Annual Report 2015

Vision

“To be the leading financial solutions provider sustainably developing individuals and businesses”and businesses”

Mission

“To provide innovative and responsible solutions true to our Values with the expertise of our multidisciplinary team of professionals and synergies of our financial services group”

Our Values

Innovative Customer Centric Professional Ethical Accountable Team Oriented Socially Responsible “The stylised ‘ V ’ in our new logo represents Vardhana, but it also stands for many other things. It stands for our values, our vision, our past and the future victories and in a slight marketing twist, a small ‘tick’ to remind people that DFCC Bank is always their right choice.” About this Reporting Period Consequent to the change of the financial year-end to 31 December Report from 31 March following the amalgamation with DFCC Vardhana Bank PLC and obtaining the commercial banking license, this DFCC Bank Annual Report 2015 covers the nine month period from This is our fourth consecutive Integrated 1 April 2015 to 31 December 2015 (period under review) and is Annual Report, one which also builds further different from our usual annual reporting cycle for financial and on the triple bottom line reporting we had adopted sustainability reporting adopted up to 31 March 2015. The previous a few years earlier. As an integrated report, it is a concise Annual Report covered the period 1 April 2014 to 31 March 2015 communication about how our strategy, governance, performance (previous year), and is available on our website (www.dfcc.lk) and prospects, in the context of the external environment, lead to along with quarterly filings and older Annual Reports. Some of the the creation of value over time. consolidated entities have a 31 March financial year-end and they

Value Creation and Capital Formation are consolidated with DFCC Bank’s reporting period with a three month time lag. A summary of the accounting periods covered by The ability of an organisation to create sustainable value for itself the Statement of Profit or Loss and Other Comprehensive Income in depends on the value it creates for its stakeholders, making value the Bank and the Group columns is given in the Financial Report creation essentially a two-way process. In fact, the more value an (page 123). organisation creates, the more value it is able to create for itself. Therefore firms spend substantial resources on creating and Report Boundary maintaining relationships with their stakeholders. Value creation Consequent to the amalgamation, our reporting covers DFCC Bank leads to capital formation. As a store of value, capital takes on PLC (‘DFCC Bank’ or ‘Bank’) and the DFCC Bank Group (‘Group’) a broader meaning in integrated reporting and constitutes the comprising the Bank and its subsidiaries, a joint venture company resources and relationships used and affected by an organisation. and an associate company. The respective entities are duly identified We classify capital that is owned by the organisation as being where applicable. ‘internal’ capital, while capital that is not owned as ‘external’ capital. Ownership is irrelevant here as long as the organisation has access Compliance to and uses all forms of its capital to create sustainable value for itself and its stakeholders. As declared on page 119 the Board of Directors of DFCC Bank, in the spirit of good governance, accepts responsibility for the entirety of Our Management Discussion and Analysis is thus structured this Annual Report 2015. likewise, based on value creation and capital formation. The information contained herein, as in the past, is in compliance Comprehensive and Yet Concise with all applicable laws, regulations and standards. Additional details are given in the Corporate Governance Report (page 89), Financial Taking forward the approach to reporting adopted last year, this Statements and the Notes thereon (page 122) and the Independent report balances the need to communicate effectively through concise, Auditors’ Report (page 121). relevant information (to a large and diverse stakeholder group), while at the same time providing comprehensive compliance-related In addition, we have drawn on concepts, principles and guidance from disclosures (that would interest only a few). We are thus presenting the Global Reporting Initiative (GRI) Sustainability Guidelines G4, our Annual Report 2015 in three primary formats: the International Integrated Reporting Framework and the Smart Integrated Reporting Methodology™ in producing this Report. a concise report (what you are now reading) in print and CD formats which meets compliance requirements while Precautionary Principle communicating with an audience looking for the essentials in a nutshell; We take due cognisance of the social and environmental consequences of our actions, both direct and indirect. The latter are more significant a comprehensive report for a universal audience in online html and they arise from our lending operations, which are addressed format [http://dfcc2015.annualreports.lk]; and through credit policies, the Social & Environment Management a condensed ‘annual snapshot’ in print and pdf formats that System (SEMS), post-disbursement supervision and risk communicates across a broad spectrum of current and potential management processes. stakeholders. Comparability Going beyond mere ‘annual’ reporting we are also striving for a more ‘current’ format for reporting and are upgrading our corporate The basis for reporting on subsidiaries, joint ventures and other website with a focus on investor relations, duly supplemented by an entities, leased facilities, outsourced operations as well as any investor relations app for smart phones and other devices. restatements and significant changes from previous reporting periods in the scope, boundary or measurement methods are disclosed where appropriate. They are in compliance with the reporting standards disclosed in the Financial Reports.

Queries We welcome your comments or questions on this Report. You may contact the Secretary to the Board at our Head Office via email or snail mail through the contact details given under Corporate Information.

04 06 Highlights Message from the Chairman 08 10 21 Chief Executive’s Profiles Business Model Review About DFCC Bank – 21 Board of Directors – 10 Group Structure – 22 Corporate Management – 14 Our Portfolio – 24 Management Team – 16 Operating Environment – 26 Strategic Direction – 28 Stakeholders – 30 Materiality – 32 33 72 73 Stewardship Management Discussion Recognition and Analysis Integrated Risk Awards and Accolades – 72 Management – 73 Value Creation and Internal Corporate Governance – 89 Capital Formation – 33 Annual Report of the Board of Financial Capital – 33 Directors on the Affairs of the Bank – 99 Institutional Capital – 40 Board Committees – 104 Value Creation and External Directors’ Statement on Capital Formation – 42 Internal Control – 110 Investor Capital – 42 Independent Assurance Report – 112 Customer Capital – 43 Employee Capital – 53 Business Partner Capital – 65 117 Social and 113 Financial Reports Environmental Capital – 68 Investor Relations Financial Calendar – 118 Statement of Directors’ Investor Engagement – 113 Responsibilities in Relation to Financial Statements – 119 Performance of the Share – 113 Chief Executive’s and Distribution of Shareholding – 115 Chief Financial Officer’s Statement of Responsibility – 120

Independent Auditors’ Report – 121

Financial Statements and Notes – 122

Other Disclosures – 210 213 Supplementary Information

Value Added Statement – 213

Sources and Distribution of Income – 214

SCAN to view the online version Ten Year Summary – 215 http://dfcc2015.annualreports.lk Corporate Information – 216 Highlights

Broadbased Launched The Utility The Tea Integrated Payment Solution Payment System More utility providers and corporates A groundbreaking supplier settlement joined the payment scheme system to serve Sri Lanka’s large community of private tea manufacturers and tea leaf suppliers

Consolidated Developed The Two Core The Mobile Wallet Banking Solutions Solution The best of both systems were unified, A convenient electronic payment and fund thus achieving true synergy management solution that allows users to send and receive funds through their mobile devices instantly

Amalgamated Established DFCC Bank and DFCC Bank's DFCC Vardhana First Ever Bank 'Automated Branch' DFCC Bank PLC is the surviving entity at the newly refurbished premises in Negombo

Celebrated Upgraded DFCC Bank�s Sri Lanka 60th Anniversary Postal Units Events for customers and other to fully-fledged branches stakeholders held in all the Regions

4 DFCC Bank PLC Annual Report 2015 Financial Highlights

Group

Based on current SLFRS

9 months Year ended 31 March ended 31 December 2015 2014 2013 2012 LKR million 2015

Operating Results Total income 17,503 20,094 20,376 16,630 12,231 Profit before tax 2,553 5,416 4,117 4,431 3,674 Tax expense 912 977 902 870 628 Profit attributable to equity holders of the Bank 1,592 4,362 3,151 3,494 2,966

Statement of Financial Position Assets Cash and short-term funds 4,316 6,855 8,043 11,625 5,054 Loans to and receivables from banks and other customers 164,945 138,887 117,716 102,477 87,827 Financial investments 66,861 56,699 40,976 27,648 24,433 Investments in associate and joint venture 1,248 1,188 1,029 901 950 Other assets 9,739 6,981 7,231 6,628 4,992 Total assets 247,109 210,610 174,995 149,279 123,256

Liabilities Due to other customers 110,551 92,712 80,917 62,878 45,682 Other borrowing 87,381 65,874 50,075 46,012 42,492 Other liabilities 5,208 3,761 3,549 3,265 2,317

Equity Total equity attributable to equity holders of the Bank 43,716 47,909 40,121 36,814 32,472 Non-controlling interests 253 354 333 310 293 Total equity and liabilities 247,109 210,610 174,995 149,279 123,256

Return on equity, %* 5.6 14.0 10.9 13.1 10.7 Return on total assets, %* 0.8 2.5 2.1 2.8 3.0

Earnings per share, LKR 6.01 16.46 11.89 13.18 11.19 Net asset value per share, LKR 164.90 180.72 151.34 138.87 122.49

Capital adequacy Core capital ratio, % 15.39 17.71 18.71 20.84 21.05 Total capital ratio, % 15.32 16.62 17.19 19.37 19.88

*After eliminating fair value reserve.

DFCC Bank PLC Annual Report 2015 5 Messages

Before commenting on what DFCC Bank will deliver, going Message from forward, I would like to review our financial performance for the nine months ended 31 December, a full analysis of which the Chairman is given in the section of this Report covering Value Creation and Internal Capital Formation. The amalgamation between DFCC and Vardhana has achieved a unique blending As mentioned earlier, this year, as a result of our advancing the financial year-end to 31 December 2015, the reporting of a 60-year heritage in development period for DFCC Bank has been reduced to nine months. The banking skills with the energetic dynamism comparisons are between a nine month period along with of Sri Lanka's fastest growing commercial the previous 12 month period. Net profit after tax for the nine months ended December 2015 was LKR 1,642 million bank. It has therefore created an entity at Group level and LKR 1,068 million at the Bank level as that is far greater than the sum of its two against LKR 4,439 million and LKR 3,240 million respectively parts making a larger bank, with a new for the 12 months ended 31 March 2015. The comparison is, however, distorted by the fact that FYE 31 March dynamism and vision. 2015 included some substantial one-off capital gains and impairment reversals and that the period ended 31 December Dear Shareholders, 2015, encompasses significant non-recurrent costs incurred on account of the amalgamation. Taxation for the full year, In my message last year, I said that the year 2015 would be even though results are for nine months, due to the change special. It turned out to be just that – a year in which DFCC of the financial year and the non-receipt of substantial Bank underwent transformations and celebrated its Diamond dividend income, which accrues in the first quarter of the Jubilee. DFCC Bank merged with DFCC Vardhana Bank calendar year, have also distorted the comparison. Total on 1 October, coinciding almost to the day with our 60th Group assets rose 17% as at 31 December 2015 to reach Anniversary which fell on 4 October. The amalgamation of the LKR 247,109 million against LKR 210,610 million as Banks also entailed the advancement of the financial year-end at 31 March 2015. This included a healthy 18% growth from 31 March to 31 December. in the credit portfolio to LKR 171,111 million from LKR 144,896 million. During the period under review, Although both Banks were operationally merged in many DFCC Group paid LKR 811 million as Super Gains Tax, areas prior to amalgamation, the amalgamation itself was which related to the profit for the year ended 31 March 2014. a painstaking process and the fact that it was achieved on schedule speaks volumes for the commitment, co-operation The amalgamation between DFCC and Vardhana has achieved and support extended by the various stakeholders involved. a unique blending of a 60-year heritage in development I must specially thank the employees of the two Banks, the banking skills with the energetic dynamism of Sri Lanka’s regulators and you, our shareholders, who ensured that fastest growing commercial bank. This has created a strong the amalgamation on the 1st of October took place almost feeling of pride and mutual loyalty among the people of both seamlessly without disruption to customers of both banks.

6 DFCC Bank PLC Annual Report 2015 Banks, which is proving its worth, not only in achieving Our subsidiaries and joint venture have contributed well significant synergies, but also in acting as an incubator for in the period under review and I thank the CEO's and their innovation across all levels. Dynamism and innovation is teams for their dedication and hard work. feeding into the Bank’s processes, most importantly in the areas of customer service and delivery. New thinking is To the valued customers of DFCC and Vardhana, my thanks pervading the internal mindset and a paradigm shift is taking for your continued patronage and loyalty. We look forward to Messages place with regard to the customer experience. Some new serving you and the host of new customers who have joined innovations include novel electronic delivery channels such as us, with a level of service that exceeds expectations. Lanka Money Transfer and the Supplier Settlement Service. Mobile Wallet is an exciting new innovation, which we hope I gratefully acknowledge the support of the officials of the to roll out in the near future. With these and other initiatives Ministry of Finance and the Central Bank of Sri Lanka planned, a ‘new’ DFCC Bank is being forged and is well- and thank them specially for the co-operation extended positioned to deliver exceptional value to all stakeholders. with regard to the amalgamation. My thanks also go out to the Registrar General of Companies and his staff for the The amalgamation with Vardhana also provided an ideal assistance provided during the amalgamation. opportunity to rebrand and relaunch the Bank's brand. Although Vardhana Bank no longer exists, Vardhana Banking I thank my colleagues on the Board for their invaluable continues to flourish - every product and service provided by contribution and counsel, especially in connection with the the Bank is now under the Vardhana brand. The stylised ‘V’ in amalgamation. Their dedication and devotion to the Bank’s

our new logo represents Vardhana, but it also stands for many progress is exemplary. The period under review saw Chairman Message from the other things. It stands for our values, our vision, our past and Ms Shamalie Gunawardena resigning from the Board in future victories and in a slight marketing twist, a small ‘tick’ June 2015 and Mr Gomin Dayasri retiring in July 2015 upon to remind people that DFCC Bank is always their right choice. reaching the age of 70. I thank them both for the support and guidance they provided to the Board during their tenure. The amalgamation of the two banks has therefore, created an entity that is far greater than the sum of its two parts In June, Mr Ranjith Asoka, joined the Board and making a larger bank, with a new dynamism and vision. The Ms Vijayanthi Senaratne was appointed in July. year 2015, was one which laid the groundwork for the future. In October 2015, Mr Lalit de S Wijeyeratne, Mr Nihal Fonseka The DFCC Banking Business team worked with dedication and Mr Lakshman Silva, who were Directors of Vardhana and commitment, although results were to some extent (Mr Silva was also the CEO) were welcomed to the Board. impacted by the less than favourable interest rate scenario The new Directors bring a multitude of skills and experience that prevailed in the market as well as the depreciation of in their respective fields, which have strengthened the the Rupee. skills set of the Board and contributed significantly to our deliberations and decisions. DFCC Bank, as a specialised bank, was unable to operate current accounts or retail savings accounts (CASA) and this The Directors have approved a first and final dividend was a serious impediment to lowering the Bank’s cost of of LKR 2.50 per share. This represents a payout of 66% funds. Now that we are a fully-fledged commercial bank, of distributable profits, in-line with the Bank’s every effort is being made to rapidly grow our CASA ratio, and Dividend Policy. lower the cost of funds, which will in turn, raise net interest margins. We will continue to provide long-term development On behalf of the Board of Directors, I assure our shareholders finance to clients and our expert teams, the best in the that we, together with the DFCC team, remain committed to business, stand ready to continue our dominance in this field add value to your shareholding in DFCC Bank. Rest assured, in the years ahead, with the ability to now provide clients with we will ‘Keep Growing’. We are embarking on an ambitious the full gamut of services to cater to all their requirements, new journey, which we hope will take us to the upper which we were unable to provide previously, unless they percentile of banks in Sri Lanka and we look forward to your opened an account with Vardhana. Corporate and Retail continuing support and encouragement. banking, Trade Financing, PFS loans and other products and services will continue to be handled speedily and efficiently with the exceptional service standards provided in the past. Plans to increase fee based income have been put in place, to offset the lower net interest margins we foresee continuing in 2016 and a tight control of expenses will be maintained, while also concentrating on increasing efficiency and productivity. C R Jansz We are poised to take advantage of this era of opportunity and Chairman our people are well equipped to meet the challenge. Working together, we will ensure our customers, you, our shareholders 24 February 2016 and other stakeholders keep growing. And DFCC Bank will grow with you, for we have always been a Bank that grew with our customers, rather than because of them.

DFCC Bank PLC Annual Report 2015 7 Messages

The lower interest rates during the period meant that there Chief Executive's was a drop in the interest margin to 3.1% from 3.6%, in line with the industry. Meanwhile, total assets grew by Review 17% to LKR 247,109 million as at 31 December 2015 from LKR 210,610 million as at 31 March 2015. This included a robust credit portfolio growth of 18% to LKR 171,111 The year 2015 was a period of transition for DFCC Bank, million from LKR 144,896 million. Credit quality was not and its mixed performance should be viewed in the context compromised. The ratio of impaired loans to total loans of the transformation undergone by the Bank, namely the for 31 December 2015 was 5.1% compared to 6.1% for amalgamation with DFCC Vardhana Bank. In fact, I would like 31 March 2015, indicating a credit quality improvement. to think of it as a case of ‘Form is temporary but Class The cumulative allowance for impairment of loans and is Permanent’. advances was maintained at a healthy level of 72.1% for 31 December 2015. Close monitoring drove down the A full analysis of DFCC Bank’s performance for the period Bank’s ratio of impaired loans to total loans as well as under review is given in the section on Value Creation and its regulatory non-performing loan ratio, with the latter Internal Capital Formation. With the change in the financial improving to 3.7% as at 31 December 2015 from 4.3% as at year-end to 31 December from 31 March, the performance 31 March 2015. Its balance sheet strength is demonstrated by relates to the period of nine months from April 2015 to a Group Tier I Capital Adequacy Ratio of 15.4% and a total December 2015, which must be considered when attempting Capital Adequacy Ratio of 15.3% making DFCC Bank one of a comparison with that of the previous full year. Moreover, the highest capitalised banks in the industry. there were several exceptional items. FYE 31 March 2015 included substantial one-off capital gains and impairment Prior to October 2015, DFCC Bank’s business was based on reversals while the period ended 31 December 2015 entailed an operational merger between DFCC’s development banking significant non-recurrent expenses incurred during the business and DFCC Vardhana Bank's commercial banking amalgamation for items such as systems integration and business. While this was a robust arrangement, the changing data migration. The change of the financial year meant that banking landscape required a paradigm shift in DFCC Bank’s the Bank incurred an additional taxation charge based on agility and thus the legal amalgamation with Vardhana Bank, the full year, even though results were for nine months. which I am happy to report was achieved almost seamlessly Also, substantial dividend income, which accrues in the first and within the set timeline. Moreover, it was most fitting quarter of the calendar year, could not be included. that this was accomplished at the time DFCC Bank celebrated its Diamond Jubilee. The outcome is that DFCC Bank is Net profit after tax for the period ended 31 December 2015 now a full-service commercial bank. It serves a variety of was LKR 1,642 million (Group) and LKR 1,068 million (Bank) clients from individuals, professionals and entrepreneurs to while that for FYE 31 March 2015 was LKR 4,439 million SMEs and corporates across the country. It has a nationwide and LKR 3,240 million respectively. Net interest income footprint through 137 branches in all districts. Importantly, was LKR 6,385 million in the current period, while it has been re-launched with a new brand, the significance of LKR 6,691 million was reported in the previous year. which I would like to explain.

8 DFCC Bank PLC Annual Report 2015 Our brand promise is that we enable our customers and other Besides banking, DFCC Group customers have access to an stakeholders to ‘Keep Growing’ and this means a lifelong array of financial expertise including investment banking, relationship of adding value. In fact, several enterprises, which wealth management, information technology, industrial are large businesses today, had their roots in the seed finance park management and consultancy delivered through the provided by DFCC Bank at their inception. A key component subsidiaries – DFCC Consulting, Lanka Industrial Estates, in delivering this promise is our employees. DFCC Bank has Synapsys and the joint venture - Acuity Partners, which itself Messages always been recognised for its development financing expertise is the parent of financial services powerhouse encompassing driven by its highly skilled and professional workforce. The corporate finance, stock-broking, fixed income trading, result is that the Bank remains the first choice for any new venture capital and asset management. All these businesses venture or expansion project. Following the amalgamation are synergised within the Group and differentiate DFCC Bank with Vardhana, a young and dynamic team has been added from the rest of the pack. Going forward, cross-selling of further enhancing the Bank’s agility. The internal culture their products and services will be an important element in is changing smoothly with a cross fertilisation of skills and DFCC Group’s value proposition. For example, DFCC Bank’s expertise. Also, new corporate initiatives were implemented. Consumer Banking business will include investment advisory The corporate structure was redrawn and new business and wealth management services to a segmented clientele. components and functions were added with equally important Another would be the digitisation of distribution channels and objectives. Firstly to instil a new internal culture that enables creation of a virtual branch network. employees to learn, innovate and embrace change. Secondly,

that the re-launched DFCC Bank provides a new and enriching In summary, while 2015 represented an aberration, we will Executive’s Review Chief experience to customers and that the change is not cosmetic strive to fulfil stakeholders’ expectations in the journey but a paradigm shift. through 2016 and beyond. While the repositioning of DFCC Bank will be a challenging task, the amalgamation While DFCC is now a licensed commercial bank, it will hold with Vardhana has laid the foundation for the Bank to take fast to its development banking mandate and expand this on the bigger players in the market. I am therefore confident business. Its ability to provide downstream commercial that we will attain our new vision to be the ‘leading financial banking products to development finance customers through solutions provider sustainably developing individuals the same legal entity based on one set of documentation has and businesses’. improved customer experience and reduced costs for both the Bank and its customers. Other amalgamation benefits To conclude, I wish to express my sincere gratitude to all are accruing. For instance, as two legal entities, DFCC and stakeholders of DFCC Bank. I thank our loyal customers Vardhana had to duplicate some of their IT operations for their continued support through times good and bad. including disaster recovery sites. The new single entity is I thank officials of the Central Bank of Sri Lanka, the Ministry enabling a systems rationalisation, cost reduction and other of Finance and other Government agencies and authorities for efficiencies. As regards processes, customer focus is intensified their cooperation. My special thanks go out to those regulators and products and services are being shaped around their and other officials who helped facilitate the amalgamation needs. An example is the ground breaking Supplier Settlement with Vardhana Bank. I also thank the various international Service launched by DFCC Bank with its IT subsidiary investment and lending institutions, our bondholders and Synapsys. Initially, it will serve the private tea manufacturer debenture holders, and depositors for the confidence they and tea leaf supplier community and later will be rolled out to place in DFCC Bank. other agricultural industries. It typifies financial inclusion by enabling suppliers to transfer sales proceeds directly to their The fact that the amalgamation with Vardhana Bank was bank accounts, which are accessible through more than 800 completed smoothly was largely due to the cooperation and ATMs island-wide. Another example is the ‘Mobile Wallet’ commitment of the DFCC and Vardhana teams, who worked developed by Synapsys with support from the Bank. This in a most collaborative manner. I am heartened by the family innovation offers many superior features when compared spirit evident at the various events held to commemorate to other products in the market, as in addition to merchant DFCC Bank’s 60th Anniversary and the amalgamation. I wish transactions, it enables a far greater level of interaction with to express my heartfelt gratitude to them for a job well-done. the bank payment and fund transfer systems. Finally, it is my fervent wish that all stakeholders of Looking ahead, DFCC Bank will embark on an ambitious five- DFCC Bank will continue to ‘Keep Growing’. year strategic plan that will reposition it in the upper quartile of the banking industry. It will be a Blue Ocean Strategy based on sustainable new elements. These include a diversification of distribution channels, increased use of digital media and an expansion into foreign markets. While the international move will be challenging, the Bank has already established its overseas credentials through assignments in Oceania and East Arjun Fernando Africa. In this regard, several options would be considered Chief Executive/Director including the setting up of representative offices and the acquisition of financial licenses or institutions. However, while 24 February 2016 embarking on the journey, DFCC Bank will not lose sight of its Sri Lankan roots or its development banking mandate, and the Sri Lankan market will remain its prime focus.

DFCC Bank PLC Annual Report 2015 9 Board of Directors Profiles

C R Jansz A R Fernando P M B Fernando Chairman Chief Executive Senior Director Appointed to the Board of DFCC Appointed to the Board of DFCC Appointed to the Board of DFCC Bank PLC in July 2010 and appointed Bank PLC as Chief Executive and Bank PLC in July 2013. Chairman in March 2014. Ex-Officio Director in October 2013. Mr Fernando is an Executive Director Mr Jansz presently serves on the Mr Fernando is the Chairman of of Laugfs Lubricants Limited and an Board of Distilleries Company of DFCC Consulting (Pvt) Limited, Independent Non-Executive Director Sri Lanka PLC, Melstacorp Limited Lanka Industrial Estates Limited of Asia Asset Finance PLC. and other companies in the Distilleries and Synapsys Limited, subsidiary A former Partner of KPMG Ford, Group. He is a Director of Lanka Milk companies of DFCC Bank PLC and Rhodes, Thornton & Company, Foods (CWE) PLC, Lanka Dairies (Pvt) the Chairman of Acuity Partners Mr Fernando has extensive Limited and other companies in the (Pvt) Limited, joint venture company experience in financial services. Lanka Milk Foods Group. of DFCC Bank PLC and a Director He has functioned as the Group of Lanka Ventures Limited and the Mr Jansz functioned as the Chairman Finance Director of Confifi Group Credit Information Bureau of of DFCC Vardhana Bank PLC from and Finance Director – Asia Region Sri Lanka. He is also a member of the October 2014 until the amalgamation Virtusa (Pvt) Limited. In 2005, Board of Directors of the Association on 1 October 2015. He is a former he became the Managing Director of Development Financing Chairman of Sri Lanka Shippers of Capital Reach Group and was Institutions in Asia and the Pacific Council and a former member of appointed as Director/Chief (ADFIAP). He was a former Director the National Trade Facilitation Executive Officer of Softlogic Finance of DFCC Vardhana Bank PLC. Committee of Sri Lanka. He has PLC following the consolidation of many years of experience in logistics Mr Fernando is a career banker activities of Capital Reach Group and in documentation, insurance, and holds 30 years experience in under Softlogic Finance PLC. banking and finance relating to the banking and financial services Mr Fernando is a Fellow Member international trade. industry. Prior to joining the Bank of The Institute of Chartered in August 2012, he was the Asia Mr Jansz holds a Diploma in Accountants of Sri Lanka and a Pacific, Regional Head of Change Banking and Finance from the Fellow Member of the Chartered and Delivery (commercial banking, London Guildhall University, UK. Institute of Management trade and supply chain) of HSBC, He is a Chevening Scholar and a UN- Accountants of UK. He holds a BSc Hong Kong. ESCAP Certified Training Manager (Applied Science) degree from the on Maritime Transport for Shippers. Mr Fernando holds a BSc University of Sri Jayewardenepura. Engineering degree from the Southern Illinois University, USA and an MSc in Management from Clemson University, South Carolina, USA. He is also an Associate of the Institute of Financial Studies (Chartered Institute of Bankers), UK.

10 DFCC Bank PLC Annual Report 2015 Profiles Board of Directors

T Dharmarajah Ms S R Thambiayah K P Cooray Director Director Director Appointed to the Board of DFCC Appointed to the Board of DFCC Appointed to the Board of DFCC Bank PLC in July 2014. Bank PLC in March 2015. Bank in March 2015. Mr Dharmarajah is the Senior Ms Thambiayah is a Joint Managing Mr Cooray has held several executive Partner (Audit & Assurance) at Director of Renuka Hotels Limited positions in several companies Messrs Amarasekera & Company and Renuka City Hotels PLC of including Ceylinco Group, Richard and serves as a Director of Raigam which she was the General Manager Peiris Group and the Maharaja Wayamba Salterns PLC, TKS Finance from 2001 to 2010 prior to assuming Organisation. Limited and TKS Securities (Pvt) the current position with the He was instrumental in setting Limited. Company. She is also a Director of up Rivira Media Corporation Cargo Boat Development Co. PLC, He is a Member of the Council of the (Pvt) Limited under the Richard Crescent Launderers & Dry Cleaners University of Sri Jayewardenepura Peiris Group and served there (Pvt) Limited, Renuka Consultants & and a Member of the Standing as founder Director and Chief Services Limited, Renuka Properties Committee on Management Studies Executive Officer. The two flagship Limited, Lancaster Holdings of the University Grants Commission. newspapers launched under his Limited, Portfolio Management He was a Director of DFCC Vardhana direction, ‘Rivira’ and ‘The Nation’, Services (Pvt) Limited and Renuka Bank PLC, a member of the Board continue to be widely read national Land (Pvt) Limited. of Management of the Postgraduate newspapers in Sri Lanka. During Institute of Management and the She was a Director of DFCC Vardhana his stint at the Maharaja Group, he Curriculum Development Committee Bank PLC during the period worked as a Consultant, supervising, of the National Institute of Education. September 2012 to February 2015. streamlining and ensuring executive He was also a member of the co-ordination of news broadcasts by Ms Thambiayah holds a BA (Hons.) Council of the Institute of Chartered the TV and Radio stations belonging degree in Economics from the Accountants of Sri Lanka. to the company. University of Nottingham, UK and Mr Dharmarajah holds a BSc degree a Master of Management degree in Mr Cooray holds a BA (Hons.) degree in Management (Sp.) from the Hospitality from Cornell University’s in Political Science and Law from the University of Sri Jayewardenepura School of Hotel Administration, USA. University of Middlesex. and is a Fellow Member of The Institute of Chartered Accountants of Sri Lanka, Association of Accounting Technicians of Sri Lanka and Institute of Public Finance & Development Accountancy.

DFCC Bank PLC Annual Report 2015 11 Profiles Board of Directors

A W Atukorala K D N R Asoka Ms V J Senaratne Director Director Director Appointed to the Board of DFCC Appointed to the Board of DFCC Appointed to the Board of DFCC Bank PLC in April 2015. Bank PLC in June 2015. Bank PLC in July 2015.

He is the Deputy Chairman of UB Mr Asoka is presently the Director Ms Senaratne presently holds the Finance Company Limited and a General – Department of Trade position of Chief Legal Officer and Director of Orient Finance PLC, & Investment Policy, Ministry Company Secretary of Distilleries United Motors Lanka PLC, Pragnya of Finance. Company of Sri Lanka PLC and Tech Parks Lanka (Pvt) Limited, TVS Company Secretary of Periceyl (Pvt) He has held several executive Lanka Limited, Unimo Enterprises Limited. She is a Director of Paradise positions in the public sector. He has Limited, Unawatuna Boutique Resort Resort Pasikudah (Pvt) Limited and served as the Additional Secretary – (Pvt) Limited and Arni Holdings & Amethyst Leisure Limited and an Ministry of Vocational Training & Investments (Pvt) Limited. Alternate Director of Melstacorp Skills Development and Ministry of Limited and Distilleries Company of Mr Atukorala has served as Deputy Education, Director General – Sri Lanka PLC. General Manager, ANZ Grindlays Department of Manpower and Bank, Sri Lanka, Country Manager Employment, Assistant Director She has 37 years of professional (Sri Lanka) of Mashreq Bank PSC and Deputy Director – Department experience and is well versed in and as a Director of Union Bank PLC of Fiscal Policy & Economic Affairs the field of litigation, commercial covering a period of over 30 years and as the Divisional Secretary – law, conveyancing and company in total. Weligama, Imbulpe. secretarial practices. She held the position of Company Secretary at He has also served as a member Mr Asoka holds a B Com (Sp.) Sri Lanka Insurance Corporation of the Presidential Commission degree from the University of PLC from May 2003 to 2009 and on Finance and Banking and was Colombo and a Postgraduate served as a Legal Officer at the a Director of Sri Lanka Banks Diploma in Economics, Postgraduate Central Bank of Sri Lanka. Association (Gte) Limited and the Diploma in Devolution and Local Credit Information Bureau of Government Studies from the Ms Senaratne is an Attorney-at-Law Sri Lanka. University of Colombo, an MBA and Notary Public, Commissioner of in HRM from the Postgraduate Oaths having admitted to the Bar on Mr Atukorala holds a BSc degree Institute of Management, Masters 25 August 1977 and also a solicitor of from the Leeds University, UK, an in Economics from the Yokohama England and Wales. MTT degree from North Carolina National University of Japan and State University, USA and an MBA. is currently reading for a PhD at the Postgraduate Institute of Management of the University of Colombo.

12 DFCC Bank PLC Annual Report 2015 Profiles Board of Directors

A N Fonseka L H A L Silva L N de S Wijeyeratne Director Director Director Appointed to the Board of DFCC Appointed to the Board of DFCC Appointed to the Board of DFCC Bank PLC in October 2015. Bank PLC in October 2015. Bank PLC in October 2015.

Mr Fonseka is a Director of John Mr Silva is the Deputy Chief Mr Wijeyeratne counts over Keells Holdings PLC, Chairman, Executive of DFCC Bank PLC 35 years of experience in Finance Group Audit Committee of Brandix with effect from 1 October 2015. and General Management both in Lanka Limited and President of He was the Chief Executive Sri Lanka and overseas. He was the the Sri Lanka National Advisory Officer and Executive Director former Group Finance Director of Council of the Chartered Institute of of DFCC Vardhana Bank PLC Richard Pieris PLC and also held Securities and Investments, UK. He during the period January 2010 to senior management positions at is also a member of the Employees’ September 2015. Mr Silva started Aitken Spence & Company, Brooke Trust Fund Board and the National his professional career with the Bonds Ceylon Limited and Zambia Procurement Commission set up Department of Inland Revenue of Sri Consolidated Copper Mines Limited. under the Constitution. Lanka and joined the DFCC Banking He also served as an Independent Group in 1987. He was seconded Director and Audit Committee He is the former Chief Executive to the service of DFCC Vardhana Chairman of DFCC Vardhana Bank Officer of DFCC Bank (until Bank in 2003 from DFCC Bank and PLC during the period October 2008 September 2013) and former functioned as the Chief Operating to September 2015. Chairman of several DFCC Group Officer of DFCC Vardhana Bank from Companies. He was a Director of the year 2003 until his appointment Mr Wijeyeratne is a member of the Commercial Bank of Ceylon PLC as the Chief Executive Officer in Quality Assurance Board and the from 2000 to 2008 and DFCC January 2010. Corporate Governance Committee Vardhana Bank from February 2009 of The Institute of Chartered to September 2015. He was also a He is a Director of Synapsys Limited Accountants of Sri Lanka and was Past Chairman of the Colombo Stock and Lanka Financial Services Bureau a former member of the Sri Lanka Exchange and the Association of Limited and also a Past President Accounting and Auditing Standards Development Financing Institutions of the Association of Professional Monitoring Board. He is presently of Asia and the Pacific (ADFIAP) Bankers of Sri Lanka. an Independent Director and Audit and a member of the Presidential Committee Chairman of several Commission on Taxation (2009). Mr Silva holds a Bachelor of listed entities. Commerce special degree from Mr Fonseka holds a BSc degree from the University of Kelaniya and a Mr Wijeyeratne is a Fellow of The the University of Ceylon and is a Master of Business Administration Institute of Chartered Accountants of Fellow of the Institute of Financial from the Postgraduate Institute of Sri Lanka. Studies (Chartered Institute of Management of the University of Bankers), UK and a member of the Sri Jayewardenepura. Chartered Institute of Securities and Investments, UK.

DFCC Bank PLC Annual Report 2015 13 Corporate Management Profiles

Arjun Fernando Lakshman Silva Tyrone de Silva Chief Executive Officer Deputy Chief Executive Officer Executive Vice President (Investments, International Relations & Strategic Planning)

Trevine Fernandopulle Palitha Gamage Anomie Withana Executive Vice President Executive Vice President Executive Vice President (Chief Risk Officer) (Integration) (Company Secretary/ Secretary to the Board)

Renuka Amarasinghe Nandasiri Bandara Achintha Hewanayake Senior Vice President Senior Vice President Senior Vice President (Corporate Banking) (Group Internal Audit) (Chief Technology & Services Officer)

14 DFCC Bank PLC Annual Report 2015 Profiles Corporate Management Ananda Kumaradasa Kapila Nanayakkara Senior Vice President Senior Vice President (Rehabilitation & Recoveries) (Treasury & Resource Mobilisation)

Darshini Wettasinghe Dharmasiri Wickramatilake Senior Vice President Senior Vice President (Chief Financial Officer) (Branch Banking & SME)

Gillian Edwards Hemanatha Samaranayake Senior Vice President Head of (Retail Assets & Leasing) Business Development & Deposits

DFCC Bank PLC Annual Report 2015 15 Management Team Profiles

Bhathiya Alahakoon Chinthika Anton Arumugam Neville Fernando Amarasekara Vice President Vice President Vice President (Regional Manager – Vice President (Regional Manager – (Business Systems) Regional Office 2) (Accounting & Reporting) Regional Office 1)

Sonali Jayasinghe Chanaka Kennedy Michael Jayangani Perera Kariyawasam Vice President Head of Marketing Vice President (Human Resources) Vice President (Branch Credit Management & (Regional Manager – Quality Assurance) Regional Office 3)

Wajira Punchihewa Sriyani Ranatunga Priyadarsana Kapila Subasinghe Sooriya Bandara Vice President Vice President Vice President (Regional Manager – (Corporate Banking – Vice President (Specialised Project Lending/ Regional Office 5) Business Development) (Regional Manager – Head of Consulting) Regional Office 4)

16 DFCC Bank PLC Annual Report 2015 Profiles

Rohan Tillekeratne Harsha De Alwis Ravi Perera Pradeep Ariyaratne Management Team Vice President Head of Remittances & Head of Financial Vice President (Compliance Officer) Cash Management Institution Relations (Branch Manager – Ratnapura)

Gunaratne Bandara Subhashi Cooray Ravi Dassanayake Pradeepa De Alwis Vice President Vice President Vice President Vice President (Branch Manager – (Credit Administration) (Planning & Monitoring) (Branch Manager – Nawala) Matara)

Champal De Costa Ranjith Dissanayake Terrence Etugala Chaminda Vice President Vice President Vice President Gunawardana (Branch Manager – (Branch Manager – (Branch Manager – Vice President Gampaha) Kurunegala) Matale) (Branch Manager – Kalutara)

DFCC Bank PLC Annual Report 2015 17 Profiles

Management Team Nalin Karunatileka Denver Lewis Thejaka Perera Prasanna Premaratne Vice President Vice President Vice President Vice President (Project Management & BCP) (Services) (Litigation) (Trade Services)

Nimali Ranaraja Sepali Ranawana Saravanapavan Kapila Samarasinghe Raveendra Vice President Vice President Vice President (Business Banking) (General Legal) Vice President (Business Banking) (Regional Manager – Regional Office 6)

Mangala Senaratna Nishan Weerasooriya Chandrin Wimaladharma Vice President Vice President Vice President (Corporate Banking) (IT Operations) (Rehabilitation & Recoveries)

18 DFCC Bank PLC Annual Report 2015 Profiles

Indaka Weerasekera Iranga Amilana Shantha Atapattu Priyadarshi Attanayake

Head of Remittances/FCBU & Assistant Vice President Assistant Vice President Assistant Vice President Management Team Transaction Processing (Private Banking & (Branch Manager – Kandy) (Business Banking) Wealth Management)

Amanthi Balasooriya Channa Dayaratne Neil De Rose Dilshan Dodanwela Dahanayake Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President (Resource Mobilisation) (Branch Manager –Kotahena/ (Foreign Exchange/ (Risk Processes & Controls) Bandaranayake Mw) Money Markets)

Gaminda Fernando Jayan Fernando Chandana Garusinghe Gemunu Gunasumana Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President (Services & Procurement) (Risk Policy & Modeling) (Branch Manager – Ampara) (Card Operations)

Shan Heenkenda Bhatika Illangarathne Gayan Jayatissa Rasika Jayawardhana Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President (Employee & Industrial (Branch Manager – (Information Systems (Innovation & Business Relations) Katugastota) Security) Process Re-engineering)

DFCC Bank PLC Annual Report 2015 19 Profiles

Samathri Kariyawasam Iresha Kumbukage Jayanath Liyanage Kelum Perera Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President Management Team (Business Legal) (Credit Administration) (Branch Manager – Malabe) (Branch Manager – Galle)

Lakmal Rajasekara Ruwan Saram Kusumsiri Sathkumara Sajith Silva Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President (Branch Manager – (Branch Manager – (Branch Banking & SME) (Bancassurance) Kaduruwela) Anuradhapura)

Duminda Silva Dushan Weerakoon Assistant Vice President Assistant Vice President (Business Development (PFS Central Processing) & Deposits)

20 DFCC Bank PLC Annual Report 2015 About DFCC Bank

Founded in 1955, DFCC Bank is one of the oldest by the Central Bank of Sri Lanka. This significant development banks in Asia, and celebrated 60 years of milestone coincided with DFCC Bank’s 60th anniversary prosperity in October 2015. The Bank possesses a proud celebrations. The joint synergies and the combined heritage of achievements, which includes financing new development banking and commercial banking resources economic sectors in the country and being the wind of the merged entities, strengthen and position DFCC beneath the wings of many trail-blazing entrepreneurs Bank PLC as a force to be reckoned with in the financial Model Business especially in their early and risky start-up stages. Today services industry. The combined entity will continue to these sectors have become mainstream businesses that support individuals and businesses of all sizes, offering support the national economy in many ways. both development banking and commercial banking facilities. It will serve a variety of clients ranging from In a landmark event in Sri Lanka’s banking and financial individuals, professionals and entrepreneurs to SMEs sector, DFCC Bank and its subsidiary, DFCC Vardhana and corporates across the country, operating through Bank amalgamated to form DFCC Bank PLC, a 137 branches and service points. DFCC Bank remains fully-fledged Licensed Commercial Bank supervised committed to driving financial inclusion in the country.

