WINNING WAYS... WHEN YOU'VE GOT THEM YOU CAN CHANGE CHALLENGES INTO SUCCESS THE SPEED YOU LOSE ON THE BENDS YOU CAN MAKE UP ON THE STRAIGHTS Annual Report 2008/09 | DFCC Bank 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. VALUES • Accountability • Be Ethical • Passion for Innovation and Excellence • Respect for the Individual • Social Responsibility • Teamwork “GREAT MOMENTUM...” IT HELPS WHEN YOU’RE ‘STRONG OUT OF THE BLOCK...’ WHEN YOU’VE MADE A STRONG START, WITH THE RIGHT FUNDAMENTALS IN PLACE... IT MAKES US GREAT CONTENDERS FOR SUCCESSFUL TOMORROWS Contents 1. Performance Highlights 03 2. Management Information Chairman’s Message 04 Chief Executive’s Report 08 Profiles of Directors 14 Management Team 17 Subsidiary, Joint Venture and Associate Companies 20 3. Reports of Directors Annual Report of the Directors 22 Corporate Governance 28 Committee Reports Audit Committee Report 36 Human Resources and Remuneration Committee Report 39 Nomination Committee Report 40 Board Integrated Risk Management Committee Report 41 4. Management Discussion and Analysis Operations Review 42 Financial Review 47 Risk Management 50 5. Sustainability Report Chief Executive’s Message 56 Reports Environment 58 Nurturing Small and Medium Enterprises 62 Transforming Education 64 Employee Empowerment 66 6. Financial Information 69 Director’s Responsibilities in relation to Financial Statements 70 CEO’s and CFO’s Responsibilities Statement 71 Independent Auditor’s Report 72 Income Statement 73 Balance Sheet 74 Statement of Changes in Equity 75 Cash Flow Statement 76 Notes on Financial Statements 79 7. Supplementary Information Capital Adequacy 137 Statement of Value Added - Bank 139 Sources & Distribution of Income - Bank 140 Ten Year Summary 141 Performance of the Share 142 Share Information 143 Twenty Major Shareholders 145 Debenture Information 146 DFCC Bank’s Other Offices 147 A Pioneer’s Journey 148 PERFORMANCE HIGHLIGHTS For the year ended 31 March 2009 2008 % change Income - Rs M 9,888 9,636 3 Profit before tax 2,006 1,983 1 Profit after tax 1,360 1,318 3 Earnings per share - Basic - Rs 10.41 10.41 – Diluted - Rs – 10.34 – Gross dividend - Rs M 654 654 – Dividend payout % 48 50 – Shareholders’ funds (capital & reserves) - Rs M 14,491 13,756 5 Medium/long-term borrowing, deposits & debentures - Rs M 38,988 43,435 (10) Total assets - Rs M 58,485 63,359 (8) Return on average total assets - % 2.2 2.1 – Return on average shareholders’ funds 9.6 11.3 – MANAGEMENT INFORMATION Chairman’s Statement However, any immediate effort to revitalise the economy is likely to be limited by the Government’s need to urgently address the financial deficits as well as rebuild cleared areas in the North and East. As such, while the peace dividend will materialise, the near-term outlook is indeed challenging in t is my privilege to present the Annual customer support; on the other, there is the most respects. Report of DFCC Bank for the financial need for cost rationalisation and profitability year ended 31 March 2009. enhancement through scale economy and I The adverse economic environment also operational homogeny. All these require took its toll on the performance of the Much has been said and written of a minimum critical mass and cannot be banking industry. Balance sheet growth was the worldwide economic crisis and its achieved efficiently, if at all, in a fragmented stifled as lending and deposit mobilisation ramifications for Sri Lanka and I shall not industry space occupied by many players. slowed down. This was accompanied by elaborate on what has taken place. Even a deterioration in credit quality. Although though the national economy was able to I must also make reference to the high these developments were not unexpected, record a laudable 6% growth in the face levels of taxation to which banks in Sri the situation was exacerbated by some high of adversity, its renowned resilience has Lanka are subject to. The combination profile failures in the local financial services yet to experience tougher tests given that of Financial VAT and Corporate Tax is sector. Thankfully, the threatened crisis the global recession is still to fully impact approaching 60% and in this scenario the of confidence in the system was arrested Sri Lanka. The early effects have been Return on Equity is sub-optimal and not by the swift response of the Central Bank. felt with the slowdown in foreign demand commensurate with the market risk as far However, looking ahead, the landscape is stifling export industries and creating a as long-term investors are concerned. This likely to be challenging and a fundamental deleterious domino effect that has infected means that the raising of equity capital, transformation to the financial system has the value and supply chain. Besides a halt already a difficult feat under the currently to take place in