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 Contents 2 Performance Highlights 4 Management Information 4 Chairman’s Message 8 Chief Executive’s Report 12 Profiles of Directors 16 Management Team 18 Subsidiary, Joint Venture and Associate Companies 20 Reports of Directors 20 Annual Report of the Board of Directors 25 Corporate Governance 32 Audit Committee Report 35 Human Resources and Remuneration Committee Report 36 Nominations Committee Report 37 Board Integrated Risk Management Committee Report 38 Management Discussion and Analysis 38 Operations Review 43 Financial Review 46 Risk Management 50 Sustainability Report 52 Chief Executive’s Message 53 Environment 55 Economy 56 Corporate Social Responsibility 59 Human Capital 61 Financial Report 62 Statement of Directors' Responsibilities in Relation to Financial Statements 63 Chief Executive Officer's and Chief Financial Officer's Responsibility Statement 64 Independent Auditor’s Report 65 Income Statement 66 Balance Sheet 67 Statement of Changes in Equity 68 Cash Flow Statement 70 Notes on the Financial Statements 121 Supplementary Information 121 Capital Adequacy 123 Statement of Value Added - Bank 124 Sources and Distribution of Income - Bank 125 Ten Year Summary 126 Performance of the Share 127 Share Information 129 Twenty Major Shareholders 130 Debenture Information 131 DFCC Bank’s Offices 132 DFCC Pioneer’s Journey Performance Highlights Despite many challenges faced by the Bank… Profit before tax increased by 20%, profit after tax increased by 26%, earnings per share increased by 25% and proposed dividend has increased by 20%. Furthermore, operating expenditure declined by 8%. For the year ended 31 March 2010 2009 % Change Income - Rs M 8,843 9,888 10 Profit before tax 2,403 2,006 20 Profit after tax 1,713 1,360 26 Earnings per share - Basic - Rs 12.97 10.41 - Diluted - Rs 12.97 – Gross dividend (Proposed) - Rs M 794 654 Dividend payout % 46 48 Shareholders' funds (capital & reserves) - Rs M 15,723 14,491 8 Medium/long-term borrowing, deposits & debentures - Rs M 38,539 38,988 1 Total assets - Rs M 56,416 58,485 4 Return on average total assets - % 3.4 2.2 Return on average shareholders’ funds 11.3 9.6 2 DFCC Bank Annual Report 2009/10 3 DFCC Bank Annual Report 2009/10 Management Information Chairman’s Message It is with great pleasure that I present Going forward, the prospects for unfettered will. It is my belief that this the Annual Report of DFCC Bank for the Sri Lanka arising from the post conflict combination of factors now exists financial year ended 31 March 2010. situation and the eventual recovery of as evidenced by the early efforts at world markets are good. Even so, the streamlining a top heavy administration. There is no doubt that it was a defining country has to embark on the long and Such efforts however, must build up period for Sri Lanka. The shackles of arduous task of nation building with momentum. conflict were finally undone and the vigour where sound strategic actions long awaited ‘light at the end of the have to prevail in order for the peace The third issue is the recurring fiscal tunnel’ was sighted. The country now dividend to materialise. While the deficit and large losses of several state- has the epochal prospect of attaining its onward path is full of promise, there owned enterprises. The resultant build up full potential. As expectations are high, are potential hazards that need to be of public sector debt is casting a shadow the new elected Government under cleared right at the very outset. There over the future development of the the leadership of His Excellency the are three immediate and perennial country. This needs to be aggressively President Mahinda Rajapakse will no issues; politics, governance and the addressed sooner rather than later with doubt grasp this opportunity and deliver fiscal deficit. the same intensity and attention that on the mandate awarded by the people. enabled the defeat of terrorism. The Firstly, the legacy of the defeated terrorist environment is now conducive for such I would like to look back briefly on the movement will not be dispelled overnight. action and what is required is the political past year. Sri Lanka’s economy had to Therefore, while the military ‘coup de will to capitalise on the ‘feel good’ factor bear the full brunt of the global recession grace’ has been administered, focus and push through the more sensitive and therefore weakened during the first must continue on the rehabilitation and measures such as factor liberalisation half of 2009. However, positive internal resettlement process, and the economic and revenue reform. and external developments towards development of all the affected regions. the latter part of the year enabled the In this context, it is encouraging that the Also, while the Government will