Vision & Mission

Innovative Customer Professional Ethical Accountable Team Socially Centric Oriented Responsible  Earnings from Banking Services & Products

Corporate Banking SME Banking Business Banking Personal Banking Treasury International Banking

Products & Services Distribution Channels ● Loans & Advances ● Project Financing ● Deposits ● Leasing ● Branches ● Internet Banking ● Call Centre ● Credit/Debit Cards ● Trade Financing ● Remittance Services ● ATMs ● Electronic Cards ● Mobile Banking ● Bancassurance ● Treasury Products ● Premier Centre for High Net Worth Customers

Spending on Enabling Support Services/Central Functions

Support Services

Planning Finance Marketing HR Risk IT Operations Audit & Compliance Legal

Returns from Subsidiaries, Joint Venture & Associate

Subsidiaries, Joint Venture & Associate

DFCC Consulting LINDEL SYNAPSYS ACUITY Partners NAMAL

Value Added Distributed Among

Government Shareholders Society in Suppliers in Payments Employees in in Taxes in Dividend CSR Projects for Goods and Services Remuneration, Training, Provided Development and Welfare

DFCC Bank PLC Annual Report 2015 21 Group Structure

Subsidiary Companies Joint Venture Associate Company

Name DFCC Consulting (Pvt) Limited Lanka Industrial Estates Limited Synapsys Limited Acuity Partners (Pvt) Limited National Asset Management Name Limited Business Model Business Address No. 73/5, Galle Road, Colombo 03 LINDEL Industrial Estate, No. 540, Nawala Road, No. 53, Dharmapala Mawatha, 7th Floor, Union Bank Building, Address Pattiwila Road, Sapugaskanda, Rajagiriya Colombo 03 No. 64, Galle Road, Colombo 03 Makola

Phone Nos. +94 11 244 2318, +94 11 240 0318, +94 11 240 0319, +94 11 288 0702 +94 11 220 6206 +94 11 244 5911/12 Phone Nos. +94 11 244 2442 +94 11 240 0320, +94 11 240 0532

Email [email protected] [email protected] [email protected] [email protected] [email protected] Email

Incorporated On 9 September 2004 12 March 1992 11 October 2006 7 February 2008 28 September 1990 Incorporated On

DFCC’s Interest 100% 51.15% 100% 50% 30% DFCC’s Interest

Principal Activity Consultancy Operating an industrial estate Information technology Investment banking and related Management of unit trusts and Principal Activity services and activities such as corporate private financial portfolios IT enabled services finance, debt structuring and IPOs

Directors A R Fernando – Chairman A R Fernando – Chairman A R Fernando – Chairman A R Fernando – Chairman A Lovell – Chairman Directors S E de Silva H A Samarakoon – CEO D J P Fernandopulle – CEO M R Abeywardena – CEO A Herat – CEO T W de Silva Mrs G M I U Bandara G S Dewaraja A J Alles Ms K S Bee T W de Silva T W de Silva T W de Silva W Dambawinne Dr R M K Ratnayake L H A L Silva D A B Ellepola T W de Silva A D Tudawe Ms A Withana D P N Rodrigo P Gamage Mrs I R D Thenabadu S Madanayake M Samaratunga I Wickramasinghe

Financial Period/ 31 March 31 March 31 December 31 December 31 December Financial Period/ Year-End Year-End

Financial Year 2015/16 2014/15 2015/16 2014/15 2015 2014 2015 2014 2015 2014 Financial Year

Profit after Tax 6.6 (4) 88 137 (12.5) 15 306 448 40 50 Profit after Tax (LKR million) (nine months ended) (nine months ended) (Before MI*) (Before MI*) (LKR million) 133 276 (After MI*) (After MI*)

Dividend per Share n.a. nil n.a. 7.00 nil nil 0.46 0.40 n.a. 3 Dividend per Share (LKR) (LKR)

ROE (%)** 44.2 n.a. 21.5 24 n.a. 46.6 8 13.3 18.3 25.3 ROE (%)

* Minority Interest ** Annualised

22 DFCC Bank PLC Annual Report 2015 Subsidiary Companies Joint Venture Associate Company

Phone Nos. +94 11 244 2318, +94 11 240 0318, +94 11 240 0319, +94 11 288 0702 +94 11 220 6206 +94 11 244 5911/12 Phone Nos. +94 11 244 2442 +94 11 240 0320, +94 11 240 0532

Email [email protected] [email protected] [email protected] [email protected] [email protected] Email

Incorporated On 9 September 2004 12 March 1992 11 October 2006 7 February 2008 28 September 1990 Incorporated On Group Structure

DFCC’s Interest 100% 51.15% 100% 50% 30% DFCC’s Interest

Financial Period/ 31 March 31 March 31 December 31 December 31 December Financial Period/ Year-End Year-End

Financial Year 2015/16 2014/15 2015/16 2014/15 2015 2014 2015 2014 2015 2014 Financial Year

Profit after Tax 6.6 (4) 88 137 (12.5) 15 306 448 40 50 Profit after Tax (LKR million) (nine months ended) (nine months ended) (Before MI*) (Before MI*) (LKR million) 133 276 (After MI*) (After MI*)

Dividend per Share n.a. nil n.a. 7.00 nil nil 0.46 0.40 n.a. 3 Dividend per Share (LKR) (LKR)

ROE (%)** 44.2 n.a. 21.5 24 n.a. 46.6 8 13.3 18.3 25.3 ROE (%)

* Minority Interest ** Annualised

DFCC Bank PLC Annual Report 2015 23 Our Portfolio

Operationally, the Bank’s primary lines of business are Our services are delivered through 79 branches and Corporate Banking, SME Banking, Business Banking, 58 DFCC Bank service points at Sri Lanka Post outlets. Personal Banking, Treasury and International Banking. Customers also have access to over 800 ATMs across the The business lines are complemented by its subsidiaries, country as well as zero cost cash withdrawals from ATMs a joint venture and an associate company for services in that are shared with eight other banks. DFCC Bank also Business Model Business consultancy, information technology, industrial estate offers Internet and mobile banking services. management, investment banking and fund management.

Product/Service Target Segment

Project loans funded by credit lines

Saubhagya Small and Medium Enterprises (SMEs) New Comprehensive Rural Credit Scheme Short-term cultivation

Miridiya (Aquatic Resources Development Revolving Fund) Freshwater fish and prawn production, nurseries, processing plants, ornamental fish, aquatic plants, tissue culture and ornamental aqua plants.

Targeted Districts: Anuradhapura, Ampara, Badulla, Batticaloa, Hambantota, Kurunegala, Matale, Moneragala, Nuwara-Eliya, Polonnaruwa, Puttalam, Ratnapura, Trincomalee and Vavuniya

Self-employment Promotion Initiative Loan Scheme Vocational qualification holders

Working capital loan scheme for registered tea factories Registered tea factories

SMILE III Revolving Fund SMEs

Commercial Scale Dairy Development Loan Scheme (CSDDLS) Dairy sector

Dasuna Revolving Fund Phase II SMEs in the Southern Province

Green Energy Global Loan Corporates and SMEs

EIB Loan Scheme SMEs

Other project loans

Term loans Corporates, SMEs, professionals and individuals

Working capital financing

Short-term working capital financing – overdrafts, revolving Current account holders, corporates, SMEs and entrepreneurs credit or short-term working capital loans

Medium long-term loans to finance permanent working Corporates, SMEs and entrepreneurs capital requirements

Leasing facilities

‘Easy Leasing’ facilities for brand new and unregistered/ Corporates, SMEs, entrepreneurs, professionals and individuals registered vehicles, machinery, plant and equipment

Hire purchase facilities

Hire purchase facilities for vehicles Corporates, SMEs, entrepreneurs, professionals and individuals

24 DFCC Bank PLC Annual Report 2015 Product/Service Target Segment

Guarantee facilities

Bid bonds, advance payment bonds, performance bonds, bank Corporates, SMEs, entrepreneurs, professionals and individuals guarantees for credit purchase of goods

Fixed deposits

A wide range of tailor-made deposit products at competitive Corporates, SMEs and individuals Model Business interest rates

Loan syndication

Loans provided by a group of lenders which is structured, Corporates arranged and administered by one or several banks

Consultancy and advisory services Our Portfolio Provision of legal, tax, finance, market and other advisory Corporates, SMEs and entrepreneurs services to start up a new business or revamp existing businesses

Savings facilities

Supreme Vaasi – Offers a superior rate of interest Businesses and individuals aged 18 years and above

Mega Bonus – Interest rates grow in tandem with the Businesses and individuals aged 18 years and above savings deposits

Vardhana Junior – Children’s savings account offering Children below 18 years of age a range of gifts and support for higher education

Vardhana Junior Plus – Children’s savings account with Children below 18 years of age a higher interest rate

Vardhana Garusaru – Offers a higher interest rate with Senior citizens above 55 years of age a range of other benefits

Personal loans

A loan that helps to meet personal financing requirements to Entrepreneurs, professionals and individuals enrich one’s life

Pawning services

Ranwarama Pawning – Gold-pledged loans Mass market/individuals

Housing loans

Sandella – Flexible and convenient housing loans at Entrepreneurs, young professionals and employed persons affordable rates

Education loans

Vardhana Nenasa – Flexible and convenient loan facilities for Individuals pursuing higher studies higher education

Other facilities

Includes a range of products and services including current Business community, entrepreneurs, professionals and accounts, overdraft facilities, foreign currency accounts, credit individuals card facilities, gift certificates, international trade services, off- shore banking, international payments, bancassurance, foreign money transfer via Western Union/Lanka Money Transfer and local payments

DFCC Bank PLC Annual Report 2015 25 Operating Environment

The Global Economy Inflation decreased to 4.2% in December 2015 from 4.8% in November 2015, on a year-on-year basis. Inflation on Global growth in 2015 was at 3.1% compared to 3.3% in an annual average basis was 3.8% in December 2015. 2014. This is primarily attributed to the slow down in emerging markets and developing economies, a weaker Business Model Business The country’s external sector performance contracted than expected recovery in advanced economies, low during November 2015, on a year-on-year basis, due to commodity prices and weaker capital and trade flows. the decline in import expenditure at a higher rate than the Growth projections for 2016 and 2017 are 3.4% and 3.6% reduction in export earnings. The workers’ remittances respectively. (IMF, World Economic Outlook Update, declined by 7.2% year-on-year in November 2015. January 2016). However, the tourist earnings continued to increase. The balance of payment has recorded an overall deficit of Projected pickup in growth in the next two years USD 1,274 million during the year up to November 2015 in is expected to come from the recovery in advanced comparison to a surplus of USD 1,628 million recorded in economies relative to 2015 and a partial normalisation of 2014. Sri Lanka’s gross official reserves stood at conditions resulting in gradual improvement of growth USD 7.3 billion at the end of November 2015, with total rates in countries currently in economic distress such as foreign assets amounting to USD 9.1 billion, equivalent to Brazil and Russia, and some countries in the Middle East. 5.7 months of imports. The Sri Lankan Rupee depreciated against the USD by 9.03% during 2015. Over the year, With rebalancing of economic activity away from based on cross currency exchange rate movements, the investment and manufacturing towards consumption and Sri Lankan Rupee appreciated against the Australian services, China is projected to continue to gradually slow Dollar by 2.42% and the Euro by 1.30%, while depreciating down further with its spillover effects on the rest of the against the Japanese Yen by 8.20%, the Pound Sterling by world through trade and commodity prices. Projected 4.46% and the Indian Rupee by 4.62%. growth may be further impacted by a gradual tightening in monetary policy in the United States and a persistent drop in commodity prices, spillover effects of the Trans-Pacific The Banking Sector Partnership agreement on non-member countries due to Sri Lanka’s banking sector remained strong with healthy diversion of trade and geo-political tensions. capital and liquidity levels. During the first eight months of 2015, deposits remained the main source of funding and The inflation has declined in advanced economies, represented 73% of the increase in assets. The cash and mostly reflecting the decline in the prices of oil and other due from banks declined due to utilisation in lending and commodities. In emerging market economies, lower investments. Driven by the expansion of credit extended to commodity prices have also contributed to lowering both private and public sectors by the banking system, all inflation, but sizeable currency depreciation has led to loan products except pawning recorded an increase during offsets on the upside in some economies. the first three quarters of 2015 and term loans accounted for 61% of the increase in total loans. The Non-Performing Major global developments in 2015 included the Loans (NPL) in most of the sectors increased and the establishment of the Asian Infrastructure Investment consumption sector which includes pawning, reported Bank; a new development bank promoted by the BRICS, the highest increase in NPLs accounting for 39% of the reaching of the Paris climate agreement and the the increase. Renminbi’s admission to the basket of currencies that constitute the International Monetary Fund’s reserve The banking sector recorded an improvement in asset; Special Drawing Rights (SDRs). profitability due to increase in net interest income resulting from lower interest expenses due to the impact The Sri Lankan Economy of declining interest rates on deposits. With two main elections and the resulting political uncertainties leading to investors adopting a ‘wait and see’ approach for want of policy direction, economic activity slowed down during the year. Sri Lanka recorded a GDP growth of 5.2% for the first nine months in 2015 compared to 7.4% in 2014.

26 DFCC Bank PLC Annual Report 2015 Benefits of Amalgamation

Institutional Strength of a Larger Balance Sheet

Rs Rs Rs

Rs Rs Effective Utilisation Rs of Branch Network

6th among Private Local Commercial Banks 6 Seamless Operations

Staff Related Efficiencies Favourable View by Rating Agencies

Tax Efficiencies Higher Growth Potential with a Full Range of Products and Services

Systems Related Efficiencies

Better Positioned to meet ever Tightening Regulatory Requirements

Strategic Direction

Goal Performance Highlights 2015 Future Strategies

Increasing market Corporate Banking portfolio expanded Increase awareness levels of the corporate share in all key to 49,039 million brand – enhance the brand through the use

Business Model Business business segments of personal relationships Branch Banking portfolio recorded an increase of 23% Cross-sell the Group products and services

Business Banking portfolio recorded a Organise regular relationship building growth of 25% events for top management and selected groups Personal Banking including finance leases recorded a growth of 37% Expand international operations and consultancy services Took part in a syndicated loan facility Regular entertainment of corporate clients: Successful in off-shore asset financing sponsorships, special events, etc. Optimised cross-selling by structuring the Extension of premier banking services to facilities for customer requirements selected high net worth branch banking Set in place a cross functional structure customers encompassing all related functions to Corporate Banking: Focus on low margins enhance the cross departmental processes and high volume strategy resulting in Revised exposure limits in line with reduction in cost-per-delivery emerging trends and developments and Business Banking: Focus on medium maintained NPL ratio at 3.7% margin and medium volume strategy to fit Carried out sector focused marketing into risk return campaigns by regions Branch Banking: Aggressive pricing for Diversified personal banking with more acquiring new relationships and continue to products and new features focus on SMEs

Improved positive customer experience Take anticipatory and preventive actions to through benchmarked standards maintain portfolio quality

Developed a comprehensive ‘SME strategy’ incorporating the rural banking and micro financing sectors

Cost efficient Increased customer deposit base by Negotiate for additional credit lines funding LKR 19,108 million from FMO, EIB, DEG, ADB etc.

CASA improved to LKR 21 million as at Improve the CASA ratio 31 December 2015 from LKR 18 million as at 31 March 2015

Raised LKR Five billion through a listed debenture issue

EIB, SME and Green Energy credit line of LKR 5,679 million as long-term funding lines

28 DFCC Bank PLC Annual Report 2015 Goal Performance Highlights 2015 Future Strategies

Diversify income Invested LKR Two billion during the period Invest in listed shares (increase streams in listed debentures trading portfolio)

LKR 20,777 million fee income from Invest in listed debentures and unit trusts credit line management operations Explore opportunities for off-shore USD 94,050 as consultancy income from operations international operations Model Business Promote insurance (bancassurance) Fee and commission income improved products for new and existing customers by 2% mainly through trade and Create customer awareness on ‘Lanka remittance business Money Transfer’ remittance business

Increase utilisation of existing limits in trade businesses

Improving Continued with initiatives on career Continue to improve employee

employee development, rotations, rewards and communications, transparency of processes Strategic Direction satisfaction index recognition, transfers etc. and methods of addressing employee needs

Maintained the staff attrition ratio Continue job rotation between support and below 8% during the period (excluding front line staff at common branches retirements/ contract expiries) Re-skilling support staff Organised quarterly meetings with Continue the talent management process department heads to share HR information using the Nine Box model and discuss issues Implement a resourcing strategy for Developed training plans based on grade/ sales staff job specific training schedules and individual development plans Review promotions framework – more focus on performance/competencies than Formulated and disseminated training qualifications, study industry practices calendars to staff Develop leadership development Identified potential successors for critical programmes for senior and middle positions and initiated development management measures as appropriate

The HR teams visited 70% of the branch network during the period to meet the branch staff and discuss their issues and concerns

Improve business Carried out marketing campaigns during Structure marketing campaigns – Street promotion and the period campaigns, Pocket meetings, CSR projects customer loyalty by branch etc. Continued customer training programmes Arrange continuous awareness programmes Sponsored a seminar on Export & Import through print media Procedure conducted by the Ceylon Chamber of Commerce and other similar Focus more on business and customer programmes orientation to capture more business

Organised customer events for key branches Continue customer training programmes

Introduced customer survey forms Diversify the customer base through at branches relationship building

DFCC Bank PLC Annual Report 2015 29 Stakeholders

Our stakeholders are various individuals and Customers organisations we mutually interact with who are impacted Customers are the source of our earnings as well as in some way by our activities as a bank, an investor, learnings, and hence, our existence. We serve them an employer, a business partner etc. or whose actions through the provision of financial products and services Business Model Business can affect our business. Our adherence to the seven to meet their diverse needs. core values enables us to build healthy, sustainable relationships with them. Their primary interests and concerns centre on our products and services, terms and conditions, tariff, Stakeholder Engagement corporate news, service standards, financial advice As a responsible banking entity committed to sustainable and convenience. Accordingly, we largely engage with value creation, we seek to proactively engage with our them through front line staff, relationship managers, stakeholders and communicate with them throughout advertising and promotion, media releases, branches, the year. It is integrated into our business decision- the corporate website, other automated services, making processes as the relationship we foster with them Facebook, surveys and the call centre. We leverage the has a direct impact on the Bank’s success. The mode insights gathered in the process to serve them better and and frequency of engagement varies depending on the build lasting relationships. stakeholder group and nature of aspects to be addressed. These aspects are summarised below. Employees Employees form the backbone of our organisation and Investors are the very essence of our competitive advantage. Given the ever-increasing capital requirements, banking It is their energy, contribution and commitment that is fast becoming a capital intensive business. It is our make our Bank high performing and sustainable. investors who provide us with equity and debt capital Hence, they are nurtured, developed and rewarded needed for expansion and growth of our business. In for their performance. turn, we strive to offer them optimal returns on their investments through sustained profitable growth. The Bank has an internally developed Code of Conduct for its employees, which is posted on the internal web The Board-approved Corporate Communications Policy and is accessible by all employees. This sets out in detail ensures that information relating to the financial the business ethics in relation to avoidance of conflicts performance and the progress of the Bank is made of interest, insider dealings, unfair business practices, available to shareholders through the Colombo Stock maintenance of confidentiality of business information, Exchange (CSE). This information is communicated etc. All employees are guided by the Bank’s core values through the Annual Report, press and electronic media (see Institutional Capital, page 40). We also have in releases and on the Bank’s website, providing context place a Whistle Blowing Policy to encourage employees to and insights on the Bank’s value creation enabling to communicate legitimate concerns if they observe investors to make informed decisions about their any illegal or unethical practices. A Board-approved investments in the Bank. Grievance Handling Policy and Procedure is in place to support sound employee relations and a fair, successful The primary modes of communicating with investors and productive environment at the workplace. The main include annual reports, the Annual General Meeting, modes of employee engagement are through meetings, the corporate website, Stock Exchange announcements, performance reviews, the human resource intranet portal, press conferences and media releases, the investor email bulletins, weekly newsletters, training workshops relations hotline, meetings and teleconferences. and seminars, special events, employee surveys, the Key topics discussed include Board governance, suggestion box and grievance procedure. sustainable performance and plans to improve returns to shareholders.

30 DFCC Bank PLC Annual Report 2015 Business Partners Society and Environment We understand that our efforts for sustainable value The local communities in which we operate are a source creation depend on the support and participation of our of customers and employees, while they also effectively business partners throughout the value chain. Our key ‘hold’ our license to operate. We endeavour to understand business partners are those who provide lines of credit their perceptions and expectations and tailor our (either to manage or to on-lend) as well as the regular business operations and CSR activities accordingly suppliers of goods and services needed for business to create win-win solutions. We play an active role in

operations. These stakeholders are an important part of building these communities, helping to raise their living Model Business our value chain and share complementary business goals. standards by meeting urgent and essential needs.

The primary topics of interest with international We engage with local communities mainly through our financiers hinge on sourcing of funds, the progress branch network and public events. We support them of programmes financed, social and environmental through volunteerism as well as CSR activities that cover management practices, compliance, overall health of the entrepreneur development, education, environment Bank as well as new developments and opportunities. Our conservation, emergency relief and sponsorships of engagement includes electronic exchanges of information, deserving causes. In addition we engage with the media Stakeholders teleconferences, participation in review missions and the through meetings, press conferences, press releases and like. We have put in place a Board-approved Procurement our corporate website. Policy; and our discussions with suppliers are mainly on quality, reliability and price while we seek mutually External Initiatives rewarding long-term relationships. DFCC Bank is a member of several associations and Regulators organisations, and staff actively participate in the activities of these institutions. Industry associations Regulators contribute to the protection and enhancement and organisations we have obtained membership in or of the stability of the country’s financial system. Through established affiliations with, are listed on page 65 under rules and regulations they inter alia provide consumer Business Partner Capital. protection, combat financial crime and create market confidence which benefits all. We reciprocate accordingly by conducting our business in an ethical, transparent and responsible manner while complying with all applicable legal and regulatory requirements.

We engage with regulators bilaterally as well as part of industry bodies through the timely submission of prescribed reports and returns, participation in meetings, forums, task forces and conferences as well as through media releases and the corporate website. The main topics discussed cover compliance with regulations, business operations and financial information pertaining to the Bank, voluntary guidelines and best practices, new legal and regulatory developments, financial inclusion and matters affecting the financial sector.

DFCC Bank PLC Annual Report 2015 31 Materiality

Materiality and Value Creation No. Category/Aspect Materiality is about what matters most to our stakeholders Economic and to the business operations of our Bank. These are economic, social and environmental topics and aspects 1. Economic performance Business Model Business that are of most concern to our stakeholders that 2. Indirect economic impacts may in turn impact our ability to create sustainable Environmental value. Hence, we take all such topics and aspects into 3. Energy consideration when formulating our strategic direction 4. GHG emissions and strategic priorities. These aspects are analysed from 5. Products and services the perspectives of importance to our stakeholders and Social: Labour Practices and Decent Work importance to the Bank. An aspect is important (material) 6. Employment if it is both relevant and significant. Significance takes 7. Occupational health and safety into account the magnitude of the impact as well the 8. Training and education probability of its occurrence. 9. Diversity and equal opportunity 10. Equal remuneration for women and men Materiality Matrix 11. Labour practices grievance mechanisms Based on the materiality analysis, we have identified the Social: Human Rights aspects that are of importance to stakeholders and of 12. Non-discrimination importance to the Bank in the context of our economic, social and environmental agenda for sustainable value Social: Society creation. To aid analysis and focus, these aspects have 13. Local communities been mapped in a two-dimensional materiality matrix 14. Anti-corruption shown below, using GRI G4 Sustainability Reporting Social: Product Responsibility Guidelines. The insights from the materiality analysis and 15. Product and service labelling the materiality matrix help us in charting our course of 16. Marketing communications sustainable value creation. 17. Customer privacy

*Detailed GRI content Index will be online.

1, 6, 7, 8, High 15, 16 9, 10, 11, Management Approach 12, 17 Through thoughtful execution of a judiciously devised set of strategies, the Bank and the Group aim to generate and deliver value to all the stakeholders and derive Moderate 2, 3, 4, value in turn from them, thereby achieving strategic 5, 13, 14 goals to ensure sustainability of the Bank’s and Group’s operations. In the process, we build lasting relationships with customers, offer mutually rewarding careers to

Importance to Stakeholder Low employees, generate steady returns for investors, establish profitable partnerships with business partners while dealing responsibly with the society and the environment.

Accordingly, the Management Discussion and Analysis that follows details our initiatives during the period under Low Moderate High review to deliver value to the stakeholders and the value derived in turn for ourselves. They are accumulated in the form of internal and external capitals, all in the context of Importance to the DFCC Bank PLC the operating environment and the strategic direction detailed above.

Details of the GRI content index are given in the online report [http://dfcc2015.annualreports.lk]

32 DFCC Bank PLC Annual Report 2015 Value Creation and Internal Capital Formation

Internal capital is the value created by the Bank and the Group for themselves through their activities, relationships and linkages over the period of their existence. It consists of financial capital which is quantifiable and reflected in the financial statements and is available for investments in economic capital and the institutional capital comprising intangibles such as organisational knowledge, systems and processes, corporate culture and values, brand equity, business ethics and integrity and the like, a repository of tacit, explicit and embedded knowledge, which gives the Bank and the Group a competitive advantage in their respective markets. Both these forms of internal capitals help the Bank and the Group to deliver more value to the stakeholders and in return derive value from them, growing these internal capitals further.

Financial Capital Accounting Framework The financial statements of DFCC Bank PLC and the Thus, the results of amalgamation of the two entities are Group have been prepared in conformity with the economically the same before and after the amalgamation requirements of Sri Lanka Accounting Standards as the amalgamated entity will have identical net assets. Management Discussion and Analysis (SLFRSs and LKASs). The SLFRSs and LKASs are aligned Therefore, DFCC Bank will continue to record the carrying with corresponding International Financial Reporting values (book values) including the remaining goodwill that Standards (IFRSs). has resulted from the original acquisitions of DVB in the consolidated statement of financial position. Whenever new standards or amendments to existing standards are introduced by The Institute of Chartered The legal form of the amalgamation is considered when Accountants of Sri Lanka (CA Sri Lanka), where preparing the separate financial statements of DFCC Bank appropriate, the Group changes existing accounting as the surviving entity. Thus, the carrying values of the policies or introduces new accounting policies. In the assets, liabilities and reserves of DVB is amalgamated event of a change of an existing accounting policy, the with that of DFCC Bank with effect from 1 October 2015. relevant accounting standard requires retrospective Therefore, no goodwill is recognised in the separate application of the amended accounting policy. Thus, in the financial statements. The difference between the total period under review, due to the adoption of the Statement investment in subsidiary by DFCC Bank and the stated of Alternative Treatment (SoAT) on accounting for Super capital of DVB is adjusted in the Statement of Changes Gains Tax, the Super Gains Tax which was liable on in Equity. Accordingly, on the date of the amalgamation, profits for the year ended 31 March 2014 is deemed to be the investment in DVB of LKR 5,945 million including the an expenditure for the year ended 31 March 2014 and as balance payment to minority shareholders amounting to such the Statement of Equity as at 1 April 2015 has been LKR 122 million has been set off against the equity of DVB. adjusted in accounting for this expense. The impact to the equity due to this adjustment was LKR 777 million Overview of Financial Performance (Group LKR 811 million). of the Group

In accordance with the provisions of Part VIII of the Currently, DFCC Group comprises DFCC Bank PLC, its Companies Act, DFCC Vardhana Bank PLC (DVB) has subsidiaries, Lanka Industrial Estates Limited (LINDEL), been amalgamated with DFCC Bank PLC with effect DFCC Consulting (Pvt) Limited, Synapsys Limited, the from 1 October 2015 and DFCC Bank survive as the joint venture company, Acuity Partners (Pvt) Limited amalgamated entity. Giving effect to the amalgamation, (APL) and the associate company National Asset the Registrar General of Companies issued a Certificate of Management Limited (NAMAL). Amalgamation in accordance with the Section 244 (1) (a) of the Companies Act. Pursuant to the amalgamation, DFCC Bank changed its financial year end from 31 March to 31 December. As DVB was a 99.17% owned subsidiary of DFCC Bank and such the period results are reported from 1 April 2015 to DFCC Bank consolidated the results of DVB up to the date 31 December 2015. of amalgamation. In the prior years, since the Bank’s financial year ended on The amalgamation between the two entities is considered 31 March, the results of DVB, APL and Synapsys Limited as a common control transaction, as DFCC Bank continues were consolidated with a three-month gap. to control the operations of DVB after the amalgamation.

DFCC Bank PLC Annual Report 2015 33 Due to the change of the financial year, the results of Group Total Assets and Return on Assets these companies with a financial year end of 31 December has now been consolidated after closing the three month 3.0 gap period of January to March. However, the results 2.8 of DFCC Consulting (Pvt) Limited and LINDEL whose 2.5 247,109 financial year ends on 31 March have been consolidated 2.1 for a period of nine months ending on 31 December 2015. 210,610 174,995 149,279 1.0 In this review, the period means the nine month period 123,256 from 1 April to 31 December 2015 and previous year means the year ended 31 March 2015.

As the performance of the period consist of only a nine 12 months 12 months 12 months 12 months 9 months ended ended ended ended ended month period, the results cannot be directly compared 31 March 31 March 31 March 31 March 31 December with that of the previous year. 2012 2013 2014 2015 2015 Group Total Assets (LKR million) Return on Total Assets (%)*

Composition of Group Profit Before Tax * After eliminating fair value reserve

9 months ended Year ended 31.12.2015 31.03.2015 Due to the contracted reporting period, as a result of LKR million LKR million changing the accounting period to 31 December from Management Discussion and Analysis Profit before tax – 31 March, and the one-off amalgamated related expenses, banking business 2,450 5,176 Group profit before and after tax for the current period reduced to LKR 2,553 million and LKR 1,642 million Profit before tax – subsidiaries respectively compared to LKR 5,416 million and – LINDEL 118 150 LKR 4,439 million in the previous financial year. The – APL (50% share) 67 138 Return on Assets (ROA) and Return on Equity (ROE) too – Other subsidiaries (6) 14 decreased to 0.84% and 5.6% respectively in the current period, from 2.5% and 14% respectively compared to the Sub total 179 302 previous year. – Consolidation adjustment (88) (77) However, the total assets of the Group recorded Total, subsidiaries 91 225 a significant growth of 17% and stood at Profit before tax, total 2,541 5,401 LKR 247,109 million as at 31 December 2015 Income tax (911) (977) compared to LKR 210,610 million on 31 March 2015. Profit after tax – sub total 1,630 4,424 Within this growth, loans and receivables to customers grew by 18% over the previous year. Share of profit – associate company, NAMAL 12 15 Profit after tax as reported 1,642 4,439 Financial Performance of DFCC Bank and DFCC Vardhana Bank (Banking Business) By far the largest contribution to profits and assets was from the Banking Business (BB), and therefore, Value Creation and Internal Capital Formation Value this review will mainly focus on the performance of the

Banking Business which is our core business.

For comparison purposes a revised Income Statement and Statement of Financial Position is presented in Notes 61.1 and 61.2 to the financial statements prepared

Financial Capital on the basis that the amalgamation took place prior to 1 April 2014.

34 DFCC Bank PLC Annual Report 2015 Profit after tax of BB Net fee and commission income of BB in the period under review was LKR 843 million compared to LKR 1,097 The profit after tax of the Banking Business in the period million in the previous year. On an annualised basis, it was LKR 1,239 million, compared to LKR 4,501 million translates to a marginal increase of 2.4% compared to in previous year. This is not comparable due to the the previous year. Fee and commission income is derived contracted financial period and the one-off items included largely from the banking services provided to customers in the two periods. engaged in import and export business, fees from guarantees issued on behalf of customers engaged in trade Revenue Mix of BB and construction activities and commission income from Key Components of Income other banking services.

9 months ended Year ended 31.12.2015 31.03.2015 Net gain from trading in the period under review was LKR million % LKR million % LKR 172 million compared to LKR 496 million reported in the previous year. Due to upward trend in the market Net interest income 5,385 76.8 6,929 63.9 interest rates for fixed income securities, less income was Net fee and commission realised from fixed income capital gains during the period income 843 12.0 1,097 10.1 compared to the previous year. Net gain from trading 172 2.5 496 4.6 Gain on sale of equity securities was LKR 37 million in Gain on sale of equity the period under review compared to LKR 1,135 million securities 37 0.5 1,135 10.5 in the previous year. The drop was mainly due to the Management Discussion and Analysis Dividend income 308 4.4 991 9.1 adverse market conditions prevailed during that period. Fx income (40) -0.6 (113) -1.0 Previous year gains were significantly high due to one-off capital gain of LKR 829 million realised on the Others 306 4.4 309 2.8 divestment of the entire holding of 9.92% ordinary voting Total operating income 7,011 100.0 10,845 100.0 shares of Nations Trust Bank PLC.

Total operating income was LKR 7,011 million in the Dividend income received by the Bank makes a significant nine months ended 31 December 2015, compared to contribution to other income. This is derived largely LKR 10,845 million in the previous year. from the investment in Commercial Bank of Ceylon PLC supplemented by dividend from other equity securities The net interest income (NII) was LKR 5,385 million which classified as available-for-sale. However, due to the which translates to a 3.6% growth on an annualised basis, financial year end being advanced to 31 December 2015, compared to LKR 6,929 million reported in the previous dividend declared during the first quarter of 2016 is not year. The Bank witnessed interest margin dropping to included in the results of the period. 3.1% during the nine months period ended 31 December 2015 from 3.6% in March 2015 due to lower interest The forward exchange contracts are accounted as a rates prevailed in the environment. NII, which is the derivative and its fair value changes are reported as main source of income from the fund-based operations net gain/(loss) from financial instruments at fair value represent over 77% of the total operating income of the through profit or loss in the income statement. Other Banking Business. forward exchange gains/losses are reported under other operating income. Value Creation and Internal Capital Formation Value In spite of the very healthy credit portfolio growth of over

15% achieved by the Banking Business during the current 9 month period, the NII growth was depressed due to the higher drop in lending rates in comparison to the drop in the deposit rates. Financial Capital

DFCC Bank PLC Annual Report 2015 35 Foreign exchange income too did not contribute In common with Banks, DFCC Bank is liable for Value positively towards the profit of the period under review Added Tax (VAT) and Nation Building Tax (NBT) on due to the depreciation of the Sri Lankan Rupee against financial services (effective rate 11.5%) and income tax the US Dollar. However, the overall foreign exchange (nominal rate 28%). The value addition from the supply contribution reported a positive variance during the of financial services is computed as the accounting profit period compared to the previous year due to the reduction plus salaries minus economic depreciation on assets of the negative open exposure and the reduced cost from replacing accounting depreciation. Value Added Tax and the foreign exchange swaps carried out in order to benefit NBT on financial services are non-deductible expenses for from higher yielding Rupee assets. computing the taxable profit for income tax purposes.

Composition of Operating Expenses The Bank has received approval under Section 28(4) of the Inland Revenue Act, to adopt the calendar year 9 months ended Year ended (1 January to 31 December) as the basis of accounting year 31.12.2015 31.03.2015 commencing from the Year of Assessment 2015 - 2016. % % Accordingly, the Bank has computed statutory income for Year of Assessment 2015 - 2016 including results for Personnel cost 52.6 50.8 12 months despite the reported results relate only to a Depreciation and amortisation 6.9 8.4 period of nine months. As a result an estimated income Others 40.4 40.8 tax liability of LKR 180 million is included under the current period tax on account of the change in the Management Discussion and Analysis Operating expenses of BB was LKR 3,883 million financial year. compared to LKR 4,218 million in the previous year. Approximately half of the operating expenses are on The total of VAT and NBT on financial services and account of personnel compensation (current and deferred income tax expense as a percentage of profit before these compensation relating to retirement). In common with taxes was 50% in the financial period compared with 31% the banking industry, personnel cost is a significant in the previous financial year. The additional tax expense proportion of the operating expenses. Due to stringent due to the change in financial year to December has cost management, operating expenses excluding personnel resulted in a 8% increase in tax expense of the Bank for cost increase was not significant. This increase was largely the period. due to costs associated with branch expansion, merger related expenses and general price increases. Due to the Credit Quality relatively young branch network the contribution from Analysis of Impaired Loans the new members in the network is lower compared to the more mature branches. These costs incurred on As at 9 months Year ended expansion of branch network will be eventually recovered ended 31.03.2015 31.12.2015 by additional revenue generation by these new branches in LKR million LKR million the years to come. Impaired loans to customers 8,554 8,658 Impairment allowance charge to the income statement Impairment allowance 6,166 6,010 is high in the period compared to what was reported in the previous year. This is mainly due to a reversal in Ratios: impairment allowance in the previous year arising from a Impairment allowance/impaired Value Creation and Internal Capital Formation Value change to the impairment assessment process. loans (%) 72.1 69.4

Impaired loans/total loans (%) 5.1 6.1 Income tax liability is based on the accounting profit computed under SLFRSs adjusted for disallowable The ratio of impaired loans to total loans on 31 December expenses and exempt income as per the provisions of the 2015 was 5.1% compared to 6.1% on 31 March 2015, Inland Revenue Act No. 10 of 2006 (as amended). indicating an improvement in credit quality. The

Financial Capital cumulative allowance for impairment for loans and advances of BB was maintained at a healthy level of 72.1% as at 31 December 2015. The impairment allowance coverage for impaired loans is adequate when fair value of the underlying collateral is taken into account.

36 DFCC Bank PLC Annual Report 2015 Due to the different computation methodologies, the Listed shares are classified as available-for-sale ratios of NPL and provision coverage under regulatory and carried at fair value. Fair value changes that regime are not comparable with SLFRSs regime. represent unrealised gains/loss are recognised in other comprehensive income. During the period ended The SLFRSs based impairment assessment, both 31 December 2015, due to adverse market conditions the individual and collective, is to a large extent based on available-for-sale securities recorded a fair value loss of historical evidence modified by an experience adjustment LKR 3,158 million. In the comparable year, the fair value by management, to take into account current economic gain was LKR 5,595 million. conditions. Interest income is recognised on an accrual basis and therefore, impairment allowance is for both Composition of Interest-Bearing Liabilities principal and interest. As at 9 months Year ended ended 31.03.2015 Aggressive recovery efforts throughout the year have 31.12.2015 consistently driven down the ratio of impaired loans to LKR LKR total loans as well as the regulatory NPL ratio of the million % million % Bank. Regulatory NPL ratio reported for the Bank as at Borrowing sourced from: end of December 2015 is 3.7% compared to 4.3% in the previous year. Multilateral lending agencies 22,581 11.4 18,949 11.5 Bilateral lenders 4,162 2.1 5,413 3.3 Composition of Total Assets International capital market 14,528 7.3 13,746 8.4 Management Discussion and Analysis Domestic capital market 12,026 6.1 6,810 4.1 As at 9 months Year ended ended 31.03.2015 Debenture issue private 31.12.2015 placement 506 0.3 526 0.3 % % Borrowing from banks 13,345 6.7 8,081 4.9 Earning assets Customer deposits 110,891 55.9 91,782 55.8 Loans to and receivable from customers 65.1 64.1 Repos 20,232 10.2 19,248 11.7 Loans to and receivable from banks 1.9 1.8 Total 198,271 100.0 164,555 100.0 Other interest-earning financial assets 7.3 7.7 Liabilities are mainly in Sri Lanka Rupees but it also Available-for-sale investments 19.9 21.2 has foreign currency liabilities, mainly US Dollars. Non-earning assets Remarkable growth of 21% was achieved in customer deposits during the nine months ended 31 December 2015 Property, plant and equipment 0.4 0.4 compared to the previous year. Intangible assets 0.1 0.1 Others 5.3 4.7 In June 2015, DVB successfully raised funds with a tenor of five years by way of unsecured redeemable Total assets 100.0 100.0 rated debenture, which was listed in the Colombo Stock Exchange. A significant feature of the issue was that Of the total assets 92% were denominated in Sri Lanka there were two types of debt offered in the same issue Rupees and the balance comprised mainly in US Dollar (i.e., senior and subordinated). Accordingly, the Bank denominated assets. Total assets of BB recorded a healthy raised LKR 3 billion by way of senior debt and Creation and Internal Capital Formation Value growth of 14% and amounted to LKR 246,151 million as at LKR 2 billion as subordinated debt. The issue was 31 December 2015 compared to LKR 215,919 million as at oversubscribed on the first day itself. end of the previous year. The USD 100 million five year notes issued to non-resident Gross loans and advances reported a significant growth investors in October 2013 continues to be supported by of 15% recording LKR 171,085 million as at end of the Government with a foreign exchange cover up to USD 31 December 2015 compared to LKR 148,433 million 75 million from the Central Bank of Sri Lanka (CBSL), to Financial Capital recorded in the previous year. neutralise any change in exchange rates.

DFCC Bank PLC Annual Report 2015 37 The accounting treatment is based on the recognition Current Year Changes and Impending and measurement criteria of forward exchange USD Changes to Financial Reporting purchase contract, a derivative asset and recognition and measurement of income grant by Government via CBSL. These are disclosed in notes to the financial statements.

Profit Contribution from Members of Management of Equity the Group Dividend Performance This comprises the profit contribution from LINDEL and The payout ratio based on the dividend approved by the DFCC Consulting (Pvt) Limited for the nine months ended Directors is 62% in the period under review compared to 31 December 2015 and Synapsys Limited, APL and 49% in the previous year. NAMAL for 12 months ended 31 December 2015. Amongst the subsidiaries, LINDEL continues to be profitable with Dividend per share for the nine months ended a return on investment of 22% during the financial period 31 December 2015 is LKR 2.50 per share compared to compared with 24% during the previous financial year. LKR 6.00 per share in the previous year. The decrease in The profit contribution from the other members was the dividend is mainly due to the financial results for the LKR 72 million. period being for a contracted period of nine months.

Financial Assistance Received from Government Management Discussion and Analysis The Government has acted as a conduit for direct funds raised from multilateral and bilateral agencies for lending to eligible sectors. The amount outstanding on 31 December 2015 was LKR 23.2 million.

The exchange loss cover provided by the Central Bank of Sri Lanka is a de-facto grant to the extent of USD 75 million international note issue.

The Government does not own direct equity, but entities over which the Government exercises control have continued to own shares of DFCC Bank. As of 31 December 2015, the aggregate shareholding was approximately 35%.

Critical Accounting Policies and Estimation Return on Equity of Uncertainties Return on equity of the Group for the period was 4%. The equity of the Group is significantly augmented due The results of DFCC Bank and the Group are sensitive to to the recognition of unrealised gains on listed ordinary the accounting policies, assumptions and estimates that shares and Government Securities classified under underlie the preparation of financial statements. available-for-sale as required under SLFRSs and the resultant increase in equity on 31 December 2015 is Value Creation and Internal Capital Formation Value Directors have the responsibility to select suitable LKR 11,858 million. The return on equity will improve to accounting policies and to make judgments and estimates 5.6% if this unrealised gain is not taken into account. that are reasonable and prudent. These accounting policies, judgments etc. are explained in the notes to the financial statements. Financial Capital

38 DFCC Bank PLC Annual Report 2015 Group Total Equity and Return on Equity

14.0 13.1 10.7 10.9 48,263 43,969 40,454 37,124 32,765 5.6

12 months 12 months 12 months 12 months 9 months ended ended ended ended ended 31 March 31 March 31 March 31 March 31 December 2012 2013 2014 2015 2015

Group Total Equity (LKR million) Return on Equity (%)*

* After eliminating fair value reserve

Return on equity is expected to improve with expansion of earning assets financed with borrowing. DFCC Bank Management Discussion and Analysis will balance higher risk associated with gearing with the need to hold capital cushion commensurate with risk and maintain a prudent dividend distribution policy.

