The difference between what a bank earns in meeting obligations associated with A financial asset is past due when a on assets such as loans and securities and financial liabilities. counterparty has failed to make a payment what it pays on 220 liabilities such as deposits when contractually due. refinance Union Bank of Colombo PLC funds Loans and Receivables and inter-bank borrowings. Non derivative financial assets with fixed or Price Earnings Ratio (P/E Ratio) determinable payments that are not quoted in The current market price of the share is divided Net Interest Margin (NIM) an active market. by the earnings per share. The margin is expressed as net interest income divided by average interest earning assets. Loans Payable Probability of Default (‘PD’) Loans payable are financial liabilities, other The probability that an obligor will default Non-Performing Loans (NPL) than short term trade payables on normal within a given period of time. A loan or an receivables placed on cash basis credit terms. (i.e., Interest income is only recognised when Provision Cover cash is received) because, in the opinion Loss Given Default (‘LGD’) Total provisions for loan losses expressed as a of management, there is reasonable doubt The estimated ratio (percentage) of the loss percentage of net non-performing loans and regarding the collectability of principal or on an exposure to the amount outstanding at advances before discounting for provisions on interest. default (EAD) upon default of counterparty. non-performing loans and advances.
Nostro Account Prudence M A bank account held in foreign country by a Inclusion of a degree of caution in the exercise domestic bank, denominated in the currency of judgment needed in making the estimates Market Capitalisation of that country. Nostro accounts are used to required under conditions of uncertainty, such The value of a company obtained by facilitate the settlement of foreign exchange that assets or income are not overstated and multiplying the number of issued shares by its trade transactions. liabilities or expenses are not understated. market value as at a date. NPL Ratios Total non-performing loans and receivables (net of interest in suspense) divided by total loans and receivables portfolio (net of interest in suspense)
320 Supplementary Information Glossary of Financial Terms Union Bank | Annual Report 2018
Single Borrower Limit Tier 2 Capital R 30% of Tier II Capital. This is the secondary component of a bank’s capital, in addition to Tier 1 capital, that makes Related Parties Statutory Reserve Fund up a bank’s required reserves. Tier 2 capital Parties where one party has ability to control A capital reserve created as per the provisions is designated as supplementary capital, and the other party or exercise significant influence of the Banking Act No. 30 of 1988. it is composed of items such as revaluation over the other party in making financial and reserves, undisclosed reserves, hybrid operating decisions, directly or indirectly. Subsidiary Company instruments and subordinated term debt. A subsidiary is an enterprise that is controlled Repurchase Agreement by another enterprise (known as the parent). Transfer Pricing Arrangement This is a contract to sell and subsequently Transfer pricing involves the terms and repurchase government securities at a given Substance Over Form prices at which related parties sell (or should price on a specified future date. The consideration that the accounting sell) goods or services to each other. When treatment and the presentation in Financial the parties are located in different taxing Return On Average Assets (ROA) Statements of transactions and events should jurisdictions, opportunities exist for the Net income expressed as a percentage of be governed by their substance and financial movement of income to a lower-taxing average total assets. reality and not merely by legal form. jurisdiction. A transfer pricing arrangement is developed to combat potential losses of Return On Average Equity (ROE) SWAPS (Currency) income tax revenue. Net income, less preferred share Dividend if The simultaneous purchase of an amount of any, expressed as a percentage of average a currency for spot settlement and the sale U ordinary shareholders’ equity. of the same amount of the same currency for forward settlement. Alternatively a Unit Trust Reverse Repurchase Agreement simultaneous spot sale and forward purchase An undertaking formed to invest in securities Transaction involving the purchase of of a currency. under the terms of a trust deed. government securities by a bank or dealer and resale back to the seller at a given price on a Stakeholders specific future date. Stakeholders are defined as entities or V individuals that can reasonably be expected to Risk Weighted Assets be significantly affected by the organisation’s Value Added On-Balance Sheet assets and the credit activities, products, and services; and whose Value of wealth created by providing banking equivalent of Off-Balance Sheet assets actions can reasonably be expected to affect and other related services less the cost of multiplied by the relevant risk weighting the ability of the organisation to successfully providing such services. factors. implement its strategies and achieve its objectives. This includes entities or individuals Value-at-Risk (‘VaR’) whose rights under law or international A measure of the loss that could occur on risk S conventions provide them with legitimate positions as a result of adverse movements claims vis-à-vis the organisation. in market risk factors (e.g., rates, prices, Segmental Analysis volatilities) over a specified time horizon and Analysis of financial information by segments to a given level of confidence. of an enterprise specifically industries in which T it operates. Total Regulatory Capital Y Shareholders’ Funds Regulatory capital of licensed banks will Total of issued and fully paid share capital and consist the following Yield to Maturity capital and revenue reserves. Discount rate at which the security’s present Tier 1 Capital value of future payments would equal the Significant Influence a) Common Equity Tier 1 (CET1) security’s current price. If an entity holds, directly or indirectly (e.g. This is a component of Tier 1 capital that through subsidiaries), 20% or more of the consists mostly of common stock held by a voting power of the investee, it is presumed bank . that entity has significant influence it can be b) Additional Tier 1 Capital (AT1) clearly demonstrated otherwise. This is similar to CET 1, but may additionally include non-redeemable non-cumulative preferred stock.
