DFCC BANK Annual Report 2011/12 DFCC Bank - Annual Report 2011/12 - Annual Report MUltIPLE STRANDS DFCC Bank DFCC Building, P.O. Box 1397, 73/5, Galle Road, Colombo 03, Sri Lanka OF BUSINess LEND Telephone: +94 11 2442 442 | Fax: +94 11 2440 376 E-mail: [email protected] | website: www.dfcc.lk STRENGTH VISION To be Sri Lanka’s premier financial services group. MISSION To provide superior financial solutions and nurture business enterprises, adding value to our customers, shareholders, employees and the nation. OUR VALUES Our seven core values are the guiding principles for our ACTIONS that shape the way we do business. We are Accountable for what we do We place Customer experience at the core We believe Teamwork is key in turning our goals into accomplishments We have a passion for Innovation and excellence We Operate our business ethically We focus on the Need to grow our business profitably We are Socially and environmentally caring MULTIPLE STRANDS OF BUSINEss LEND STRENGTH The cover depicts the multiple strands of a fibre optic cable - a technology which has opened a whole new world to humankind. A key aspect of the DFCC Banking Business is the manner in which we have woven the various strands of business - development banking, commercial banking and investment banking - into a cohesive whole. The composite strength, by the very nature of its variety, provides us the vibrancy, energy and speed in serving a diversified portfolio ranging from top corporates to SMEs, from project financing to personal financial services and everything in between. DFCC really is about celebrating composite strength – the results of which unfold through the pages of this report. CONTENTS 03 PERFORMANCE HIGHLIGHTS - DFCC BANK 04 MANAGEMENT INFORMATION 04 Chairman’s Message 08 Chief Executive’s Report 14 Board of Directors 18 Management Team 20 Group Structure 22 MANAGEMENT DISCUSSION AND ANALYSIS 22 Operations Review 33 Financial Review 37 Integrated Risk Management 46 Sustainability Report 46 Chief Executive’s Message 47 Our Approach to Reporting 51 Corporate Governance 63 Economic Performance 65 Product & Service Responsibility 67 Environment 70 Employees 79 Community 84 GRI Index 96 REPORTS OF DIRECTORS 96 Annual Report of the Board of Directors 104 Report of the Audit Committee 107 Report of the Human Resources and Remuneration Committee 108 Report of the Nomination Committee 109 Report of the Board Integrated Risk Management Committee 110 Directors’ Statement on Internal Control 113 Independent Assurance Report 114 SUPPLEMENTARY FINANCIAL INFORMATION 114 Consolidated Income Statement of DFCC & DVB (DBB) 115 Consolidated Balance Sheet of DFCC & DVB (DBB) 117 Key Performance Indicators of Consolidated Banking Business (DBB) 118 Reconciliation with Group Financial Statements 119 FINANCIAL REPORTS 120 Statement of Directors’ Responsibilities in Relation to Financial Statements 121 Chief Executive’s and Chief Financial Officer’s Statement of Responsibility 122 Independent Auditor’s Report 123 Income Statement 124 Balance Sheet 125 Statement of Changes in Equity 126 Cash Flow Statement 128 Notes to the Financial Statements 183 SUPPLEMENTARY INFORMATION 183 Capital Adequacy 185 Sources and Distribution of Income - Bank 186 Ten Year Summary 187 Performance of the Share 188 Share Information 190 Twenty Major Shareholders 191 DFCC Bank’s Offices 192 A Pioneer's Journey Corporate Information - Inner Back Cover Performance Highlights - DFCC Bank TOTAL ASSETS AND RETURN ON ASSETS PROFITS LKR million % LKR million 90,000 15 3,000 75,000 12 2,400 60,000 9 1,800 45,000 6 1,200 30,000 15,000 3 600 0 0 0 08 09 10 11 12 08 09 10 11 12 Total Assets (LKR million) Profit Before Tax* Return on Total Assets (%) Profit After Tax* * excluding exceptional proct from CBC SHAREHOLDERSFUNDS AND RETURN ON EQUITY LKR million % 25,000 50 20,000 40 15,000 30 10,000 20 5,000 10 0 0 08 09 10 11 12 Shareholders’ Funds (LKR million) Return on Total Equity (%) For the year ended 31 March 2012 2011 % Change Income - LKR million 7,434 14,191 (48) Profit before tax - LKR million 2,748 7,876 (65) Profit before tax - LKR million 2,748 2,515* 9 Profit after tax - LKR million 2,317 7,137 (68) Profit after tax - LKR million 2,317 1,776* 30 Earnings per share - Basic - LKR 8.74 26.95 - Diluted - LKR – 26.93 Interim dividend paid LKR million – 1,855 Final dividend (Proposed) - LKR million 1,060 795 Dividend payout % 46 37 Shareholders' funds (capital & reserves) - LKR million 21,754 20,219 8 Medium/long-term borrowing, deposits & debentures - LKR million 45,631 31,017 47 Total assets - LKR million 71,707 59,926 20 Return on average total assets - % 3.52 12.27 Return on average shareholders’ funds - % 11.04 39.7 * excluding exceptional profit arising from the sale of Commercial Bank of Ceylon PLC shares. Annual Report 2011/12 DFCC BANK 3 MANAGEMENT INFORMATION MANAGEMENT DISCUSSION AND SUSTAINABILITY REPORT 04 Chairman’s Message ANALYSIS 08 Chief Executive’s Report 14 Board of Directors 18 Management Team 20 Group Structure Chairman’s Message Our composite strength equips us to ride change Dear Shareholder, In chaos theory, ‘the Butterfly Effect’ propounded by the famed mathematician and meteorologist Edward Lorenz hypothesises how, for instance, a butterfly flapping its wings on one side of the globe may trigger a chain of events that could lead to a hurricane on the other. This notion could very well describe Sri Lanka’s situation if one considers, the impact that the seemingly disconnected Iranian nuclear programme or for that matter the debt mountains in some European countries are having on the country’s fortunes in the context of its economy, the external sector and geopolitics. 