Regulatory Minimum Capital Requirement DFCC Bank’s capital is well over the minimum requirement (refer page 208).

The regulatory capital computation excludes fair value changes of financial assets classified as available-for-sale. Bank continued to remain as one of the best capitalised Banks in the industry with Group Tier 1 capital adequacy ratio at 15.39% and total capital adequacy ratio at 15.32%.

Financial Value Added The total value added by DFCC Bank during the nine months ended 31 December 2015 amounted to LKR 3,303 million (year ended 31 March 2015: LKR 5,440 million). Details of value added and distributed are given under Supplementary Information on page 213. Value Creation and Internal Capital Formation Value

Financial Capital

DFCC Bank PLC Annual Report 2015 39 INSTITUTIONAL CAPITAL Systems, Processes and ICT Institutional capital entails a broad spectrum of non- Our internal systems and processes are developed with a financial intangible components of capital that are unique strong focus on innovation, and Information Technology to DFCC Bank. It includes organisational knowledge, plays a vital role in executing day-to-day operations systems, processes and ICT, corporate culture and values, of the Bank. As a result of the amalgamation, many of brand equity and business ethics and integrity, all of our systems and processes were revamped in order to which are important elements in creating sustainable increase efficiency. We are continuously improving our value for our stakeholders. management information system in order to make sound strategic decisions. Organisational Knowledge The initiatives implemented during the period under Being in operation for 60 years, we have been able to review are as follows: perfect our competencies in every area, especially when it comes to project financing. We have developed a team Replacement of an old Lotus Note based Loan of diverse multi-skilled professionals, and our knowledge Origination system with a web based Facility and expertise is one of the major value drivers of our Origination Workflow solution, to manage the credit business. The result has been, a strong reputation of being approval workflow originating from the branch network a comprehensive service provider and the first choice for and flowing up to the level of the Board of Directors. any new venture or expansion project whether it is on a Broadbasing the utility payment solution with the large or small scale. Management Discussion and Analysis addition of more utility providers and corporates, facilitating the island wide cash collections from We have used our expertise to provide sustainable consumers/agents to be transmitted online to development financing, especially in the rural areas, their respective back-end systems. Moreover, the helping to transform rural economies and support and fund transfer capability of utility payments/agency bolster livelihoods, generate employment and encourage collections through the Online Banking solution has capital formation in every district in Sri Lanka. The World enabled the customers to manage transactions from Bank recognised DFCC Bank as being one of a small their desktops. Requests for Letters of Credit (LC) number of development finance institutions that was not facilities have been enabled through the Online only viable but also successful in transforming itself into Banking solution for corporate clients facilitating a a multi-product, strong financial institution in a changing faster service. international and local environment. Successful consolidation of the two core banking Today, we have amalgamated with our commercial solutions by migrating data from DFCC Bank to DFCC banking subsidiary, DFCC Vardhana Bank, and have Vardhana Bank to facilitate the amalgamation of the transformed into a fully-fledged commercial bank. We two institutions into one commercial bank. Similarly draw synergies from our complementary areas of business the Oracle Financials ERP solution went through a through our subsidiaries, joint venture and associate consolidation process for financial reporting on the company. These services include consultancy, industrial amalgamated entity. estate management, IT services, investment banking, Launching a supplier settlement solution developed stockbroking and venture capital and management of by Synapsys for a leading tea factory covering the unit trusts. automation of the entire life cycle from weighing of tea Value Creation and Internal Capital Formation Value leaf collections from smallholders, and effecting tea leaf We will continue to develop capabilities and build supplier payments through the Bank to facilitating cash stronger and more profitable relationships by providing withdrawals from the ATM network. customised solutions, leveraging synergies across our main businesses and capitalising on our core strengths Development of the Mobile Wallet solution developed whilst nurturing our most valued assets; our employees. by Synapsys, which will facilitate the management of wallet accounts by bank/non-bank customers using a mobile application. This mobile application will facilitate transfer/cash top-ups, merchant payments, fund transfers between wallet accounts, utility payments and a host of other features.

40 DFCC Bank PLC Annual Report 2015 Corporate Culture and Values Business Ethics and Integrity With the launch of the new entity, a new vision, mission DFCC Bank is uncompromising in its adoption of the and a set of values were introduced. A cross-functional highest ethics and integrity. Being ethical is one of our team was appointed to give in their recommendations key values, and drives our every strategy and action. We to the Board in this regard, and a company-wide survey have a comprehensive governance mechanism in place and was also carried out. This demonstrates the Bank’s team the Corporate Governance Report appearing on page 89 culture, where every individual is directly involved and explains these measures in detail. accountable in realising the Bank’s overall vision. Anti-Corruption Our corporate culture and values are derived from our new vision which is ‘to be the leading financial solutions Given the negative consequences associated with provider sustainably developing individuals and corruption and also in the interest of our reputation and businesses’. Ours is a culture that values professionalism, maintaining transparency, the Bank has a written Code teamwork, openness, diversity, respect for individual of Conduct that, inter alia, includes provisions relating values and recognition; each individual is respected, to anti-corruption. It is not just for legal compliance, but rewarded and recognised for his/her competence, we view it as an ethical issue and a business imperative. capabilities and knowledge. We assess not just what In order to ensure collective action by all in the Bank, people have achieved, but also how they have achieved it, these provisions have been explained to all staff and are in doing so encouraging sustainable performance. reinforced through updates and monitored throughout all business operations. We are a responsible corporate Management Discussion and Analysis Our core values are: being innovative, customer centric, citizen. We are proud of our unblemished track record in professional, ethical, accountable, team oriented and this sphere and it aids our resolve to make our operations socially responsible. sustainable into the future.

Brand Equity Compliance The DFCC Bank brand is a heritage brand that has Being a financial service intermediary, the need to ensure been established as a pioneer and risk taker, nurturing full compliance with the applicable laws, rules and entrepreneurs, businesses and sectors in their early and regulations cannot be overemphasised. All of us in the risky start up stages. The Bank’s clientele consisted Bank and the Group understand our responsibility in this of mainly businesses looking to fulfil their project regard. Our policies and procedures in fact go beyond financing needs. the legal/regulatory requirements and embrace broader standards of integrity and ethical conduct. Compliance is Following the amalgamation, DFCC Bank updated its embedded into our organisational culture. We understand positioning as a comprehensive financial solutions the gravity of non-compliance and the risks associated provider that enables all its stakeholders to ‘Keep therewith. Measures taken to manage such risks are Growing’ by providing responsible and innovative detailed under Operational Risk on page 82 of this Report. financial solutions. Leveraging its development banking and commercial banking expertise, the Bank serves a In this sphere too, we maintain a clean scorecard. We have variety of clients ranging from individuals, professionals not been informed of any fines or actions by the regulators and entrepreneurs to SMEs and corporates across the in relation to any incidents of non-compliance with laws country, operating through 137 branches and service and regulations pertaining to corruption, anti-competitive Value Creation and Internal Capital Formation Value points, and is committed to driving financial inclusion. behaviour, anti-trust, monopoly practices, provision and

We are careful to maintain our brand equity at favourable use of products and services and similar infringements levels and constantly monitor the performance of our during the period under review. brand. The DFCC Bank brand will keep evolving to stay relevant for the future, focusing on sustainable progress and prosperity for all. Institutional Capital

DFCC Bank PLC Annual Report 2015 41 Value Creation and External Capital Formation

External capital refers to the value of the various stakeholders to the Bank and the Group and comprises lasting relationships and profitable partnerships built over the years through the activities, interactions and linkages with them. Unlike the financial and institutional capitals, external capital ‘resides’ in the stakeholders – material ones being investors, customers, employees, business partners, society and environment and hence is ‘external’ to the Bank and the Group. But we have access to and make use of this external capital together with our internal capital in driving our business to deliver value to them and deriving value from them, thereby growing external and internal capitals further. In fact, the greater the external capital we will be able to build, the greater will be the value that we will be able to create for ourselves in future.

INVESTOR CAPITAL The Bank’s investors are persons, both institutional and Shareholders are primarily rewarded through dividends individual, who provide equity or debt capital with the and share price appreciation. The Bank aims to provide expectation of a superior return over the short, medium consistently high total shareholder returns through and long term. In turn, the Bank drives future earnings profitable and sustainable performance. Dividends are Management Discussion and Analysis while operating within sound risk management and determined based on growth in profits while taking into control frameworks to derive value for itself and to deliver account future cash needs and the maintenance of prudent value to its investors. ratios. The Board of Directors has approved a first and final dividend of LKR 2.50 per share for the period under Shareholder Profile review (FY 2014/15: LKR 6.00).

The Bank had 8,640 shareholders on 31 December 2015 The DFCC Bank share closed at LKR 168.90 on (March 2015: 8,443 shareholders), with the total number 31 December 2015. During the period the highest value of of shares in issue remaining unchanged at 265,097,688 LKR 230.00 was recorded on 21 April 2015 and the lowest ordinary shares. Around 86% of the Bank’s share capital is value was recorded on 3 December 2015 as LKR 155.00. held by institutions. Local shareholders, both institutional Over the nine month period, the share posted a loss of and individual, hold about 74% of the total number of LKR 36.10 (21.4%). The share price tracked the movement shares in issue and account for 98% of all shareholders. of the All Share Price Index (ASPI) closely during the period under review. Return to Shareholders Financial Return Additional details are given under the section Investor Relations (commencing on page 113). All shareholders of the Bank are treated equally on the basis of one vote per ordinary share. The Bank has not issued any non-voting ordinary shares or preference shares. Value Creation and External Capital Formation Value

42 DFCC Bank PLC Annual Report 2015 CUSTOMER CAPITAL relocated to the Bank’s own newly constructed building. The Borella building was refurbished and more central Branch Network and Service Delivery processing teams were transferred into this space to enhance efficiency.

The Bank has 79 branches and 58 service points with a Details of the branch network are given in the online report geographically dispersed network of 77 ATMs island-wide. [http://dfcc2015.annualreports.lk] The Bank’s first off-site ATM was set up at Galpadithanna, Ratnapura in the premises of a tea factory and the Bank is optimistic of setting up a few more at identified areas for As we write, a lot of changes are taking place in the wider reach. banking industry. These changes will fundamentally change the role of a bank and transform branch banking The Bank will continue to increase the placement of kiosk and retail service delivery in particular. DFCC Bank is machines and the branches that have courtesy phones, gearing itself to greet these changes and make use of currently 30, will be further increased. immense opportunities they will bring about, thereby staying relevant and benefiting therefrom. We will The Mobile Teller concept continued to catch on. This is develop a much more complete understanding of the a mechanism used to collect cash deposits and respond future customer and deliver a significantly enhanced to account balance inquiries of selected customers in customer experience by matching our value proposition the vicinity of the branch. An assigned permanent staff with their preferences and offering it through channels member is given a palm-top device and a portable printer Management Discussion and Analysis of distribution that suit them best. All this calls for the in order to complete a transaction. This concept is optimal deployment of technology, suitably aligned with currently being used by two branches and it will be our chosen direction and strategic goals while keeping the further expanded. operational risk low. We are working on it. Work on centralisation progressed during the period In this context, during the period under review, the Bank under review. The documentation for account opening and focused on value added initiatives, to improve customer maintenance has been moved to an off-site storage facility centric services, centralise and increase efficiency freeing up space for more productive usage. and effectiveness of resource utilisation. As the year progressed, several key initiatives were implemented The Service Quality unit has engineered many studies of improving the overall customer experience, leading to various branches and departments in order to streamline cross-selling opportunities and customer retention. existing processes. The unit has been successful in executing process improvements through focused and The present day customers are tech-savvy and aspire to gradual review of process flows. The unit studied current have prompt service and information at their fingertips. processes through which services are offered to customers, Conventional banking practices are overshadowed by the critically evaluated strengths and weaknesses, identified evolution of digital innovations. ways of improvement, conducted root cause analysis on failures, and redesigned processes to achieve efficiency The appetite for electronic banking continued to grow. and effectiveness. Service level agreements with specific The Bank’s first ever ‘Automated Branch’ was established turnaround times have been implemented in certain at the newly refurbished premises in Negombo. The departments so that employee productivity can be Creation and External Capital Formation Value Automated Counter is equipped with a personal computer improved and staff can be deployed as per the identified enabled with online banking access, and in addition has staff requirements to serve customers better. a kiosk unit, ATM and courtesy phone. This trend setting practice is to be adopted in more branches in the future The unit wears many hats from acting as a quality with a view to creating fast and easy access transaction administrator and engaging in inspection of services capability so that customers can reap the benefits of a to providing service related advice. The team conducts traffic free, convenient and speedier service. regular quality audits, sends out alerts on identified service gaps and reviews department manuals to identify In light of the competitive consumer banking environment, any loopholes and bottlenecks. the Bank continued to consolidate the branch network with the Sri Lanka Postal unit conversions. The Weligama In essence, most of the focus and efforts during the period unit was converted to a fully-fledged branch whilst the revolved around the amalgamation, where the team spent Gangodawila and Kottawa units were refurbished in order considerable time planning, executing work assignments, to create a better ambience. The Negombo branch was changing processes, communicating changes, educating

DFCC Bank PLC Annual Report 2015 43 branches and changing customer facing forms and While the commercial banking funded portfolio witnessed documents amongst others. All these were delivered well a marginal decline of 4%, the non-funded portfolio grew within the required time frames. to LKR 9,787 million from LKR 7,269 million during the period. Total approved limits as at 31 December 2015 Corporate Banking amounted to LKR 34,603 million of which the utilisation amounted to LKR 20,133 million or 58% compared to 55% Following the amalgamation of DFCC Bank and DFCC utilisation as at the beginning of April 2015. The increased Vardhana Bank, DFCC Bank’s Corporate Banking function utilisation of limits despite high volatility in short-term now seamlessly offers an all-encompassing range of interest rates reflects the increasing success of the unit’s products spanning development banking and commercial relationship banking efforts. banking. The services offered cater to both the short-term and long-term financial requirements of As indicated by the insignificant non-performing loan corporate customers. Besides the broadening of the ratio, asset quality continued to be maintained. DFCC product range, the amalgamation has also achieved Bank places great emphasis on effective appraisal and further synergies. Uniquely, it is now a ‘One-Stop-Shop’ excellent post disbursement follow up and procedures, offering a superior value proposition in terms of product including adherence to both internal and external and service quality. regulatory limits in terms of sector, group and client level exposures and this continues to underpin the high quality Despite the sluggish credit conditions during the year of the portfolio. and the general ‘wait and see’ attitude of the business and

Management Discussion and Analysis investor community, approvals during the period under The low interest rate regime that prevailed during 2015 review amounted to almost LKR 19,782 million. The total posed a significant challenge in maintaining interest domestic loans and advances portfolio also experienced margins owing to the lag effect in the re-pricing of various a growth to LKR 49,039 million from LKR 46,316 million sources of funding. Therefore, in order to mitigate the during the period April 2015 to December 2015. negative impact of the decline in net interest income, a concerted effort was made to grow the non-funded income DFCC Bank continues to be in the forefront of project base and increase fee, commission and other income. financing and despite the relatively low level of long-term investment activity, the Bank was able to grow its A substantial effort was also made in deposit mobilisation corporate project loan portfolio by almost 9%. Power and in order to grow the Bank’s deposit and CASA base. energy projects continued to account for a significant DFCC Bank’s strong corporate relationships and superior share of the new approvals accounting for almost 20%, service levels enabled the Bank to mobilise a significant further reinforcing the Bank’s status as a leading lender quantum of deposits, current and savings accounts within to this sector. The finance and business service industry a short span of time. accounted for approximately 26% of new approvals. The growth in approvals to the finance and business Way Forward service sectors were notable and due mainly to the issuance of debentures and other securities during the Driving growth by seizing opportunities in growth sectors year by several non-banking financial institutions involved in the economy is one of the key strategies for 2016. In in the leasing industry. The Corporate Banking portfolio particular we see significant potential in the logistics, remained well diversified with the Bank financing other construction, tourism and agro business sectors as projects across the board in growth sectors such as indicative from concessions granted to these sectors in the

Value Creation and External Capital Formation Value transportation and logistics, tourism, trade, education 2016 Budget and overall Government policy with regard to

and telecommunications. these industries. Sri Lanka is increasingly being promoted as a global logistics hub which provides significant lending Corporate Banking continued to pass the benefit of opportunities to this sector. Likewise, the tourism sector concessionary loan schemes to clients. In particular which is actively being marketed as a MICE destination the European Investment Bank (EIB) credit line made is likely to attract investor interest which the Bank is available to the SME sector and the renewable energy well positioned to harness. The traditional agriculture

Customer Capital sector since 2014 was proactively promoted during the sector is rapidly transforming into an agro business and period. The total quantum of loans approved under promises to be a key growth sector in the medium to long the EIB scheme by Corporate Banking since its launch term. Further, Government plans such as developing amounted to LKR 5,500 million which is almost 50% of the Western Province as a Megapolis, as well as rapid the total loan quantum granted under this concessionary urbanisation which has seen a significant increase in scheme by DFCC Bank. condominium development is expected to boost the construction industry in the short to medium term.

44 DFCC Bank PLC Annual Report 2015 Infrastructure development will continue to be a priority Capacity Development of SMEs in Sri Lanka and with the Government’s emphasis on public-private As Sri Lanka’s premiere development financial institution, partnerships and private banks participation in these DFCC Bank has a rich heritage of equipping SMEs with projects, the Bank sees significant scope to be a part of the knowledge to face the challenges of a modern business this development. Having funded a number of large scale environment. The Bank has been constantly reaching infrastructure projects in the recent past DFCC Bank is out to this critical sector with capacity development well poised to take advantage of these opportunities. programmes on important areas such as entrepreneurship, management, modern business practices, etc. We will continue to focus on the renewable energy sector, expanding our presence in areas such as solar, wind Taking into consideration the emphasis placed on power and hydro power. With the Government seeking sustainability, renewable energy and energy efficiency in a contribution of at least 20% from small scale power the modern globalised business environment, DFCC Bank producers by 2020, we see significant potential in this teamed up with Deutsche Gesellschaft fur Internationale sector which we are well placed to harness considering our Zusammenarbeit (GIZ) of Germany and DFCC Consulting pioneering status. (Pvt) Limited to develop a framework to inculcate best practices in sustainability and energy efficiency in local Off-Shore lending and the growth of the Bank’s FCBU SMEs. As part of this effort, the Bank organised nine clientele are other areas that will be focused on in the light training programmes for SMEs during the period with of the Government’s renewed emphasis on developing the assistance of DFCC Consulting (Pvt) Limited and the the export sector and attracting more foreign direct

branch network. Technical assistance for these workshops Management Discussion and Analysis investments into the country. was provided by GIZ through German and local energy consultants. Particular attention was given to emerging Consolidating DFCC Bank’s position as one of the key districts in the Northern, Eastern, Southern and Uva commercial banks in the country will continue to be a Provinces when selecting locations. Over 300 SMEs priority in 2016. We will continue to capitalise on our directly benefited from this initiative. In the second long-term banking relationships and leverage the phase, the Bank will look at nurturing new initiatives synergies arising out of the amalgamation to grow the by these SMEs, in the areas of sustainable energy and commercial banking portfolio. efficiency management, and provide financial assistance and guidance. Small and Medium Enterprises Branch Banking Performance During 2015 The branch network of DFCC Bank was a hive of activity Branch Banking showed a robust performance during the during 2015 with the unit’s involvement in the Bank’s period ended 31 December 2015. The advances portfolio Diamond Jubilee Celebrations and the amalgamation of the branches increased to LKR 102,189 million from of DFCC Vardhana Bank. The Bank’s main objective LKR 83,104 million showing a growth of 23%. A strong was to make the transfer of operations seamless and growth was observed in term loans, working capital loans hassle-free as far as our valued customers are concerned. and finance leases. The focus remained strong towards Bringing the two operations onto a single IT platform, lending to Small and Medium Enterprises, fulfilling its amalgamation of the customer databases, standardising mandate as the pioneer development bank in the country. the credit processing and streamlining the loan repayment The branches proactively engaged in drawing down

and recovery procedures proved to be the critical aspects Creation and External Capital Formation Value during the amalgamation. The Branch Banking unit was from several lines of credit available to the Bank for able to successfully complete the process and commence SME lending. Particular attention was given to the services as a fully-fledged commercial bank within the concessionary loan scheme available through the stipulated time frame. This would not have been possible European Investment Bank (EIB). A total of 37 projects without the commitment of the branch staff and the were financed by the branches amounting to support and guidance extended by the Central Steering LKR 2,570 million under this line of credit in 2015.

Committee and the support Committees. The key sectors supported through the line included Customer Capital leisure, food and beverage, health and education The branches continued with normal business operations services. Several other lines of credit that included amidst all the energy and excitement. Project and Smile III (RF), Saubhagya and the Commercial Scale SME financing remained the quintessence of branch Dairy Development Loan Scheme were also utilised lending activities while a substantial effort was made in to finance loans to the SME sector. DFCC Bank’s the deposit mobilisation sphere to sustain the growth commitment to the development of Small and Medium momentum experienced by the Bank in the recent past. Enterprises outside the Western Province is noteworthy. A substantial portion of these concessionary loan

DFCC Bank PLC Annual Report 2015 45 Service Points

Mobile Rs. Banking Rs.

Rs.Rs. Rs. Rs. Rs.

Branch

Online Banking

ATM

schemes were used to finance projects in the outstations. synergies envisioned through the amalgamation. The Particularly, attention was given to projects originating initial amalgamation of workflow processes of the two from emerging provinces of the country including North, entities was successfully completed in three regions East, Uva and North-Central. during the period. Restructuring and streamlining of processes among the balance regions will be completed Non-performing advances ratio of the branches improved during the first quarter of 2016. to 4.2% from 4.7% during the period amidst strong Expansion of the Branch Network recovery and follow-up framework. DFCC Bank envisions a rapid expansion of its branch Roadmap for 2016 network in reaching out to the under-banked segments in the outstations. Thus, the Bank will look to convert Branch Banking is highly optimistic about the prospects outlets that have limited banking operations such as for 2016 even though the general forecast for the economy the Sri Lanka Post outlets into fully-fledged branches in is mediocre. The unit has incorporated several new stages. In order to optimise the span of control with the initiatives in the business plan for 2016 to optimise the proposed expansion, the number of Regional Offices operational efficiencies in the branch network and to drive will be increased from the current six to seven in business growth. These include: early 2016. Restructuring and streamlining processes in the regions The transformation to a commercial bank on 1 October 2015 required substantial change to the organisational structure of the Branch Banking operation to reap the

46 DFCC Bank PLC Annual Report 2015 Service Points

Mobile Rs. Banking Rs.

Rs.Rs. Rs. Rs. Rs.

Branch

Online Banking

ATM

Enhancing project and SME lending capabilities Providing comprehensive project financing solutions The Bank’s project lending activities are currently concentrated mainly in 20 dedicated SME units. The role of the Regional Offices will be enhanced With the amalgamation of operations, the number of in the future by establishing credit processing units potential customer access points through which the in each Regional Office. These units will be staffed Bank can provide SME products has considerably by Relationship Managers with wider experience in increased, and the Branch Banking unit is eager to SME lending and project financing. The larger credit enhance the project and SME lending capabilities of facilities (Specially project loan facilities) stemming these units to reach a wider client base. from branches will be appraised through these units. In addition, any special projects or green-field projects Development of specialised credit products tapped by the branches will be routed to a special unit The Bank has identified a dearth in financial products established at the Bank’s Head Office. Branch Banking in the market for emerging SMEs, especially those expects to expand its sphere of operations beyond who are in transition stage from micro-scale to traditional boundaries and provide comprehensive small enterprise category. This segment has unique project financing solutions through all its branches requirements, and lenders need to identify the using this framework. capabilities of these entrepreneurs in structuring Expanding the scope of the Marketing Cell products. DFCC Bank with its six decades of experience in development banking has the capacity to nurture The Marketing Cell concept introduced in 2014 has these entrepreneurs. Therefore the Bank is in the brought in rich rewards during 2015 and is expected to process of developing specialised credit products for be further strengthened during 2016. The scope of the this segment and intends to launch them in 2016. Marketing Cell has been expanded to include liability products as well, following the amalgamation.

DFCC Bank PLC Annual Report 2015 47 Business Banking for High End SMEs The individual borrower sector caters to both the fixed income earners as well as the self-employed, providing DFCC Bank’s Business Banking offers the entire range of personalised solutions designed to meet the financial banking services inclusive of commercial banking counter requirements of these individuals. operations and lending products. Positioned in-between Branch Banking and Corporate Banking, Business Banking New heights were reached in terms of growth and process combines the best of both ends of the spectrum, offering a improvements. The bulk of PFS was generated from the professional service to clients as well as maintaining close outstations where the demand contributed mostly for the and cordial relationships with them. The client portfolio is growth in 2015. This trend has continued for the past four also diversified, with a mix of lower-end corporate clients, years since the product initiation, and further it is the higher end SME clients and retail customers. The Bank segment that is expected to shine in the coming years. strives to customise products to suit the requirements of customers. Business Banking products include project Also in the period under review, the Central Loan loans, term loans for financing of business assets Processing unit was expanded and is now a fully-geared and construction of commercial buildings, loans and back-office service delivery unit, allowing the Bank to overdrafts to finance working capital, trade finance excel in service delivery for valued customers. Enabling to facilitate imports/exports, debenture investments, customer acquisition, strengthening existing relationships fee-based products such as letters of credit and guarantees and relentless focus on service delivery are the key to cover transaction-related contingencies as well as features that the Bank follows to provide better Personal Financial Services such as credit cards, leasing, financial services.

Management Discussion and Analysis personal loans and housing loans.

2015 was a momentous year for Personal Financial During the period under review, the Business Banking Services (PFS) with a remarkable 37% growth in the assets portfolio grew by 25% to LKR 19,088 million, total PFS portfolio during the period under review. which is a very impressive achievement given that the The retail asset portfolio at the end of the year reached growth was only 13.8% during the year ended 31 March LKR 24,922 million. 2015. The major contribution for the growth of asset portfolio was given by the loan portfolio despite the very DFCC Bank is fully equipped to take its place among the competitive market conditions and rising cost of funds. front-runners in the industry. The Bank’s aim and vision The liability base, showed a moderate growth of 7.3% to for 2016 is to be the ‘Preferred Bank’ in the mind of every LKR 8,575 million. The unit has laid out solid plans for Sri Lankan. growing the liability base in 2016.

Personal Financial Services was an area which was Personal Loans keenly focused on, which yielded successful results. Vardhana Personal Loans, introduced in 2013, is a product The retail asset portfolio at the end of the period marketed under the umbrella of Personal Plus which is was LKR 951 million. The combined renewals/ tailored with the objective of providing financial solutions approvals during the period under review amounted to to fulfill the varying requirements of individual borrowers. LKR 15,083 million. This loan scheme is primarily targeted to meet personal commitments of salaried employees of both the private Personal Financial Services and public sectors. The product is also extended to appeal to professionals and members of the defense forces. Loans DFCC Bank's Personal Financial Services (PFS) was Value Creation and External Capital Formation Value can be obtained for education, home improvements, launched in 2011 as a total solutions provider meeting

vehicle purchase or any other requirement that is deemed the needs and wants of individual borrowers. A great feasible by the Bank. Loans extended to professionals have deal of emphasis is placed on personal banking as it is proved to be a successful niche that contributed healthy a consistent contributor to the growth and profitability volumes to the portfolio growth whilst enhancing the of the Bank. Being a late entrant to this segment, the customer base. Bank has been able to penetrate and fly high in the retail

Customer Capital banking sector amidst severe competition. During the period under review, Personal Loans recorded a notable growth of 54%. The strategy for success Marketed under the brand name ‘Vardhana Personal revolved around promoting the Personal Loans Scheme Plus’ the product portfolio consists of asset and liability to employees of the existing corporate client base across products comprising convenient deposits and lending the Bank’s network, and also to employees of recognised options such as home loans, personal loans, vehicle leases, corporate entities. The bulk of the Personal Loans booked pawning and credit card facilities. PFS products are during the period under review was generated from the available through the Bank’s multi channeled distribution outstations, a trend witnessed across all PFS products. network including the branches located island-wide, providing a seamless customer experience.

48 DFCC Bank PLC Annual Report 2015 Within the highly competitive Personal Loan segment, The loans disbursed were partly funded by the ADB Credit the Bank differentiates itself by offering competitive and Line. The first tranche amounting to USD 7.5 million was flexible interest rates, simplified documentation, utilised since its inception in 2012, and the second tranche tailor-made solutions and faster turnaround times. of USD 7.5 million was availed in April 2015.

A healthy growth has been witnessed during the During the period under review, a remarkable growth short tenure since the product was launched and we of 42% was recorded in the housing loans portfolio. see immense potential for growth in this segment. In The portfolio as at 31 December 2015 stood at 2016, DFCC Bank intends to have a series of product LKR 5,602 million. The success was primarily from marketing promotions, specially focusing in the North outstation branches which accounted for over 78% of the and the East Regions where there is huge potential for contribution. The ease of access to the Northern and the growing this product. Eastern regions has phenomenally supported the growth.

Housing Loans With the amalgamation of DFCC Bank and DFCC Vardhana Bank, much attention has been given to The Sandella Housing Loan, marketed under the umbrella growing the Retail Assets portfolio of the Bank. With the of Vardhana Personal Plus with a promise to “Make expanding branch network our services will have a wider Your Dream Home a Reality”, is designed to cater to all reach, especially in the North and the East regions and avenues of home ownership, such as house purchase, land much emphasis will be placed on vertical living financing investment and condominiums. It also accommodates the whilst continuing to cater to the middle-income sector. construction of new housing units as well as renovation DFCC Bank intends to continue promoting housing loans Management Discussion and Analysis and extensions to existing houses. The product was with appropriate advertising and a pool of ‘foot soldiers’ introduced in 2010, and throughout the last five years island-wide. there has been a phenomenal growth in the market, accounting for a significant portion in the retail assets Finance Leasing portfolio of the Bank. This scheme is intended for a wide cross-section of demographic including persons from DFCC Bank is one of the pioneer facilitators in providing business and professional backgrounds, public and private leasing in the banking sector in Sri Lanka. The Bank sector employees, self-employed individuals as well as has provided lease facilities to customers from a wide Sri Lankan citizens employed abroad. Loans under this spectrum of sectors such as industry, transport, tourism, scheme are priced at competitive rates and the tenor can agriculture, manufacturing and construction apart from be structured to suit the repayment capacity of individuals. catering to the needs of individuals. By providing lease facilities for these sectors, the Bank has immensely The increase in condominium developments in the country contributed to the development of the country in its long also led to a demand for such financing by high net-worth run; over the past six decades. In addition to providing individuals and also by those employed abroad. The Bank’s financial assistance, the Bank has provided guidance to tie-up arrangements with the condominium developers led its customers leveraging the expertise available within to mutual collaboration in business generation that also the Bank, being the pioneering development bank in the contributed to the overall housing growth. country. By educating the clientele, the Bank has been able to build skilled entrepreneurs to lead in almost every During the year 2012, DFCC Vardhana Bank, subsidiary sector in Sri Lankan enterprises. of DFCC Bank at the time, signed an agreement with the

Asian Development Bank (ADB) to obtain a Credit Line of The Bank offered the most competitive interest rates in Creation and External Capital Formation Value

USD 15 million for housing finance with a view to reach out the leasing market throughout the period under review, further to the developing housing market, increasing focus and promotional campaigns conducted jointly with motor on regional geographies. The ADB Credit Line prioritises vehicle suppliers were highly successful. The Bank has for first time homebuilders, young professionals, family been able to reach a substantial customer base under borrowers, female entrepreneurs and middle and different sectors and achieve a geographically lower-middle income individuals. Further, indirect well-diversified portfolio through the island-wide branch development in terms of contribution to the development network. As part of product diversification, DFCC Bank Customer Capital of the country and employment generation within the introduced two stage lease facilities enabling customers to sector is expected to be achieved through the Credit Line. have an affordable monthly pay back rental by extending DFCC Bank was the first to initiate such a credit scheme the lease period up to seven years. for the purpose of financing residential property. DFCC Bank recorded 32% net growth in the collective leasing portfolio of the DFCC Banking Business (DFCC Bank and its subsidiary at the time, DFCC Vardhana

DFCC Bank PLC Annual Report 2015 49 Bank) in 2015 which reached LKR 15,436 million by DFCC Bank’s credit card operation remains a viable 31 December 2015. In the regional distribution for 2015, business line despite its late entry into the market. The most of the facilities granted were out of Colombo. card portfolio is free of material infections due to prudent Also a substantial growth was seen in the North and the screening methods adopted at the time of issuing them. East regions compared to the previous year. Overall, 2015 was an excellent year for the Bank’s leasing business and The chip based multi currency Visa Global Travel card was the Bank looks forward to enhancing the growth introduced in 2015 replacing the magnetic stripe based momentum in 2016. single currency Global Travel card. The Global Travel card is a prepaid card which provides the choice of preloading Gold Pledge Lending and accessing four international currencies in one card at any given time, thus reducing additional costs arising The Ranwarama Pawning product was introduced in 2008 from multiple currency conversions. as a convenient source of funding to meet the varying needs of customers. However, with the drastic downturn DFCC Bank has started providing card acceptance in the gold prices experienced in April 2013 the market facilities to merchant establishments with the assistance has been very cautious and opportunity for growth has of ‘Global Payments’ from the third quarter of 2015 and so been limited. The year 2015 was challenging where there far over 100 merchant establishments have been provided was a decline in the portfolio during the first two quarters. with card acceptance facilities. Nevertheless, the Bank continued to promote the product, offering customers an extremely competitive advance Investment Banking and DFCC Bank’s Management Discussion and Analysis value at a low interest rate, through extended banking and weekend banking coupled with a friendly and efficient Investment Portfolio service, which has borne fruit. Investment Banking services are offered through Acuity Partners (Pvt) Limited; a full service investment bank Card Operations promoted as an equally owned joint venture between DFCC Bank and Hatton National Bank (HNB). It offers Having launched the Visa international debit card in a comprehensive suite of products and services in Fixed the year 2011, DFCC Bank ended the year 2015 with a Income Securities, Stock Brokering, Corporate Finance, base of over 84,500 debit cards in issue. During the period Margin Trading, Asset Management and Venture Capital under review, over 18,000 Visa debit cards were issued. Financing. The DFCC Visa debit cards provide access to over 36 million Visa-accredited merchants globally for purchase of goods and services and can be used for cash DFCC Bank’s Investment Portfolio withdrawals worldwide through a network of over As at 31 December 2015, the aggregate cost of investment 2.4 million ATMs. in DFCC Bank’s portfolio of quoted shares [excluding the holding in Commercial Bank of Ceylon PLC (CBC) voting The period under review saw debit card usage amount to shares], unit holdings and unquoted shares amounted LKR 1,974 million from 333,994 transactions at ATMs to LKR 1,658 million. The distribution of the aggregate and LKR 272 million from 93,301 transactions at POS investment portfolio is given below: terminals. In addition to the standard Visa debit cards the Bank introduced three special Visa debit cards for Investment Portfolio as at 31 December 2015: DFCC Premier banking customers, namely, Premier plus, Cost Market value

Value Creation and External Capital Formation Value Premier and Prabhu. (LKR million) (LKR million)

The credit card range of DFCC Bank covers internationally Quoted share portfolio valid Visa Classic, Gold and Platinum cards. The Platinum (excluding CBC) 673.7 1,122.3 cards, with a number of value added features, are issued Unit Trust portfolio 836.5 995.0 to key customers of the Bank, while corporate cards target corporate customers. All the credit cards issued by the Unquoted share portfolio 147.4 147.4

Customer Capital Bank are chip based and provide enhanced protection Total 1,657.6 2,264.7 against credit card frauds. This includes SMS alert messages relating to transactions and a 24-hour hotline. The unquoted share portfolio is carried at cost in the The total credit exposure of the credit card portfolio stood balance sheet. The market value of the investment in CBC at LKR 738 million as at 31 December 2015, with a card voting shares was LKR 17,001 million on 31 December usage of LKR 357 million during the period under review. 2015 as against the cost of LKR 3,290 million.

50 DFCC Bank PLC Annual Report 2015 During the nine month period ended 31 December 2015, The policy rates [Standard Deposit Facility (SDF) and DFCC Bank carried out selected divestment of mature Standard Lending Facility (SLF)] that stood at 6.50% and quoted shares and unit trust holdings, realising 8.00% respectively at the beginning of the year closed at LKR 78 million in sales proceeds and LKR 37 million 6.00% and 7.50% at the end of the year. In the first half in capital gains. of the year, Interbank money market rates continued to decline amidst highly liquid market conditions, which on Credit Line Management average maintained daily excess liquidity of approximately LKR 72,000 million. Nonetheless, the developments that EIB SME & Green Energy Global Loan took place globally and locally specially at the latter part of the year have shown signals of fuelling inflation and DFCC Bank was appointed by the Government of tight money supply. Government borrowing had increased Sri Lanka to implement the EIB SME & Green Energy during the period in the backdrop of expenditure related Global Loan credit line in March 2014. 70% of the credit to elections and public welfare initiatives of the past line was allocated for SME projects and the balance 30% and incumbent Governments. On the other hand, the for renewable energy and energy efficiency projects. continued US FED rate hike speculations in the global Attractive features of the credit line were the long markets and eventual rate hike in December, fuelled a repayment period offered at a low fixed interest rate and sense of risk averseness and resulted in the continued the relatively large loan amount. sell off in equities and debt by investors especially in the emerging and frontier markets. This had put further The entire loan of Euro 90 million was fully allocated pressure on the Government’s foreign reserves and cost of

within the availability period, which ended on Management Discussion and Analysis funding through foreign sources. 13 November 2015. A total of 167 requests from three participating intermediary banks, including DFCC Bank, In a move that signals and acknowledges the impact of aggregating to approximately LKR 14.65 billion were the above developments, the CBSL in December chose allocated funds. Of the amount allocated, by the year-end, to increase the Statutory Reserve Ratio (SRR) applicable LKR 6.74 billion (Euro 42.46 million) or 47.2% of the to all Rupee deposit liabilities of commercial banks by total loan, had been disbursed to intermediary banks for 1.50% to 7.50% effective from the reserve week the benefit of their customers. The balance funds will be commencing 16 January 2016. disbursed during 2016.

In response to the above local and global trends, the SME projects in a variety of sectors were approved for benchmark Government Treasury Bill/Bond yields also funding. Prominent sectors were auto service & repair, gradually increased during the calendar year 2015, with bakery products, construction, education, healthcare, 12 month Treasury bill rates rising to 7.30% from 6.00%, manufacturing including agro processing, printing, five year bonds rising to 9.53% from 7.50% and 10 retailing, tourism and trading. Under ‘Green Energy’, year bonds rising to 10.20% from 8.30%. Under this 57.7 MW of renewable energy capacity will be added to challenging environment, the Fixed Income (FI) desk the national grid. Notable features were the approval of a has made significant gains through trading activities. 10MW photo voltaic solar power plant and a 4 MW The FI portfolio witnessed a growth and stood at bio mass combined heat and power co-generation LKR 51,966 million while the encumbered portfolio plant which will use fuel wood only from authenticated (allocated for REPO transactions) alone was sustainably grown sources, benefiting over 12,000 farmers. LKR 20,231 million at the end of the period. In addition, two 10MW wind farms and numerous ‘mini

hydro’ projects were approved for funding. Creation and External Capital Formation Value Maintaining the targeted interest rate spreads between deposit liabilities and lending rates in the light of Treasury prevalent low interest rate sentiment, which bank’s The easing monetary policy stance of the Central Bank of witnessed in the early part of 2015, was a challenge for all Sri Lanka (CBSL), in the back drop of slow credit growth market players. This, coupled with high market liquidity, and low inflation that the country witnessed in the year especially in the early part of 2015, prompted fierce 2014, continued to the early part of 2015 as well. The competition among banks and non-banking financial Customer Capital lackluster private sector credit growth that continued institutions for growth in advances at the expense of until the middle of the year was mainly attributable to margins. This scenario compelled bank treasuries to political and policy uncertainties that prevailed during improve the efficiency of liquidity and interest rate this period. However, at the latter part of the year an management to a level never witnessed before. expansion of credit to both the private and public sectors was witnessed. In the local Foreign Exchange markets, the pressure on the LKR witnessed at the end of 2014, continued in 2015, mainly due to foreign outflows from the equity and debt

DFCC Bank PLC Annual Report 2015 51 markets, along with the gradual widening of the trade The country witnessed a considerable increase in the deficit. This had compelled the CBSL to revise its strategy importation of vehicles during the first nine months of in managing the USD/LKR exchange rate in the third 2015, and in line with this, the Bank was able to increase quarter of the year, encouraging the market to find its the fee income by issuance of import LCs. However, the equilibrium instead. The USD/LKR rate closed the year imposition of the margin requirement during the latter 2015 with a depreciation of approximately 9.2%. part of the last quarter impacted the business volumes and The rate as at 31 December 2015 was LKR 144.15 the fee income negatively. compared to LKR 131.95 quoted as at 31 December 2014. At the latter part of the year, we saw an upward movement Attracting new corporate and SME clients also contributed in the USD/LKR premiums with the premiums settling to the growth. Further, DFCC Bank was able to earn a at around LKR 2.00, LKR 3.50 and LKR 7.00 for three considerable commission income from LCs issued for months, six months and 12 months respectively. importation of machinery and equipment for the projects financed through project lending. Amidst this challenging environment, DFCC Bank Treasury made LKR 118.9 million through FX trading The Bank's continuous efforts to grow the correspondent activities while positively contributing to reduce the cost banking network helped the customers to arrange advising of funds through its FX swap operation. of Letters of Credit to their suppliers in various countries which in turn enabled the Bank to increase the volumes of As the economy slowly continued to expand, LCs issued and grow its fee income. improvements in customer volumes were witnessed Management Discussion and Analysis throughout the year resulting in a 22.6% year-on-year Business volumes handled by Trade Services consisting growth, while contributing LKR 212 million to the bottom of import Letters of Credit, import collection bills, line through FX customer transactions. During the acceptances, shipping guarantees and export bills period under review, the Treasury sales desk successfully amounted to LKR 100,228 million which is an increase organised several customer events including the annual of 23% compared to 2014. DFCC Economic Forum in collaboration with market experts, economists and senior CBSL officials, with the Remittance Services objective of enhancing the knowledge on current economic trends and resultant opportunities. The period under review was fruitful for Inward and Outward Telegraphic Transfer business. This was The Group Treasury played a vital role in the process mainly due to the import customers opting to settle of amalgamation between DFCC Bank and DFCC their suppliers through the Advance Payments and Open Vardhana Bank in October 2015, ensuring all regulatory Account Payment mechanism. The budgeted income requirements of the new entity were met while for the period under review from these transactions operationally ready for the day of the amalgamation was achieved with a growth in excess of 30% over the and beyond. At the same time certain functions within preceding year. Treasury were amalgamated and streamlined to ensure greater efficiencies to meet the requirements of all The income generation from drafts and cheques continued external and internal customers. to slide with the gradual extinction of these products from banking services due to the increasing use of electronic Going forward, while maintaining the positive momentum banking services and direct debits/credits, and the built over the years, with customer service at its core, ever-increasing risks of frauds and manipulations Value Creation and External Capital Formation Value Treasury is focusing on a series of process improvements associated with them. At present the drafts are requested with the support of IT. The focus will be on upgrading mainly by BOI companies for settlement of their various existing systems in order to better handle growing volumes suppliers who are also customers of other commercial while improving efficiency in fund transfer pricing. banks’ Foreign Currency Banking units.