economy to recover strongly from the development thrust that is gathering pace spearhead the development of lacklustre start. While the catalyst was particularly in the South is also gaining infrastructure and other areas, there the ending of the long running terrorist momentum in the North and East and is the need to increase the role of the violence, the country’s economic achieving tangible results on the ground. private sector in this activity particularly situation was also aided by the through public-private partnerships continuing recovery in world markets. The second issue is the question of and other transparent structures. In the The containment of inflation and the governance. In this regard, a top down context of investing in a post conflict decline in interest rates were also approach based on meritocracy is the important factors that helped to regain best strategy. Such action requires business and investor confidence. determination and a strong and politically 4 DFCC Bank Annual Report 2009/10 "Going forward, the prospects for Sri Lanka arising from the post conflict situation and the eventual recovery of world markets are good. Even so, the country has to embark on the long and arduous task of nation building with vigour where sound strategic actions have to prevail in order for the peace dividend to materialise." 5 Chairman’s Message | DFCC Bank Annual Report 2009/10 Sri Lanka, I do not believe that the domestic banking industry continued delinquent assets and all aspects of financing of such projects would be a to be profitable, the performance of the cost in order to achieve a respectable constraint provided that transparency core business of intermediation was growth in the bottom line. Bearing in prevails. Most long-term financial weak. However, there are welcome mind its responsibility as a development institutions have a pragmatic attitude signs of revival that have emerged in the finance institution, the Bank took a particularly when it comes to project last few months. conscious decision to provide liquidity finance. However, ethical investing either by restructuring or providing new and best practices, especially after the Looking ahead, there is widespread funding to many viable businesses in global banking crisis, are overriding acceptance that the financial system sectors that experienced stress. These considerations meaning that any has to undergo a fundamental structural endeavours enabled the Bank and the opaqueness will stall a transaction. transformation. The domestic banking Group to record growths of 26% and space is too fragmented and this will 30% respectively in profits after tax I would like to move on to the banking require the players to attain a critical for the financial year ended 31 March sector itself. Globally, the image of the mass, particularly given the credit 2010. I am also pleased to inform that, industry has suffered. Depositors and demand prospects and the emerging at the Group level, the investment in the investors lost much due to endemic regulatory scenario. The need for distribution network of DFCC Vardhana moral hazard while taxpayers had to corporate consolidation to achieve scale Bank Limited (DVB) began to bear fruit foot huge bills for the bailouts of those economy and operational homogeny as expected. DVB has now expanded its institutions deemed ‘too Big to Fail’. In and thereby cost rationalisation and distribution network to all the provinces. the United States alone, 140 banks went profitability enhancement has thus Despite the inherent difficulties that under in 2009 and a further 41 failed been voiced many a time. The need for a small commercial bank has to face during January to March 2010. However, an equitable tax rate to incentivise the in difficult economic conditions, DVB following concerted policy actions that raising of equity capital has also been more than doubled its contribution to helped stabilise the system, there was articulated repeatedly. In all this, there Group profit. It is clear that the Bank some recovery beginning in the latter is a unity of opinion and I therefore requires to expand its franchise in the part of 2009. Even so, confidence in hope that the policy makers and the commercial banking space to enable it the industry needs to be quickly rebuilt authorities concerned will give due heed to effectively deliver on its development particularly through the implementation to the industry situation and address the banking mandate. Accordingly, we are of reform and regulatory tightening on a issues raised. in the process of developing a model global scale. In contrast, the domestic under which both these businesses financial system remained stable due I now turn to the performance of can continue. The future of the Bank’s in no small part to proactive regulatory DFCC Bank.