4 DFCC BANK Annual Report 2011/12 REPORTS OF DIRECTORS Supplementary FINANCIAL Information In 2011, the Sri Lankan economy recorded It must be borne in mind though, that most of a growth of 8.3%, the highest in its post- the ‘South’ is powered by the export-driven independence history. It was achieved whilst economic model and any downturn and fall maintaining inflation in single digits and in consumption in the ‘North’ will cause a unemployment below 5%. This performance, demand slack down the supply chain. The which was driven by the consumption and silver lining is that most Asian economies investment boom following the end of the are expected to demonstrate a relatively high conflict in 2009, merited the upgrade of the degree of resilience. Supporting this view sovereign credit rating in June 2011. However, is the fact that intra-regional investment, in the second half of 2011, some overheating domestic consumption, commerce and trade was evident and developments in the external have taken off. As such, there is comfort that sector were not positive. A widening trade regional growth should remain relatively deficit raised concerns about Sri Lanka’s robust in the face of a general decline in external finances and led to corrective global momentum. This would have positive measures in the form of the depreciation implications and provide support for the Sri of the Rupee, the hike in policy rates and Lankan economy. a ceiling on credit growth. It delivered the message that the authorities were willing to Geopolitics - the third aspect referred to in bite the bullet and accept a lower growth in my preface - has a significant bearing on the context of giving priority to the external Sri Lanka. From Sri Lanka’s perspective, sector. This is crucial given that Sri Lanka’s the external macro situation has been external financing hinges on retaining investor made more complicated by the geopolitical confidence in a consistent and rational policy developments in the West as well as in the framework. Middle East. The former is still our largest trading bloc and source of tourism while the The world economy is in flux. Many latter is a key market for our tea exports and ‘Developed’ or ‘Northern’ economies are principal source of oil. Therefore, the fallout stagnant, suffering a lack of competitiveness from the recent imposition of sanctions and and an overload of debt that has sapped other politically driven actions would be growth, reduced incomes, consumed cash better dealt with in a pragmatic rather than and strained budgets. In contrast, most a reactive fashion. Given the new geopolitical ‘Developing’ or ‘Southern’ economies, realities, this will require a fine balancing act exemplified by the BRICS group of nations, if Sri Lanka is to avoid the ‘Butterfly Effect’ are surging with growth and investment and assert itself without burning any of the founded on a vibrant business culture bridges that have long stood the test of time. driven by demographics, urbanisation and an increasingly educated population. The Moving on to the Financial Sector; despite historical balance of economic power is thus some systemic pressures in the latter tilting Southward perhaps foreshadowing the part of the year, the industry reported a emergence of a ‘New World Economic Order’. healthy performance with strong balance sheet growth, higher asset quality and increased profitability despite the narrowing of margins as the year progressed. Annual Report 2011/12 DFCC BANK 5 MANAGEMENT INFORMATION MANAGEMENT DISCUSSION AND SUSTAINABILITY REPORT 04 Chairman’s Message ANALYSIS 08 Chief Executive’s Report 14 Board of Directors 18 Management Team 20 Group Structure This was accompanied by the expansion as we complete the 10th year in commercial of delivery channels to unbanked regions banking undertaken through our almost with increased deployment of electronic wholly-owned subsidiary DVB, its assets of banking. On the regulatory side recent LKR 45,940 million now comprise 40% of the pronouncements indicate that there is greater total DFCC Banking Business Assets. Good awareness of the benefits of consolidation in progress has been made in the expansion of the banking sector and it is hoped that the its distribution network.