The Bank’s remittance business is promising with the International Banking widening of the network and the growing customer Customer Capital Trade Services base. The superior customer service characterised by expeditious and meticulous delivery has contributed to With an excellent understanding of customers’ need for enhancing customer satisfaction and confidence, enabling quick service, the Trade Services unit efficiently handled customer acquisition and retention. the increased volumes, enhancing customer satisfaction and enabling the Bank to build a loyal customer base.

52 DFCC Bank PLC Annual Report 2015 EMPLOYEE CAPITAL External Consultants The Bank acknowledges that its human capital is a key To assist in the amalgamation process as well as in the enabler for executing its strategy and achieving goals. interest of transparency and equality, the services of It is only when the employees, from the Chief Executive external consultants were engaged. Cerebrus Consultants to the Office Assistant live the espoused values of the came on board to design and develop a job evaluation Bank and promote a culture of extraordinary customer scheme and conduct a job evaluation exercise covering care that our stakeholders, customers in particular, will all positions across the merged entity as well as provide have trust and confidence in the Bank. Consequently, the insights on grade structures and designations. Another Bank attracts the best of talent, develops a professional consultant was engaged to assist in the integration process and collaborative work environment, promotes a culture particularly in relation to rationalisation of staffing of diversity and inclusion and provides opportunities requirements across the organisation and enhancing for employees to work to their full potential and realise staff communication. their personal career goals. In turn, we reward their performance, in the form of compensation and benefits as Communication well as recognition and appreciation. We used a range of internal communication tools and Our reporting boundary on employee capital is the DFCC programmes to openly engage with our employees Bank, unless otherwise stated. throughout the integration process. Regular updates on developments were shared with employees through the internal newsletter; the ‘Weekly Roundup’ as well HR Challenges of Amalgamation Management Discussion and Analysis as through formal notifications. Meetings were held 2015 was an exciting and challenging one for the with different staff groups to explain revisions to Human Resource Department. After 12 years of separate organisation structures, HR and business processes. operations, DFCC and DFCC Vardhana Bank amalgamated Video communications by the CEOs of the two banks were their enterprises to come under one umbrella – DFCC disseminated regionally to ensure all employees received Bank PLC – with one collective vision of becoming a consistent message. The external consultant engaged the ‘leading financial solutions provider sustainably by the Bank also functioned as ‘Ombudsman’ to our developing individuals and businesses’. employees to provide them with another avenue to raise any issues or queries they had pertaining to Legal and Statutory Concerns and the amalgamation.

Amalgamation of Remuneration Structures Another pre-amalgamation engagement and energising and Processes activity that was conducted encompassing all staff across From a Human Resource (HR) perspective, the the two banks, was the ‘I Will Rise’ series of programmes. amalgamation process necessitated multiple legal and These programmes were structured to ensure that each statutory concerns to be addressed in consultation and every employee was aware of what our objectives were with regulatory authorities. Differences in certain HR with the amalgamation and the contribution required policies and processes, which had developed over time from each of them to achieve the same. due to the different business models of the two banks needed review and realignment to meet the needs of the An internal cross-functional team was set up to formulate amalgamated entity. The Board of Directors mandated the vision, mission and values for the merged entity. The team engaged with varied groups of staff across the two that disparities in employment practices, remuneration Creation and External Capital Formation Value and benefits between the two banks be addressed to the banks and incorporated feedback received when the new maximum possible extent at the outset. Accordingly, grade vision and mission statements and values of the Bank structures, designations, perquisites etc. were reviewed were developed. and standardised and in the process, grade placements of 84 non-executive employees were rectified. Following the amalgamation, HR policies were revised to cater to the demands of the new business environment.

DFCC Bank PLC Annual Report 2015 53 Our Vision Our Mission Our Values “To be the leading financial “To be the leading financial “To be the leading financial “To provide innovative and We are;

solutions provider sustainably responsible solutions true to zz Innovative developing individuals and our Values with the expertise of zz Customer Centric our multidisciplinary team of businesses” zz Professional professionals and synergies of zz Ethical our financial services group” zz Accountable zz Team Oriented zz Socially Responsible Management Discussion and Analysis

Amalgamation of Human Resource On 1 October 2015, a total of 958 employees were Branches (excluding centralised operations and other absorbed from DFCC Vardhana Bank to DFCC Bank business units) absorbed 67% of the total workforce. PLC without any adverse impact to their employment Within branches, proportionate to the large number of terms and remuneration. It is noteworthy that this branches in the province, the Western Province accounted amalgamation was achieved within a span of four months for 33.5% of employees, followed by Southern (14%) and primarily utilising internal resources. The integration Central (12%) provinces. teams took on a significant volume of additional tasks while handling their day-to-day responsibilities to An age analysis of staff reveals that 59.2% are between ensure a successful amalgamation within a challenging 18-30 years. They belong to the ‘new generation’ of time frame. employees we refer to later and are the most ‘volatile’ in terms of retention. Staff Strength At the year-end, the overall head count excluding Grade 2015 2014/15 2013/14 outsourced staff for janitorial and security personnel etc. Management 78 82 76 stood at 1,445 a growth of 1.3% over the previous year. Executives 419 413 384 88% of the workforce are in the permanent cadre. Overall male female gender ratio of 50:50 is maintained. Supervisory 243 199 185

Junior Staff 705 733 726 Value Creation and External Capital Formation Value Total 1,445 1,427 1,371

Total Number of Permanent Employees by Employment Type and Gender

December 2015 2014/15 2013/14

Employee Capital Grade Male Female Total Male Female Total Male Female Total

Management 51 15 66 53 17 70 48 17 65 Executive 210 171 381 203 165 368 193 157 350 Supervisory Staff 123 117 240 106 92 198 80 104 184 Junior 249 332 581 271 369 640 372 264 636 Total 633 635 1,268 633 643 1,276 609 626 1,235

54 DFCC Bank PLC Annual Report 2015 Total Number of Employees by Employment Type/Contract and Gender

Permanent Contract/Casual/Part time Total Number of Employees

Grade Male Female Total Male Female Total Male Female Total Management 51 15 66 11 1 12 62 16 78 Executive 210 171 381 20 18 38 230 189 419 Supervisory Staff 123 117 240 1 2 3 124 119 243 Junior Staff 249 332 581 61 63 124 310 395 705 Total 633 635 1,268 93 84 177 726 719 1,445

Total Number of Employees by Employment Contract and Gender

No. of Employees Composition of Employees (%)

Employee Type 2015 2014/15 2013/14 2015 2014/15 2013/14 Full-time – Male 726 707 690 50 50 50 Full-time – Female 719 720 681 50 50 50 Management Discussion and Analysis Outsourced – Male 0 0 0 0 0 0 Outsourced – Female 0 0 0 0 0 0 Total 1,445 1,427 1,371 100 100 100

Staff Distribution by Grade and Age

Management Executives Supervisory Junior Staff Total Staff

Grade Count % Count % Count % Count % Count % 18-25 0 0 14 3 2 1 374 53 390 27 26-30 0 0 124 30 97 40 245 35 466 32 31-40 4 5 212 51 105 43 56 8 377 26 41-50 44 57 64 15 34 14 19 3 161 11 51-55 19 24 3 1 4 2 8 1 34 3 56+ 11 14 2 0 1 0 3 0 17 1 Totals 78 100 419 100 243 100 705 100 1,445 100 Value Creation and External Capital Formation Value

As at 31 December 2015 Female Male Total DFCC 719 726 1,445 Employee Capital

DFCC Bank PLC Annual Report 2015 55 Breakdown of Employees by Province

Female Male Total %

Central 47 69 116 8 Eastern 22 50 72 5 Northern 21 34 55 4 North Central 20 42 62 4 North Western 38 36 74 5 Sabaragamuwa 35 36 71 5 Southern 67 67 134 9 Uva 18 38 56 4 Western 451 354 805 56 Total 719 726 1,445 100

Total Workforce by Region and Gender Management Discussion and Analysis

2015 December 2014/15 2013/14

No. of employees No. of employees No. of employees

No. of No. of No. of Province/Departments No. of SLP No. of SLP No. of SLP and Other Business Units Branches Units Male Female Total Branches Units Male Female Total Branches Units Male Female Total

Central 10 4 69 47 116 10 4 62 47 109 9 5 57 47 104 Eastern 7 4 50 22 72 7 4 48 22 70 7 4 50 20 70 Northern 6 0 34 21 55 6 0 36 22 58 6 0 34 22 56 North-Central 3 6 42 20 62 3 6 39 23 62 3 6 39 20 59 North-Western 6 4 36 38 74 6 4 34 40 74 5 5 31 34 65 Sabaragamuwa 5 10 36 35 71 5 10 32 36 68 5 10 37 38 75 Southern 9 14 67 67 134 8 15 69 65 134 8 15 67 60 127 Uva 4 5 38 18 56 4 5 41 20 61 3 6 39 18 57 Western 29 11 146 176 322 29 11 144 175 319 28 11 140 169 309

Departments and Other Business Units 64 0 208 275 483 74 0 202 270 472 63 0 196 253 449

Value Creation and External Capital Formation Value Total 79 58 726 719 1,445 78 59 707 720 1,427 74 62 690 681 1,371

Note: Number of staff attached to regional offices are included with respective province staff count. Employee Capital

56 DFCC Bank PLC Annual Report 2015 Age Analysis

Years 56 and Over

51-55

41-50

31-40

26-30

18-25

40 30 20 10 0 10 20 30 40

Female (%) Male (%)

Service Analysis Management Discussion and Analysis

Years > 20

15-20

10-15

5-10

1-5

< 1

50 40 30 20 10 0 10 20 30 40 50

Female (%) Male (%)

Return to Work After Parental Leave

Indicator Male Female Total

Number of employees entitled to parental leave during previous reporting period n.a. 715 715 Creation and External Capital Formation Value

Number of employees who took parental leave during 2015 n.a. 60 60 Number of employees who returned to work after parental leave ended during 2015 n.a. 60 60 Number of employees who returned to work after parental leave during 2014 n.a. 44 44 Number of employees who returned to work after parental leave during 2014 who were still employed 12 months after return to work

n.a. 41 41 Employee Capital Retention rate n.a. 87% 87%

DFCC Bank PLC Annual Report 2015 57 Manpower Planning Given the expansion and the market dynamics, manpower career fairs to source new talent in the market, as well as planning is a continuous process in the Bank. It entails to provide career guidance to young job seekers as a part estimation of future manpower requirements in both of our social responsibility focus. quantitative and qualitative terms, inventorying the existing workforce with regard to their characteristics, Managing The Employee Exit Experience facilitating the selection and recruitment process, ensuring effective utilisation of human resources and The Bank accords equal importance to managing the undertaking programmes for their development. employee exit experience as the entry process. We believe that a positive and professional cessation to an employment relationship goes a long way in assisting Recruitment external branding of the Bank and its workplace culture, The Bank recruited 122 employees during the period while feedback received at these interviews also surfaces under review, of whom 70.5% were at the entry level/ valuable information towards required improvement in non-executive grades. Supporting opportunities for of processes, policies, risk mitigants and managerial job rotation and enrichment and providing avenues for competencies. Feedback from exit interviews is shared career advancement, the Bank gives priority to internal with senior management as well as the Operational Risk candidates to fill vacancies. For external recruitments, Management Committee on a regular basis. we largely rely on referrals and online advertising. We have also obtained the services of head hunting firms for A total of 89 employees resigned during the period under Management Discussion and Analysis sourcing senior candidates and recruitment of technical review and it worked out to a turnover of 6.2%. Of the staff. Further, the Human Resources team participates in resignations, 54% were junior level employees. Migration is a key factor for resignation among young graduates and professionals.

Grade Turnover by Age Group and Gender*

Age group Gender

Less than Between Above Total Male Female Total 30 years 30-50 years 50 years

Management 0 1 1 2 1 1 2 Executive 11 13 0 24 12 12 24 Supervisory Staff 6 9 0 15 9 6 15 Junior Staff 46 2 0 48 19 29 48 Total 63 25 1 89 41 48 89

* Excluding Terminations/Contract Expiries/Retirements.

Total Number and Percentage of Employee Turnover by Age Group and Gender

Value Creation and External Capital Formation Value 2015 2014/15 2013/14

Employee Turnover* (%)** Employee Turnover* (%)** Employee Turnover* (%)**

Category Male Female Male Female Male Female Male Female Male Female Male Female Below 30 years 26 37 7 9 44 50 12 11 51 57 14 13 30 - 50 years 15 10 5 4 20 11 6 4 17 8 6 3

Employee Capital 51 - 60 years 0 1 0 8 5 1 16 9 6 2 16 17

Above 60 0 0 0 0 0 0 0 0 2 0 40 0 Total 41 48 6 7 69 62 10 9 76 67 11 10

* Excluding retirements/Contract expiries/Terminations. **As a % of total male/female staff in each employee category.

58 DFCC Bank PLC Annual Report 2015 Parental Leave Maximising Talent Productivity As per the Shop and Office Act, female employees are Through effective engagement, defining roles and entitled to parental (maternity) leave. We give them responsibilities, bringing them to live the corporate unhindered opportunity to avail of this benefit, while also values, aligning the corporate goals with theirs, encouraging and facilitating their return to work. We offer empowerment, establishing mechanisms for feedback the same or an alternate position without any prejudice to and rewarding and recognising them, the Bank constantly their job security, remuneration or career path upon looks for ways to maximise talent productivity. return. We take pride in our high return to work rate, that also serves to boost employee morale and productivity. During the period under review, focus was accorded to ensure rationalising of resourcing towards optimising Return to Work value generation from our human capital. Staffing structures across the branch network and departments are Employees who returned to work out of those due to in the process of being reviewed and standardised. The return during 2015 was 100% (2014: 94%). Bank encourages internal mobility of staff and facilitates their move within and across divisions. Retention Rate During the period, 122 employees were recruited of which Employees who stayed on at least 12 months out of those 70% were for the business lines while others were for returning in 2014 was 87% (2013: 92%). support services. Management Discussion and Analysis

Recruitments by Age and Gender

2015 2014/15 2013/14

New Employees Hired (%)* New Employees Hired (%)* New Employees Hired (%)*

Category Male Female Male Female Male Female Male Female Male Female Male Female Below 30 years 50 52 14 12 80 96 22 21 100 122 27 29 30 - 50 years 13 5 4 2 9 6 3 2 20 11 7 5 51 - 60 years 1 1 3 8 4 1 13 9 3 0 8 0 Above 60 0 0 0 0 0 0 0 0 0 0 0 0 Total 64 58 9 8 93 103 13 14 123 133 18 20

* As a % of total male/female staff in each employee category.

New Hires by Age Group and Staff Category

Grade New employees joining in the current Financial Year

Age group Gender

Less than Between Above Total Male Female Total

30 years 30-50 years 50 years Creation and External Capital Formation Value

Management 0 1 0 1 1 0 1 Executive 17 10 1 28 17 11 28 Non-Executive 2 5 0 7 4 3 7 Other/SLP 83 2 1 86 42 44 86 Total 102 18 2 122 64 58 122 Employee Capital

Percentage of Leave during 2015

Leave Type %

Vacation Leave 57.2 Medical Leave 25.2

DFCC Bank PLC Annual Report 2015 59 Capacity Building and Talent Management are assessed by the Management based on which individual development and career planning initiatives are Approach to Talent Management designed and implemented. Over the years, the Bank has invested generously in the area of capability and capacity enhancement of its Based on skilling requirements identified through the employees. The Bank adopts a four-pronged approach to development planning discussions and also taking into talent management. consideration certain business objectives and priorities of the Bank, the annual training plan is prepared at the The development and implementation of mechanisms beginning of the year and shared across the Bank. While for talent identification/differentiation training is prioritised based on needs surfaced in the A formal process for succession planning and building development plans, employees also have the option of managerial and leadership competencies across the requesting for specific additional programmes should they organisation so wish.

Availability of standardised methodology for identification of strengths and development gaps of Training and Development employees, and providing opportunities to employees During the period under review, 4,069 participants to address the identified development needs attended 234 programmes of which 112 were organised in-house. The total number of training hours provided Encouraging and facilitating employees to extend their reflected an increase of 12% over the previous year. The horizons in terms of personal and professional growth. Management Discussion and Analysis e-learning platform continued to more than justify its investment with usage increasing by 22%. During the The process of talent identification and differentiation at period under review, 133 employees availed of the many the Bank is based on the ‘Nine Box’ talent management attractive subsidised loan and grant schemes offered by methodology. Annually, the capabilities of all executives the Bank to assist in furthering their education. Of the study programmes subsidised, 56% pertained to obtaining banking qualifications. Training Hours 2015

No. of person hours of training Average training hours per employee

Male Female Total Males Female Total

Management 998 285 1,283 15.84 16.75 16.04 Executives 7,601 6,330 13,931 33.34 33.76 33.54 Non-Executives 9,806 11,744 21,550 22.91 22.92 22.91 Total 18,406 18,359 36,764 25.60 25.60 25.60

Type of Number of Staff Members who Completed Banking Training Qualifications during year 2015

Total person hours Qualification No. of Staff Value Creation and External Capital Formation Value

Types of training 2015 2014 AIB 20 In-house 34,275 27,741 DBF 37 External 2,393 3,706 CBF 62 Foreign 96 1,384

Employee Capital Total 36,764 32,831

60 DFCC Bank PLC Annual Report 2015 Other Initiatives A mentoring programme and DFCC REDS projects, with preference to work in teams, they have different targeted towards assisting new recruits acclimatise with expectations from employment and ways of working. We the culture of the Bank as well as amass the requisite skills will require new methods of engaging them and will have to enable effective contribution to the Bank, continued to gear our systems and processes to encourage further during the period. Activities organised by the DFCC REDS collaboration and innovation. We will consider these Committee included two CSR projects, social events such dynamics in formulating our training and development as a quiz night, bowling tournament, an adventure-based initiatives going forward. development programme, as well as a field trip targeted towards recent executive recruits of the Bank. Performance Management

To ensure that our employees are exposed to the functions The Bank is committed to fair and equitable remuneration of both development and commercial banking, a series and follows a performance-based approach in determining of training opportunities to provide cross exposure were annual staff emoluments. Strategic goals are cascaded arranged. These programmes were a business imperative down to the plans of the business unit, which in turn, this year considering the amalgamation that was taking lead to the formulation of personal accountabilities to place. Skilling occurred through classroom-based training, be defined in respective scorecards of staff members. e-learning and job rotations. During the latter part of Performance against agreed targets is evaluated formally the year, a structured re-skilling initiative was launched at mid-year and year-end by supervisors with one-on-one meetings with their staff, accompanied by constructive to fulfil job based skilling needs of staff whose job roles Management Discussion and Analysis changed as a result of the amalgamation. feedback on goal achievement and qualitative behavioural aspects, which could impact current job roles and future In tandem with the Bank’s drive to canvass business more career advancement plans. aggressively, this year too sales training continued to be an area of focus with most of the programmes pegged The Nine Box Framework that we follow since 2013 for to specified ROI measures. Of special mention is the talent identification and differentiation among Executives programme on Sales Excellence which is differentiated is an useful tool for targated retention and career from many training initiatives as it focuses on continued planning. Constructive discussions are also held with development through a series of activities and those whose performance needs improvement. performance monitoring and enhancement mechanisms driven by the participants themselves. The initiative Managing Remuneration is being further developed and expanded this year, The Bank participates in periodic surveys to benchmark incorporating continuous learning and development its remuneration levels against the industry, to ensure a utilising multiple tools. This is also envisaged to provide competitive and an equitable reward system. Moreover, a platform for sales staff to network, provide support and with the amalgamation, differences in remuneration share vital market information amongst each other. structures of the two banks were reviewed and revised to ensure consistency across application among different During the period, several overseas resource persons staff levels of the merged entity. were engaged to conduct programmes on key account management, wallet sizing, ALM, credit appraisal etc. Benefits Offered to Permanent Employees

Since 2014, mandatory product knowledge quizzes are The following are benefits offered to permanent Creation and External Capital Formation Value

conducted via e-learning on a quarterly basis for the employees that are not available to contract staff (barring frontline staff to ensure that they have the requisite some exceptions that are noted): knowledge to perform their job functions effectively. It is Housing loan, vehicle loan, miscellaneous staff loan, encouraging to note that over the period the number of MBA loan employees passing the assessment has steadily increased. Also available for certain contract staff, Executive

A New Generation of Employees Trainees and Management Trainees: Reimbursement Employee Capital of examination fee, professional membership We are aware that a new generation of employees who subscriptions, fitness and social club membership are well educated, skilled in technology, highly self-confident, able to multitask and have plenty of energy Also available for some contract staff based on contract: are now entering the workforce. Seeking challenge and Holiday grant

Only for Non-Executive permanent staff: Festival advance

DFCC Bank PLC Annual Report 2015 61

CAREER DEVELOPMENT SKILLS BULDIN N G RECOGNITIO

RECOGNITION

Career Advancement The annual career advancement programme which assists and expectations of our stakeholders. Therefore, we junior level staff to obtain entry into the executive cadre actively promote diversity and inclusion in our workforce was held during the period. 59 employees applied for the in terms of social strata, ethnicity, religion, exposure programme at the conclusion of which 11 candidates were and knowledge and make every effort to appoint the best selected for higher level promotions and job roles. person for the job regardless of age, gender, disability or culture. The OIC Certification; a mandatory 12-day training programme and assessment for all staff functioning in the The high ethical standards of conduct expected of the role of Officer in Charge, was held this year as well. A total employees is clearly communicated to them during of 54 staff underwent the programme and 32 successfully on-boarding sessions and reinforced through meetings, passed the intensive two-day assessment. specific classroom based training sessions and mandated training modules. We have a policy of zero tolerance Embracing Diversity, Inclusion and Equality towards harassment and victimisation and have instituted mechanisms for reporting such occurrences, if any, to We believe that a diverse and inclusive workforce relevant decision makers. helps us to build stronger relationships, maximise team performance, foster innovation and strengthen partnership and collaboration internally as well as with external stakeholders. It also reflects the changing needs

62 DFCC Bank PLC Annual Report 2015

CAREER DEVELOPMENT SKILLS BULDIN N G RECOGNITIO

RECOGNITION

Ratio of Salary of Men to Women by Employee Category

Grade Basic Salary Ratio, Male/Female

Management 50:50 Executive 51:49 Supervisory Staff 50:50 Junior Staff 49:51 Total 50:50

Minority ethnic communities accounted for 17 persons Staff Well-Being or 14% of new recruits during the period under review. In terms of gender, our workforce is equally divided. Health and Wellness Programme The return to work and retention rates of employees The programme to drive health and wellness among the who availed of maternity leave are a high 100% and 87% staff gathered momentum during the period. Knowledge respectively. The Bank ensures equitable remuneration enhancing articles on physical and mental health and based on merit and transparent procedures that take safety were regularly sent to staff via a number of no account of caste, creed or gender. Each employment communication methods. A number of wellness driven level has a specified salary range based on benchmarked programmes were also arranged. industry data and employees placed at each grade receive a base pay within the established range. The benefits The weekly services of a doctor has been made available to available are usually standardised by grade. In addition, staff at the main offices. certain job-specific benefits too are offered. Employees also have the option of joining social clubs and gyms with full or part reimbursement of expenses. Several avenues to perform at mercantile level in relation to tennis, basketball, swimming and cricket are also available to them.

DFCC Bank PLC Annual Report 2015 63 Occupational Health and Safety Employee Relations and Recognition The Bank places high importance to ensuring the safety A formalised Grievance Policy is in place and accessible to of employees in terms of the physical environment as well all staff through the e-learning portal. During the period, as emotional aspects. No occupational incidents were regular communications continued to be shared with staff reported during the period. on the options available to them under the policy. The Grievance Committee, a cross-functional team, continued The Bank also has in place a disaster recovery team to be active through the year and provided another avenue trained in varying aspects including first aid, evacuation for staff to surface concerns and issues. In addition, the and fire fighting to ensure that our employees are taken Bank has in place a Whistle Blowing procedure, detailing care of in an eventuality. Periodic drills and training of the procedure by which issues of concern can be raised at these teams are carried out based on an annual plan. the Bank.

To ensure emotional well-being and freedom from Showing our appreciation for staff who go the extra harassment, a secure office environment policy has been mile continued to be a key HR initiative. As such, on a implemented. The Bank places a high importance on quarterly basis throughout the year, employees respecting individuals and implements this policy nominated by the supervisors, subordinates or peers strictly. No incidents of this nature were reported were recognised for commitment and exceptional during the period. contribution made towards the Bank’s success under the rewarding excellence scheme. During the period under

Management Discussion and Analysis All permanent staff are also entitled for medical leave, review, 26 employees were recognised and appreciated medical insurance and reimbursement of medical through this scheme. In addition all department heads expenses up to predetermined limits. are provided an annual allowance to show appreciation to their staff as well as staff of other departments who Work/Life Balance have provided exceptional assistance. The period also saw 18 branch/team/individual awards being disbursed During the period under review, several social and fitness in recognition of outstanding performance during the related events were organised for the staff. The annual past year. staff trip was a family trip organised by the DFCC Welfare and Recreation Club and it was held in Singapore where 520 employees took advantage of the opportunity. In addition, the Club also organised sports and cricket events as well as other social engagement activities for the staff and their families. A new event, the ‘DFCC Run’, was also included in the annual schedule, which was a marathon in which our employees took part enthusiastically.

This year proved to be an exceedingly eventful year, with the Bank also celebrating its 60th Anniversary. In addition to a series of client events held across the country to mark the event, celebrations also included a gigantic event organised at Stein Studios, Ratmalana for all staff. The event had a two-pronged objective of marking the 60th Value Creation and External Capital Formation Value anniversary of the Bank as well as introducing the new brand, vision, mission and values of the amalgamated entity to our workforce.

Employee Capital

64 DFCC Bank PLC Annual Report 2015 Business Partner Capital

DFCC Bank recognises that in order to accomplish our Some of the recent programmes DFCC Bank has worked mission, we need the support and blessings of a wide with these partners, as detailed elsewhere, bear testimony range of trusted and committed partners. Accordingly, to the beneficial relationships the Bank has been able to the Bank has partnered with reputed global and local build with them. organisations. They include multilateral and bilateral development institutions, local financial institutions, DFCC Bank implemented two successive renewable energy Government institutions, industry associations and credit lines from The World Bank (1997-2011), playing an suppliers of goods and services. All these business exemplary role in mainstreaming the renewable energy partners actively collaborate with us in our efforts to sector in Sri Lanka leading to landmark transformational create value. We share complementary business goals impacts in the areas of technology, financing and with them and our interactions with them foster mutually regulation. On behalf of the Government of Sri Lanka beneficial long-term relationships. and the EIB, the Bank is currently implementing the EUR 90 million EIB funded SME & Green Energy Global Multilateral and Bilateral Institutions Loan scheme. Previously, the Bank implemented the EIB Post-Tsunami credit line and also disbursed two dedicated Since its establishment in 1955, on the recommendation global loans from the EIB. of the World Bank, DFCC Bank has developed and nurtured strong relationships with many multilateral DFCC Bank is also currently implementing a dedicated and bilateral institutions that share similar goals. housing loan credit scheme funded by ADB, and will also Management Discussion and Analysis Our business partners in this context include The be a participating bank in a new ADB credit line for SMEs. World Bank; the European Investment Bank (EIB); The Bank previously implemented the credit component Asian Development Bank (ADB); Kreditanstalt für of the ADB funded Plantation Development Project (PDP) Wiederaufbau (KfW), Germany; Deutsche Investitions- and managed the Plantation Trust Fund component of the und Entwicklungsgesellschaft (DEG), a subsidiary of PDP jointly with associate – National Asset Management KfW; Nederlandse Financierings-Maatschappij voor Limited. The KfW DFCC V credit line for SMEs in the Ontwikkelingslanden (FMO), Netherlands and Proparco, North and the East was also implemented by DFCC Bank. a subsidiary of Agence Francaise de Developement (AFD), France. Primarily our roles in these partnerships have DEG, FMO and Proparco promote private sector been as an effective credit institution for on-lending initiatives in developing and emerging countries. While funds to end users, or as the project manager in DFCC Bank has ongoing loans from DEG and FMO, both implementing credit programmes, administering grant institutions were former shareholders of the Bank and funds and smart subsidiaries for market development, had representation on the Board. DFCC Bank established and capacity building. a relationship with Proparco in 2015 and is expecting to conduct transactions shortly. Value Creation and External Capital Formation Value

DFCC Bank PLC Annual Report 2015 65 Correspondent Banks We have established correspondent banking relationships with the following banks in order to service transactions of our customers, which originate in or involve foreign countries. They also act as our agents in the respective countries.

Bank Country City Length of Relationship

HSBC Bank Australia Sydney 12 Years The Bank of Nova Scotia Canada Toronto 12 Years Commerzbank AG Germany Frankfurt 12 Years Bank of Ceylon (UK) Limited UK London 12 Years Sumitomo Mitsui Banking Corporation Japan Tokyo 12 Years Standard Chartered Bank PLC Singapore Singapore 12 Years Deutsche Bank Trust Company Americas USA Ne w York 12 Years Management Discussion and Analysis HSBC Bank USA NA USA Ne w York 12 Years Mashreq Bank PSC USA Ne w York 12 Years Standard Chartered Bank PLC USA Ne w York 12 Years Commonwealth Bank of Australia Australia Sydney 4 Years Bank of China China Beijing 4 Years Zurcher Kantonal Bank Switzerland Zurich 3 Years HDFC Bank India Mumbai 3 Years UniCredit Bank AG Germany Munich 12 Years

The Supply Chain have signed up with LMT. Irrespective of the bank, LMT DFCC Bank’s procurement policy requires that the notifies the beneficiary via an SMS informing the receipt selection of its suppliers and procurement of goods and of the remittance. Work on many other value additions services be done in a fair, transparent and economically are in progress to be delivered in 2016. Seven exchange effective manner. Selection of suppliers is through a companies in the UAE and Qatar have already signed up rigorous evaluation process, which, inter alia, takes into with LMT and negotiations are underway with exchange account the price, quality, after sales support, satisfactory companies in Saudi Arabia, Kuwait, Bahrain, Jordan, Italy references, timely delivery and technical capacity. and the UK to expand its global presence.

Value Creation and External Capital Formation Value Previously registered suppliers who fail to qualify are subsequently reviewed once in every three years. We

Tea Integrated Payment System prefer to procure from local suppliers thereby helping DFCC Bank together with Synapsys, launched a them to establish themselves by associating with the Bank groundbreaking supplier settlement system to support and receiving financial advice and assistance if required. Sri Lanka’s large community of private tea manufacturers and tea leaf suppliers. Designed by Synapsys, the system Industry Initiatives gives suppliers the opportunity to have proceeds from Lanka Money Transfer their sales managed by a bank and have it transferred directly to their bank accounts. DFCC Bank launched the

Business Partner Capital DFCC Bank’s remittance system, Lanka Money Transfer V Cash Card as part of this initiative, enabling tea leaf (LMT) was launched in April 2015. LMT is unique in suppliers to withdraw cash from over 700 ATMs across that other banks/financial institutions can have direct the country. The system provides efficiency, visibility arrangements with it to receive direct remittances for their and greater accountability, resulting in tea leaf suppliers account holders. Currently, eight such establishments having greater confidence in the collection process and control over their receipts.

66 DFCC Bank PLC Annual Report 2015 Mobile Wallet Lanka Industrial Estates PLC (LINDEL) The Vardhana Virtual Wallet® developed by Synapsys, is Lanka Industrial Estates, better known as LINDEL, is a convenient electronic payment and fund management located strategically in Sapugaskanda on 125 acres of land. solution that allows users to send and receive funds With its close proximity to the Colombo Harbour (18 km) through their mobile devices instantly. The funds stored and to the International Airport (25 km), this industrial therein could be used to electronically pay for goods estate offers the most advanced infrastructure facilities and services at selected merchant outlets, withdraw available in Sri Lanka. Out of the 19 production facilities cash at designated outlets, pay utility bills and transfer which are currently operational, five are run by Fortune to or receive funds from one’s near and dear. Available 500 Companies. Out of the leasable land, 80% has been let round the clock, these services take place within a to industries. secure transaction network. This will reduce the need for customers and merchants to hold cash to carry out Memberships in Industry Associations transactions. Vardhana Virtual Wallet® will be made available on Apple and Android devices free of charge. DFCC Bank has obtained membership in or established Retail customers and merchants will however be required affiliations with the following industry associations to register with the Bank to avail this service. and organisations. Our association with them provides opportunities for networking, contributing to development of standards and best practices for the industry and Strategic Alliances making a collective voice representing the industry with While organically growing through judicious management regard to issues relating to regulation and policy. Management Discussion and Analysis of its business, DFCC Bank diversified itself through a series of timely and prudent strategic acquisitions, Association of Development Financing Institutions in alliances and partnerships over the years and immensely Asia & The Pacific (Adfiap) benefited from the resulting synergies. The DFCC Group American Chamber of Commerce in Sri Lanka today comprises its subsidiaries; Synapsys, DFCC Consulting, Lanka Industrial Estates Limited, its joint Association of Compliance Officers of Banks – venture, Acuity Partners and associate company National Sri Lanka Asset Management Limited, together providing the full Chamber of Commerce & Industry of Central Province gamut of services to the financial sector. Cima Sri Lanka Division Acuity Partners Colombo Stock Exchange Fitch Ratings Lanka Limited Acuity Partners, a joint venture by DFCC Bank and HNB, is a full service investment bank. It is the only integrated, Genesiis Software (Pvt) Limited full service investment bank in Sri Lanka offering a Lanka Business Coalition On HIV and Aids comprehensive suite of products and services in Fixed Income Securities, Stock Brokering, Corporate Finance, LankaClear (Pvt) Limited Margin Trading, Asset Management and Venture Capital Sabaragamuwa Chamber of Commerce and Industry Financing. Acuity is the successor to the investment Sri Lanka Banks’ Association (Guarantee) Limited banking related subsidiaries and divisions of DFCC Bank and HNB and was created through the consolidation of all Sri Lanka Forex Association Corporate Finance, Equities and Fixed Income Securities Sri Lanka Interbank Payment System (Slips) activities of the two banks. Creation and External Capital Formation Value The Association Of Banking Sector Risk Professionals

The following subsidiaries/associates and business units The Ceylon Chamber of Commerce come under the Acuity umbrella; The Ceylon National Chamber of Industries Acuity Corporate Finance – Provides Corporate Finance The Employers’ Federation of Ceylon and Advisory Services The European Chamber of Commerce of Sri Lanka Acuity Securities Limited – A Primary Dealer for The Financial Ombudsman Sri Lanka Government Securities (Guarantee) Limited Acuity Stockbrokers (Pvt) Limited – A member of Business Partner Capital The Institute of Bankers of Sri Lanka Colombo Stock Exchange The Institute of Chartered Accountants of Sri Lanka Lanka Ventures PLC – A Venture Capital Company The Mercantile Service Provident Society Guardian Acuity Asset Management Limited – A dedicated fund management entity The National Chamber of Commerce of Sri Lanka

DFCC Bank PLC Annual Report 2015 67 SOCIAL and ENVIRONMENTAL committed to rural economic development through CAPITAL providing loan, savings and investment products and other services that will stimulate capital formation and Society and environment has had an enormous bearing employment creation. on our journey so far. Given the growing issues that the world is confronted with at present, it is expected to have Province GDP* Provincial No. of DBB’s an even greater relevance as we move forward. Hence, LKR million % of total DBB service provincial DFCC Bank has an unwavering commitment to the society (2013) GDP centres presence (%) and the environment, which is built into strategy. We use our financial and other resources to address social Western 3,643,241 42.0 38 27.7 and environmental issues of the communities in which Southern 954,518 11.0 23 16.8 we operate. We encourage our staff to actively engage with members of the community in order to understand Sabaragamuwa 526,155 6.1 15 10.9 their concerns, extend a helping hand to them wherever Central 959,918 11.1 14 10.2 possible and bring serious issues and concerns to the attention of the Management and the Board of Directors. North-Western 887,083 10.2 12 8.8 Eastern 542,905 6.3 11 8.0 Social Capital North-Central 438,896 5.1 9 6.6 Socio-Economic Impact Uva 409,972 4.7 9 6.6 Management Discussion and Analysis DFCC Bank PLC has for 60 years, directly and indirectly Northern 311,542 3.6 6 4.4 contributed to the economic development of the country at a national, provincial and local community level. Being Total 8,674,230 100 137 a net transferor of financial resources, especially in the provincial areas, the Bank has helped to transform rural Strategic CSR economies, enhance livelihoods, generate employment and encourage capital formation in every district. Community development is an integral part of DFCC Bank’s core value system, and employees at every level Over the years, the Bank has pioneered the financing are encouraged to engage with local communities through of new economic sectors in the country which are now varied community development projects. Our corporate mainstream businesses. One of the earliest examples social investment initiatives spread further than charitable is when DFCC Bank financed Sri Lanka’s first beach donations, and what we aim to do is create long-term hotel in the 1960’s. This set the stage for the many hotel social value for the communities in which we operate. projects that followed suit and helped develop the tourism sector in the nation, which today, is a thriving industry. The Bank has undertaken many initiatives in the past, The Bank also pioneered several other industries in the one of our flagship projects being the 6S implementation private sector namely apparel, aquaculture, ceramics, in schools. This project was carried out under the theme horticulture and renewable energy. Going beyond simply ‘Towards an exemplary society’, making a difference in providing financial solutions, the Bank also provides 100 schools across the country. This was a long-term advisory services and has catalysed the transformation of project spanning four years and was aimed at educating organisations, both locally and internationally. children at primary school level on the 6S principles. Additionally, our branches have also engaged in many Value Creation and External Capital Formation Value Looking at the present, the Bank continues to be a community upliftment projects, creating an impact in pioneer and is committed to driving financial inclusivity their localities. particularly in the rural and economically backward areas. In this context, the reach of DFCC Bank’s network in This year DFCC Bank implemented a 4E Strategy, relation to the contribution of each province to national further strengthening its strategic CSR focus. This GDP indicates a high concentration of service centre’s in integrated approach is aligned with the Banks’ brand the lower GDP-ranked areas. values, strengths and processes. The 4E Strategic Theme Framework is as shown in the next page: These achievements indicate our long-term commitment and significant contribution to sector development and economic development of the country. We remain

68 DFCC Bank PLC Annual Report 2015 Education Improving access to quality education in different spheres

Environment Entrepreneurship

Being actively involved in Fostering a more environment conservation entrepreneurial mindset in efforts the community and encouraging the development of entrepreneurs

Emergency Relief

Being actively involved in emergency relief when natural disaster strikes Management Discussion and Analysis

Initiatives in 2015 premises. The opening ceremony was held on the 5th of November with the Regional Manager, the branch Northern Region’s Flood Relief Initiative managers of Batticaloa, Kattankudy and Sainthamaruthu DFCC Bank’s team in the Northern Region provided and other members of the team in attendance. assistance to families affected by floods in the Vatharavarai village. The village was severely affected 2. Reaching out to Health Care Institutions and many people were displaced due to the flash floods caused by heavy rain. The team distributed food in the North items, as many of the families, especially children were DFCC Bank assisted two health care institutions in the without food. They also distributed mosquito coils, and Jaffna and Vavuniya Regions, by providing them with provided relief for about 100 families. essential equipment to cater to the needs of patients. The Bank donated 30 wheelchairs to the Jaffna Teaching Nepal Disaster Relief Hospital fulfilling an urgent requirement. The Bank The staff of DFCC Bank contributed basic necessities also donated 200 seats to be placed in the OPD patients to be sent to people affected by the Nepal earthquake. waiting area at the Vavuniya General Hospital. The The Bank has had a close relationship with Nepal on equipment was handed over to the Director of the Jaffna development of renewable energy, and joined hands Teaching Hospital and the Director General of the with the Sri Lanka Government t0 transport the relief Vavuniya General Hospital. These initiatives helped to goods to Nepal. enhance the service experience of needy patients during their visits to the respective hospitals. Community Based CSR Initiatives:

In addition to the Strategic CSR projects, employees Volunteerism Creation and External Capital Formation Value across the Bank are encouraged to engage with the The DFCC REDS also engage in CSR activities every year. local communities through various other community This group is one that comprises young recruits in the development initiatives. The Bank aims to be a model executive and management trainee cadres. Collectively corporate citizen and the Bank’s head office, regional they engage in CSR projects as a team building exercise. and branch level staff in fact undertook many initiatives Two noteworthy initiatives by the REDS during the period in their respective communities during the period under were the contribution made towards renovating the review. Two noteworthy initiatives were – Opatha Hospital in the Galle District and organisation of a blood donation campaign. 1. Providing a Clean Drinking Water System for Bt/Koddamunai Kanishta Vidyalayam Sponsorships The Batticaloa branch undertook a project to supply

The Bank funds and supports numerous events across Social And Environmental Capital clean drinking water for nearly 800 students who attend the country through sponsorships which are approved Bt/Koddamunai Kanishta Vidyalayam in Batticaloa by based on internal policies on eligibility, transparency and setting up a hygienic drinking water station at the school due process. Approximately 60% of the support during

DFCC Bank PLC Annual Report 2015 69 the period was towards events organised by the business Measures taken to minimise electricity consumption community with whom the Bank has built relationships. include calibrating all air conditioning systems for optimal The balance was allocated for local communities, efficiency, shifting towards LED bulbs, retrofitting plant educational and professional institutions, and sports and equipment with energy efficient technologies and related events. considering the energy labelling when procuring office equipment. These efforts and investments have borne In return, these events enhance the Bank’s visibility and fruit. The Bank’s electrical energy consumption decreased goodwill while also providing opportunities for the Bank from 4,915 MWh to 4,859 MWh during the year under to build trust and establish rapport with existing and review. prospective stakeholders. GHG Emissions Environment Capital We are reporting our greenhouse gas (GHG) emissions DFCC Bank is a strong advocate of environment on a voluntary basis for the fourth consecutive year. The protection, and strives to minimise adverse impacts. boundary in the previous years was the 'DFCC Banking As a financial services provider, our impacts on the Business' which comprised DFCC Bank and DFCC environment are mostly indirect. However, we continually Vardhana Bank. Following the amalgamation of these two encourage our clients, employees and service providers to entities with effect from 1 October 2015 our reporting has adopt environmentally responsible practices. changed to DFCC Bank for the 12 months ending 31 December 2015 which includes 'pre and post-merger' The direct environmental impacts we address include DFCC Bank and the pre-merger DFCC Vardhana Bank Management Discussion and Analysis those associated with materials, energy, waste and for the nine months ending 31 October 2015. Hence, transportation. the physical boundary is effectively still the same for comparability, but the shift to a new timeframe brings Managing Resource Consumption about some overlaps over the previous accounting period.