order to augment and in new investment, pay-cuts, work-hour depressed stock market conditions, may preserve its integrity as well as provide the cuts, labour lay-offs and closures have been only be possible with a steep discount wherewithal to absorb shocks and weather effected by industries striving to curtail costs to fair value for most banks, even if the adverse times. In this context, the case and conserve cash flows. Dependence market was to improve substantially. While for consolidation is strong, especially in on the global economy means that Sri DFCC Bank and its commercial banking the banking industry. Let us take just two Lanka’s prospects are unlikely to improve Subsidiary, DFCC Vardhana Bank Limited aspects: on the one hand, there is the in the short-term, given the prognosis for (DVB) are well positioned in terms of need for raising additional equity capital to recovery in international markets. At the regulatory capital, the difficult outlook strengthen the base for loan growth and same time, the unprecedented success of implies that the banking industry may be the military action that has paved the way hard pressed to sustain loan growth and for future peace and prosperity deserves weather future shocks. I trust that the the highest appreciation by all Sri Lankans. concerned authorities will take due heed of the emerging situation. PAGE 4 | DFCC Bank | Annual Report 2008/09 THE STRENGTH OF STRATEGY AND PROCESS... POSITIONS DFCC WELL TO FACE A FUTURE THAT WILL CHALLENGE US... Chairman’s Statement | Annual Report 2008/09 | DFCC Bank | PAGE 5 business of financing capital assets. At the same time, the Bank was mindful of the increasing stress on the cash flows and debt servicing capacity of customers, both existing and new, and the focus was proactively shifted from growing the lending portfolio to managing its quality. As part of Although the outlook is difficult, the opening level of provisioning for non-performing this strategy, industry assessments were up of the North and East of the country assets. Costs were also incurred as part carried out with a view to effecting, where presents opportunities for the private sector of a strategy to invest in the expansion of required, sector-wide restructuring of credit and financial institutions to participate in its distribution network. This investment facilities in the case of businesses that the development of the North and East. will duly bear a commensurate return and were experiencing temporary cash flow At the initial stages, the activities to be enable DFCC Vardhana Bank Limited to difficulties. It is notable that DFCC was the focussed on could be agriculture, fisheries, increase its future contribution to Group first Bank to extend such a programme to small and medium industries, and trading. profit. Meanwhile, despite a challenging the low country tea manufacturing industry. However, given the capacity limitations year, the associate company, Commercial This enabled a much needed breathing of the local institutions, larger public Bank of Ceylon PLC, posted a solid space to several factory owners in the undertakings, particularly infrastructure performance and provided a substantial aftermath of the collapse of tea prices in projects, would need to be implemented contribution to the Group. Even so, the late 2008. with financial support from external total profit contribution from the subsidiary multilateral agencies. Anyhow, in order and associate companies was impacted DFCC was once again a recipient of to facilitate the involvement of the private by the Bank’s share of the post - tax losses an Annual Award by the Association of sector, the Government’s role is vital. As reported by Lanka Ventures PLC due to a Development Financing Institutions in Asia such, the shift of focus from the warfront to prior year tax charge and Synapsys Limited, & the Pacific. In recognition of its efforts the economic front has to be achieved as the IT subsidiary, which is in the capacity to promote new technologies, DFCC soon as possible. In this context, the long building phase. was adjudged winner in the Technology awaited conclusion of the separatist war will Development Category for assisting a create an environment that should enable Acuity Partners (Private) Limited, the pioneering turbine manufacturing project. all stakeholders to concentrate fully on the equally-owned investment banking joint urgent development tasks at hand. venture with Hatton National Bank PLC At the Group level, the dip in profits (HNB) and the newest member of the reported by DVB reflected the increased I would now like to briefly review the Group, formally began operations in performance of DFCC Bank. Profit after July 2008. DFCC’s contribution to the tax at the Bank level was up 3% while that venture amounted to Rs250 million, which at the Group was down 8%.