Supplementary Information Glossary of Financial Terms 321 Union Bank | Annual Report 2018
Branch Network
Branch Address Telephone 01. Head Office 64, Galle Road, Colombo 3. 011 2374100 02. Akuressa 50A, D.C. Wanigasekara Mawatha, Akuressa. 041 2284672 03. Ambalangoda 118, Galle Road, Ambalangoda. 091 2256420 04. Ambalantota 133/1, Hambantota Road, Ambalantota. 047 2225642 05. Angunakolapelessa Hungama Road, Angunakolapelessa. 047 2228500 06. Anuradhapura 38, Main Street, Anuradhapura. 025 2224888 07. Atchuvely Pathameny, Sannadhy Road, Atchuvely. 021 2058650 08. Attidiya 126, Main Street, Attidiya. 011 2761292 09. Badulla 81, Bank Road, Badulla. 055 2224657 10. Balangoda 167/B, Barns Rathwathta Mawatha, Balangoda. 045 2289455 11. Bandarawela No.348, Badulla Road, Bandarawela. 057 2221808 12. Batticaloa 03, Station Road, Batticaloa. 065 2228512 13. Borella 40, Gnanartha Pradeepa Mawatha, Colombo 8. 011 2672404 14. Chilaw 50, Colombo Road, Chilaw. 032 2224556 15. Chunnakam 118, Sir P Ramanathan Road, Chunnakam. 021 2240930 16. Dambulla 723, Anuradhapura Road, Dambulla. 066 2285511 17. Elpitiya 40, Ambalangoda Road, Elpitiya. 091 2291695 18. Embilipitiya 58, Main Street, Pallegama, Embilipitiya. 047 2230761 19. Galle 143, Main Street, Galle. 091 2247307 20. Gampaha No. 170 A, Colombo Road, Gampaha. 033 2248813 21. Gampola 121, Kandy Road, Gampola. 081 2353785 22. Ganemulla 367/B3, Kadawatha Road, Ganemulla. 033 2250170 23. Horana 41, Panadura Road, Horana. 034 2263156 24. Horowpothana Rest House Junction, Trincomalee Road, Horowpothana. 025 2278558 25. Ibbagamuwa 48, Aluth Mawatha, Ibbagamuwa. 037 2057177 26. Ja Ela 151/B, Colombo Road, Ja-Ela. 011 2228573 27. Jaffna 398, Hospital Road, Jaffna. 021 2224567 28. Kadawatha 315F, Kandy Road, Kadawatha. 011 2927716 29. Kandy 165, D.S.Senanayake Veediya, Kandy. 081 2224500 30. Kebithigollewa Padaviya Road, Kebithigollewa. 025 2298111 31. Kegalle 340, Kandy Road, Kegalle. 035 2223605 32. Kekirawa 21D, Yakalla Road, Kekirawa. 025 2265350 33. Kohuwala 96B, Dutugamunu Street, Kohuwala. 011 2813693 34. Kollupitiya 51A, Ananda Coomaraswamy Mawatha, Colombo 3. 011 2565475
322 Supplementary Information Branch Network Union Bank | Annual Report 2018
Branch Address Telephone 35. Kotahena 16A, Kotahena Street, Colombo 13. 011 2448825 36. Kuliyapitiya 203, Hettipola Road, Kuliyapitiya. 037 2284446 37. Kurunagala 11, Rajapihilla Road, Kurunagala. 037 2225419 38. Maharagama 140, High Level Road, Maharagama. 011 2088800 39. Mannar 66, Main Street, Mannar. 023 2251343 40. Marawila 44, Chilaw Road, Marawila. 032 2252522 41. Matara 17, Station Road, Matara. 041 2228442 42. Matugama 121/B, Agalawatta Road, Matugama. 034 2248555 43. Medawachchiya 40, Kandy Road, Medawachchiya. 025 2245580 44. Minuwangoda 68, Veyangoda Road, Minuwangoda. 011 2299277 45. Monaragala 48, New Bus Stand Road, Monaragala. 055 2055456 46. Moratuwa 729, Galle Road, Moratuwa. 011 2642502 47. Narammala 64, Kuliyapitiya Road, Narammala. 037 2248710 48. Nawala 232, Nawala Road, Nawala. 011 2806987 49. Nawalapitiya 21, Dolosbage Road, Nawalapitiya. 054 2050722 50. Negombo 387, Main Street, Negombo. 