We periodically review our resource consumption and As before, our calculations are based on the WBCSD/ look at innovative methods of conserving energy and WRI Greenhouse Gas Protocol Corporate Standard and providing business solutions in a proactive manner. The the most recent versions of applicable Calculation Tools. 3R concept – reduce, reuse, recycle – is strictly used when Our reporting under Scopes 1 and 2 is complete except procuring and managing resources. Our work processes for fugitive emissions from air conditioning plants, which are extensively automated to minimise paper usage are relatively insignificant. Reporting on Scope 3, which and all internal correspondence is electronic. Further, is optional, is selective based on significance and data most management meetings are conducted through availability. technological solutions which include video and voice conferencing. Waste paper and hazardous waste are sent to verified recyclers for disposal.

Carbon Footprint of the Bank

Scope Source GHG emissions

2015 2014/15

tCO2e % tCO2e % Value Creation and External Capital Formation Value

Scope 1 (direct) Stationary combustion 0.2 0 11.6 0.5 Mobile combustion 215 8.0 98.4 4.0 Total Scope 1 215.2 8.0 110.0 4.5 Scope 2 (indirect) Purchased electricity (CEB) 988.2 36.9 885.8 35.8 Total Scopes 1 and 2 1,203.4 44.9 995.8 40.3 Scope 3 (indirect) Stationary combustion 47.1 1.8 31.6 1.3 Purchased electricity (CEB) 1,423.6 53.1 1,419.2 57.3 Employee air travel 5.1 0.2 28.7 1.2 Total Scope 3 1,475.9 55.1 1,479.5 59.8 Social And Environmental Capital

Total Scopes 1, 2 and 3 2,679.3 100.0 2,475.4 100.0

Note: Totals may not tally exactly due to rounding

70 DFCC Bank PLC Annual Report 2015 The total GHG emissions during the period under review Staff Awareness amounted to 2,679 tonnes carbon dioxide equivalent DFCC Bank educates staff on concepts related to (tCO e), an increase of 8.2% over the previous year. 2 sustainability and environment protection via a module on the Bank’s e-learning portal as well as through regular Managing Our Environmental Impact articles featured in its weekly newsletter.

4,915 4,859 Supporting Environmental Initiatives 4,525 4,612 DFCC Bank plays an active role in supporting industry and Government initiatives related to protecting the environment. Further, employees were encouraged to 2,679 2,470 2,433 2,475 buy energy efficient products by arranging for discounted prices during the period. These products included solar net metering, solar water heaters and pureit water filters.

2012/13 2013/14 2014/15 2015 Initiatives in 2015

Total GHG emissions, tCO2e Electricity consumed, MWh Commemorating World Environment Day on 5 June 2015 A tree planting ceremony was held on 5 June 2015 to Management Discussion and Analysis Indirect GHG emissions from purchased electricity was commemorate World Environment Day at the DFCC by far the single largest contributor, accounting for 37% Bank Head Office. The two trees that will dominate the of the total in respect of Bank-owned premises (2014/15: porch area of the Head Office in the future were jointly 36%) and another 53% of the total in respect of rented planted by Mr Arjun Fernando – CEO and Mr Palitha premises (2014/15: 57%), bringing its total share to 90% Gamage – Executive Vice President. (2014/15: 93%). Global Climate March Given the nature of our business, the relatively high The Global Climate March was organised by ‘Earth proportion of electricity in our total GHG emissions is to Hour Sri Lanka’ in Colombo on 29 November 2015, and be expected. DFCC Bank also joined the Climate March in support of this initiative.

However, it is noteworthy that total electricity Energy Efficiency Programmes for SMEs consumption was well managed during the year, recording DFCC Bank facilitated a workshop for SMEs on a 1.1% reduction compared to the previous reporting ‘Financing Energy Efficiencies’ in partnership period. Nevertheless, this achievement was negated with the Deutsche Gesellschaft fur Internationale by a higher grid emission factor used for the period Zusammenarbeit (GIZ) in various parts of the country. under review, which in turn impacted on the total GHG This workshop was conducted for SME customers of emissions. the Bank and members of the Chamber of Commerce. In addition, as a part of this initiative, the Bank part- Integration with Business Processes financed Energy Audits on selected SMEs.

Being fully aware that economic development creates an Earth Hour 2015 impact on the environment and social aspects of life, we Creation and External Capital Formation Value DFCC Bank supports Earth Hour every year, which is a give high priority to environmental and social appraisal global event organised by the World Wildlife Fund. in making investment decisions and managing internal The programme aims to create awareness on climate operations. change by getting businesses and households to turn off non-essential lights and other electrical appliances Thus, we have established a Social & Environmental for one hour. Management System (SEMS) which ensures that the performance of existing operations and environmental/ The Bank supports this initiative by switching off social implications due to proposed projects are reviewed, all signboard lights across all branches, serving as and that subsequent monitoring is carried out to maintain an example to the wider community to adopt a more stipulated environmental standards. responsible attitude towards the environment. Social And Environmental Capital

DFCC Bank PLC Annual Report 2015 71 Awards and Accolades

Category Awards Area Institution Date Recognition Best Achiever Credit Administration Credit Information Bureau of May 2015 of the Year Sri Lanka (CRIB) Rating Award 2014

Merit Sri Lanka's First Grid Global Sustainable Finance June 2015 Connected Solar Power Conference, City of Karlsruhe, Outstanding Sustainable Project Germany Project Finance Award

Ten Best DFCC Bank Institute of Certified July 2015 Integrated Reports Annual Report 2014/15 Management Accountants of Sri Lanka Excellence in Integrated Reporting Award

Merit DFCC Bank Website LK Domain Registry August 2015

Best Corporate, Banking, Finance & Insurance

RIT WINNE ME R

Merit DFCC Bank Website LK Domain Registry August 2015

T W

A L I M

Best Tamil Website

Position-16 Corporate Business Today Magazine October 15

Business Today – Top 25

Gold DFCC Bank The Institute of Chartered December 2015 Annual Report 2014/15 Accountants of Sri Lanka

Financial Institution

72 DFCC Bank PLC Annual Report 2015 Integrated Risk Management

Risk Culture and Vision DFCC Bank adopts a comprehensive and well-structured C. Structure of ‘Three Lines of Defence’ in DFCC Bank mechanism for assessing, quantifying and managing for management of risks which consists of the Stewardship risk exposures which are material and relevant for its risk-assuming functions, independent risk management operations within a well-defined risk framework. The and compliance functions and the internal and external articulated set of limits explains the risk appetite of the audit functions. Bank for all material and relevant risk categories and D. Ensuring compliance with regulatory requirements the risk capital position. Risk management is integrated and other laws underpinning the risk management and with strategic, business and financial planning and business operations of DFCC Bank. customer/client transactions so that business and risk E. Centralised Integrated Risk Management Function management goals and responsibilities are aligned across which is independent from the risk assuming functions. the organisation. Risk is managed in a systematic manner by focusing on a group basis as well as managing risk F. Ensuring internal expertise, capabilities for risk across the enterprise, individual business units, products, management and ability to absorb unexpected losses services, transactions and across all geographic locations. when entering into new business, developing products or adopting new strategies. Credit risk amounts to the highest quantum of G. An assessment of risk exposures on an incremental quantifiable risk faced by the Bank based on the currently and portfolio basis when designing and redesigning effective quantification techniques. In DFCC Bank new products and processes before implementation. credit risk accounted for 92% of risk-weighted assets. Such analysis will include among other areas, business Additionally, the Bank takes necessary measures to opportunities, target customer requirements, core proactively manage operational and market risk as very competencies of the Bank and the competitors and important risk categories. Operational risk incidents financial viability. may be with high frequency but low impact or with low H. Adoption of the principle of risk-based pricing. frequency but high impact all of which warrant being However, ALCO may consider shifting to market- closely monitored and managed prudently. based pricing approach based on the prevailing market conditions and business strategy. Following broad risk categories are in focus: I. Ensuring that the Board approved target capital Business risk and strategic risk requirements, which are more stringent than the Credit risk including settlement risk in Treasury and minimum regulatory capital requirements, are not international operations and credit concentration risk compromised. For internal purposes, economic capital is quantified using Basel II recommended guidelines Interest rate risk in the banking book and the in the Internal Capital Adequacy Assessment Process trading book (ICAAP). A cushion for the regulatory capital over Liquidity risk and above the economic capital requirement is maintained to cover for stress losses or losses caused by Foreign currency risk unquantifiable risks such as strategic risk, liquidity and Equity prices risk reputation risk (risk categories which are not in Pillar I of Basel II). Under ICAAP capital is monitored on a Operational risk quarterly basis based on certain stress scenarios which Legal risk are subject to regular review based on macro-level anticipated developments. Compliance risk J. Aligning risk management strategy to DFCC Bank’s Reputational risk business strategy. K. Ensuring comprehensive, transparent and objective DFCC Bank’s general policies for risk management are risk disclosures to the Board, Corporate Management, outlined as follows: Regulators, Shareholders and Other Stakeholders. A. The Board of Directors’ responsibility for maintenance L. Continuous review of risk management framework and of a prudent integrated risk management function in ICAAP to align with Basel II and III recommendations DFCC Bank. and regulatory guidelines. B. Communication of the risk policies to all relevant employees of DFCC Bank.

DFCC Bank PLC Annual Report 2015 73 M. Maintenance of internal prudential risk limits based on The First Line of Defence involves the supervision the risk appetite of the DFCC Bank wherever relevant, and monitoring of risk management practices by the over and above the required regulatory limits. business managers, corporate management and executive N. Ensuring a prudent risk management culture within committees while discharging their responsibilities DFCC Bank. and accountability for day-to-day management of business operations. Independent risk monitoring, O. Periodic review of risk management policies

Stewardship validation, policy review and compliance by the IRMD, and practices to be in line with the developments the compliance function and periodic monitoring and in regulations, business environment and oversight by the Board Integrated Risk Management internal environment. Committee (BIRMC) constitute the Second Line of Defence. The Third Line of Defence is provided by the Risk Governance independent check and quality assurance of the internal Approach of ‘Three Lines of Defence’ and external audit functions. DFCC Bank advocates strong risk governance applied DFCC Bank exhibits an established risk management pragmatically and consistently with a strong emphasis culture with effective risk management approaches, on the concept of ‘Three Lines of Defence’. The systems and controls. Policy manuals, internal controls, governance structure encompasses accountability, segregation of duties, clearly demarcated authority limits responsibility, independence, reporting, communication and internal audit form a part of key risk management and transparency, both internally and with our relevant tools. The Group Chief Risk Officer (CRO), who is an external stakeholders. Executive Vice President functions on a Group basis with Integrated Risk Management direct access to the BIRMC.

Governance Structure for Risk Management in DFCC Bank The Concept of ‘Three Lines of Defence’ for Integrated Risk Management Function of DFCC Bank

First Line of Defence Second Line of Defence Third Line of Defence

Involvement by the Board, CEO, Senior Management Committees, Oversight by the BIRMC and Oversight by the Board’s accountability and responsibility of senior and middle management independent risk monitoring Audit Committee and supported by internal controls, governance structure, processes and compliance by IRM and independent check and and risk management. Compliance and Legal. quality assurance

Strategy, Performance and Policy, Monitoring and Independent Risk Management Oversight Assurance

Board of Directors

Chief Executive Officer

Senior Management Committees

Corporate/ Branch Accounting Compliance and Internal Audit Business Treasury Banking and Finance Legal Banking

Rehabilitation General IT HR and Operations Recoveries

International Personal Financial Credit Operations Services Administration

Branch Credit Management Integrated Risk External Audit & Quality Assurance Management

74 DFCC Bank PLC Annual Report 2015 Risk Policies and Guidelines Organisational Structure for Risk A set of structured policies and frameworks approved Management by the BIRMC and the Board forms a key part of the Board Integrated Risk Management risk governance structure. Integrated Risk Management Framework stipulates, in a broader aspect, the policies, Committee (BIRMC) guidelines and organisational structure for the The BIRMC is a Board sub-committee, which oversees the Stewardship management of overall risk exposures of DFCC Bank risk management function and the provisions of Basel II in an integrated approach. This framework defines risk and III implementation as required by the Regulator from integration and the aggregation approaches for different time to time in line with Board-approved policies and risk categories. In addition, separate policy frameworks strategies. The Central Bank has already implemented detail the practices for management of key specific the liquidity standards (Liquidity Coverage Ratio) under risk categories such as credit risk, market risk, credit Basel III while the minimum capital requirements concentration risk, liquidity risk, operational risk. These including Capital Conservation Buffer and Countercyclical policy frameworks are communicated across the Bank. Buffer have been envisaged to be implemented on a Respective staff members are required to adhere to the phased in basis starting from 2016. specifications of these frameworks when conducting business transactions. The BIRMC functions under the responsibilities set out in the Board-approved Charter for the BIRMC, which Risk Appetite incorporates corporate governance requirements for Licensed Commercial Banks issued by the Central Bank of

Risk appetite of DFCC Bank has been defined in the Integrated Risk Management Sri Lanka (CBSL). BIRMC sets the policy and operations Overall Risk Limits System. It consists of risk limits for bank-wide risk management including credit risk, arising from regulatory requirements, borrowing market risk, operational risk and liquidity risk. In addition covenants and internal limits for prudential purposes. to the Board representatives, the BIRMC consists of the The limit system forms a key part of the key risk indicators CEO and CRO as members. Further, Heads representing and covers key risk areas such as credit, interest rate, Credit, Finance, Treasury, Information Technology and liquidity, operational, foreign exchange, concentration and Operations attend the meeting as invitees. A summary of risk capital position amongst others. Lending limits cover the responsibilities and functions of the BIRMC is given the industry sectors and geographical regions as part of in the Report on the Board Integrated Risk Management the prudential internal limits. These limits are monitored Committee on page 109 of this Annual Report. monthly and quarterly on a ‘Traffic Light’ system. These risk appetite limits are reviewed at least annually in line with the risk management capacities, business Involvement of Management Committees opportunities, business strategy of the Bank and regulatory Management Committees such as Credit Committees(CC), specifications. Industry sector limits for the lending Asset and Liability Management Committee (ALCO), portfolio considers the inherent diversification within the Operational Risk Management Committee (ORMC), sub-sectors and the borrowers within broader sectors. Special Loan Review Committee (SLRC) and Impairment Assessment Committee (IAC) are included in the organisational structure for integrated risk management function. The responsibilities and tasks of these committees are stipulated in the Board approved charters and TORs and the membership of each committee is defined to bring an optimal balance between the business and risk management.

DFCC Bank PLC Annual Report 2015 75 Organisational Structure for Integrated Risk Management

Management Committees Board of Directors ALCO Credit Committee Operational Risk Management

Stewardship Board Integrated Risk Committee Management Committee IT Steering Committee [BIRMC] Impairment Special Loans Investment CEO Assessment Review Committee Committee Committee

Integrated Group Chief Risk Officer Risk Management Department Integrated Risk Management Risk Policy Risk Processes Market Risk, and Modelling/ and Controls Risk Quantification and Operational Risk Treasury Middle Office

Risk Policy Operational Credit Risk Risk Market Risk Treasury and Risk Risk Management Quantification Monitoring Middle Modelling Management Unit Unit Unit Office Unit Unit

Integrated Risk Management Department Impact of the Amalgamation of DFCC Bank (IRMD) and DFCC Vardhana Bank on the Risk IRMD is responsible for measuring and monitoring Management Function risk at operational levels on an ongoing basis to ensure As the risk management functions of DFCC Bank and compliance with the parameters set out by the Board/ DFCC Vardhana Bank were carried out on a group basis, BIRMC and other executive committees for carrying out but reported at entity level, the amalgamation did not the overall risk management function in DFCC Bank. have a material impact in terms of monitoring and It consists of six separate units such as Risk Policy and reporting. The amalgamation has enabled the Bank to Modelling, Credit Risk Management, Market Risk bring all customer databases onto a common IT platform. Monitoring, Operational Risk Management, Risk Quantification and Treasury Middle Office. IRMD is Key Developments in Risk Management involved with product or business strategy development or entering into new business lines from the initial design Function during the Period Under Review stage through input to the task/process from a risk During the period under review, several significant management perspective. Credit Risk Management Unit of initiatives were undertaken paying continuous the IRMD carries out an independent review of the credit emphasis on regulatory developments and reassessing ratings of all corporates over a minimum threshold and DFCC Bank’s existing risk management policies, also carries out random examination of other exposures. guidelines and practices for necessary improvements. Treasury Middle Office which is functionally segregated In addition to these regulatory specifications, changes in from the Treasury Department, directly reports to the business strategy, industry factors and international best Group CRO and monitors the Treasury-related market practices were also considered during this improvement risk limits. process. The following are the key initiatives during the

76 DFCC Bank PLC Annual Report 2015 period under review which brought improvements to the From 2014, interest margins came under pressure overall Integrated Risk Management Function: with the sharp drop in the market rates, where lending Prudential risk limits were reviewed in order to reflect the rates dropped faster than the deposits rates. Scenario current risk appetite of the Bank. analysis and simulations by the ALM unit to assess the expected behaviour of interest margins enabled ALCO Periodic validation of the credit rating models was to take proactive measures to manage the erosion carried out for better discriminatory power while new

of margins. DFCC Bank, being net asset sensitive to Stewardship scorecards were introduced for other categories. As interest rate changes was able to improve the interest part of establishing an independent model validation margins from mid 2015, with the marginal increase in process, the Bank has engaged the services of a foreign the market rates. risk management consultancy firm to obtain an independent validation for its corporate banking and IRMD continued to calculate Loss Ratios for key leasing rating models. lending products using historical recovery data in support of impairment assessment under IFRS. During The previous year saw the Credit portfolio 2014, a review on the Loss Ratio Methodology was segmentation which categorises the borrowers in a conducted in line with the historical evidence. The methodical manner being introduced across DFCC methodology was refined to incorporate the cash flow Bank and DFCC Vardhana Bank. During the concluding patterns and recovery experience of impaired assets of period, the segmentation process was pursued the Bank. further, ensuring that loan clients of the Banks, pre and post merger, are subjected to segmentation. This IRMD continued to support the pawning business of the categorisation is important in several aspects for Bank through timely studies, research and providing Integrated Risk Management credit risk management. Application of rating models necessary market information to the business. IRMD is customised for differing borrower segments while was actively engaged with the business of arriving at depth and breadth of credit appraisals can vary based advance rates and interest rates for pawning products on borrower segments. This borrower segmentation is a while managing the market and credit risk aspects. prerequisite for DFCC Bank to obtain regulatory capital As part of the risk management practices, the Bank advantage from lending to SME and retail segments. computed the key credit risk quantification parameters IRMD as an independent unit detached from the such as Probability of Default (PD), Loss Given business units, established close monitoring and watch Default (LGD) and the Loss Ratios which are defined listing of clients whereby arrears positions in loans and recommended under the Basel II and IFRS. The are closely monitored to identify recurring incidents, results indicated improvements in the credit risk possible trends inherent to business units/regions rating process, rating models, recovery process and the and/or industry segments with the view of minimising collateral quality in DFCC Bank. probable default risk incidents. DFCC Bank realigned the credit work flow in order to Risk reporting process was improved during the period ensure that every credit proposal sent for approval is as per the requirements stated in ICAAP framework. independently evaluated. The new work flow ensures that every credit proposal is independently evaluated Treasury Middle Office (TMO) uses a dashboard that by either the Quality Assurance Unit (QAU) or the facilitates the timely reporting of Treasury market IRMD based on the region/origination unit and positions independently to the management. During approving authority. the period, the dashboard was further improved with more and timely information including information on Having duly recognised the global trend on increasing Government security portfolios, stress testing results threats on system and information security, the Bank and limit positions. paid increased attention to IT systems security under its operational risk management practices. The Bank commenced computation and monitoring of the Liquidity Coverage Ratio (LCR) under Basel III as All the Board approved Charters and TORs were per the guidelines issued by the CBSL and implemented reviewed during the period especially considering the from April 2015. On a pre and post-amalgamation changes required at the time of the amalgamation. basis, DFCC Bank comfortably complied with the minimum requirements.

DFCC Bank PLC Annual Report 2015 77 DFCC Bank’s External Credit Rating Sri Lanka is the benchmark for the foreign currency rating of other institutions within the country. During the period under review, the DFCC Bank’s local currency rating of ‘AA-’ was maintained while Fitch Ratings has affirmed that the rating of DFCC Bank PLC is Credit Risk unaffected by the merger of DFCC Bank and DVB, because Credit risk is the risk of loss to the Bank if a customer DFCC Bank’s rating was already based on the consolidated or counterparty fails to meet its financial obligations in Stewardship credit profile. The increased significance of Group’s accordance with agreed terms and conditions. It arises commercial banking business segment is a result of its principally from On-Balance Sheet lending such as loans, business diversification strategy to bring earnings growth leases, trade finance and overdrafts as well as through while managing the excessive dependence on the project Off-Balance Sheet products such as guarantees and letters lending business. of credit. A deterioration of counterparty credit quality can lead to potential credit-related losses for a bank. The Bank also continued to maintain its foreign currency Credit risk is the largest component of the quantified credit rating of B+ (stable outlook) by Fitch Ratings and risk accounting for 92% of Risk-Weighted Assets at B (stable outlook) assigned by Standard & Poor’s. The DFCC Bank. sovereign rating of BB- assigned for the Government of

Product Composition Integrated Risk Management

0.56% Preference 14.6% shares unquoted Overdrafts

0.04% 11.3% Debenture loans Trade ﬁnance

1.2% Commercial papers 9.3% and asset back notes Leases

61.3% 0.1% Term loans Credit cards

0.9% Pawning 0.7% Staff loans

Term Loan Collateral Distribution Composition of the Lending Portfolio

5% Securities 10% Unsecured 60% Project Loans 30% Others 7% Movable property

40% 47% Other Term Loans Immovable property 1% Vehicles

78 DFCC Bank PLC Annual Report 2015 Credit Risk Management Process Movement of NPL at DFCC Bank 4.6 The DFCC Bank’s Credit Policies approved by the Board of 4.2 4.2 4.2 Directors define the credit objectives, outlining the credit 3.7 strategy to be adopted at the Bank. The policies are based on CBSL Direction on Integrated Risk Management, Basel Stewardship recommendations, business practices of DFCC Bank and 1.9 former DFCC Vardhana Bank and risk appetite of 1.6 1.7 1.7 1.4 DFCC Bank.

Credit risk management guidelines identify target markets Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 and industry sectors, define risk tolerance limits and recommend control measures to manage concentration Net NP Ratio (%) Gross NP Ratio (%) risk. Standardised formats and clearly documented processes and procedures ensure uniformity of practices across DFCC Bank. Along with the innumerable business opportunities that the larger merged entity is likely to get it is also likely to face increased credit risk events. The challenge of credit risk management is to maximise the risk adjusted rate

of return by maintaining the credit risk exposure within Integrated Risk Management acceptable levels.

Credit Credit Risk Management Framework and Credit Policy Risk Culture Governance structure and specific organisational structure for credit risk management

IRMD creates awareness of credit risk management through training programmes and experience sharing sessions

Credit Structured and standardised credit approval process as documented in credit manuals. The entire gamut of Approval activities involving credit appraisal, documentation, funds disbursement, monitoring performance, restructuring Process and recovery procedure are described in detail in these manuals which are reviewed annually

Standardised appraisal formats have been designed for each product type

Clearly defined credit workflow ensures segregation of duties among credit originators, independent review and approval authority

Delegation of Lending Authority sets out approval limits based on a combination of risk level, as defined by risk rating and security type, and loan size, proposed tenure, borrower and group exposure, IRM’s involvement in independent rating reviews of borrowers above a defined threshold for credit proposals

GCRO is a member of the Credit Committee, evaluates credit proposals from a risk perspective

Risk based pricing is practiced at DFCC Bank, any deviations being allowed only for funding through credit lines and where strong justification is made due to business development purposes

Control Negative sectors and special clearance sectors are identified based on the country’s laws and regulations, DFCC Measures Bank’s corporate values and policies and level of risk exposure. Negative sectors are recognised as industry sectors to which lending is disallowed while special clearance sectors are industry sectors and credit products to which DFCC Bank practices caution in lending

Exposure limits on single borrower, group exposure, and advisory limits on industry sectors, large group borrowers and selected geographical regions are set by the Board of Directors on recommendation of IRMD

DFCC Bank PLC Annual Report 2015 79 Credit Risk Timely identification of problem credits through product-wise and concentration analysis in relation to Management industries, specific products and geographical locations such as branches/regions/provinces

Industry reports/periodical economic analysis provide direction to lending units to identify profitable business sectors to grow the Group’s portfolio and to identify industry related risk sources and their impact

Stewardship Evaluation of new products from a credit risk perspective

Post sanction review of loans within stipulated time frame is in place in accordance with Loan Review Policy to ensure credit quality is maintained

Independent rating review by Credit Risk Management Unit of IRMD ensures proper identification of credit quality at the time of credit origination and annual credit reviews

Credit Risk Analysis of total portfolio in terms of NP movement, product distribution, industry sectors, Top 20 exposures, Monitoring borrower rating distribution, region-wise portfolio distribution, collateral distribution is carried out periodically and and reporting to BIRMC Reporting Watchlisting of significant arrears clients and receiving feedback from regional offices on recovery action taken to regularise the position

Monitoring of potentially high risk advances of significant value, booked at branches and new advances where

Integrated Risk Management IRMD has instructed the business units to exercise extra caution

Reporting quarterly to BIRMC on credit concentration risk positions with regards to regulatory limits such as single borrower and group exposure limits and internal advisory limits on industry sectors, large group borrowers and selected geographical regions as well as exposure based on credit rating grades

Monthly reporting on Top Key Risks to BIRMC and the Board

Credit Risk Borrower’s ability to pay is the primary source of recovery, whereas collateral acts as the secondary source in the Mitigation event borrower’s cash inflow is impaired

Market Risk Market risk is the possibility of losses arising from Treasury Middle Office (TMO) is segregated from changes in the value of a financial instrument as a result the Treasury Front Office (TFO) and Treasury Back of changes in market variables such as interest rates, Office (TBO) and reports to the CRO. The role of the exchange rates, equity prices and commodity prices. As TMO includes the day-to-day operational function of a financial intermediary the Bank is exposed primarily monitoring and controlling risks assumed in the TFO to the interest rate risk and as an authorised dealer, and TBO based on clearly defined limits and controls. commercial banking business is exposed to the exchange Being independent of the dealers, the TMO provides an rate risk on foreign currency portfolio positions. objective view on Front Office activities and monitors the limits. TMO has the authority to escalate limit excesses as Market risk could impact DFCC Bank mainly in two ways; per delegation of authority to the relevant hierarchy. viz., loss of cash flows or loss of economic value. Market The Treasury information management system maintained risk can be looked at in two dimensions; as traded market by TMO includes a dashboard that facilitates the timely risk, which is associated with the trading book and reporting of Treasury market positions independently non-traded market risk, which is associated with the to management. banking book. The strengthened Treasury and market risk management The ALCO oversees the management of both the practices contribute positively to the overall risk traded and the non-traded market risks. The Treasury rating of the Group and efficiency in the overall manages the foreign exchange risk with permitted Treasury operations. hedging mechanisms. Trends in relevant local as well as international markets are analysed and reported by IRMD TBO which is reporting to Head of Finance is responsible and the Treasury to ALCO and BIRMC. The market risks for accounting, processing settlements and valuations are controlled through various limits. These limits are of all Treasury products and transactions. The Treasury stipulated by the Group’s Investment Policy, Treasury transactions related information is independently Manual and Policy, and limits system of DFCC Bank. submitted by TBO to relevant authorities.

80 DFCC Bank PLC Annual Report 2015 Interest Rate Risk Indirect Exposures to Commodity Prices Interest rate risk can be termed as the risk of loss in Risk – Gold Prices the net interest income (earnings perspective) or the DFCC Bank’s pawning portfolio amounted to net worth (economic value perspective) due to adverse LKR 1,532 million at 31 December 2015, which was only changes in the market interest rates. ALM unit routinely 0.6% of total assets. assesses the Bank’s asset and liability profile in terms of Stewardship interest rate risk and the trends in costs and yields are Equity Prices Risk reported to ALCO for necessary realignment in the asset and liability structure and the pricing mechanism. ALM Equity prices risk is the risk of losses in the performed a number of scenario analysis and simulations marked-to-market equity portfolio, due to the decline in on the effect of interest rate changes to the Bank’s interest the market prices. The direct exposure to the equity prices income during the period to facilitate pricing decisions risk by the Bank arises from the trading and available-for- taken at ALCO. The ALM function is planned to be sale equity portfolios. Indirect exposure to equity prices transferred to the Finance Department subsequent to the risk arises through the margin lending portfolio of DFCC amalgamation of the Banks. Bank in the event of crystallisation of credit risk of margin borrowers. The Investment Committee of DFCC Bank is Foreign Exchange Rate Risk responsible for managing equity portfolio in line with the policies and the guidelines set out by the Board and the Foreign exchange rate risk can be termed as possibility BIRMC. Allocation of limits for equities taken as collateral of adverse impact to the Group’s capital or earnings due for loans and margin trading activities of customers to fluctuations in the market exchange rates. This risk and for our investment/trading portfolio forms part of Integrated Risk Management arises due to holding of assets or liabilities in foreign the tools for managing the equity portfolio. Rigorous currencies. Net Open Position (NOP) on foreign currency appraisal, proper market timing and close monitoring indicates the level of net foreign currency exposure that of the portfolio performance in relation to the market has been assumed by the Bank at a point of time. This performance facilitate the management of the equity figure represents the unhedged position of the Bank portfolio within the framework of investment strategy in all the foreign currencies. The Bank accrues foreign and the risk policy. DFCC Bank’s long-term investment currency exposure through purchase and sale of foreign horizon for equity investments smoothens out the adverse currency from customers in its commercial banking and implications of the short-term market volatilities while international trade business and through borrowings and enabling the Group to reap optimal benefits from the lendings in foreign currency. selected securities in the portfolio. Part of the Bank’s investment portfolio is also outsourced to well established DFCC Bank manages the foreign currency risk using a set and reputed investment management companies through of tools which includes limits for net unhedged exposures, a stringent evaluation process. hedging through forward contracts and hedging through creating offsetting foreign currency asset or liability. TMO The indirect exposure to equity prices risk arising from monitors the end of the day NOP as calculated by the TBO, margin lending of DFCC Bank is managed through the and the NOP movement in relation to the spot movement. specific margin trading policy framework under the The daily inter-bank foreign currency transactions are supervision of the Credit Committee. Each margin lending monitored for consistency with preset limits and any customer is carefully appraised for his track record with excesses are reported to the management and to BIRMC. the Bank and the financial strength to meet margin calls, The unhedged foreign currency exposure of the Bank is if needed, while the equity exposure arising in terms of closely monitored and necessary steps are taken to hedge collateral is assessed under a structured process set out in accordance with the market volatilities. in the Margin Trading Policy before the origination of the facility. Fundamentals of the lodged shares, market In October 2013, the Bank issued its debut foreign liquidity of the share and the diversification of the currency international bond of USD 100 million with an portfolio are considered as part of the assessment. Margin original maturity of 5 years. The Bank actively manages lending is governed by proper documentation and daily the exchange risk arising from this transaction. monitoring and management reporting as specified in the Margin Trading Policy.

DFCC Bank PLC Annual Report 2015 81 Liquidity Risk In October 2014, the Central Bank issued consultative guidelines for implementation of the minimum liquidity Liquidity risk is the risk of not having sufficient funds standards (Liquidity Coverage Ratio) under Basel III, to meet financial obligations in time and in full, at a which was implemented from April 2015. Accordingly, reasonable cost. Liquidity risk arises from mismatched banks will be required to maintain an adequate level of maturities of assets and liabilities. DFCC Bank has a well unencumbered High Quality Liquid Assets (HQLAs) that set out framework for liquidity risk management and a

Stewardship can be easily and readily converted into cash to meet contingency funding plan. The liquidity risk management their liquidity needs for a 30 calendar day time horizon process includes regular analysis and monitoring of the under a significantly severe liquidity stress scenario. The liquidity position by ALCO and maintenance of market computations of LCR performed for DFCC Bank, DVB and accessibility. Regular cash flow forecasts, liquidity ratios at Group level indicated that the Banks were comfortably and maturity gap analysis are used as analytical tools by in compliance with the Basel III minimum requirements the ALCO. Any negative mismatches up to the next quarter having sufficient High Quality Liquid Assets well in excess revealed through cash flow gap statements are matched of the minimum requirements specified by the Central against cash availability either through incremental Bank (The minimum requirement is 60% of HQLAs to be deposits or committed lines of credit. Whilst comfortably maintained over the immediate 30-day net cash outflow meeting the regulatory requirements relating to liquidity, for the year 2015). for internal monitoring purposes, the Bank takes into consideration the liquidity of each eligible instrument relating to the market at a given point in time as well as Operational Risk undrawn commitments to borrowers when stress testing Operational risk is defined as the potential risk of loss Integrated Risk Management its liquidity position. The maintenance of a strong credit resulting from inadequate or failed internal processes, rating [AA- (LKA)] and reputation in the market enable people, systems and external events. It covers a wide area the DFCC Bank to access domestic wholesale funds. For ranging from losses arising from fraudulent activities, short-term liquidity support the Bank also has access to unauthorised trade or account activities, human errors, the money market at competitive rates. omissions, inefficiencies in reporting, technology failures or from external events such as natural disasters, The CBSL Direction No. 7 of 2011 specifies that liquidity terrorism, theft or even political instability. The objective can be measured through stock or flow approaches. of DFCC Bank is to manage, control and mitigate Under the stock approach, liquidity is measured in terms operational risk in a cost effective manner consistent of key ratios which portray the liquidity in the balance with the Bank’s risk appetite. The Bank has ensured an sheet. Under the flow approach banks should prepare a escalated level of rigor in operational risk management statement of maturities of assets and liabilities placing all approaches for sensitive areas of its operations. cash inflows and outflows in the time bands according to their residual time to maturity in major currencies. DFCC The Operational Risk Management Committee (ORMC) Bank primarily used the flow approach in measuring and oversees and directs the management of operational risk managing liquidity risk, until amalgamation while DVB of the Bank at an operational level with facilitation from used both the flow and stock approaches and the Bank will the Operational Risk Management Unit of the IRMD. continue to adopt both the methods in combination Active representation of the relevant departments and to assess liquidity risk in the future. In line with the units of the Bank has been ensured in the process of long-term project financing business, the Bank focuses on operational risk management through the Operational long-term funding through dedicated credit lines while Risk Coordination Officers. its commercial banking business focuses on Current and Savings Accounts (CASA) and Term Deposits as the key Segregation of duties with demarcated authority limits, source of funding for its lending. internal and external audit, strict monitoring facilitated by the technology platform and back-up facilities for The structure and procedures for asset and liability information are the fundamental tools of operational risk management at the Bank have been clearly set out in the management. Audit findings and management responses Board approved ALCO Charter, which is reviewed on an are forwarded to the Board’s Audit sub-committee for annual basis. their examination. Effective internal control systems, supervision by the Board, senior management and the line managers forms part of ‘First Line of Defence’ for operational risk management at DFCC Bank. The Bank

82 DFCC Bank PLC Annual Report 2015 demands high level of technical skills, professionalism and training, a specific policy was established to take action in ethical conduct from its staff and these serve as insulators case of an event which hinders the reputation. DFCC Bank for many operational risk factors. has zero tolerance for knowingly engaging in any business, activity or association where foreseeable reputational The Bank’s Business Continuity Plan is in place as a damage has not been considered and mitigated. While contingency control measure and deals with natural/other there is a level of risk in every aspect of business activity,

catastrophes. The Bank carries out at least two disaster appropriate consideration of potential harm to the Stewardship recovery drills every year. The loss of physical assets is Bank’s good name is a part of all business decisions. The mitigated through insurance. complaints management process and the Whistle Blowing process of the Bank include a set of key tools to recognise The following are other key aspects of the operational risk and manage reputation risk. management process in DFCC Bank:

Monitoring of the Key Risk Indicators (KRIs) for the Business Risk departments/functions under the defined threshold Business risk is the risk of deterioration in earnings due limits using a traffic light system. to the loss of market share, changes in the cost structure Operational risk incident reporting system and the and adverse changes in industry or macroeconomic independent analysis of the incidents by IRMD, and conditions. The Bank’s medium term strategic plan recognising necessary improvements in the systems, and annual business plan form a strategic road map processes and procedures. for sustainable growth. Continuous competitor and customer analysis, and monitoring of the macroeconomic Trend analysis on operational risk incidents and review environment enable the Bank to formulate its strategies Integrated Risk Management at the ORMC and the BIRMC. for growth and business risk management. The processes Review of downtime of the critical systems and assess such as Planning, ALM, IT and Product Development the reasons. The necessary risk and business impact is in coordination with business functions facilitate the evaluated. Rectification measures are introduced once management of business risk through recognition, the tolerance levels are compromised. measurement and implementation of tasks. Business risk relating to customers is assessed in the credit rating Review of HR attrition and exit interview comments in process and is priced accordingly. detail including a trend analysis with the involvement of the IRMD. The key findings of the analysis Legal Risk are evaluated at the ORMC and the BIRMC in an operational risk perspective. Legal risk arises from unenforceable transactions in a court of law or the failure to successfully defend legal Establishment of Whistle Blowing process. action instituted against the Bank. Legal risk management Establishment of the complaint management process commences from prior analysis, and a thorough of the Bank under the Board approved complaints understanding of, and adherence to, related legislation by management policy. IRMD periodically evaluates on the the staff. Necessary precautions are taken at the design effectiveness of the complaints management process stage of transactions to minimise legal risk exposure. and reports to the ORMC and the BIRMC. In the event of a legal risk factor, the legal unit of DFCC Bank takes immediate action to address and mitigate these risks. External legal advice is obtained or Counsel Reputation Risk retained when required. Reputation risk is the risk of losing public trust or tarnishing of the DFCC Bank’s image in the public eye. Compliance Risk It could arise from environmental, social, regulatory Compliance risk can be termed as the risk of legal or or operational risk factors. Events that could lead to regulatory sanctions, financial losses or damages to the reputation risk events are closely monitored, utilising reputation of the Bank as a result of its failure to comply an early warning system that includes inputs from with all applicable laws, regulations, Codes of Conduct frontline staff, media reports and internal and external and Standards of good practice. The Bank ensures market survey results. Though all policies and standards the effective compliance policies and procedures are relating to the conduct of the Bank’s business have followed and appropriate corrective actions are taken to been promulgated through internal communication and rectify any breaches of laws, rules and standards if and

DFCC Bank PLC Annual Report 2015 83 when identified. A robust compliance culture has been The DFCC Group’s Risk Capital Position and established within DFCC Bank with processes and work Financial Flexibility flows designed with the required checks and balances to facilitate compliance. The compliance function works The Group adopts a proactive approach to ensure closely with the business and operational units to satisfactory risk capital level throughout its operations. ensure the consistent management of compliance risk. In line with its historical practice and the capital targets, the Group aims to maintain its risk capital position

Stewardship Compliance is a key area of focus during the process of new product development and review. Head of compliance higher than the regulatory minimum requirements of submits quarterly reports on the compliance status to the 5% for Tier I and 10% for Total Capital. The risk capital BIRMC and the Board to enable oversight to be exercised position of the DFCC Group demonstrates the following with the added safeguard of being subject to internal key features: audit. A culture of compliance permeates all levels of DFCC Bank. DFCC Group Capital Adequacy Ratios

Under Simple Approaches of Basel II Anti-Money Laundering (AML)/Combating

Terrorist Financing (CTF) Parameter Tier I Total Capital % % In response to international best practices, global standards on AML and CTF, Sri Lanka has enacted Minimum regulatory laws relating to AML and CTF. Further, the Financial requirement 5 10 Intelligence Unit, under the purview of the Central Bank, Integrated Risk Management DFCC Group capital position has issued rules for Know Your Customer (KYC), and Customer Due Diligence (CDD) to identify and report - 31 March 2010 26.2 23.1 suspicious transactions. DFCC Bank has taken necessary - 31 March 2011 28.0 26.9 measures to implement these regulatory and legislative requirements for AML and CTF. The steps taken in this - 31 March 2012 21.0 19.9 respect include customer identification and verification, - 31 March 2013 20.8 19.3 maintenance of records, ascertaining sources of funds, monitoring and maintenance of AML/CTF programmes. - 31 March 2014 18.7 17.2 The customers of DFCC Bank are subject to KYC/CDD - 31 March 2015 17.7 16.6 measures. - 31 December 2015 15.4 15.3 Business Continuity Management A. DFCC Group maintains a healthy risk capital position The Business Continuity Plan (BCP) of DFCC Bank based on the local regulatory guidelines. The capital ensures timely recovery of critical operations that are position as at 31 December 2015, demonstrates a required to meet stakeholder needs based on identified cushion of about 10.39% and 5.32%, respectively, for disruptions categorised into various severity levels. BCP Tier I and total capital over the minimum regulatory has been designed to minimise risk to human resources requirements. and to enable the resumption of critical operations within reasonable time frames with minimum disruption B. The Group’s Tier I capital is higher than the total to customer service and payment settlement systems. capital ratio, which reflects that its capital base mainly The BCP site, which is located in a suburb of Colombo, consists of equity capital, which has the higher risk is prepared in line with the BCP Guidelines issued by absorption capacity. the Central Bank and is tested regularly to establish its C. Higher Tier I capital ratio, relative to the total capital effectiveness. Training is carried out to ensure that all ratio, ensures that Group carries flexibility for capital staff is fully aware of their role within the BCP. augmentation through mobilising qualifying Tier II capital, without a fresh issue of shares and without adversely impacting ROE, in case of a future portfolio growth or new business diversification.

