Continuous growth... that’s what we believe in. A process that continues to grow in ever increasing value. Always keeping a step ahead, continuing to add to the already added. Foreseeing the possibilities and promise of tomorrow, today. Keeping with the evolutionary cycle of banking, we have geared ourselves from the outset to meet our customers’ future needs. And today, we continue our growth in that vein. Our Vision To become the most customer preferred commercial bank in Sri Lanka. Our Mission To create the largest satisfied customer base by providing professional, personalised, secure, quality banking and financial services, using modern technology and innovative products. We will delight our customers, create a better future for employees and enhance stakeholder value. 2 Annual Report 2007 Contents Vision & Mission 2 Income Statement 64 Highlights of Special Events 4 Balance Sheet 65 Financial Highlights 5 Statement of Changes in Equity 66 Chairman’s Report 6 Cash Flow Statement 67 CEO’s Report 10 Notes to the Financial Statements 68 Board of Directors 16 Capital Adequacy 91 Corporate Management 20 Quarterly Statistics 93 Senior Management 21 Analysis of Deposits 94 Operational Review 23 Analysis of Advances 95 Products & Services 28 Sources & Utilisation of Funds 96 Corporate Social Responsibility 30 Value Added Statement 97 Human Capital 35 Information of Shareholders 98 Corporate Governance 40 Top Twenty Shareholders 99 Annual Report of the Board of Directors on the Ten Year Statistical Summary 100 Affairs of the Company 44 Graphical Review of Ten Year Summary 102 Risk Management 52 Branch Network 103 Audit Committee Report 55 Correspondent Banks 104 Directors’ Responsibility for Financial Reporting 58 Definition of Financial Terms 106 Financial Review 59 Notice of Meeting 107 Financial Reports & Accounts 61 Notes 108 Financial Calendar 62 Form of proxy (enclosed) Auditors’ Report 63 Annual Report 2007 3 Highlights of Special Events First Quarter Second Quarter • Street campaign • Vesak Bakthi Gee • Branch opening - Maharagama • Branch opening - Kirulapone • Staff training programme • Induction programme for new recruits Third Quarter Fourth Quarter • Branch opening - Galle • Sponsoring and participating at Childrens’ Day • Continuous Skill Development • Branch opening - Kadawatha • Annual trip • Winner of PABC quiz competition - Kotahena Branch 4 Annual Report 2007 Financial Highlights 2007 2006 Change Rs. (Mn) Rs. (Mn) % Results for the Year Income 2,317.14 1,580.84 46.58 Profit before Provisioning & Taxes 460.87 307.33 49.96 Profit before Income Tax 316.79 250.17 26.63 Income Tax on Profits 100.71 86.43 16.52 Profit for the year 216.07 163.74 31.96 At the Year End Shareholders' Funds 1,451.19 1,235.12 17.49 Deposits from Customers 12,130.21 8,962.89 35.34 Debentures 303.79 303.79 - Advances to Customers (Net) 10,304.61 8,063.40 27.79 Total Assets 15,525.70 12,625.88 22.97 Net Asset Value per share (Rs.) 13.12 11.16 Earnings Per Share (Rs.) 1.95 2.63 Statutory Ratios (%) Capital Adequacy - Tier I (Minimum Requirement - 5%) 14.92 16.35 - Tier I & II (Minimum Requirement - 10%) 16.13 18.37 Liquidity (Minimum Requirement - 20%) 23.11 21.98 Return on Average Assets 1.52 1.44 Return on Average Shareholders’ Funds 16.19 23.41 Annual Report 2007 5 Chairman’s Report As the year unfolded, the Business Community had to confront The Economy still seemed resilient, recording GDP growth of 6.2% many issues which were not very supportive to their aspirations. in the first half of 2007. The rate predicted for 2008 is 6.7%. In the They were apprehensive of the scenarios unfolding in the political Service Sector, which contributed more than 50% of overall growth sphere, the escalation of the North-East conflict, the rising inflation, in GDP,Telecommunication and Information Technology facets grew the spiraling global oil prices to name a few. A key economic encouragingly, backed by new technology, expanded coverage and indicator, interest rates which were highly volatile to begin with, value added services. rose to even higher levels. In fact, the interest rates were behaving Despite the political uncertainty the ongoing North-East conflict in a manner that was creating an unusual gap between the policy and some unfavourable economic indicators it is encouraging to rates and the Money Market rates. note that the Banking sector and the large corporates, especially, Escalating energy prices had a chain effect on essential commodity have achieved increase in profits, compared to those that were prices which then spread to all segments of the economy, heating achieved in the previous year. up the prices of all goods and services. The inflationary trends rode The Global economy has taken a plunge in recent times - courtesy, high during the year, propelled by heavy government expenditure the heightened threat of terrorism and the counter measures that and external factors such as commodity and oil prices. Heavy have resulted in mini wars raging in several hot-spots around the public sector borrowing requirement jump started the rate hikes globe as well as the spiraling oil prices which are affected by the and inflation hovered between 16% - 20% making Bank deposits unrest in Middle-East. The world still depends heavily on oil to more attractive than investment in the Capital markets where risks move the wheels of Industry. Therefore, oil prices will continue to are higher. 