031 2238299 51. Nugegoda 114, Stanley Thilakaratne Mawatha, Nugegoda. 011 2832323 52. Old Moor Street 343, Old Moor Street, Colombo 12. 011 2399994 53. Panadura 495, Galle Road, Panadura. 038 2237098 54. Pelawatte 966, Pannipitiya Road, Pelawatte. 011 2785337 55. Peradeniya 921, Peradeniya Road, Kandy. 081 2068440 56. Pettah 111, Main Street, Colombo 11. 011 2321139 57. Pilimathalawa 211/A, Colombo Road, Pilimathalawa. 081 2575901 58. Piliyandala 71, Moratuwa Road, Piliyandala. 011 2606152 59. Rajagiriya 115, Old Kotte Road, Rajagiriya. 011 2075566 60. Ratmalana 143C, Mount City, Galle Road, Ratmalana. 011 2731860 61. Ratnapura 109, Main Street, Ratnapura. 045 2224422 62. Trincomalee 306, Central Road, Trincomalee. 026 2226505 63. Vavuniya 124, Bazzar Street, Vavuniya. 024 2225612 64. Warakapola 238B, Kandy Road, Warakapola. 035 2268226 65. Wattala 258, Negombo Road, Wattala. 011 2980731 66. Wellawatte 605, Galle Road, Colombo 6. 011 2553223 67. Wennappuwa 33, Colombo Road, Wennappuwa. 031 2253543
Supplementary Information Branch Network 323 Union Bank | Annual Report 2018
Notice of Meeting
UNION BANK OF COLOMBO PLC 6. To re-appoint Messrs. Ernst & Young, (PB 676 PQ) Chartered Accountants as Auditors for the ensuing year and to authorise the Board of Directors to determine their remuneration. NOTICE IS HEREBY GIVEN THAT the 24th Annual General Meeting of UNION BANK OF By order of the Board. COLOMBO PLC will be held on 28th March 2019 at 2.00 p.m. at the “Auditorium” of Sri Lanka Foundation at No. 100, Sri Lanka Padanama Mawatha, Independence Square, Colombo 07 for the following purposes: Inoka Jayawardhana 1. To receive and consider the Annual Report Company Secretary of the Board of Directors on the affairs of the Company and the Statement of 26th February 2019 Audited Accounts for the year ended 31st December 2018 together with the Report of the Auditors thereon. Notes: 2. To re-elect as a director in terms of Article 89 of the Articles of Association of the 1. A Shareholder unable to attend the Bank, Mr. Puneet Bhatia who retires at Meeting is entitled to appoint a Proxy to this Annual General Meeting in terms of attend and vote in his/her/its place. Articles 88(i) read together with Article 89 2. A Proxy need not be a Shareholder of the of the Articles of Association of the Bank. Bank. 3. A Shareholder wishing to vote by proxy 3. To re-elect as a director in terms of Article at the meeting may use the Form of Proxy 89 of the Articles of Association of the enclosed. Bank, Mr. Michael J O’Hanlon who retires 4. In order to be valid, the completed Form at this Annual General Meeting in terms of of Proxy must be lodged at the registered Articles 88(i) read together with Article 89 office of the Bank at No. 64, Galle Road, of the Articles of Association of the Bank. Colombo 03 not less than thirty six (36) hours before the time appointed for the 4. To re-elect as a director in terms of Article holding of the meeting. 89 of the Articles of Association of the Bank, Ms. Sow Lin Chiew who retires at this Annual General Meeting in terms of Articles 88(i) read together with Article 89 of the Articles of Association of the Bank.