84 DFCC Bank PLC Annual Report 2015 Capital Adequacy Management Capital adequacy measures the adequacy of the Group’s aggregate capital in relation to the risk it assumes. The capital adequacy of the Group has been computed under the following approaches of Basel II which are currently effective in the local banking industry. Stewardship Standardised approach for credit risk

Standardised approach for market risk

Basic Indicator approach for operational risk

Graph below shows DFCC Group’s capital allocation and available capital buffer as at 31 December 2015, based on the quantified risk as per the applicable regulatory guidelines. Out of the regulatory risk capital (total capital) available as at 31 December, credit risk accounts to 59.8% of the total capital while the available capital buffer is 34.7%.

Capital Distribution Integrated Risk Management

59.8% Capital allocation for Credit Risk 34.7% Capital Cushion

5.1% Capital allocation for Operational Risk 0.4% Capital allocation for Market Risk

Risk-Weighted Assets of DFCC Bank on a Solo and a Group Basis

Risk-weighted assets (quantified risk category as per the CBSL Guidelines) 31 December 2015 31 March 2015 31 March 2014

Bank Group Bank Group Bank Group Credit risk 169,201 169,547 86,158 150,641 73,852 125,745 Market risk 1,218 1,218 2,655 2,720 2,896 3,069 Operational risk 14,395 14,385 7,637 14,034 7,575 13,172 Total 184,814 185,150 96,450 167,395 84,323 141,986

DFCC Bank PLC Annual Report 2015 85 Further, DFCC Bank develops an ICAAP report which is D. CBSL Direction No. 5 of 2013 – Supervisory Review in compliance with Pillar II of the Basel II framework. Process (Pillar 2 of Basel II) for Licensed Commercial It focuses on formulating a mechanism to assess the Banks and the Licensed Specialised Banks. Bank’s capital requirement covering all relevant risk and stress conditions in a futuristic perspective in line E. CBSL Guidelines issued on 31 March 2014 on with the level of assumed risk exposures through its quantification of operational risk under the Standardised Approach of Basel II. Under this

Stewardship business operations. This ICAAP formulates the Bank’s capital targets, capital management objectives and capital approach, the gross income of the banks will be augmentation plans. It evaluates the capital adequacy recognised in 8 different business lines and different covering both Pillar I and Pillar II risks as well. alpha factors (prescribed by the Basel II) will be applicable to quantify the operational risk exposures.

Financial Flexibility in the DFCC Group’s F. In October 2014, CBSL issued consultative guidelines Capital Structure for implementation of the minimum liquidity standards (Liquidity Coverage Ratio to be maintained Apart from the strong capital position reported on-balance by the banks) under Basel III. These guidelines were sheet, the Group maintains a financial flexibility through implemented from April 2015 through the CBSL the stored value in it its equity investment portfolio. Direction No 1 of 2015 on Liquidity Coverage Ratio The unrealised capital gain of the listed equity portfolio under Basel III Liquidity Standards for LCBs and LSBs is included in the Fair Value Reserve and is currently not taken into consideration in the capital adequacy G. Guidelines on Stress Testing of Licensed Commercial computation based on regulatory specifications. Integrated Risk Management Banks and Licensed Specialised Banks were released by Bank Supervision Department in September 2014. The Local Supervisory Background new direction has given recommendations for various sensitivity and stress test scenarios to be carried out to Banking Supervision Department of the Central Bank of determine credit, exchange rate, interest rate, equity, Sri Lanka (CBSL) has taken steps to strengthen the risk liquidity, operational and other risks. management aspects of the licensed banks in Sri Lanka by enforcing certain regulations, specifications, guidelines H. The regulation issued by CBSL in December 2014, and recommendations from time to time, which are in requires LCBs and LSBs to increase their Core capital line with the Basel II and Basel III recommendations. The (equity capital) to LKR 10 billion and LKR 5 billion following regulatory specifications are particularly crucial; respectively, commencing 1 January 2016. This new CBSL direction will have no impact on DFCC Group. A. CBSL Direction No. 10 of 2007 on Maintenance of capital adequacy ratios. In this Direction, specifications I. Further consultative guidelines on implementation of were issued for the licensed banks to quantify and Basel III, Minimum Capital Requirements and Leverage maintain the capital adequacy in line with the Basel II Ratio have been issued in June 2015. This Consultation Standardized Approach for credit risk and market risk Paper provided the proposed framework to implement and Basic Indicator Approach for operational risk. the Basel III Minimum Capital Requirements across the banking sector with a view to further improving the B. CBSL Direction No. 11 of 2007 on the Corporate quantity and quality of capital. Governance of Licensed Banks in Sri Lanka. In this Direction, the licensed banks are required to form a Board subcommittee on Integrated Risk Management with a defined scope of responsibilities.

C. CBSL Direction No. 7 of 2011 on Integrated Risk Management Frameworks of Licensed Banks issued in October 2011. This specifies the requirement for Integrated Risk Management Framework for the banks and issued specific guidelines for the structure, quantification and management of risk on an integrated approach.

86 DFCC Bank PLC Annual Report 2015 The bank has complied with all the currently applicable risk related regulatory requirements in addition to the internal requirements as given in the table below:

Risk Category Impact Key Risk Indicators Statutory/ Position as at Internal Limit 31.12.2015

Integrated Risk An adequate level of Capital Adequacy Ratio Regulatory Complied

Management capital is required to (Core capital as a percentage of total risk-weighted asset) Stewardship absorb unexpected losses without Capital Adequacy Ratio Regulatory Complied affecting the Bank’s (Total capital as a percentage of total risk-weighted asset) stability. (Total capital as a Capital Adequacy Ratio Internal Complied percentage of total (Tier I as a percentage of total risk-weighted assets) risk-weighted assets) (Total capital as a percentage of total risk-weighted assets)

Concentration/ When the credit Single Borrower Limit – Individual Regulatory Complied Credit Risk portfolio is (Amount of accommodation granted to any single company, public Management concentrated corporation, firm, association of persons or an individual/capital base) to a few borrowers or a few groups of Single Borrower limit – Group Regulatory Complied borrowers with large Aggregate large accommodation (Sum of total of the outstanding Regulatory Complied exposures,there amount of accommodation granted to customers whose is a high risk of a accommodation exceeds 15% of the capital base/outstanding substantial loss due

amount of accommodation granted by the Bank to total customers Integrated Risk Management to failure of one excluding the Government of Sri Lanka) such borrower. Aggregate limits for related parties (Accommodation to related Internal Complied parties as per the CBSL Direction/Regulatory Capital) Exposure to agriculture sector (As per the CBSL Direction) Regulatory Complied Exposure to each industry sector (On-Balance Sheet exposure to Internal Complied each industry as a percentage of total Lending Portfolio) Exposure to selected regions (On-Balance Sheet exposure to the Internal Complied regions as a percentage of the Total Lending Portfolio) Leases Portfolio (On-Balance Sheet exposure to the leasing Internal Complied product as a percentage of Total Lending Portfolio Plus Securities Portfolio) Exposure to GOSL Internal Complied Non-Performing Ratio Internal Complied Industry HHI Internal Complied Maximum expected loss limits for each product line Internal Complied Loan & OD – Exposure in BB and below grades Internal Complied Loan & OD – Exposure in B and below grades Internal Complied Leasing – Exposure in BB and below grades Internal Complied Leasing – Exposure in B and below grades Internal Complied Target Rating-wise PDs and provisions Internal Complied Margin trading (Aggregate exposure of margin loans extended/ Internal Complied total loans and advances)

Liquidity Risk If adequate liquidity Liquid Asset Ratio for DBU (Average Monthly liquid assets/ Regulatory Complied Management is not maintained, total monthly liabilities) the Bank will be unable to fund the Bank’s commitments and Liquid Asset Ratio for FCBU Regulatory Complied planned assets growth without incurring costs Liquidity Coverage Ratio (All Currencies & Rupee only) Regulatory Complied or losses.

DFCC Bank PLC Annual Report 2015 87 Risk Category Impact Key Risk Indicators Statutory/ Position as at Internal Limit 31.12.2015

Market Risk Forex Net Open Long Position Regulatory Complied Management Forex Net Open Short Position Regulatory Complied Limit for counter party Off-Balance Sheet Market Risk Internal Complied

Stewardship Net interbank borrowing exposure Internal Complied Limit for settlement risk arising from market risk Internal Complied

Max holding period for trading portfolio Internal Complied

Treasury trading securities portfolio Internal Complied

Investment Equity exposure – Individual (Equity Investment in a private OR Regulatory Complied Risk public company/Capital fund of the Bank) Equity exposure – Individual (Equity investment in a private OR Regulatory Complied public company/Paid-up capital of the Company) Aggregate equity exposure in public companies (Aggregate amount Regulatory Complied of equity investments in public companies/capital fund of the Bank) Aggregate equity exposure in private companies (Aggregate amount Regulatory Complied of equity investments in private companies/capital fund of the Bank) Aggregate equity exposure in private and public companies Regulatory Complied

Integrated Risk Management (Total investments in private and public companies/capital fund of the bank) Equity exposure (Equity exposure as a percentage of Total Lending Internal Complied Portfolio plus Securities Portfolio) Equity exposure in each sector Internal Complied Single equity exposure Internal Complied Operational Cost to income ratio (Solo) – Operational Cost/Operational Income Internal Complied Efficiency

Operational Adequately placed Reputation risk of the Bank and Group (Zero risk appetite) Internal Complied Risk policies, processes, and systems will ensure Significant regulatory breaches (Zero risk appetite) Internal Complied and mitigate against Inability to recover from business disruptions over and above the Internal Complied excessive risks arising. Recovery Time Objectives (RTO) as defined in the BCP of the Bank This will result in the (Zero risk appetite) stability of the Bank. Mis-selling of financial products and services Internal Complied (Zero risk appetite) Failure to undertake risk-based customer due diligence Internal Complied (Zero risk appetite) Internal fraud (Zero tolerance for losses due to acts of a type Internal Complied intended to defraud, misappropriate property or circumvent regulations, the law or bank policy, excluding diversity/ discrimination events, which involves at least one internal party). External fraud (Very low appetite for losses due to act of a type Internal Complied intended to defraud misappropriate property or circumvent laws, by a third party) Employee practices and workplace safety (Zero appetite for losses Internal Complied arising from acts inconsistent with employment, health or safety laws or agreements from payment of personal injury claims or from diversity/discrimination events) Client products and business practices (Zero risk appetite for Internal Complied losses arising from an unintentional or negligent failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements) or from the nature or design of a product). Damage to physical assets (Very low appetite for loss arising Internal Complied from loss or damage to physical assets from natural disaster or other events). Business disruption and systems failures (Very low appetite for Internal Complied business disruptions/system failures for more than 30 minutes during service hours). Execution, delivery and process management (Very low appetite for Internal Complied losses from failed transaction processing or process management).

88 DFCC Bank PLC Annual Report 2015 Corporate Governance

Good corporate governance is a mechanism that Our Goals of Good Corporate Governance harmonises the interests of a wide range of stakeholders of an institution, while contributing to sustainable growth Stewardship by attracting outside sources of capital. The corporate Integrated governance practices of DFCC Bank PLC (Bank) are Nominations Risk in accordance with the Board-approved Corporate Committee Management Creation of Committee Governance Charter of the Bank. wealth Credit Restructure Committee The Bank practices high standards of corporate Human governance based on the OECD principles of good Resources and governance. OECD principles of good governance are Credit Approval Remuneration Sustainable based on the following six guidelines: Committee Committee growth Promoting transparency, being consistent with laws and clearly articulating division of responsibilities Audit Board of Committee Protecting and facilitating the exercise of Directors shareholder rights Adequate and timely Equitable treatment of all shareholders Chief disclosures and transparency Recognising the rights of stakeholders and encouraging Executive co-operation between stakeholders in creating wealth and sustainability Corporate Timely and accurate disclosure on all material matters Management Protection of regarding the entity including financial situation, Investment stakeholder performance, ownership and governance Committee rights

Ensuring the strategic guidance of the entity, Asset Quality effective monitoring of management of the Board, Review Committee and the Board’s accountability to the entity and the Special Loan Equal Review shareholders treatment of Committee shareholders Planning The key corporate governance practices of the Bank are Committee given in this Report with specific disclosures relating to Credit the status of compliance with the mandatory requirements Committee IT Steering Compliance with of Direction No. 11 of 2007 of the Central Bank of laws, regulations Committee and ethical Sri Lanka (as amended). In view of the application of Asset Liability standards these mandatory regulatory provisions and disclosures Committee that are required to be made, the Colombo Stock Exchange has exempted licensed banks from the application of Section 7.10 of the Listing Rules of the Colombo Stock Exchange relating to corporate governance.

Board Committees as at 31 December 2015 Board Committees

Audit Human Resources Nominations Integrated Credit Approval Credit Committee and Remuneration Committee Risk Management Committee Restructure Committee Committee Committee*

*The Credit Restructure Committee approves papers by circulation.

DFCC Bank PLC Annual Report 2015 89 Attendance

Attendance of Directors at Meetings

Name of Director Main Board Audit Human Nominations Integrated Risk Credit Approval Committee Resources & Committee Management Committee Remuneration Committee Committee Stewardship Total No. of Meetings 13 12 3 4 3 6 K D N R Asoka 10/10 8/10 A W Atukorala 11/13 3/3 3/3 4/5 K P Cooray 13/13 3/3 3/3 G K Dayasri 3/5 T Dharmarajah 13/13 11/12 2/2 6/6 A R Fernando 12/13 3/3 P M B Fernando 13/13 12/12 4/4 2/3

Corporate Governance A N Fonseka 3/3 0/1 C R Jansz 13/13 3/3 4/4 3/3 6/6 J E A Perumal 1/1 1/1 Ms V J Senaratne 8/9 2/3 L H A L Silva 3/3 Ms S R Thambiayah 11/13 1/2 1/1 L N de S Wijeyeratne 2/3 4/5 1/1

Shareholder Rights The basic rights of shareholders include the ability to Bank’s shares by employees and Directors. As a general (a) transfer shares freely, (b) have access to financial and rule, the period commencing two weeks after the end of other relevant information about the entity on a regular each quarter up until three market days after the financial and timely basis, (c) effectively participate in shareholder information is released, is treated as a closed period. meetings, (d) appoint Directors and Auditors, and Procedures are in place to detect any violations. (e) receive equitable treatment relating to the type of shares owned. The shares of the Bank are freely During the period under review, the Bank has shared a transferable through the Colombo Stock Exchange but reasonable portion of its profit with shareholders in the subject to limitations stated in the Articles of Association form of a dividend while retaining the balance to support its of the Bank and the Banking Act. growth and development.

The Board approved Corporate Communications Policy All shareholders of the Bank are treated equally on the ensures that information relating to the financial basis of one vote per ordinary share. The Bank has not performance and the progress of the Bank is made issued any non-voting ordinary shares or preference shares. available to shareholders through timely disclosures made to the Colombo Stock Exchange (CSE). The Annual Report Annual General Meeting contains a comprehensive review of performance as well as other information of relevance to the other stakeholders The Annual General Meeting of the Bank is held within a apart from reporting on the financial condition of the period of one year from the date of the previous meeting Bank and the Group. All important information is given after giving adequate notice to shareholders as required publicity through the press and electronic media and by the Articles of Association. The Annual Report and posted on the Bank’s website. Notice of Meeting are sent to all shareholders in order to enable effective shareholder participation at the meeting. The Bank has procedures to promptly disseminate Shareholders have the opportunity to obtain the Annual price sensitive information and trading in shares by the Report as an electronic or printed document. Extraordinary Directors to the CSE as required by the Listing Rules. General Meetings are held to obtain shareholder approval In instances where this is not possible, the Head of on matters that require such approval. Compliance advises closed periods for the trading in

90 DFCC Bank PLC Annual Report 2015 Annual Corporate Governance Report for the Period Ended 31 December 2015 Published in Terms of Section 3 (1) (xvi) of the Banking Act Direction No. 11 of 2007

Rule Governance Principle Compliance Remarks

3.1 Responsibilities of the Board

3.1 (i) Safety and soundness of Stewardship the Bank The Board has strengthened the safety and soundness of the Bank through the implementation of the following:

(a) Strategic objectives and Compliant The corporate values approved by the Board are posted on the internal web and corporate values all employees are guided by these values.

(b) Overall business strategy Compliant The Bank’s strategic plan for the medium term was approved by the Board in May 2015. The Board engages in the strategic planning and control of the Bank by overseeing the formulation of business objectives and targets and assessing Corporate Governance risks by engaging qualified and experienced personnel, delegating them with the authority for conducting operational activities and monitoring the performance through a formal reporting process.

(c) Principal Risks Compliant The identification of Principal Risks, approving of overall Risk Policy and Risk Appetite are carried out through the Board Integrated Risk Management Committee and these are reviewed annually.

(d) Communication with Compliant The Board approved Corporate Communications Policy ensures that information stakeholders is made available to shareholders and other stakeholders through timely disclosures made to the Colombo Stock Exchange (CSE), publicity through press and electronic media and posts on the Bank’s website. The Bank has an internally-developed Code of Conduct for its employees which is posted on the internal web and is accessible by all employees.

(e) Bank’s internal control Compliant The Audit Committee assists the Board in reviewing and evaluating the and management effectiveness of the internal control system including the controls over financial information systems reporting of the Bank. Internal Audit carries out periodic reviews to ensure that the internal control systems are functioning as appropriate. The Report by the Board of Directors on internal control over financial reporting is given on page 110 The Independent Assurance Report by the External Auditor on the Directors’ Statement on Internal Control is given on page 112.

(f) Key Management Compliant The Board has identified and designated the Bank's Key Management Personnel. Personnel (KMP)

(g) Authority and Compliant The Board has identified matters reserved for the Board. The duties and responsibility responsibilities of other KMPs are formally documented in their job descriptions.

(h) Oversight of the affairs Compliant Oversight exercised through Board Committees with reporting to the Board of the Bank by KMPs as appropriate.

(i) Board’s own governance Compliant The effectiveness of the Board’s own governance practices is reviewed by the practices Board. An annual self-assessment is carried out on a structured format and areas for improvement are discussed for necessary action.

(j) Succession plan for Compliant The Bank has in place a succession plan for senior management which is KMPs reviewed annually and approved by the Board.

(k) Regular meetings with Compliant Meetings are attended by relevant executives when required. Additional KMPs to monitor information sought by Directors on papers submitted to the Board is clarified by the respective officers. The Board has free access to senior management.

(l) Regulatory environment Compliant The Board Secretary provides all regulatory information required to Board members. The Chief Executive briefs the Board on specific issues. Senior management maintains continuous dialogue with the Regulator to ensure an effective relationship.

DFCC Bank PLC Annual Report 2015 91 Rule Governance Principle Compliance Remarks

(m) Due diligence in Compliant The primary responsibility for making recommendations on the appointment of hiring and oversight of the External Auditor rests with the Audit Committee. External Auditor A formal policy approved by the Board on Engagement of External Auditor to perform non-audit services is in place.

Stewardship 3.1 (ii) Appointment and Compliant The Board elects the Chairman and appoints the Chief Executive, while the segregation of the roles of Chairman provides leadership to the direction, oversight and control process the Chairman and CEO exercised by the Board. The CEO is responsible for management of the Bank.

3.1 (iii) Board meetings Compliant The Board held 13 Board meetings during the period. The Directors actively participated in the Board decision-making process as evident from the Board minutes. Seeking approval of the Board by circulation of written circulars was done only in exceptional circumstances due to urgency.

3.1 (iv) The Board to ensure that Compliant Whenever the Directors provide suggestions of topics for consideration at the arrangements are in place Board meetings, they are included in the Agenda under ‘open discussion’ which for Directors to include items is an integral part of every Board meeting and other supporting data, reports, and proposals in the Agenda documents etc., relevant for the subject matter are circulated among the of Board meetings Directors for information. Corporate Governance 3.1 (v) Notice of Board Compliant Dates for the regular monthly Board meetings are agreed by the Directors at the meetings – At least 7 days commencement of each year and any changes to dates of scheduled meetings are notice of regular meetings decided well in advance. The Board circulars and other documents pertaining and reasonable notice of to meetings are made available well in advance to enable the Directors to other meetings to be given participate in deliberations.

3.1 (vi) Attendance at Board meetings Compliant All Directors attended more than two-thirds of Board meetings and no Director was absent for three or more consecutive meetings. Attendance details are given on page 90.

3.1 (vii) Duties and qualifications of Compliant The Company Secretary possesses the qualifications specified in Section 43 of the Company Secretary the Banking Act. The Company Secretary while performing the secretariat services for the Board and shareholders’ meetings is responsible for ensuring that Board procedures and applicable rules and regulations are followed. All new Directors are provided with the necessary documentation on Directors’ responsibilities and specific banking-related directions/policies that are required to perform their function effectively.

3.1 (viii) The Directors’ access to the Compliant All Directors have access to the advice and services of the Company Company Secretary Secretary directly.

3.1 (ix) The Company Secretary’s Compliant The Company Secretary compiles the minutes of the Board meetings which duty to maintain minutes are subject to approval of the Board and signed by the Chairman. Copies of of the Board meetings and minutes are provided and Directors have access to the original minutes at all ensure the Directors have reasonable times. access to them

3.1 (x) The form and contents of the Compliant The Board minutes are drawn with reference to Board Circulars with minutes of Board meetings sufficient details to indicate the decisions made by the Board of Directors. The information used in making such decisions, the reasons and rationale of making them and each Director’s contribution if considered material is included in the minutes.

3.1 (xi) Independent professional Compliant The Board has put in place a procedure where the Directors can obtain advice on request for independent professional advice, at the Bank’s expense, to perform their duties. Directors to perform their duties

3.1 (xii) The Directors’ avoidance of Compliant The Companies Act No. 07 of 2007 required Directors who are directly or conflict of interest indirectly interested in contracts or a proposed contract with the Bank to declare the nature of such interest. The Directors have declared their interests in contracts involving the Bank and have not participated in the decision-making.

3.1 (xiii) Schedule of matters Compliant Schedule of matters reserved for the Board have been decided on. specifically reserved for the decisions of the Board

92 DFCC Bank PLC Annual Report 2015 Rule Governance Principle Compliance Remarks

3.1 (xiv) Reporting insolvency to the Compliant Solvency is a matter constantly monitored by the Treasury Department, Director of Bank Supervision Integrated Risk Management Committee and the Board of Directors. During the period under review, the Bank remained solvent and no event has or is likely to occur that would result in the Bank not being able to meet its obligations.

3.1 (xv) Adequacy of capital Compliant The Bank is capitalised well above the minimum levels required by the Monetary Stewardship Board in terms of the capital adequacy and minimum required capital.

3.1 (xvi) Corporate Governance Compliant The annual Corporate Governance Report forms an integral part of the Report Directors’ Report of the Bank’s Annual Report.

3.1 Self-assessment of the Board Compliant The Board has a structured scheme of self-assessment which is carried out (xvii) of Directors annually. The performance of the respective sub-committees is also evaluated by the other members who are not members of the respective sub-committees in order to ensure that they function effectively. The findings are discussed at the Board meetings and action is taken on areas identified for improvement. The performance assessment criteria of CEO are given in 3.5 (xi).

3.2 Composition of the Board Corporate Governance

3.2 (i) Number of Directors Compliant The Board of Directors comprised twelve Directors at the end of the period under review.

3.2 (ii) Period of service of a Director Compliant No Director has held the position of a Director of the Bank for more than nine years.

3.2 (iii) Number of Executive Compliant The Chief Executive and the Deputy Chief Executive are the only Executive Directors Directors of the Board.

3.2 (iv) Number of Independent Compliant There were six Independent Directors at the end of the period under review. Directors

3.2 (v) Alternate Directors Compliant All persons who are appointed as Alternate Directors to existing Directors of the Board are subject to the same criteria applicable to Directors.

3.2 (vi) The skills, experience and Compliant All Non-Executive Directors have professional backgrounds, strong track track records of records and high level managerial experience in banking, business, industry, Non-Executive Directors law, auditing or service sectors.

3.2 (vii) Number of Non-Executive Compliant The Bank has been compliant with this rule at all times as monitored by the Directors required to form a Company Secretary. quorum of Board meetings

3.2 (viii) Disclosure of Details of Compliant The names and the composition of the Directors by category are disclosed in the Directors Annual Report of the Board of Directors.

3.2 (ix) Appointment of new Directors Compliant Appointment of all new Directors is formally evaluated by the Nominations Committee and recommended to the Board of Directors for approval.

3.2 (x) Appointment of a Director to Compliant The Articles of Association of the Bank provide that the Directors appointed by fill a casual vacancy the Board of Directors hold office until the following AGM at which they have to be elected by the shareholders.

3.2 (xi) Resignation or removal Compliant The retirement/resignation of Directors from office during the period under of a Director review are given in the Directors’ Report. No Director was removed during the period under review. There were no matters that need to be brought to the attention of the shareholders as a consequence to the resignation of J E A Perumal as he resigned due to a personal reason.

3.2 (xii) Appointment of a Director or Compliant No Director or employee of the Bank is a Director of another bank as at the end an employee to another bank of the period. Until the amalgamation of the subsidiary, DFCC Vardhana Bank PLC, some of the Directors were also Directors of DFCC Vardhana Bank PLC, which was a permitted exception.

DFCC Bank PLC Annual Report 2015 93 Rule Governance Principle Compliance Remarks

3.3 Fitness and Propriety of Directors

3.3 (i) Maximum age of Directors Compliant All Directors who reached the age of seventy have relinquished office.

3.3 (ii) Holding of Director’s Compliant All Directors comply with this requirement.

Stewardship position in more than 20 companies in all

3.4 Management Functions Delegated by the Board

3.4 (i) Delegation arrangements Compliant The Board of Directors has delegated authority to the management subject to specific criteria, limitations, safeguards and monitoring mechanisms.

3.4 (ii) Extent of delegation Compliant The delegation of authority made by the Board is designed to facilitate efficient management of the affairs of the Bank and to aid the oversight role exercised by the Board. It is not of an extent to hinder the ability of the Board to discharge its functions. The Board retains the authority to expand, curtail, limit or revoke such delegated authority.

3.4 (iii) Review of delegation process Compliant The delegation process is subject to periodic review by the Board in order to

Corporate Governance ensure that necessary amendments are approved to meet the requirements of the Bank. Material decisions made under delegated authority are reported to the Board for information.

3.5 The Chairman and Chief Executive

3.5 (i) Separation of the roles of the Compliant The Chairman and the Chief Executive are two separate individuals. Chairman and CEO

3.5 (ii) The Chairman to be a Compliant The Chairman is a Non-Executive Director. The Board appointed an Non-Executive Director Independent Director as the Senior Director as disclosed in the Annual Report. The Board has approved terms of reference for the Senior Director.

3.5 (iii) Disclosure of relationship Compliant No relationships exist between the Chairman, CEO and the other Directors between the Chairman, CEO according to the declarations made by them except being Directors of subsidiaries and other Directors and the Chairman and one other Director being on the Board of a Company outside the Group.

3.5 (iv) Role of the Chairman Compliant The Chairman provides leadership to the Board and ensures that the Board discharges its responsibilities effectively and encourages members to actively participate and to raise their independent judgment on all key and appropriate issues in a timely manner.

3.5 (v) Agenda of Board meetings Compliant The Agenda of each Board meeting is drawn by the Company Secretary under the direction of the CEO and Chairman and any matters relevant to the policies and operations of the Bank proposed by other Directors are included in the Agenda upon approval by the Chairman.

3.5 (vi) Providing information to the Compliant The Chairman ensures that all Directors are properly briefed on issues which Directors arise at the Board meetings and that they receive adequate information in a timely manner.

3.5 (vii) The Board to act in the best Compliant The Chairman encourages exercise of independent judgment by the Directors on interest of the Bank matters under consideration by the Board in order that the best interests of the Bank can be assured.

3.5 (viii) Effective contribution of Compliant The Chairman facilitates contributions by the Non-Executive Directors in Non-Executive Directors making decisions.

3.5 (ix) The Chairman not to engage Compliant The Chairman is Non-Executive and does not supervise any management in executive functions personnel of the Bank directly.

3.5 (x) Communication with Compliant The Chairman has assigned the CEO/DCEO to maintain a dialogue with shareholders institutional investors and bring any matters of concern to the notice of the Board. During the period, the DCEO participated in an international forum which attracted a large number of participants including institutional and high net worth investors and fund managers and also had one-on-one meetings with 10 potential institutional investors and briefed the Board on the discussions held as appropriate.

94 DFCC Bank PLC Annual Report 2015 Rule Governance Principle Compliance Remarks

3.5 (xi) CEO to be in charge of the Compliant The Chief Executive is the Head of the management team and is in charge of the management of operations day-to-day management of the Bank’s operations and business. and business At the beginning of each year the Board discusses the business plan with the CEO and senior management and agrees on the medium and short-term financial and non-financial targets to be achieved and action plans to be implemented by the Bank. Progress is monitored on an ongoing basis and the Stewardship assessment of the performance of the Bank is carried out by the Board at the end of each year based on the initiatives laid down in the business plan.

3.6 Board Appointed Committees

3.6 (i) Four Board appointed Compliant The Board has appointed the four committees required by the Direction. The committees reports on their duties, performance and roles are published in the Annual Report.

3.6 (ii) Board Audit Committee – Please refer page 104.

(a) Chairman of the Compliant During the period, the Audit Committee was chaired by an Independent Committee Non-Executive Director who is a qualified Chartered Accountant.

(b) Composition of the Compliant All members of the Committee are Non-Executive Directors. Corporate Governance members

(c) External Auditor Compliant The Audit Committee assists the Board in implementing a transparent process in the engagement and remuneration of External Auditor and assists in the general oversight of financial reporting, internal controls and compliance with laws, regulations and codes of conduct. The Committee ensures that the engagement of the audit partner does not exceed five years.

(d) Independence and Compliant The Committee reviewed the statement issued by the External Auditor in effectiveness of the audit pursuance to Section 163 (3) of the Companies Act No. 07 of 2007. process

(e) Non-audit services Compliant A formal policy approved by the Board on Engagement of External Auditor to perform non-audit services is in place.

(f) Nature and scope of Compliant The Committee met with the External Auditor to discuss and finalise the external audit scope of the audit to ensure that it is in compliance with guidelines issued by the Central Bank.

(g) Review of financial Compliant The Committee reviewed all quarterly non-audited interim financial statements information of the Bank and the financial statement for the period ended 31 December 2015.

(h) Meetings with External Compliant The Committee met with the External Auditor on five occasions and two Auditor meetings without the presence of the management.

(i) Review of management Compliant The Committee considered the management letter issued by the External Auditor letter for the year ended 31 March 2015 and the management responses thereto.

(j) Internal audit function Compliant The Committee reviews the adequacy of the internal audit function to ensure that it is in conformity with the Audit Committee Charter. The annual audit plan and the annual performance appraisal of the Head of Internal Audit is reviewed by the Committee. The Committee with the approval of the Board continued to supplement the internal audit function by engaging two firms of chartered accountants to carry out the periodic audits of some business units. The internal audit function is independent of the activities it audits and the findings are reported directly to the Audit Committee.

(k) Internal audit findings Compliant The Committee reviewed the internal audit reports and considered the findings, recommendations and corrective action.

(l) Attendance of non-audit Compliant Senior Vice President – Group Internal Audit attends all Committee meetings. committee members Chief Financial Officer attends meeting where matters relating to finance are considered. The External Auditors attend meetings on invitation. During the period under review, the Committee met with the External Auditor on two occasions without the presence of the CEO.

(m) Terms of reference Compliant The Committee is guided by the Audit Committee Charter.

(n) Meetings Compliant During the financial period ended 31 December 2015, 12 meetings were held. Attendance of committee members is given in the table on page 90.

DFCC Bank PLC Annual Report 2015 95 Rule Governance Principle Compliance Remarks

(o) Audit Committee activities Compliant Please refer Committee Report on page 104.

(p) Secretary Compliant Senior Vice President – Group Internal Audit serves as the Secretary of the Committee.

Stewardship (q) Process of raising issues Compliant The Board has adopted a Whistle Blowing Policy to encourage employees to in confidence communicate legitimate concerns in case of any illegal or unethical practices. Arrangements are in place to ensure that all employees are duly informed of the effective use of this process.

3.6 (iii) Board Human Resources and Please refer page 107. Remuneration Committee –

(a) Remuneration Policy Compliant A formal Remuneration Policy approved by the Board is in place.

(b) Goals and Targets for Compliant The business plan which is approved by the Board encompasses the annual goals KMPs and targets of the CEO and other Key Management Personnel.

(c) Review of performance Compliant The Committee annually reviews the performance against set targets of the of KMPs CEO and other KMPs and the remuneration levels of the CEO and KMPs, while

Corporate Governance ensuring appropriate compensation levels are maintained in order to retain and motivate staff.

(d) CEO’s presence Compliant The CEO attends meetings by invitation and participates in deliberations except when matters relating to him are discussed.

3.6 (iv) Board Nominations Please refer page 108. Committee –

(a) Appointment of new Compliant During the period the Committee considered and recommended to the Board Directors and KMPs the appointment of six new Directors.

(b) Re-election of Directors Compliant During the period, the Committee considered and recommended to the Board the re-election of the Directors retiring under Articles 44 and 46 (ii) while ensuring that they are fit and proper persons to hold such office.

(c) Criteria relating to Compliant The Committee evaluates the qualifications, experience and key attributes appointment of KMPs required for eligibility for appointment of KMPs.

(d) Fit and proper test Compliant The fitness and propriety of KMPs are monitored by the Committee.

(e) Succession Planning Compliant The Committee evaluates the need for additional/new expertise to the Board and succession for retiring KMPs.

(f) Composition Compliant The Committee consists of four Non-Executive Directors and is chaired by an Independent Director.

3.6 (v) Board Integrated Risk Please refer page 109. Management Committee (BIRMC)

(a) Composition Compliant Please refer page 109.

(b) Assessment of Risk Compliant The Committee has put in place a Board approved risk framework. The risk exposures of the Bank are assessed on a monthly basis through Key Risk Indicators. Until the amalgamation the risk exposures of its commercial banking subsidiary DFCC Vardhana Bank was also assessed monthly. Risk assessment of other subsidiaries, joint venture and the associate are reviewed quarterly.

(c) Review of adequacy Compliant The Committee assessed the effectiveness of all Management Committees. of Management Committees

(d) Controlling risks within Compliant The Committee assesses possible risks, reviews and takes appropriate action to prudent limits mitigate such risks.

(e) Frequency of meetings Compliant The Committee met on a quarterly basis.

(f) Corrective action on any Compliant Action is taken by the Committee on any officer responsible for failure to management failure to identify specific risks and appropriate corrective action is taken to remedy such identify risks situations.

96 DFCC Bank PLC Annual Report 2015 Rule Governance Principle Compliance Remarks

(g) Submission of Risk Compliant By submitting BIRMC minutes the Board is informed of proceedings. The Assessment Reports to required approvals are obtained through specific submissions to the Board. the Board

(h) Compliance function Compliant The compliance function is headed by a dedicated officer identified as a KMP in

terms of the Corporate Governance Direction. The Compliance Officer reports Stewardship to the BIRMC. The Committee overseas the function and reviews the quarterly reports on compliance.

3.7 Related Party Transactions

3.7 (i) to Avoidance of conflicts of Compliant The Bank has adhered to the law as specified in the Banking Act and the (iii) interest and favourable Directions issued there under with regard to transactions with related parties. treatment in transactions The Board ensures that no related party benefits from any favourable treatment with related parties except as indicated in Rule 3.7 (vi). The Bank has put in place a mechanism to obtain confirmation on a structured format from all KMPs on a quarterly basis, to assist in the process of collating related party transactions. Corporate Governance 3.7 (iv) Accommodation for Compliant The Bank complies with the law as specified in the Banking Act and the Directors or their close Directions issued there under in granting accommodation to the Directors relations and/or their close relations.

3.7 (v) Accommodation granted Compliant The provisions of the Banking Act will be followed if such situations arise and to Directors prior to public will be informed if not compliant by the specified date as he/she will appointment cease to hold office. This situation did not arise.

3.7 (vi) Avoidance of favourable Compliant The accommodation to employees, close relations of employees and/or entities treatment in accommodation in which any employee or close relation of such employee holds substantial to employees, close relations interest are subject to normal commercial terms applicable to such transactions of employees and/or entities and secured by security approved by the Monetary Board except in case of in which any employee or close accommodation under approved schemes uniformly applicable to all or specific relation of such employee categories of employees. holds substantial interest

3.7 (vii) Not to remit part of Compliant No such situation has arisen. accommodation or interest without prior approval of the Monetary Board

Disclosure on Corporate Governance made in terms of Section 3 (8) of the Banking Act Direction No. 11 of 2007 of the Central Bank of Sri Lanka

(i) The Board shall ensure that: The annual audited financial statements and Complied with. quarterly financial statements are prepared and published in accordance with the formats prescribed by the supervisory and regulatory authorities and applicable accounting standards and that such statements are published in the newspapers in an abridged form in Sinhala, Tamil and English.

(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 Complied with. Please refer the Statement of Directors’ financial statements have been prepared in line with Responsibility on page 119. applicable accounting standards and regulatory requirements, inclusive of specific disclosures.

DFCC Bank PLC Annual Report 2015 97 (b) A Report by the Board on the Bank’s internal control Complied with. Please refer to the Directors’ Statement of Internal mechanism that confirms that the financial reporting Control on page 110. 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

Stewardship regulatory requirements. (c) The External Auditor’s Certification on the Complied with. Please refer Assurance Report of the External Auditor effectiveness of the internal control mechanism in on page 112. respect of any statements prepared or published.

(d) Details of Directors, including names, fitness and Complied with. Please refer to page 100 and Notes 20 and 59.5 to propriety, transactions with the Bank and the total the financial statements. fees/remuneration paid by the Bank (e) Total net accommodation as defined in 3 (7) (iii) Complied with. granted to each category of related parties shall also be disclosed as a percentage of the Bank’s 31 December 2015 regulatory capital Category of related party LKR 000 %

Corporate Governance Key Management Personnel & 30,461 0.11 close family members

Subsidiaries 1,960 0.01 Total net accommodation 32,421 0.12 Regulatory capital – Solo basis 26,526,720

The total net accommodation was 0.12% of the Bank’s regulatory capital on solo basis. Maximum limit determined by Directors is 25% of the Bank’s regulatory capital on solo basis. (f) The aggregate values of remuneration paid by Complied with. the Bank to its Key Management Personnel and the aggregate values of the transactions of the The aggregate value of compensation and transactions with the Bank Bank with its Key Management Personnel, set out by Key Management Personnel as defined by LKAS 24 for financial by broad categories such as remuneration paid. reporting purposes are given in Note 59.6 to the financial statements. Accommodation granted and deposits or investments made in the Bank. Further in addition to the above, compensation, total deposits and investments made and accommodation obtained as at 31 December 2015 by the other Key Management Personnel (Officers Performing Executive Functions referred to in Banking Act Determination No. 3 of 2010) amounted to LKR 16.99 million, LKR 12.95 million and LKR 7.44 million respectively. (g) All findings of the ‘Factual Findings Report’ of the Complied with. External Auditor to be incorporated in this Report. (h) A report setting out details of the compliance with Complied with. See Annual Report of the Board of Directors. prudential requirements, regulations, laws and internal controls and measures taken to rectify any material non-compliance. (i) A statement of the regulatory and supervisory The Monetary Board has not required any disclosure to be made. concerns on lapses in the Bank’s risk management, or non-compliance with 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.

Independent Assurance The External Auditors have performed procedures set out in Sri Lanka Related Services Practice Statement 4750 (SLRSPS 4750) issued by The Institute of Chartered Accountants of Sri Lanka, to meet the compliance requirement of the Corporate Governance Direction. Their findings presented in their Report addressed to the Board are consistent with the matters disclosed above and did not identify any inconsistencies to those reported above by the Board.