6 Annual Report 2007 Chairman’s Report dictate the World economy even as we go in to the future. Many during 2007 to record the highest profits in its 12 year history. The countries are now researching for alternative cheap power sources Profit before Financial VAT & Tax recorded was Rs 400.49 Mn, an in order to overcome the potential future energy crisis. increase of 25.24%, over the previous year. The post tax profits earned was Rs. 216.07 Mn with a growth of Rs. 52.34 Mn over last The world economic order is also fast changing, with the old year. These results were achieved despite several factors such as industrial giants, i.e. USA, Japan and Germany, being challenged by increased financial costs, a high tax regime, and ever increasing the emerging economies seen in the form of China, India and so on. operational costs pushing against us adversely. The GDP of China and India are now growing at the remarkable pace of over 10% per year. Their external reserves have recorded We established 8 new Branches during the year taking the total to unprecedented levels. This will essentially shift the economic and 29 outlets. We have plans to open 10 more branches in the year political levers of power to the Asian region to which we belong. 2008. The Bank's deposits grew by 35.34% during the year, Our giant neighbour is reaping the benefits of a conducive business which is very satisfactory when compared with the overall climate, through improved Foreign Investment inflows and a higher industry performance. savings function. We would do well to take a leaf out of their book in order to emulate their success. Your Bank has invested well in to its infrastructure, Information Technology systems and people in order to constantly improve The biggest economic and political challenges facing the country customer interface, services quality and productivity. The Bank will are the continuing ethnic conflict, the political instability and the ensure that Return On Assets and Human Capital will be optimised rampant inflation. The business diaspora will be able to operate in to give our valued stakeholders sufficient returns. a friendly atmosphere free of apprehension if the above conditions could be mitigated. We desperately need to find a way The Board of Directors will ensure that the Bank will be steered by to peace, speedily. high caliber professionals and that the staff will be kept highly motivated to bring out the best in them. They are put through With regard to the financial aspects, we have to meet the minimum continuous training schedules for skill development and to capital requirement by infusing new capital, within the given time- refashion their vistas of horizon. frame and I am pleased to mention that arrangements are underway to comply. It will certainly be a challenge for businesses Also, a performance based reward system is in place to spur them to earn reasonable profits as demanded by their stakeholders in towards improved productivity and performance. The PABC family view of the heavy tax burdens placed on corporate profits. Against has now grown above the 500 mark and will continue to grow, many odds as mentioned above, your Bank performed quite well when the proposed new branches are established. 8 Annual Report 2007 Chairman’s Report It is our plan to enhance appreciably the Bank's growth momentum We cannot forget the contribution made by our growing and loyal with a view to realise our vision “To become the most customer customers to our success story. We could not have achieved these preferred commercial bank in Sri Lanka”. results without their co-operation and at times constructive criticism. We appreciate their contribution. The Central Bank of Sri Lanka introduced The Mandatory Corporate Governance Rules for banks effective January 01, 2008. This was Finally, on behalf of the Board of Directors, I wish to assure you that introduced after lengthy discussions with the banks during the year your Bank will continue to add value to your investment through 2007. We too were able to contribute to the formulation of the rules well planned and prudent business strategies and moves. in an effective manner. We consider the compliance essential and assure complete adherence. I would like to thank the Governor of the Central Bank of Sri Lanka and the Bank Supervision Department headed by the Director of A.