5. To authorise the Directors to determine donations for the year ending 31st December 2019 and up to the date of the next Annual General Meeting.
324 Supplementary Information Notice of Meeting Union Bank | Annual Report 2018
Form of Proxy
I/We,.……………………………...... of………………………...….……...... …………………….……………
……………………………………………….………………… being a Shareholder/Shareholders of Union Bank of Colombo PLC hereby appoint Mr/
Mrs/Miss ……..……………………………………………………………….. (holder of NIC No……………………………………..……) of ……………
…………………………………………………..………………………………. (or failing him)
Mr. Atul Malik of No. 64, Galle Road, Colombo 03 or failing him Mr. Priyantha Damian Joseph Fernando of No.12/14, Dharmaratne Avenue, Rawatawatte, Moratuwa or failing him Mr. Mohamed Hisham Sabry Ghouse of No. 127A, Campbell Place, Colombo 08 or failing him Mr. Ranvir Dewan of No. 64, Galle Road, Colombo 03 or failing him Mr. Gaurav Trehan of No. 64, Galle Road, Colombo 03 or failing him Mr. Puneet Bhatia of No. 64, Galle Road, Colombo 03 or failing him Mr. Michael J O’Hanlon of No. 64, Galle Road, Colombo 03 or failing him Mr. Indrajit Asela Wickramasinghe of No. 410/35, Bauddhaloka Mawatha, Colombo 07 or failing him Mrs. Sow Lin Chiew of No. 64, Galle Road, Colombo 03 or failing her Mrs. Dilshani Wijayawardana of No. 40/15, Park Road, Colombo 05 or failing her Mr. Trevine Fernandopulle of No.03, Austin Place, Off Kynsey Road, Colombo 08 as my/our proxy to represent me/us and to speak and vote whether on a show of hands or on a poll for me/us on my/our behalf at the Annual General Meeting of the Company to be held on 28th March 2019 at 2.00 p.m. at the “Auditorium” of Sri Lanka Foundation at No. 100, Sri Lanka Padanama Mawatha, Independence Square, Colombo 07 and at any adjournment thereof.
For Against 1. To receive and consider the Annual Report of the Board of Directors on the affairs of the Company and the Statement of Audited Accounts for the year ended 31st December 2018 together with the Report of the Auditors thereon. 2. To re-elect, as a director, in terms of Article 89 of the Articles of Association of the Bank, Mr. Puneet Bhatia who retires at this Annual General Meeting in terms of Article 88 (i) read together with Article 89 of the Articles of Association of the Bank. 3. To re-elect, as a director, in terms of Article 89 of the Articles of Association of the Bank, Mr. Michael J O’ Hanlon who retires at this Annual General Meeting in terms of Article 88 (i) read together with Article 89 of the Articles of Association of the Bank. 4. To re-elect, as a director, in terms of Article 89 of the Articles of Association of the Bank, Ms. Sow Lin Chiew who retires at this Annual General Meeting in terms of Article 88 (i) read together with Article 89 of the Articles of Association of the Bank. 5. To authorise the Directors to determine donations for the year ending 31st December 2019 and up to the date of the next Annual General Meeting. 6. To re-appoint Messrs. Ernst & Young, Chartered Accountants as Auditors for the ensuing year and authorise the Board of Directors to determine their remuneration.
Signed on this …………… day of …………………. Two Thousand and Nineteen.
………………………………… Signature
Notes: 1. Instructions as to completion appear overleaf. 2. Please indicate with ‘X’ in the space provided, how your Proxy is to vote on the Resolutions. If no indication is given, the Proxy in it’s discretion will vote as it thinks fit.