98 DFCC Bank PLC Annual Report 2015 Annual Report of the Board of Directors on the affairs of the Bank

Constitution Stewardship DFCC Bank was incorporated in 1955 under the DFCC During the period under review, subsequent to the Bank Act No. 35 of 1955 as a limited liability public amalgamation, the financial year of the Bank was changed company and the ordinary shares of the Bank were listed to a calendar year commencing the year 2015, to fall in the Colombo Stock Exchange. in line with other licensed commercial banks. As such the Income Statement is in respect of the nine month period Consequent to the enactment of the DFCC Bank (Repeal ending 31 December 2015. and Consequential Provisions) Act No. 39 of 2014, the DFCC Bank Act No. 35 of 1955 was repealed and with Review of Business of the Period effect from 6 January 2015 the Bank was incorporated under the Companies Act No. 07 of 2007 as a public The Chairman’s Statement, Chief Executive’s Report and limited company listed in the Colombo Stock Exchange the Management Discussions and Analysis give details with the name ‘DFCC Bank PLC’. of the operations of the Bank and the Group and the key strategies that were adopted during the nine month period The shareholders at the Extraordinary General Meeting under review. held on 28 August 2015 approved the amalgamation of DFCC Vardhana Bank PLC (DVB) with DFCC Bank PLC Profit and Appropriations (DFCC). The Registrar General of Companies on 1 October 2015 issued the Certificate of Amalgamation 9 months ended 31 December 2015 LKR 000 in terms of Section 244 (1) (a) of the Companies Profit for the period 1,068,350 Act No. 07 of 2007 that DVB has been amalgamated with Appropriations DFCC in accordance with the provisions of Part VIII of the Companies Act, with DFCC Bank PLC surviving as the Transfer to: amalgamated entity. Reserve Fund (statutory requirement) 60,000

DFCC Bank PLC also obtained a commercial banking First and final dividend approved for license from the Monetary Board of the Central Bank of financial period ended 31 December 2015 662,744 Sri Lanka in terms of the Banking Act No. 30 of 1988, as Unappropriated profit for the period 345,606 amended, and accordingly upon the amalgamation now operates as a licensed commercial bank with effect from 1 October 2015. Accounting Policies The accounting policies adopted in the preparation of the Going Concern financial statements of the Bank and the Group are stated on pages 131 to 145 of this Annual Report. The Directors are satisfied that the Bank has adequate resources to continue its operations in the future and as There were no changes to the accounting policies of such, the financial statements are prepared on the basis the Group in the period under review other than due to of a going concern. The Auditors have declared the Bank the adoption of Statement of Alternative Treatment on solvent even after the payment of dividend. accounting for super gains tax. Financial Statements Auditors’ Report The financial statements of the Bank and the Group are The Auditors’ Report on the financial statements, which is given on pages 122 to 208 of this Annual Report. unqualified, is given on page 121. The financial statements of the Bank and the Group have been prepared in accordance with Sri Lanka Accounting Standards prefixed SLFRS and LKAS, the Banking Act No. 30 of 1988 and amendments thereto, the Companies Act No. 07 of 2007 and other applicable statutory and regulatory requirements.

DFCC Bank PLC Annual Report 2015 99 Reappointment of Auditors Senior Director The present Auditors, Messrs KPMG have expressed Upon the retirement of G K Dayasri on 14 July 2015, their willingness to continue as Auditors of the Bank for P M B Fernando was designated as the Senior Director the next financial year ending 31 December 2016. The in terms of the Central Bank of Sri Lanka Direction on Audit Committee has reviewed the effectiveness and the Corporate Governance. relationship with DFCC Bank including the fees paid to Stewardship the Auditors and has concluded that they are suitable to Resignation and Retirement of Directors continue in office. The Directors are satisfied that based on the written representation made by the Auditors, G K Dayasri retired from the Board with effect they have no relationship or interest with the Bank or from 14 July 2015 upon reaching the age of 70. with any of its subsidiaries which would impair the J E A Perumal and Ms H M N S Gunawardana resigned Auditor’s independence. A Resolution pertaining to their from the Board with effect from 30 April 2015 and reappointment and authorising the Directors to determine 23 June 2015 respectively. The Directors’ record their their remuneration will be proposed at the Annual General appreciation for the contributions made by them during Meeting for adoption. their tenure as Directors.

The Board of Directors Appointment and Re-election of Directors The Board of Directors of the Bank presently consist A W Atukorala and Ms V J Senaratne were appointed as of 12 Directors with wide knowledge and experience in Directors on 23 April 2015 and 6 July 2015 respectively. the fields of banking and finance, trade, law, commerce, K D N R Asoka was appointed to succeed manufacturing or services. Profiles of the Directors are Ms H M N S Gunawardana on 23 June 2015. given in pages 10 to 13. The following were the Directors L N de S Wijeyeratne, A N Fonseka and L H A L Silva were of the Bank as at 31 December 2015 categorised in appointed as Directors with effect from 15 October 2015. accordance with criteria specified in the Direction No. 11 of 2007 issued by the Central Bank of Sri Lanka. Ms V J Senaratne, L N de S Wijeyeratne, A N Fonseka and L H A L Silva will retire in terms of Article 46 (ii) of the Articles of Association and are offering themselves for Non-Executive Directors re-election at the Annual General Meeting. The C R Jansz – Chairman Nominations Committee has recommended their K D N R Asoka* re-election and the Board having concluded that they A N Fonseka are fit and proper persons to be Directors in terms of the Ms V J Senaratne provision of the Banking Act, unanimously endorsed the recommendation of the Nominations Committee. Independent Non-Executive Directors Annual Report of the Board of Directors on the affairs of the Bank affairs of the Board of Directors on the Annual Report of the Retirement by Rotation and Re-election of A W Atukorala K P Cooray Directors T Dharmarajah The Directors retiring by rotation in terms of Article 44 P M B Fernando of the Articles of Association are P M B Fernando and Ms S R Thambiayah T Dharmarajah, who offer themselves for re-election L N de S Wijeyeratne under the said Article with the unanimous support of the Directors. Executive Directors A R Fernando – Chief Executive Directors’ Remuneration L H A L Silva – Deputy Chief Executive The Directors’ remuneration for the financial period ended 31 December 2015 is given in Note 20 of the * Appointment in terms of Article 36 (ii) of the Articles of Association financial statements.

K D N R Asoka represents a specific stakeholder and as Directors’ Meetings such does not qualify to be designated as an independent director. C R Jansz, Ms V J Senaratne and A N Fonseka The Bank held 13 Board meetings during the nine month also do not meet the criteria set out in the Direction to be period. The attendance of Directors is shown in the table designated as Independent Directors by virtue of the fact on page 90 of the Annual Report. that Mr Jansz and Ms Senaratne are common directors of another company and Mr Fonseka was an employee of the Bank until 31 March 2014.

100 DFCC Bank PLC Annual Report 2015 Directors’ Interests in Shares Directors’ Interests in Transactions with the Bank No. of Shares* No. of Shares as at 31.12.2015 as at 31.03.2015 The Directors’ interests in transactions with entities/ K D N R Asoka1 Nil – persons (other than subsidiaries, joint ventures and associate) is listed under each Director for the nine 1 A W Atukorala 14,500 – months ended 31 December 2015 as follows: Stewardship

K P Cooray Nil Nil LKR 000 G K Dayasri2 – 1,036 A W Atukorala T Dharmarajah 500 500 TVS Lanka Limited Aggregate amount of accommodation 354,800 A R Fernando 4,470 4,470 United Motors Lanka PLC P M B Fernando 1,000 1,000 Aggregate amount of payments made for services 31 A N Fonseka1 142,006 – K D N R Asoka Postgraduate Institute of Management Ms H M N S Gunawardana2 – Nil Aggregate amount of payments made for services 40 C R Jansz 1,000 1,000 K P Cooray J E A Perumal2 – 42,475 Sri Lanka Telecom PLC USD Aggregate amount of accommodation 10 million V J Senaratne1 1,296 – Aggregate amount of payments made for services 20,697 L H A L Silva1 3,476 – T Dharmarajah Ms S R Thambiayah Nil Nil The Institute of Chartered Accountants of Sri Lanka L N de S Wijeyeratne1 Nil – Aggregate amount of payments made for services 647 A R Fernando Directors’ Interests in Debentures Aggregate amount of accommodation 50,000 Credit Information Bureau of Sri Lanka 31.12.2015 31.03.2015 Aggregate amount of payments made for services LKR 000 LKR 000 3,070 Home Finance Company Limited-Fiji A R Fernando 5,000 5,000 Aggregate amount of fee received for services 13,278 A N Fonseka1 5,000 – C R Jansz Distilleries Company of Sri Lanka PLC 1 Not a Director as at 31 March 2015 Aggregate amount of accommodation 1,000,000 2 Not a Director as at 31 December 2015 Bank affairs of the Board of Directors on the Annual Report of the * Includes shares held by the spouse Lanka Bell (Pvt) Limited Aggregate amount of payments made for services 1,878 No Director directly or indirectly holds options of the Bank. Ms V J Senaratne Distilleries Company of Sri Lanka PLC Directors’ Interests Register Aggregate amount of accommodation 1,000,000 L N de S Wijeyaratne An interest register is maintained by the Bank as required Kelani Valley Plantations PLC by the Companies Act, No. 07 of 2007. Directors have made the general disclosure as provided for in Section 192 LB Finance PLC of the Companies Act, No. 07 of 2007. The Directors have Talawakelle Tea Estates PLC declared all material interests in contracts involving the Aggregate amount of accommodation 937,402 Bank and have not participated in the decision-making related to such transactions. All related entries were made in the Interest Register during the nine months Messrs C R Jansz and A R Fernando are or have been Chairman/Director of one or more of the subsidiaries, under review. joint venture or associate company. Details of transactions with subsidiaries, joint venture and associate company are disclosed in Notes 59.2-59.4 in the Notes to the financial statements.

Corporate Donations During the period the Bank did not make any donations.

DFCC Bank PLC Annual Report 2015 101 Board Committees Dividend The following are the present members of the permanent The Directors have approved the payment of a first and committees of the Board. Changes to the composition final dividend of LKR 2.50 per share, (final dividend during the period are set out in the respective committee paid in the previous year, LKR 6/- per share). The total reports in the Annual Report. dividend for the period will amount to approximately LKR 663 million (LKR 1,591 million in the previous year),

Stewardship which amounts to 66% of the Bank’s distributable profit. Audit Committee P M B Fernando – Chairman The Directors unanimously declare that, DFCC Bank K D N R Asoka will satisfy the solvency test stipulated in Section 57 of T Dharmarajah the Companies Act No. 07 of 2007 immediately after the L N de S Wijeyeratne dividend payment is made and have obtained a certificate of solvency from its Auditor. Credit Approval Committee Property, Plant and Equipment and C R Jansz – Chairman Leasehold Property T Dharmarajah A W Atukorala The total expenditure of acquisition on property, K P Cooray plant and equipment during the year amounted to LKR 119 million of which intangible assets amounted to Credit Restructure Committee LKR 36 million. Details of these are given in the Notes 40 and 41 to the financial statements. C R Jansz – Chairman A W Atukorala Reserves Ms S R Thambiayah Total reserves and retained profit amounted to Human Resources and Remuneration LKR 38,104 million. Committee Market Value of Freehold Properties C R Jansz – Chairman The information on market value of freehold properties A W Atukorala are given in Note 40.1.2 to the financial statements. Ms V J Senaratne

Stated Capital and Subordinated Debentures Nominations Committee The stated capital as at 31 December 2015 was P M B Fernando – Chairman LKR 4,716 million. The number of shares in issue as at C R Jansz 31 December 2015 was 265,097,688. Further information Annual Report of the Board of Directors on the affairs of the Bank affairs of the Board of Directors on the Annual Report of the A W Atukorala is given on pages 179 and 180. K P Cooray Share Information Integrated Risk Management Committee Information relating to earnings, net asset and market C R Jansz – Chairman value per share are given on pages 5 and 114 of the Annual P M B Fernando Report and also contains information pertaining to the A N Fonseka share trading during that period. L N de S Wijeyeratne A R Fernando Shareholders As at 31 December 2015, there were 8,640 registered The Chief Risk Officer of the Bank is also a member of shareholders and the distribution is indicated on page 115. the Committee. The 20 largest shareholders as at 31 December 2015 are In addition, from time to time the Board appoints listed on page 115. committees to deal with specific matters. The Board also invites external advisers and Key Management Personnel to Employment and Remuneration Policies serve on some of the Committees as and when necessary. The policy of the Bank is to develop and maintain a dedicated and highly motivated group of employees who Further details relating to the committees are given are committed to creating sustainable value through in the section on Corporate Governance and the effective risk management and high quality service Committee Reports. while supporting the public and private sector in its development efforts within the ambit of the Articles of

102 DFCC Bank PLC Annual Report 2015 Association of the Bank. DFCC Bank continuously invests Events Occurring after the Reporting Period in training and development of its staff to meet these Subsequent to the date of the statement of financial objectives. The Bank is an equal opportunity employer. position, no circumstances have arisen which would Remuneration of employees consists of fixed and variable require adjustments to the accounts. Significant events payments. Annual increments and pay awards are based occurring after the reporting period which in the opinion on the performance of the Bank and the individual. It is of Directors require disclosure are described in Note 63 to DFCC Bank’s policy to fix remuneration at a level which the financial statements. Stewardship will attract, motivate and retain high quality employees.

Statutory Payments Corporate Governance The Directors place great emphasis on following The Directors, to the best of their knowledge and beliefs internationally accepted good corporate governance are satisfied that all statutory payments due to the practices and principles and systems and procedures are Government and in relation to the employees have been in place in order to satisfy good governance requirements. made on time. The Directors’ have obtained External Auditor’s assurance Compliance with Laws, Regulations and on effectiveness of the internal control mechanism and Prudential Requirements compliance with the Direction 11 of 2007 of the Central Bank of Sri Lanka on Corporate Governance. The Bank has not engaged in any activities contravening the laws and regulations and has complied with Details of governance practices and the required prudential requirements. The Directors obtain a quarterly disclosures are given on pages 89 to 98. Rule 3 (8) of confirmation report from the Management with regard the Direction No. 11 of 2007 on Corporate Governance to compliance with laws, regulations and prudential for Licensed Commercial Banks in Sri Lanka prescribes requirements. disclosures in the Annual Report. These disclosures have been made in this Annual Report as shown in the The Table below provides cross references following Table: to facilitate easy reference:

Reference to Rule Requirement Reference to Annual Report

3 (8) (i) Financial statements on prescribed format Financial statements on pages 122 to 208 3 (8) (ii) (a) Affirmative assurance of compliance with Directors’ Responsibility Statement on page 119 accounting standards and requirements 3 (8) (ii) (b) Affirmative assurance of the integrity of financial Directors Statement of Internal Control on page 110 reporting system 3 (8) (ii) (c) Assurance report issued by the external auditor Independent Assurance Report on page 112 3 (8) (ii) (d) Information on Directors Corporate Governance Report. Table on page 98 Bank affairs of the Board of Directors on the Annual Report of the 3 (8) (ii) (d) Remuneration of Directors Notes on the financial statements on page 149 3 (8) (ii) (e) Net accommodation granted to each category of Corporate Governance Report. Table on page 98 related party 3 (8) (ii) (f) Compensation and other transactions with Corporate Governance Report. Table on page 98 Key Management Personnel 3 (8) (ii) (h) Compliance with prudential requirements This report. and regulations

Acknowledgement of the Content of the Report As required by Section 168 (1) (k) of the Companies Act, No. 7 of 2007, the Board of Directors does hereby acknowledge the contents of this Report.

For and on behalf of the Board of Directors,

C R Jansz A R Fernando Ms A Withana Chairman Director and Chief Executive Company Secretary 24 February 2016

DFCC Bank PLC Annual Report 2015 103 Report of the Audit Committee

The purpose of the Audit Committee is to assist the Attendance by the Committee members at the meetings is Board in its general oversight of financial reporting, given in the table on page 90 of the Annual Report. internal controls and audit functions. The composition Stewardship requirements and the terms of reference of the Audit The Chief Executive and Chief Financial Officer attend Committee are set out in Direction No. 11 of 2007 on the meetings by invitation. The Committee met with the Corporate Governance for Licensed Commercial Banks External Auditor, KPMG on five occasions which included in Sri Lanka issued by the Central Bank of Sri Lanka. two meetings without management presence so as to This is complementary to the Charter formulated by the provide the External Auditor an opportunity to have a Audit Committee. frank dialogue with the Committee.

This Report provides information on the compliance Mandate and Role with regulatory requirements and where appropriate the process adopted by the Audit Committee to discharge The Audit Committee assists the Board of Directors in their responsibilities. fulfilling its oversight responsibilities for DFCC Bank’s accounting and financial reporting process and audit of the financial statements of DFCC by monitoring the Bank’s Composition (1) integrity of financial statements, (2) independence All members of this Committee are Independent and qualifications of its External Auditor, (3) the system Non-Executive Directors. The Chairman is a Chartered of internal controls, (4) performance of Internal Audit Accountant with considerable experience in the field of process and (5) compliance with laws, regulations and Finance and Audit. The profiles of the Members are given codes of conduct with a view to safeguarding the interests elsewhere in the Annual Report. of all stakeholders of DFCC Bank.

The composition of the Committee during the nine months The Committee has discharged the responsibilities period ended 31 December 2015 is as follows: assigned by Rule No. 3 (6) (ii) of the Corporate Governance Direction No. 11 of 2007, issued by the Central Bank of Sri P M B Fernando – Chairman Lanka. Where appropriate more details are provided under L N de S Wijeyeratne (from October 2015) separate headings in this Report.

T Dharmarajah K D N R Asoka (from June 2015) Financial Reporting Ms S R Thambiayah (Up to May 2015) The Committee assists the Board of Directors to discharge their responsibility for the preparation of true L N de S Wijeyeratne was appointed a member with effect and fair financial statements in accordance with the books from October 2015, after the merger of DFCC Bank and of accounts and Sri Lanka Accounting Standards by: DFCC Vardhana Bank. Mr Wijeyeratne served as the (1) reviewing the adequacy and effectiveness of the Chairman of the Audit Committee of DFCC Vardhana internal control system and procedures to provide Bank before his appointment to the DFCC Bank Audit reasonable assurance that all transactions are accurately Committee. K D N R Asoka was appointed a member and completely recorded in the books of accounts; with effect from June 2015 in place of Ms S R Tambiayah (2) reviewing the integrity of the process by which who served the Audit Committee for an interim period. financial statements are derived from the books of Senior Vice President – Group Internal Audit serves as the accounts; (3) reviewing the choice of appropriate Secretary of the Committee. He has direct access to the accounting policies and the judgments made in the members of the Audit Committee. application of such accounting policies; (4) reviewing compliance with Sri Lanka Accounting Standards Meetings and other regulatory provisions relating to financial statements. During the nine months period ended 31 December 2015, twelve Audit Committee Meetings were held. Proceedings of the Audit Committee Meetings are reported regularly to the Board.

104 DFCC Bank PLC Annual Report 2015 The Committee reviewed all quarterly non-audited interim Risks and Controls financial statements and financial statements for the The risk profile of the Bank with appropriate risk nine months period ended 31 December 2015, together mitigation strategies has been developed and documented with supporting information that included significant by the Integrated Risk Management Committee. Audit assumptions and judgments made in the preparation Committee has adopted a Risk Assessment Framework to of financial statements. The Committee also took into identify and assess risks encountered during the internal

consideration the internal audit reports, management Stewardship audit work which is reviewed periodically. letter issued by the External Auditor and the responsibility statements in relation to the financial statements issued All key controls of the Bank have been documented by the Chief Financial Officer and Chief Executive in by the relevant process owners and the internal audit making an overall assessment on the integrity of the has introduced required audit procedures to relevant Financial Reporting System. audit programmes to test the adequacy and effectiveness of internal controls. The Committee seeks and obtains The Annual Report of the Directors for the period ended the required assurance from the head of the business 31 December 2015, includes a separate report on internal unit on the remedial action taken in order to maintain controls on page 110. This report is issued pursuant to the effectiveness of internal controls. Any significant Rule 3 (8) (ii) (b) of the Direction No. 11 of 2007 on non-compliances are followed up by the Audit Committee Corporate Governance for Licensed Commercial Banks and where necessary instructions were given to and includes inter alia an affirmative assurance on the the management to enhance and strengthen the integrity of Financial Reporting System to produce internal controls. reliable financial statements that are true and fair. Report of the Audit Committee Report of the The Committee confirms that to the best of its knowledge External Audit and belief the financial statements issued for external The Audit Committee assists the Board of Directors to purposes by DFCC Bank complied with generally accepted implement a transparent process; (1) in the engagement principles of accounting as enunciated in Sri Lanka and remuneration of the External Auditor for audit Accounting Standards and complies with the statutory services with the approval of the shareholders; (2) in provisions of Companies Act No. 07 of 2007 and Banking reviewing the non-audit services to ensure that they Act No. 30 of 1988 and subsequent amendments thereto. do not lead to impairment of the independence of the Auditor; (3) in assisting the Auditor to complete the audit Internal Audit programme within an agreed time frame in compliance with relevant guidelines issued by the Central Bank of With the concurrence of the Board of Directors, Audit Sri Lanka. Committee engaged the services of two firms of Chartered Accountants to supplement the Bank’s Internal Audit In order to discharge its responsibilities the Audit Function in carrying out periodic audits at some of the Committee meets with the Auditor as and when it is business units of for the period ended 31 December 2015. necessary. During these meetings with the Auditor the Representatives from the Audit Firm were invited to Audit Committee; (1) reviews the non-audit services the Audit Committee meetings convened to discuss provided by the External Auditor to ensure that provision their reports. of such services are not in conflict with the guidelines issued by the Central Bank of Sri Lanka and that the A Risk and Significance Based Internal Audit Plan for remuneration for such services are not of such value so as the period covering all significant operational areas to impair their independence; (2) request for information was approved during the year and Audit Committee relating to the total remuneration of the External Auditor periodically evaluated the status of the audits carried out for audit and non-audit services provided to the Bank and during the period. Group; (3) discusses and finalises the scope of the audit to

ensure that it is in compliance with the guidelines issued The Audit Committee also provides a forum for the by the Central Bank of Sri Lanka. review of Internal Audit Reports and consideration of findings, recommendations and corrective action taken by management to overcome the deficiencies identified, with a view to managing significant business risks and improving controls. Department/Unit heads attend meetings when their reports are discussed.

DFCC Bank PLC Annual Report 2015 105 In the context of determining the independence of the Auditor, the Committee reviewed the statements issued by the External Auditor pursuant to Section 163 (3) of the Companies Act No. 07 of 2007. As per this declaratory statement the Auditor has confirmed that they do not have any relationship that would impair their independence

Stewardship and has disclosed the total remuneration for the period ended 31 December 2015, for both audit and permitted non-audit services.

The Audit Committee has also recommended the adoption of a Policy on the engagement of the External Auditor to provide non-audit services. This policy document approved by the Board of Directors, in addition to complying with the regulatory requirements, has included guidelines to ensure that the independence of the External Auditor is not impaired by the scale and scope of non- audit services.

The Audit Committee also meets with the Auditor at the conclusion of the audit to review the Management Letter

Report of the Audit Committee Report of the issued by the Auditor before it is transmitted to the Board of Directors and the Central Bank of Sri Lanka.

Regulatory Compliance DFCC Bank’s procedures in place to ensure compliance with mandatory banking and other statutory requirements were monitored on an ongoing basis. The compliance reporting is subject to internal audit verification on a sample basis. The Committee is satisfied that the Bank substantially complies with these requirements.

Evaluation An evaluation of the effectiveness of the Committee was carried out by the other members of the Board and the Committee has been found to be effective.

Reappointment of the External Auditor The Audit Committee having evaluated the quality of audit service provided by the current Auditor has recommended to the Board of Directors that KPMG be reappointed as Auditors for the year ending 31 December 2016, subject to the approval of shareholders at the Annual General Meeting at a fee to be determined by the Board.

P M B Fernando Chairman – Audit Committee

24 February 2016

106 DFCC Bank PLC Annual Report 2015 Report of the Human Resources and Remuneration Committee

The Composition The Procedure Stewardship The Human Resources and Remuneration Committee Apart from the general review of remuneration, in keeping appointed by the Board of Directors, presently consists of with the policy of pay for performance, the Committee three Non-Executive Directors. C R Jansz is the Chairman reviewed the performance of DFCC Bank against the of the Committee. A W Atukorala and Ms V J Senaratne historical performance, key performance indicators agreed are the other members. G K Dayasri also functioned as a at the beginning of the year as well as against a peer group member of the Committee until his retirement in when determining and recommending to the Board the July 2015. annual salary increment pool and the performance based variable pay pool for DFCC Bank. The Committee also The Chief Executive attended meetings by invitation and appraised the performance of the Chief Executive based participated in its deliberations except when his own on the pre-agreed targets and desired skills and reviewed evaluation and remuneration was under discussion. He his remuneration. also serves as the Secretary. The Group Vice President, Human Resources assisted the Committee by providing In addition, the Committee considers and recommends relevant information. The Committee obtains input from to the Board of Directors from time to time, the external specialists as and when required. requirements of additional/new expertise/skills and also salary revisions. The Committee periodically assesses the The Mandate succession plan for key management positions and took appropriate steps to induct external skills to strengthen The Committee adopted as its mandate the tasks the management of the banking business of DFCC Group specified in Section 3 (6) (iii) of Direction No. 12 of 2007 where it was deemed necessary. of the Central Bank of Sri Lanka on Corporate Governance for licensed specialised banks until 30 September 2015 Meetings and Section 3 (6) (iii) of Direction No. 11 of 2007 of the Central Bank of Sri Lanka on Corporate Governance The Committee held three meetings during the financial for licensed commercial banks with effect from period to carry out its task. The attendance by members is 1 October 2015. given on page 90 of this Annual Report.

The Committee in determining the remuneration policy relating to Directors, Chief Executive and Key Management Personnel of DFCC Bank, in terms of Directions ensures appropriate compensation levels in order to attract, retain and motivate talented staff with the core capabilities matched to its strategy and C R Jansz also to ensure that the Bank consistently delivers value Chairman — Human Resources and to all stakeholders and to make the organisation more Remuneration Committee competitive. To achieve this, the Committee uses a mixture of fixed and variable pay to reward employees. 24 February 2016 During the period under review, the Committee oversaw a review of the Bank's perquisite structure. The Committee also reviewed and recommended a revision to the staff grading structure and designations based on a study carried out by an external consultant.

DFCC Bank PLC Annual Report 2015 107 Report of the Nominations Committee

Composition Procedure Stewardship The Nominations Committee of the Board of Directors The Committee meets when required and acts within its consists of four Non-Executive Directors. P M B Fernando mandate approved by the Board of Directors and makes an independent Director is the Chairman with recommendations to the Board for consideration. Messrs C R Jansz, A W Atukorala and K P Cooray serving as members. Meetings

J E A Perumal served as the Chairman until his Four meetings were held during the nine month period resignation in April 2015. Messrs A W Atukorala and ending in December 2015. During the period the K P Cooray were appointed to the Committee in May 2015. Committee considered and recommended to the Board Ms S R Thambiayah also functioned as a member of the the appointment of four new Directors. The Committee Committee for a short period during September 2015 to also reviewed the list of Key Management Personnel 14 October 2015. of the amalgamated bank and assessed the fitness and propriety of Directors and Key Management Personnel, in The Chief Executive attends the meeting by invitation, terms of the requirements of the Banking Act. Individual while the Secretary to the Board functions as the Secretary Committee members do not participate in discussions of the Committee. in matters relating to them. The attendance by Directors at meetings is given on page 90 of the Annual Report. The Committee has recommended the re-election of the Mandate Directors offering themselves for re-election at the Annual The Committee carried out the tasks set out in Section General Meeting. 3 (6) (iv) of Direction No. 12 of 2007 issued by the Central Bank of Sri Lanka on Corporate Governance in licensed specialised banks until 30 September 2015 and Section 3 (6) (iii) of Direction No. 11 of 2007 of the Central Bank of Sri Lanka on Corporate Governance in licensed commercial banks with effect from 1 October 2015.

In terms of this Direction the role of the Committee P M B Fernando is to identify and evaluate persons with the required Chairman — Nominations Committee skills, knowledge, standing, fitness and propriety to join the Board of the Bank and to evaluate the suitability of 24 February 2016 Directors who are seeking re-election. The Committee is responsible for the task of putting in place a procedure for the appointment of the CEO and Key Management Personnel. During the period the Committee reviewed and revised the Policy on Board Composition, Appointments, Re-election and Resignation of Directors and succession to incorporate the changes in line with the Articles of Association of the amalgamated bank.

108 DFCC Bank PLC Annual Report 2015 Report of the Board Integrated Risk Management Committee

Composition of Board Integrated strategies, risk capital position and key risk indicators at these

meetings and was satisfied that the risk exposures of the Bank Stewardship Risk Management Committee were being appropriately managed. During the year, the following During the year, the Board Integrated Risk Management key initiatives were achieved by the Committee: Committee (BIRMC) functioned on Group basis overlooking the A. Review and approval of the prudential risk limits to reflect the integrated risk management of DFCC Bank and DFCC Vardhana current risk appetite of the Bank. Bank (DVB) until the amalgamation of the two banks. The B. Review and approval of the Internal Capital Adequacy Group BIRMC consisted of necessary representation from both Assessment Process (ICAAP) of the Bank which was a regulatory the DFCC Bank and the DVB Boards with two Non-Executive requirement with effect from January 2014. As a part of the Directors representing DFCC and DVB, one Non-Executive ICAAP, BIRMC monitored the risk capital forecast and capital Director representing DFCC, one Non-Executive Director cushion in line with the business strategy and industry positions. representing DVB, one Executive Director representing DFCC and one Executive Director representing DVB. The composition of the C. The annual review of effectiveness and adequacy of the BIRMC was changed after the amalgamation of DFCC Bank and Management Committees were conducted by the BIRMC DVB, to four Non-Executive Directors including Chairman and during the first quarter of 2015. The review results and one Executive Director. The Group Chief Risk Officer, who has recommendations of the BIRMC were shared with the the voting power, functions as the Secretary to the Committee. respective committees for necessary improvements. Heads of key functional areas such as lending, finance, treasury, D. Close monitoring of the arrears positions in loans to identify operations, IT and internal audit attend the meetings on recurring incidents, possible trends inherent to business invitation. The membership of the BIRMC as at units/regions and/or industry segments with the view of 31 December 2015 was as follows: minimising probable default risk incidents.

C R Jansz – Chairman E. Monitoring of the Liquidity Coverage Ratio (LCR) under Basel III as per the guidelines issues by the CBSL implemented P M B Fernando – Non-Executive Director from April 2015. The LCR is expected to strengthen the A N Fonseka – Non-Executive Director liquidity risk management ensuring that Banks have adequate L N de S Wijeyaratne – Non-Executive Director stock of high quality liquid assets for 30 days that can be easily and immediately converted to cash even under a liquidity A R Fernando – CEO/Director stressed scenario. On a pre and post-amalgamation basis DFCC T S A Fernandopulle – Chief Risk Officer Bank comfortably complied with the minimum requirements. F. Review and approval of risk management policies and Charter and the Responsibilities guidelines for the amalgamated entity of the BIRMC G. Having duly recognised the global trend on increasing threats on system and information security, BIRMC paid increased The approved Charter for the BIRMC stipulates authority, attention to IT systems security under its operational risk structure, responsibilities and tasks of BIRMC. As per its Charter, management practices the primary responsibilities of BIRMC are to review and ensure: A. Integrity and adequacy of the risk management function of the Bank. Reporting B. Adequacy of the Bank’s capital and its allocation. The proceedings of the BIRMC meetings are reported to the Board through submission of the meeting minutes. Monthly C. Risk exposures and risk profiles of the Bank are within Key Risk Indicators and other specific matters are submitted acceptable parameters and to make recommendations to the separately for the Board’s approval on recommendation of the Board of Directors on any action required. BIRMC. The recommendations made by the BIRMC during the D. The adequacy and effectiveness of the management year under review were approved by the Board. committees through a set of defined tools. E. Availability of a comprehensive and updated set of risk policies and guidelines covering overall operations of the Bank. F. The compliance of the Bank’s operations with relevant laws, regulations and standards including the adherence to the Direction on Corporate Governance issued by the Central Bank. C R Jansz The process through which the BIRMC discharges its responsibilities Chairman – Board Integrated Risk Management Committee is detailed in the Risk Management Section of this Annual Report. 24 February 2016 BIRMC Meetings BIRMC meets on a quarterly basis. During the year, DFCC Bank convened four BIRMC meetings. The attendance of the members is listed on page 90 of the Annual Report. The Committee continued to review policy frameworks, risk management

DFCC Bank PLC Annual Report 2015 109 Directors' Statement on Internal Control

Introduction the changes in the business environment or regulatory guidelines. In making this assessment, all key processes Internal Control is the process designed and effected by relating to material or significant transactions capture Stewardship those charged with governance, management and other and recording in the books of accounts are identified and personnel to provide reasonable assurance about the covered on an ongoing basis that is compatible with the achievement of the DFCC Bank PLC’s (Bank) objectives with guidance for Directors of Banks on the Directors’ Statement regard to reliability of financial reporting, effectiveness and of Internal Control issued by The Institute of Chartered efficiency of operations and compliance with applicable laws Accountants of Sri Lanka. and regulations. Key Internal Control Processes Internal control consists of the following components: a. The control environment; The key processes that have been established in reviewing b. The entity’s risk assessment process; the adequacy and integrity of the system of internal controls c. The information system, including the related include the following: business processes, relevant to financial reporting and The Board has established Committees to assist the communication; Board in exercising an oversight on the effectiveness of d. Control activities; and the Bank’s daily operations and ensuring that they are in e. Monitoring of controls. accordance with the corporate objectives, strategies and the budgetary targets as well as the policies and business The subset of this wider internal control system is the directions that have been approved. internal controls designed and implemented to provide reasonable assurance regarding the reliability of the The Internal Audit Department of the Bank verifies financial reporting, and that the preparation of financial compliance of operations with policies and procedures statements for external purposes has been done in and the effectiveness of the internal control systems accordance with relevant accounting principles and and highlights significant findings in respect of any regulatory requirements. non-compliance. Audits are carried out on all units and branches, the frequency of which are determined by Responsibility the level of risk assessed, to provide an independent and objective report on operational and management The Board of Directors acknowledge their responsibility activities of these units and branches. The annual audit for the adequacy and effectiveness of the Bank’s system of plan is reviewed and approved by the Audit Committee internal controls which is designed to provide assurance and the findings of the audits are submitted to the Audit on the maintenance of proper accounting records and Committee for review at their periodic meetings. the reliability of financial information generated, and safeguarding of the assets of the Bank. The Audit Committee of the Bank reviews internal control issues identified by the internal audit, the External However, such systems are designed to manage the Bank’s Auditors, regulatory authorities and management and key exposures to risk within acceptable risk parameters, evaluates the adequacy and effectiveness of the risk rather than to eliminate the risk of failure to achieve the management and internal control systems. They also business goals and objectives of the Bank. Therefore, the review the internal audit function focusing on the scope system of internal controls can only provide reasonable of audits and the quality of reporting. The minutes of the and not absolute assurance against errors or material Audit Committee meetings are tabled for the information misstatement of management and financial information and of the Board on a periodic basis. Further details of the records or against financial losses or fraud. activities undertaken by the Audit Committee of the Bank are set out in the Audit Committee Report on page 104. Framework for Managing Material Risks of The Board Integrated Risk Management Committee the Bank (BIRMC) is established by the Board to assist the Board to oversee the overall management of principal areas of The Board has set up an ongoing process for identifying, risk of the Bank. The BIRMC includes representation monitoring and managing the material risks faced by the from all key business and operations areas of the Bank Bank. This includes establishment of a dedicated Risk and assists the Board in the implementation of policies, Management Department that provides regular reports on procedures and controls identified by the BIRMC. various risks, subject to an oversight by the Internal Audit Department through Internal Audit Reports that enables the Audit Committee to review the adequacy and effectiveness of the system of internal controls continuously to match

110 DFCC Bank PLC Annual Report 2015 Operational Committees have also been established with and appropriate steps have been taken to rectify them. The appropriate mandates to ensure effective management recommendations made by the External Auditor, KPMG for and supervision of the Bank’s core areas of business the 9 months ended 31 December 2015 in connection with operations. These committees include the Management the internal control system will be addressed in the future. Committee, the Credit Committee, the Asset/Liability Committee, the Impairment Assessment Committee and The Directors are of the opinion that these the Information Technology Steering Committee. recommendations are intended to further improve the

internal control system and they do not any way detract Stewardship Assessment of the Adequacy and from the conclusion that the financial reporting system is Effectiveness of Internal Control reliable to provide reasonable assurance that the financial statements for external use are true and fair and complies Although this process is carried out every year on a continuing with Sri Lanka Accounting Standards and the regulatory basis, the Direction on Corporate Governance issued by the requirements of the Central Bank of Sri Lanka. Central Bank of Sri Lanka requires the Board of Directors to provide a separate report on the Bank’s Internal Control This assessment of internal control process is confined mechanism that confirms that the financial reporting system to the Bank including DFCC Vardhana Bank PLC up to has been designed to provide reasonable assurance regarding September 2015 on a standalone basis and for the combined the reliability of financial reporting and that the preparation entity from October 2015 to 31 December 2015, and did not of financial statements for external purposes has been done in include its other subsidiaries. accordance with relevant accounting principles and regulatory requirements, supplemented with independent certification by Confirmation the Auditor. The Auditors provide the independent Assurance Report in accordance with Sri Lanka Standard on Assurance Based on the above processes, the Board confirms that the Engagements (SLSAE) – 3050 issued by The Institute of financial reporting system of the Bank has been designed Chartered Accountants of Sri Lanka. to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial In order to facilitate the tasks of the Auditors to issue statements for external purposes is in accordance with the Independent Assurance Report, the SLSAE – 3050 Sri Lanka Accounting Standards and regulatory Directors' Statement on Internal Control requires documentation of all procedures and controls that requirements of the Central Bank of Sri Lanka. are related to significant accounts and disclosures of the financial statements of the Bank with audit evidence of Review of the Statement by External Auditors checks performed by the Bank on an ongoing basis. The External Auditors have reviewed the above Directors’ Statement on Internal Control for the 9 months ended 31 The risk-based Internal Audit Plan implemented by the December 2015 and their Independent Assurance Report is Internal Audit Department in consultation with the Board on page 112 of the Annual Report. Committee on Audit specifically included on a sample basis, independent verification that the internal control process By Order of the Board, documented by the Bank and supported with audit evidence was in fact carried out on an ongoing basis.

Transition to New Sri Lanka Accounting Standards

Consequent to full convergence of Sri Lanka Accounting P M B Fernando Standards with International Financial Reporting Standards Chairman - Audit Committee and International Accounting Standards that became effective from the financial year to 31 March 2013, the bank implemented a process to make required adjustments to the financial statements prepared under the previous accounting standards. The process for making necessary adjustments continue to be made based on Excel software application. C R Jansz The process followed by the Bank for quantification of Chairman - Board of Directors adjustments is continually reviewed and improved based on feedback received from the External Auditors and Internal Auditors. The testing of such process by the internal audit was carried out during the Period. These processes will be further improved on an ongoing basis. A R Fernando Chief Executive/Director Management Information 24 February 2016 The comments made by the External Auditors in connection with internal control system in the financial year to 31 March 2015 were reviewed during the current period DFCC Bank PLC Annual Report 2015 111 Independent Assurance Report Stewardship

To the Board of Directors of DFCC Bank PLC (d) Reviewed the minutes of the meetings of the Board of Directors and of relevant Board Committees. We were engaged by the Board of Directors of DFCC Bank PLC (“Bank”) to provide assurance on the Directors’ Statement on (e) Attended meetings of the audit committee at which the Internal Control (“Statement”) included in the annual report for annual report, including the Statement on Internal the period ended 31 December 2015 as set out on pages 110 to 111 Control is considered and approved for submission to the in this Annual Report. Board of Directors. (f) Considered whether the Directors’ Statement on Management’s Responsibility for the Internal Control covers the period under review and that Statement on Internal Control adequate processes are in place to identify any significant matters arising. Management is responsible for the preparation and presentation (g) Obtained written representations from Directors on matters of the Statement in accordance with the “Guidance for Directors material to the Statement on Internal Control where other of Banks on the Directors’ Statement on Internal Control” sufficient appropriate audit evidence cannot reasonably be issued in compliance with the section 3(8)(ii)(b) of the Banking expected to exist. Act Direction No. 11 of 2007, by the Institute of Chartered Accountants of Sri Lanka. SLSAE 3050 does not require us to consider whether the Statement covers all risks and controls, or to form an opinion Scope of the Engagement in Compliance on the effectiveness of the Bank’s risk and control procedures. with SLSAE 3050 SLSAE 3050 also does not require us to consider whether the processes described to deal with material internal control aspects Our responsibility is to issue a report to the Board on the of any significant problems disclosed in the annual report will, in Statement based on the work performed. We conducted our fact, remedy the problems. engagement in accordance with Sri Lanka Standard on Assurance Engagements SLSAE 3050 – Assurance Report for Banks on Our Conclusion Directors’ Statement on Internal Control issued by the Institute of Chartered Accountants of Sri Lanka. Based on the procedures performed, nothing has come to our attention that causes us to believe that the Statement included in the Summary of Work Performed Annual Report is inconsistent with our understanding of the process the Board of Directors has adopted in the review of the design and Our engagement has been conducted to assess whether the effectiveness of internal control system over the financial reporting of Statement is both supported by the documentation prepared the Bank. by or for directors and appropriately reflects the process the directors have adopted in reviewing the system of internal control for the Bank.

To achieve this objective, appropriate evidence has been obtained by performing the following procedures: Chartered Accountants (a) Enquired the Directors to obtain an understanding of the Colombo process defined by the Board of Directors for their review of the design and effectiveness of internal control and compared 24th February 2016 their understanding to the Statement made by the Directors in the Annual Report. (b) Reviewed the documentation prepared by the Directors to support their Statement made. (c) Related the Statement made by the Directors to our knowledge of the Bank obtained during the audit of the Financial Statements.

112 DFCC Bank PLC Annual Report 2015 Investor Relations

Investor Engagement Performance of the Share Listening to and maintaining a dialogue with the The market value of the DFCC Bank PLC ordinary share investors, both existing and potential, help us understand on 31 December 2015 was LKR 168.90, compared to their expectations as well as concerns. That understanding LKR 202.90 on 31 March 2015. During the nine months in turn, helps us to fine-tune our engagement and period, the highest price of LKR 230.00 was recorded Investor Relations structure reporting, so that information will be relevant on 21 April 2015. The lowest price for the period was to them, leading to building up mutual trust and a loyal recorded on 3 December 2015 as LKR 155.00. following of investors who will take a long-term view of the value of their investments in the Bank, without The share price of DFCC Bank followed the movement of being swayed by short-term fluctuations in performance. the All Share Price Index (ASPI) closely during the period The section on Stakeholders (page 30), details various under review. frameworks that govern our engagement process and how we communicate with our investors in general.