Supplementary Information Form of Proxy 325 Union Bank | Annual Report 2018
Form of Proxy
INSTRUCTIONS FOR COMPLETION 1. The full name and the registered address of the shareholder appointing the Proxy should be legibly entered in the Form of Proxy, duly signed and dated.
2. The completed Form of Proxy should be deposited at the Registered Office of the Bank at No.64, Galle Road, Colombo 03 not less than thirty six (36) hours before the time appointed for the holding of the Meeting.
3. The Proxy shall –
(a) in the case of an individual, be signed by the shareholder or by his attorney, and if signed by an attorney, a notarially certified copy of the Power of Attorney should be attached to the completed Proxy if it has not already been registered with the Bank.
(b) in the case of a company or corporate body, either be under its Common Seal or signed by its attorney or by an officer on behalf of the Company or corporate body in accordance with the Articles of Association or the Constitution of that Company or corporate body.
The Bank may but shall not be bound to, require evidence of the authority of any such attorney or officer.
(c) in the case of joint holders, be signed by the joint holder whose name appears first in the Register of Members.
4. Every alteration or addition to the Proxy must be duly authenticated by the full signature of the shareholder signing the Proxy. Such signature should as far as possible be placed in close proximity to the alteration or addition intended to be authenticated.
5. Please indicate with an ‘X’ in the space provided how your Proxy is to vote on the resolution. If no indication is given, the Proxy will vote as it thinks fit.
Please fill the details:
Share Certificate No./ CDS Account No. :
Name :
Address :
Jointly with :
National Identity Card No/s. Passport No/s of the shareholders :
326 Supplementary Information Form of Proxy Union Bank | Annual Report 2018
Stakeholder Feedback Form
We welcome your valuable feedback on this integrated Annual Report, on our commitments and our performance. Please complete the following and return this page to –
Chief Financial Officer Union Bank of Colombo PLC No. 64, Galle Road, Colombo 03, Sri Lanka.
Name : ………………...... ……………………………………………………………………………………......
Permanent Mailing Address : ………………...... ……………………………………………………………………………………......
Contact Number – (Tel) : ………………...... ……………………………………………………………………………………......
(Fax) : ………………...... ……………………………………………………………………………………......
Email : ………………...... ……………………………………………………………………………………......
Queries/Comments:
Recommendations:
Supplementary Information Stakeholder Feedback Form 327
Corporate Information You can view this Annual Report online on: www.unionb.com
NAME OF THE COMPANY AUDITORS Union Bank of Colombo PLC M/s. Ernst & Young, Chartered Accountants, LEGAL FORM No.201, De Saram Place, A Public Limited Liability Company Colombo 10. incorporated in Sri Lanka under the Companies Act No. 17 of 1982 and re-registered under BOARD OF DIRECTORS the Companies Act No. 7 of 2007. Listed as a Atul Malik - Chairman public quoted Company on the Colombo Stock Priyantha Fernando- Deputy Chairman/Senior Director Exchange. A Licensed Commercial Bank under Indrajit Wickramasinghe - Executive Director/ the Banking Act No. 30 of 1988. Chief Executive Officer Sabry Ghouse DATE OF INCORPORATION Ranvir Dewan 2nd February 1995 Gaurav Trehan Puneet Bhatia COMPANY REGISTRATION NUMBER Michael J O’ Hanlon PB 676 PQ Sow Lin Chiew Dilshani Wijayawardana REGISTERED OFFICE Trevine Fernandopulle No. 64, Galle Road, Colombo 03, ALTERNATE DIRECTORS Sri Lanka. Yoke Sun Woon Tel : +94 11 2374100 Keshav Thakkar Fax : +94 11 2370971 E-mail : [email protected] BOARD SECRETARY Website : www.unionb.com Inoka Jayawardhana
SWIFT CODE UBCL LK LC
VAT REGISTRATION NUMBER 134005610-7000 Union Bank of Colombo c Pl
- Annual Report 2018 - Annual Report
Union Bank of Colombo PLC Annual Report Head office: 64, Galle Road, Colombo 03, Sri Lanka. +94 11 2374100 | www.unionb.com