The Chief Executive and the Deputy Chief Executive, maintain a dialogue with key institutional investors and bring any matters of concern to the notice of the Board. Details of their participation in investor forums and meetings during the year, are given in the Corporate Governance report on page 94. In addition to the Annual General Meeting held on 30 June 2015, the Extra-ordinary General Meeting held on 28 August 2015 to obtain the approval of the shareholders for the proposal relating to the amalgamation with DFCC Vardhana Bank PLC, also gave an opportunity for the shareholders to interact with the Board and the Management.

Share Price Movement of DFCC Bank from April 2015 -- December 2015

ASPI Share Price ()LKR

7,800 280

7,300 240 6,800 200 6,300

5,800 160

5,300 120 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15

ASPI Share Price ()LKR

DFCC Bank PLC Annual Report 2015 113 DFCC Bank Share Price Information

9 months ended Period 1 April to 31 March 31 December 2015 2015 2014 2013

Price Indices ASPI 6,894.50 6,820.34 5,968.31 5,735.68 S&P SL 20 3,625.69 3,852.43 3,279.92 3,293.57

Investor Relations Share Price Lowest Price (LKR) 155.0 144.7 115.0 103.00 (03.12.2015) (01.04.2014) (15.11.2013) (07.06.2012) Highest Price (LKR) 230.0 239.0 154.0 131.80 (21.04.2015) (07.10.2014) (13.01.2014) (28.03.2013) Closing Price (LKR) 168.9 202.9 143.0 131.10 (31.12.2015) (31.03.2015) (31.03.2014) (28.03.2013)

Market Capitalisation Value (LKR million) 44,775 53,788 38,148 34,754 Percentage of total market cap 1.52 1.86 1.53 1.58 Rank 14 11 13 13

Value of Shares Traded Value (LKR million) 1,717 6,761 906 1,315 Percentage of total market turnover 0.91 1.91 0.46 0.69 Rank 25 9 45 26

Days Traded No. of days traded 182 239 241 239 Total No. of market days 183 239 243 239 Percentage of market days traded 99.5 100.0 99.2 100.0

Frequency of Shares Traded No. of transactions 4,654 9,020 5,444 5,171 Percentage of total frequency 0.41 0.45 0.37 0.32 Rank 81 78 82 99

114 DFCC Bank PLC Annual Report 2015 Distribution of Shareholding

Categories of Shareholders

As at 31 December 2015 31 March 2015 Shareholding, % Foreign Local Total Foreign Local Total Individual 5.78 8.33 14.11 5.38 9.13 14.51 Institutional 19.89 66.00 85.89 20.49 65.00 85.49 25.67 74.33 100.00 25.87 74.13 100.00 Investor Relations Public holding percentage and number of shareholders as at 31 December 2015 were 63.34% and 8,622 respectively.

Size-wise Distribution of Shareholding

31 December 2015 31 March 2015 Share range No. of Total holding % No. of Total holding % shareholders shareholders 01 - 1,000 5,457 1,763,749 0.66 5,285 1,744,865 0.66 1,001 - 5,000 2,436 5,002,934 1.89 2,420 4,986,874 1.88 5,001 - 10,000 324 2,336,279 0.88 314 2,256,205 0.85 10,001 - 50,000 303 6,522,498 2.46 303 6,818,222 2.57 50,001 - 100,000 41 2,929,838 1.10 41 2,872,994 1.08 100,001 - 500,000 46 9,261,557 3.49 46 8,725,933 3.29 500,001 - 1,000,000 8 5,509,745 2.08 9 5,740,741 2.17 1,000,000 & above 25 231,771,088 87.44 25 231,951,854 87.50 8,640 265,097,688 100.00 8,443 265,097,688 100.00

Twenty Major Shareholders of the Bank as at 31 December 2015

Name of Shareholder/Company 31 December 2015 31 March 2015*

No. of Shares % No. of Shares %

Bank of Ceylon A/c No. 2 38,039,994 14.35 38,039,994 14.35 Hatton National Bank PLC A/c No. 1 32,396,140 12.22 32,396,140 12.22 Sri Lanka Insurance Corporation Limited-Life Fund 26,509,832 10.00 26,509,832 10.00 Employees� Provident Fund 24,368,995 9.19 24,368,995 9.19 Mr M A Yaseen 20,296,700 7.66 19,246,700 7.26 Melstacorp Limited 17,042,856 6.43 17,042,856 6.43 Seafeld International Limited 15,286,794 5.77 15,286,794 5.77 HSBC Intl. Nom. Limited. – BPSS Lux-Aberdeen Global Asia Pacific Equity Fund 12,216,146 4.61 12,216,146 4.61 Renuka City Hotels PLC 6,926,870 2.61 6,926,870 2.61 HSBC Intl. Nom Limited. – BP2S LDN-Aberdeen Asia Pacific Equity Fund 6,750,000 2.55 6,750,000 2.55 HSBC Intl. Nominees Limited. -BP2S London-Edinburg Dragon Trust PLC 5,620,164 2.12 5,620,164 2.12 Renuka Hotels Limited 4,073,360 1.54 4,073,360 1.54 HSBC Intl. Nominees Limited. – BP2S London-Aberdeen Asia Smaller Companies Investment Trust 3,889,870 1.47 3,889,870 1.47 Employees Trust Fund Board 3,599,793 1.36 2,408,991 0.91 HSBC Intl. Nominees Limited. – BP2S Luxembourg-Aberdeen Globoal Frontier Markets Equity Fund 2,284,584 0.86 3,287,584 1.24 Cargo Boat Development Company PLC 2,098,200 0.79 2,098,200 0.79 Mrs L E M Yaseen 2,000,000 0.75 3,520,000 1.33 HSBC Intl. Nominees Limited. – BP2S-London-Aberdeen New Dawn Investment Trust XCC6 1,800,000 0.68 1,800,000 0.68 Akbar Brothers Pvt Limited A/c No. 1 1,221,269 0.46 536,709 0.20 Renuka Consultants & Services Limited 1,097,992 0.41 1,097,992 0.41 Total of the 20 Major Sahreholders 227,519,559 85.83 Other Shareholders 37,578,129 14.17 Total 265,097,688 100.00

*Shareholding as at 31 March 2015 of the twenty largest shareholders as at 31 December 2015

DFCC Bank PLC Annual Report 2015 115 116 DFCC Bank PLC Annual Report 2015 Chief Executive’sandChief FinancialOfficer’s Statement ofDirectors’Responsibilitiesin Financial Notes tothe FinancialStatements Relation toFinancialStatements Statement ofChanges inEquity Statement ofFinancial Position Statement ofProfitor Loss and Independent Auditors’Report Other Comprehensive Income Statement ofResponsibility Reports DFCC BankPLC Statement ofCash Flows Income Statement

Annual Report2015

- 120 - 128 - 126 - 124 - 122 - 123 - 119 - 121 - 131

117

Notes to the Financial Statements Financial Reports Financial Calendar - 2015

LKR 6.00 per share Final Dividend for F/Y 2014/15 paid on 10 July 2015 Audited financial statements signed on 24 February 2016 60th Annual General Meeting to be held on 30 March 2016 LKR 2.50 per share Final Dividend for 2015 payable on 16 March 2016 1st Quarter Interim Results released on 12 August 2015 2nd Quarter Interim Results released on 13 November 2015 Financial Reports Proposed Financial Calendar - 2016

1st Quarter Interim Results to be released in May 2016 2nd Quarter Interim Results to be released in August 2016 3rd Quarter Interim Results to be released in November 2016 61st Annual General Meeting to be held in March 2017

118 DFCC Bank PLC Annual Report 2015 Statement of Directors’ Responsibilities in Relation to Financial Statements

The Auditors’ Report sets out the respective responsibilities of The Board appointed Audit Committee chaired by an the Directors and Auditors relating to the financial statements Independent Non-Executive Director who possesses and this statement provides additional information. qualifications and experience in accountancy and audit assists the Directors to discharge their responsibility on the The Directors are required by relevant statutory provisions integrity of financial reporting system and monitoring the to prepare financial statements for each financial year effectiveness and adequacy of internal control system. which give a true and fair view of the state of affairs of This Committee has made an independent assessment of the Financial Reports the Bank and the Group for that period. The statutory financial reporting system of the Bank and confirmed that to provisions are in the Companies Act, No. 07 of 2007 and the best of its knowledge and belief the financial statements the Banking Act, No. 30 of 1988 and amendments thereto. issued for external purposes by the Bank complied with The application of principal qualitative characteristics Sri Lanka Accounting Standards and complies with the and appropriate accounting standards and regulatory statutory provisions of the Companies Act, No. 07 of 2007 requirements inclusive of specific disclosures would result and the Banking Act, No. 30 of 1988 as amended. The in financial statements that convey a true and fair view of Report of this Committee is on pages 104 to 106. financial information and financial position. The Directors are in agreement with the assessment The Directors are satisfied that the Bank and the Group of the Audit Committee on the reliability of financial have the resources to continue in business for the reporting system of the Bank and confirm that the financial foreseeable future and therefore, these financial statements statements prepared for external use is in accordance with are prepared on a going concern basis. relevant accounting principles and regulatory requirements. As part of institutional checks and balances and The financial statements for the nine month period ending accountability, in addition to this Statement of Directors’ 31 December 2015 and the comparative periods have Responsibility, the Directors have included the Chief been prepared in accordance with Sri Lanka Accounting Executive’s and the Chief Financial Officer’s Responsibility Standards (SLFRS and LKAS). Statement on page 120.

The Directors are responsible for keeping proper accounting By Order of the Board, records and to take reasonable steps as far as practicable, to ensure the accuracy and reliability of accounting records, to enable the preparation of financial statements. The Directors have a general responsibility to take reasonable steps to safeguard the assets of the Bank. In discharging Ms A Withana these responsibilities, the Directors have instituted a Company Secretary system of internal financial controls and a system for monitoring its effectiveness. These provide reasonable Colombo but not absolute assurance of safeguarding of the Bank’s 24 February 2016 assets, maintenance of proper accounting records and the reliability of financial information.

DFCC Bank PLC Annual Report 2015 119 Chief Executive’s and Chief Financial Officer’s Statement of Responsibility

The financial statements are prepared in compliance with the Sri Lanka Financial Reporting Standards (SLFRS/LKAS) issued by The Institute of Chartered Accountants of Sri Lanka, Companies Act, No. 07 of 2007 and Banking Act, No. 30 of 1988 as amended and Directions issued thereunder relating to financial statement formats and disclosure of information. Financial Reports The Board of Directors and the Management of the Bank accept responsibility for the integrity and objectivity of these financial statements. The estimates and judgments relating to the financial statements were made on a prudent and reasonable basis, in order that the financial statements are true and fair. To ensure this, the Bank has taken proper and sufficient care in installing a system of internal control and accounting records, for safeguarding assets and for preventing and detecting frauds as well as other irregularities, which is reviewed, evaluated and updated on an ongoing basis. Our Internal Auditors have conducted periodic audits to provide reasonable assurance that the established policies and procedures of the Bank were consistently followed. However, there are inherent limitations that should be recognised in weighing the assurances provided by any system of internal controls and accounting.

The financial statements of the subsidiary, joint venture Company and the associate Company with a financial year end of 31 December were audited by KPMG. The subsidiaries with a financial year end of 31 March were subject to a limited review engagement by KPMG for nine months ended 31 December 2015.

The Audit Committee of the Bank meets periodically with the Internal Auditors and the Independent Auditors to review the manner in which these Auditors perform their responsibilities, and to discuss auditing, internal control and financial reporting issues. To ensure complete independence, the Independent Auditor and the Internal Auditors have full and free access to the members of the Audit Committee to discuss any matter of substance.

A R Fernando Director/Chief Executive

Ms D S J Wettasinghe Chief Financial Officer

Colombo 24 February 2016

120 DFCC Bank PLC Annual Report 2015 Independent Auditors’ Report

To the Shareholders of DFCC Bank PLC also includes evaluating the appropriateness of accounting Financial Reports policies used and the reasonableness of accounting estimates Report on the Financial Statements made by Board, as well as evaluating the overall presentation We have audited the accompanying financial statements of of the financial statements. DFCC Bank PLC (“the Bank”), and the consolidated financial statements of the Bank and its subsidiaries (“Group”), We believe that the audit evidence we have obtained is which comprise the statement of financial position as at sufficient and appropriate to provide a basis for our 31st December 2015, and the statements of income, profit or audit opinion. loss and other comprehensive income, changes in equity and, cash flows for the period then ended, and notes, comprising Opinion a summary of significant accounting policies and other In our opinion, the consolidated financial statements give a explanatory information set out on pages 122 to 208 of the true and fair view of the financial position of the Group as at annual report. 31st December 2015, and of its financial performance and cash flows for the period then ended in accordance with Sri Lanka Board’s Responsibility for the Financial Accounting Standards. Statements The Board of Directors (“Board”) is responsible for the Report on Other Legal and Regulatory preparation of these financial statements that give a true and Requirements fair view in accordance with Sri Lanka Accounting Standards, As required by section 163 (2) of the Companies Act No. 07 of and for such internal control as Board determines is necessary 2007, we state the following: to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. (a) The basis of opinion and scope and limitations of the audit are as stated above Auditors’ Responsibility (b) In our opinion: – we have obtained all the information and explanations Our responsibility is to express an opinion on these financial that were required for the audit and, as far as appears statements based on our audit. We conducted our audit from our examination, proper accounting records have in accordance with Sri Lanka Auditing Standards. Those been kept by the Bank, standards require that we comply with ethical requirements – The financial statements of the Bank give a true and and plan and perform the audit to obtain reasonable assurance fair view of its financial position as at 31st December about whether the financial statements are free from material 2015, and of its financial performance and cash flows misstatement. for the period then ended in accordance with Sri Lanka An audit involves performing procedures to obtain audit Accounting Standards. evidence about the amounts and disclosures in the financial – The financial statements of the Bank and the Group statements. The procedures selected depend on the auditors’ comply with the requirements of sections 151 and 153 of judgment, including the assessment of the risks of material the Companies Act No. 07 of 2007. misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the Chartered Accountants circumstances, but not for the purpose of expressing an opinion Colombo on the effectiveness of the entity’s internal control. An audit 24th February 2016

DFCC Bank PLC Annual Report 2015 121 Income Statement

BANK GROUP

Notes Page 9 months ended Year ended 9 months ended Year ended No. 31 December 31 March 31 December 31 March 2015 2015 2015 2015 LKR 000 LKR 000 LKR 000 LKR 000

Income 11 146 10,036,280 10,394,085 17,502,868 20,093,711 Financial Reports Interest income 8,918,343 8,010,024 15,308,568 16,098,667 Interest expenses 5,560,354 4,675,447 8,923,243 9,407,584 Net interest income 12 146 3,357,989 3,334,577 6,385,325 6,691,083 Fee and commission income 371,590 167,995 1,151,029 1,137,267 Fee and commission expenses 1,208 – 9,914 17,303 Net fee and commission income 13 147 370,382 167,995 1,141,115 1,119,964 Net gain from trading 14 147 87,062 146,679 215,575 479,988 Net (loss)/gain from financial instruments at fair value through profit or loss 15 147 (330) 656,512 74,583 678,217 Net gain from financial investments 16 148 640,637 2,150,427 507,528 2,201,070 Other operating income/(loss) – net 17 148 18,978 (737,552) 245,585 (501,498) Total operating income 4,474,718 5,718,638 8,569,711 10,668,824 Impairment charge/(write back) for loans and other losses 18 148 224,939 (307,564) 795,327 246,556 Net operating income 4,249,779 6,026,202 7,774,384 10,422,268 Operating expenses Personnel expenses 19 148 1,212,541 943,041 2,559,350 2,212,600 Other expenses 20 149 1,105,475 726,627 2,150,927 2,062,896 Operating profit before value added tax and nation building tax on financial services 1,931,763 4,356,534 3,064,107 6,146,772 Value added tax and nation building tax on financial services 21 150 342,498 585,244 589,330 884,072 Operating profit after value added tax and nation building tax on financial services 1,589,265 3,771,290 2,474,777 5,262,700 Share of profits of associate and joint venture – – 78,693 153,270 Profit before tax 1,589,265 3,771,290 2,553,470 5,415,970 Tax expense 22 150 520,915 530,942 911,842 977,358 Profit for the period 1,068,350 3,240,348 1,641,628 4,438,612 Profit attributable to: - Equity holders of the Bank 1,068,350 3,240,348 1,592,303 4,362,256 - Non-controlling interests 49,325 76,356 Profit for the period 1,068,350 3,240,348 1,641,628 4,438,612

Basic earnings per ordinary share (LKR) 23 152 4.03 12.22 6.01 16.46 The notes to the financial statements from pages 131 to 208 form part of these financial statements.

122 DFCC Bank PLC Annual Report 2015 Statement of Profit or Loss and Other Comprehensive Income

BANK GROUP

9 months ended Year ended 9 months ended Year ended 31 December 31 March 31 December 31 March 2015 2015 2015 2015 LKR 000 LKR 000 LKR 000 LKR 000

Profit for the period 1,068,350 3,240,348 1,641,628 4,438,612 Financial Reports Other comprehensive (expenses)/income for the period, net of tax

Other comprehensive (expenses)/income to be reclassified to income statement Available for sale financial assets: Net change in fair value of available-for-sale financial assets (3,157,505) 5,474,513 (3,246,069) 5,531,519 Net amount transferred to income statement on disposal of available-for-sale financial assets (36,682) (404,565) (56,933) (490,253) Tax expense relating to available-for-sale financial assets (360) (163) 30,108 (17,892) Share of other comprehensive income of equity accounted joint venture – – 17,041 8,378 Share of other comprehensive (expenses)/income of equity accounted associate – – (12) 708 Total other comprehensive (expenses)/income to be reclassified to income statement (3,194,547) 5,069,785 (3,255,865) 5,032,460

Other comprehensive expenses not to be reclassified to income statement Actuarial gains and losses on defined benefit plans (102,755) (171,807) (104,118) (187,912) Tax expense relating to actuarial gains and losses on defined benefit plans 1,112 4,898 1,553 10,276 Total other comprehensive expenses not to be reclassified to income statement (101,643) (166,909) (102,565) (177,636) Other comprehensive (expenses)/income for the period, net of tax (3,296,190) 4,902,876 (3,358,430) 4,854,824

Total comprehensive (expenses)/income for the period (2,227,840) 8,143,224 (1,716,802) 9,293,436

Total comprehensive (expenses)/ income attributable to: - Equity holders of the Bank (2,227,840) 8,143,224 (1,765,468) 9,217,506 - Non-controlling interests 48,666 75,930 Total comprehensive (expenses)/income for the period (2,227,840) 8,143,224 (1,716,802) 9,293,436

The notes to the financial statements from pages 131 to 208 form part of these financial statements.

DFCC Bank PLC Annual Report 2015 123 Statement of Financial Position

BANK GROUP

As at 31.12.2015 31.03.2015 31.12.2015 31.03.2015 Notes Page No. LKR 000 LKR 000 LKR 000 LKR 000

Assets Cash and cash equivalents 26 154 4,305,247 110,576 4,314,777 4,060,820 Balances with Central Bank of Sri Lanka 27 154 5,553,809 – 5,553,809 2,616,406 Placements with banks

Financial Reports 28 155 – 716,622 1,718 1,324,892 Derivative assets held-for-risk management 29 155 198,776 29,335 198,776 89,861 Other financial assets held-for-trading 30 155 – 1,469,166 – 1,469,166 Loans to and receivables from banks 31 156 4,574,319 484,067 4,602,263 3,563,647 Loans to and receivables from other customers 32 156 160,345,530 73,448,705 160,343,155 135,322,723 Financial investments – available-for-sale 33 158 48,957,015 27,823,496 48,957,015 45,826,878 Financial investments – held-to-maturity 34 163 17,903,885 2,085,921 17,903,885 10,872,287 Investments in subsidiaries 35 164 132,855 5,957,564 – – Investment in associate 36 165 35,270 35,270 66,980 63,960 Investment in joint venture 37 166 655,000 655,000 1,180,819 1,124,025 Due from subsidiaries 38 167 17,394 135,091 – – Investment property 39 167 – – 195,732 186,070 Property, plant and equipment 40 168 943,017 351,207 1,042,301 1,051,932 Intangible assets 41 169 247,115 82,380 247,945 280,196 Goodwill on consolidation 42 170 – – 156,226 156,226 Government grant receivable 43 170 539,758 483,727 539,758 483,727 Deferred tax asset 44 171 – – 1,536 1,562 Income tax refund due – – – 1,178 Prepayments 36,708 26,342 36,708 26,342 Other assets 45 172 1,705,379 717,125 1,765,199 2,088,401 Total assets 246,151,077 114,611,594 247,108,602 210,610,299

Liabilities Due to banks 46 172 24,364,403 1,928,867 24,365,653 5,972,567 Derivative liabilities held-for-risk-management 29 155 85,333 1,737 85,333 37,153 Due to other customers 47 173 110,890,685 22,484,652 110,551,220 92,711,793 Other borrowing 48 173 35,955,297 24,361,797 35,955,297 38,846,172 Debt securities issued 49 174 23,292,660 19,445,924 23,292,660 19,445,924 Current tax liability 251,551 53,211 266,723 191,598 Deferred tax liability 44 171 880,490 486,855 880,490 642,021 Government grant – deferred income 43 170 476,008 303,727 476,008 303,727 Other liabilities 50 175 3,368,558 840,156 3,500,012 2,586,927 Due to subsidiaries 51 179 – 31 – – Subordinated term debt 52 179 3,767,081 609,373 3,767,081 1,609,664 Total liabilities 203,332,066 70,516,330 203,140,477 162,347,546

124 DFCC Bank PLC Annual Report 2015 BANK GROUP

As at 31.12.2015 31.03.2015 31.12.2015 31.03.2015 Notes Page No. LKR 000 LKR 000 LKR 000 LKR 000

Equity Stated capital 53 180 4,715,814 4,715,814 4,715,814 4,715,814 Statutory reserve 54 180 1,834,275 1,545,000 1,834,275 1,545,000

Retained earnings 55 180 8,203,426 6,541,651 11,506,206 12,752,999 Financial Reports Other reserves 56 180 28,065,496 31,292,799 25,659,404 28,895,058 Total equity attributable to equity holders of the Bank 42,819,011 44,095,264 43,715,699 47,908,871 Non-controlling interests 252,426 353,882 Total equity 42,819,011 44,095,264 43,968,125 48,262,753 Total equity and liabilities 246,151,077 114,611,594 247,108,602 210,610,299

Contingent liabilities and commitments 57 181 76,014,851 40,979,686 76,014,851 75,072,548

Net assets value per share, LKR 161.52 166.34 164.90 180.72

The notes to the financial statements from pages 131 to 208 form part of these financial statements.

I certify that these financial statements comply with the requirements of the Companies Act, No. 07 of 2007. Statement of Financial Position

Ms D S J Wettasinghe Chief Financial Officer

For and on behalf of the Board of Directors,

C R Jansz A R Fernando Chairman Director and Chief Executive

Colombo 24 February 2016

DFCC Bank PLC Annual Report 2015 125 Statement of Changes in Equity

Statutory reserves Other reserves

Stated Reserve Investment Fair value General Retained Total capital fund fund account reserve reserve earnings equity LKR 000 LKR 000 LKR 000 LKR 000 LKR 000 LKR 000 LKR 000

Bank Balance as at 01.04.2014 4,715,814 1,380,000 1,001,648 12,443,175 13,779,839 4,089,601 37,410,077 Financial Reports Profit for the year – – – – – 3,240,348 3,240,348 Other comprehensive income net of tax – – – 5,069,785 – (166,909) 4,902,876 Total comprehensive income for the year – – – 5,069,785 – 3,073,439 8,143,224 Transfers – 165,000 (1,001,648) – – 836,648 –

Transactions with equity holders, recognised directly in equity Final dividend approved on 30.06.2014 – – – – – (1,458,037) (1,458,037) Total contributions from and distribution to equity holders – – – – – (1,458,037) (1,458,037)

Balance as at 31.03.2015 4,715,814 1,545,000 – 17,512,960 13,779,839 6,541,651 44,095,264

Super gain tax (Note 22.4) – – – – – (776,593) (776,593) Adjusted Balance as at 01.04.2015 4,715,814 1,545,000 – 17,512,960 13,779,839 5,765,058 43,318,671

Balances transferred on amalgamation (Note 61.3) – 229,275 – (32,756) – 3,122,247 3,318,766 4,715,814 1,774,275 – 17,480,204 13,779,839 8,887,305 46,637,437

Total comprehensive (expenses)/income for the period Profit for the period – – – – – 1,068,350 1,068,350 Other comprehensive expenses net of tax – – – (3,194,547) – (101,643) (3,296,190) Total comprehensive (expenses)/income for the period – – – (3,194,547) – 966,707 (2,227,840)

Transfers – 60,000 – – – (60,000) –

Transactions with equity holders, recognised directly in equity Final dividend approved on 30.06.2015 – – – – – (1,590,586) (1,590,586) Total contributions from and distribution to equity holders – – – – – (1,590,586) (1,590,586) Balance as at 31.12.2015 4,715,814 1,834,275 – 14,285,657 13,779,839 8,203,426 42,819,011

126 DFCC Bank PLC Annual Report 2015 Attributable to the equity holders of the Bank

Statutory reserves Other reserves Stated Reserve Investment Fair value Exchange General Retained Total Non- Total capital fund fund reserve equalisa- reserve earnings controlling Equity account tion interests reserve LKR 000 LKR 000 LKR 000 LKR 000 LKR 000 LKR 000 LKR 000 LKR 000 LKR 000 LKR 000

Group Financial Reports Balance as at 01.04.2014 4,715,814 1,380,000 1,001,648 10,079,975 – 13,779,839 9,163,494 40,120,770 333,728 40,454,498

Profit for the year – – – – – – 4,362,256 4,362,256 76,356 4,438,612 Other comprehensive income net of tax – – – 5,032,886 2,358 – (179,994) 4,855,250 (426) 4,854,824 Total comprehensive income for the year – – – 5,032,886 2,358 – 4,182,262 9,217,506 75,930 9,293,436 Transfers 165,000 (1,001,648) – – – 836,648 – – –

Transactions with equity holders, recognised directly in equity Change in holding through joint venture – – – – – – 28,632 28,632 – 28,632 Final dividend approved on 30.06.2014 – – – – – – (1,458,037) (1,458,037) – (1,458,037) Dividend distributed to non-controlling interest by subsidiaries – – – – – – – – (55,776) (55,776) Statement of Changes in Equity Total contributions from and distribution to equity holders – – – – (1,429,405) (1,429,405) (55,776) (1,485,181) Balance as at 31.03.2015 4,715,814 1,545,000 – 15,112,861 2,358 13,779,839 12,752,999 47,908,871 353,882 48,262,753 Super gain tax (Note 22.4) – – – – – – (794,705) (794,705) (16,663) (811,368) Adjusted balance as at 01.04.2015 4,715,814 1,545,000 – 15,112,861 2,358 13,779,839 11,958,294 47,114,166 337,219 47,451,385 Profit for the period – – – – – – 1,592,303 1,592,303 49,325 1,641,628 Other comprehensive income/(expenses) net of tax – – – (3,255,206) 19,552 – (122,117) (3,357,771) (659) (3,358,430) Total comprehensive income/(expenses) for the period (3,255,206) 19,552 1,470,186 (1,765,468) 48,666 (1,716,802) Transfers – 289,275 – – – – (289,275) – – –

Transactions with equity holders, recognised directly in equity Increase in ownership interest by the Bank that does not result in change of control – – – – – – (45,667) (45,667) (76,741) (122,408) Change in holding through joint venture – – – – – – 9,830 9,830 – 9,830 Final dividend approved on 30.06.2015 – – – – – – (1,590,586) (1,590,586) – (1,590,586) Preference share dividend paid by subsidiary of joint venture – – – – – – (6,576) (6,576) – (6,576) Dividend distributed to non-controlling interest by subsidiaries – – – – – – – – (56,718) (56,718) Total contributions from and distribution to equity holders – – – – – (1,632,999) (1,632,999) (133,459) (1,766,458) Balance as at 31.12.2015 4,715,814 1,834,275 – 11,857,655 21,910 13,779,839 11,506,206 43,715,699 252,426 43,968,125

DFCC Bank PLC Annual Report 2015 127 Statement of Cash Flows

BANK GROUP

9 months ended Year ended 9 months ended Year ended 31 December 31 March 31 December 31 March 2015 2015 2015 2015 LKR 000 LKR 000 LKR 000 LKR 000

Cash flow from operating activities Interest receipts 7,238,360 6,873,761 12,887,530 13,921,453

Financial Reports Interest payments (5,375,259) (4,292,672) (8,432,834) (9,144,115) Recoveries on loans previously written-off 23,267 42,471 31,463 46,244 Receipts from other operating activities 2,237,257 72,612 3,556,605 2,105,965 Cash payments to employees and suppliers (1,790,725) (1,405,580) (3,669,959) (3,562,254) Value added tax and nation building tax on financial services (327,844) (600,176) (589,020) (871,983) Other levies (29,199) (34,187) (37,844) (37,699) Operating cash flow before changes in operating assets and liabilities 1,975,857 656,229 3,745,941 2,457,611

(Increase)/decrease in operating assets Deposits held for regulatory or monetary control purposes (2,308,744) – (2,937,403) 254,086 Funds advanced to customers (12,925,166) (10,941,817) (27,448,299) (23,632,764) Others 576,482 (229,292) 660,963 (321,067)

Increase/(decrease) in operating liabilities Deposits from customers 13,298,437 5,549,600 17,122,636 11,727,396 Negotiable certificates of deposit 18,055 – 143,675 (37,703) Others 135,829 96,982 137,817 223,154 Net cash flow from/(used in) operating activities before income tax 770,750 (4,868,298) (8,574,670) (9,329,287) Income tax paid (951,490) (576,581) (1,248,318) (810,755) Net cash flow used in operating activities (180,740) (5,444,879) (9,822,988) (10,140,042)

Cash flow from investing activities Dividend received 563,704 1,565,746 284,255 1,383,206 Interest received 1,104,679 663,278 1,398,108 1,239,098 Government Securities – net (4,818,751) 1,019,756 (9,002,938) (2,707,313) Proceeds from sale and redemption of securities 558,085 3,138,109 558,085 3,138,109 Purchase of securities (2,496,929) (2,451,221) (2,214,741) (10,920,313) Purchase of property, equipment, intangibles and investment property (118,534) (60,774) (313,883) (389,311) Proceeds from sale of equipment and investment property 2,810 1,940 (1,445) 1,962 Net cash (used in)/from investing activities (5,204,936) 3,876,834 (9,292,559) (8,254,562)

128 DFCC Bank PLC Annual Report 2015 BANK GROUP

9 months ended Year ended 9 months ended Year ended 31 December 31 March 31 December 31 March 2015 2015 2015 2015 LKR 000 LKR 000 LKR 000 LKR 000

Cash flow from financing activities Payment to minority shareholders on amalgamation (122,408) – (122,408) –

Issue of debentures – 4,963,600 – 4,963,600 Financial Reports Borrowing, medium and long term 3,318,581 2,662,392 3,315,727 2,662,392 Other borrowing – net 7,094,903 (3,552,000) 20,167,940 11,364,228 Repayment of borrowing, medium and long term (3,505,648) (3,798,259) (3,505,649) (3,801,057) Dividends paid (1,572,012) (1,451,188) (1,628,735) (1,506,965)

Net cash flow from/(used in) financing activities 5,213,416 (1,175,455) 18,226,875 13,682,198

Net decrease in cash and cash equivalents (172,260) (2,743,500) (888,672) (4,712,406) Cash and cash equivalents at the beginning of period 498,619 3,242,119 5,205,167 9,917,573 Cash and cash equivalents of DFCC Vardhana Bank PLC

as at the date of amalgamation 3,978,888 – – – Flows Statement of Cash Cash and cash equivalents at the end of period 4,305,247 498,619 4,316,495 5,205,167

Reconciliation of cash and cash equivalents with items reported in the statement of financial position Cash and cash equivalents (Note 26) 4,305,247 110,576 4,314,777 4,060,820 Bank overdrafts (Note 46) – (328,579) – (330,545) Placements with banks (Note 28) – 716,622 1,718 1,324,892 Government Securities – less than 3 months – – – 150,000 4,305,247 498,619 4,316,495 5,205,167

DFCC Bank PLC Annual Report 2015 129 Reconciliation of profit for the period to net cash flows used in operating activities.

BANK GROUP

9 months ended Year ended 9 months ended Year ended 31 December 31 March 31 December 31 March 2015 2015 2015 2015 LKR 000 LKR 000 LKR 000 LKR 000

Profit for the period 1,068,350 3,240,348 1,641,628 4,438,612

Financial Reports Add/(deduct) items not using (providing) cash: 326,785 (143,036) 798,376 133,871 Depreciation – Property, equipment and investment property 114,781 116,673 247,234 279,899 Amortisation – Intangible assets 42,538 23,682 102,158 100,232 Unrealised gain on Treasury Bills and Bonds (95,558) (146,679) (96,659) (335,559) Net loss/gain from financial instruments at fair value – Contracts with commercial banks 14,368 (81,577) (60,545) (96,819) – CBSL Swap (14,038) (574,935) (14,038) (574,935) Amortisation of deferred income on Government grant 130,288 376,185 130,288 376,185 Foreign exchange loss (17,139) 500,677 (77,984) 465,807 Impairment for loans and other losses 224,939 (307,564) 795,327 246,556 Notional tax credit on Treasury Bills and Bonds (73,394) (49,498) (148,712) (174,225) Statement of Cash Flows Statement of Cash Share of profits of associate and joint venture – – (78,693) (153,270)

Deduct items reported gross under investing activities: (575,948) (2,128,729) (258,637) (1,913,934) Dividend income (536,276) (991,958) (218,569) (777,803) Gains on sale of financial investment (37,018) (1,135,054) (37,018) (1,135,054) Gain on sale of equipment and investment property (2,654) (1,717) (3,050) (1,077)

Deduct changes in operating assets and liabilities: (995,429) (6,413,462) (12,004,255) (12,798,591) Decrease/(increase) in account receivables 99,234 (1,300,683) (491,604) (1,749,264) Increase in account payables 540,522 457,387 1,143,801 570,968 Increase in income tax payable (36,940) 7,981 (94,908) 255,237 Decrease in deferred tax (393,634) (53,620) (241,568) (88,634) Increase in operating assets (14,657,430) (11,171,109) (29,724,203) (23,699,745) Increase in operating liabilities 13,452,321 5,646,582 17,404,127 11,912,847 Net cash used in operating activities (180,740) (5,444,879) (9,822,988) (10,140,042)

130 DFCC Bank PLC Annual Report 2015 Notes to the Financial Statements

1 Reporting Entity A summary of principal activities of DFCC Bank PLC, its subsidiary companies, associate company and joint venture DFCC Bank PLC (‘Bank’) is a limited liability public company is as follows: company incorporated and domiciled in Sri Lanka. DFCC Bank PLC The Bank was incorporated in 1955 under DFCC Bank Act, Range of financial services such as accepting deposits, No. 35 of 1955 as a limited liability public company and corporate credit and retail banking, personal financial the ordinary shares of the Bank were listed in the Colombo services, project financing, investment banking, foreign Stock Exchange. currency operations, trade finance and dealing in Financial Reports Government Securities and treasury related products. Consequent to the enactment of the DFCC Bank (Repeal and Consequential Provisions) Act, No. 39 of 2014, the DFCC Consulting (Pvt) Limited DFCC Bank Act, No. 35 of 1955 was repealed and the Bank Technical, financial and other professional consultancy was incorporated under the Companies Act, No. 07 of 2007 services in Sri Lanka and abroad. as a public limited company listed in the Colombo Stock Exchange with the name ‘DFCC Bank PLC’ with effect from Lanka Industrial Estates Limited 6 January 2015. Leasing of land and buildings to industrial enterprises. The Registrar General of Companies on 1 October 2015 Synapsys Limited issued the Certificate of Amalgamation in terms of Section 244 (1) (a) of the Companies Act, No. 07 of 2007 that DFCC Information technology services and information Vardhana Bank PLC (DVB) has been amalgamated with technology enabled services. DFCC Bank PLC in accordance with the provisions of Part VIII of the Companies Act, No. 07 of 2007 with DFCC Bank National Asset Management Limited PLC surviving as the amalgamated entity. Fund management.

DFCC Bank PLC (DFCC) also obtained a commercial Acuity Partners (Pvt) Limited banking license from the Monetary Board of the Central Investment banking related financial services. Bank of Sri Lanka in terms of the Banking Act, No. 30 of 1988, as amended, and accordingly upon the amalgamation There were no significant changes in the nature of the now operates as a licensed commercial bank. principal activities of the Group during the financial period under review. The registered office of the Bank is at 73/5, Galle Road, Colombo 3. 2 Basis of Preparation

The Bank does not have a parent company. 2.1 Statement of Compliance The consolidated financial statements of the Bank The Bank’s Group comprises subsidiary companies viz, (Group) and the separate financial statements of the DFCC Consulting (Pvt) Limited, Lanka Industrial Estates Bank (Bank), which comprise the statement of financial Limited and Synapsys Limited. position, income statement, statement of profit or loss and other comprehensive income, statement of changes A joint venture company, Acuity Partners (Pvt) Limited in equity, statement of cash flows and notes thereto, have which is equally owned by the Bank and Hatton National been prepared in accordance with Sri Lanka Accounting Bank PLC. Standards (SLFRSs and LKASs) issued by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and in The Bank has one associate company viz, National Asset compliance with the requirements of the Companies Act, Management Limited. No. 07 of 2007 and the Banking Act, No. 30 of 1988 and amendments thereto. Total employee population of the Bank and the Group on 31 December 2015 was 1,445 and 1,659 respectively 2.2 Approval of Financial Statements by Directors (31 March 2015 - 495 and 1,611 respectively). The financial statements are authorised for issue by the Board of Directors on 24 February 2016.

DFCC Bank PLC Annual Report 2015 131 Notes to the Financial Statements Financial Reports 132 financial liabilities. measurement inconsistencybetweenfinancialassetsand no significantaccountingmismatchesduetorecognition or derivative andtheBankconsidersthatcurrently, thereare and Measurement’, sinceitdoesnothaveanyembedded Accounting Standard-FinancialInstruments: Recognition fair valuewhichisanoptionunderLKAS 39–‘Sri Lanka The Bankhasnotdesignatedanyfinancialinstrumentat v. Financialassetsavailable-for-salearemeasuredat iv. Theliabilityfordefinedbenefitstatutoryendofservice iii. Theliability/assetfordefinedbenefitpension ii. Derivative assetsandderivative liabilitiesheldforrisk function arepresentedseparately unlesstheyareimmaterial. in thefinancial statements. Items ofadissimilarnatureor Each materialclassofsimilar itemsispresentedseparately 2.6 MaterialityandAggregation i. material itemsinthestatementoffinancialposition: prepared onthehistoricalcostbasisexceptforfollowing nearest thousandand, unlessotherwisestated, havebeen the, functionalandpresentationcurrency,roundedtothe the BankarepresentedinSriLanka Rupees(LKR) being The consolidatedandseparatefinancialstatementsof 2.5 BasisofMeasurement the bookvaluesisreflectedwithinequity. to eitherofthecombiningentities. Anydifferencebetween goodwill thatisrecognisedanyexistingrelating goodwill isrecognisedasaresultofthemerger.Theonly the existingbookvaluesofpremergedentities. Nonew and liabilitiesofthecombinedentityisaccountedusing from thatlargergrouparetherelevantones.Theassets are partofalargereconomicgroup,andthatthefigures value accounting.Thisisonthebasisthatentities All commoncontroltransactionsareaccountedusingbook 2.4 CommonControlTransactions Banking Act,No. 30of1988andamendmentsthereto. presented aspertheCompaniesAct, No. 07of2007and financial statements,separatestatementsarealso Statements’. However, inadditiontotheconsolidated Standard LKAS 27–‘ConsolidatedandSeparateFinancial financial statementsasperSriLanka Accounting its controlisrequiredtopresentonlytheconsolidated DFCC BankPLCastheparentofsubsidiariesunder Financial Statements 2.3 ConsolidatedandSeparate

fair value. the definedbenefitgratuityobligation. gratuity obligationsisrecognisedasthepresentvalueof a trustseparatefromtheBank. pension assetsmaintainedinDFCCBankPensionFund, defined benefitpensionobligationlessthenettotalof obligations isrecognisedasthepresentvalueof management aremeasuredatfairvalue. Assets held-for-tradingaremeasuredatfairvalue.

DFCC BankPLC

Annual Report2015

significantly differentfromthe estimate. tend toreducetheprobability thattheactualresultswillbe annual actuarialvaluationand reviewofkeyassumptions employment. Theseriskmitigationstrategiestogetherwith pension amount is frozen on the date of cessation of tenured or after1May2004andthebasicpensionsurvivor The pensionschemeisclosedtonewentrantsrecruitedon Note 50.1.3.8. of coveredemployees, etc. Keyassumptionsaredisclosedin future incomederived frompensionassets, lifeexpectancy long-term assumptionsonfuturechangestosalaries, independent, qualifiedactuary,necessarilyinvolves The estimationofthisliabilitydeterminedbyan 2.7.3 PensionLiability amount. significant loansandsecondlytodeterminetherecoverable that alossmayalreadyhavebeenincurredinindividually required firstlytodeterminewhetherthereareindications considerable judgmentandestimation. Judgmentis The assessmentofloanlossassetoutinNote32.2 involves 2.7.2 Loan Losses set outinthenotestofinancialstatements. future andotherkeysourcesofestimateduncertaintyare Further informationaboutkeyassumptionsconcerningthe deferred taxassetsandprovisions forliabilities. leases andgoodwill,thevaluationoffinancialinstruments, which relatetoimpairmentofloansandadvances, financial policies wherejudgmentisnecessarilyappliedarethose Management believesthatBank’s criticalaccounting financial year,ifany,arerecognisedprospectively. an ongoingbasis. Changestoestimatesinasubsequent Estimates andunderlyingassumptionsarereviewedon financial informationisprepared. results inthefuturemaydifferfromestimatesuponwhich judgment areinherentintheformationofestimates; actual The useofavailableinformationandapplication relating tomajorestimationuncertainties. policies andtheirapplication,assumptionsmade development, selectionanddisclosureofcriticalaccounting Management discusseswiththeBoardAuditCommittee of assets,liabilities, incomeandexpenses. application ofaccountingpoliciesandthereportedamounts judgments, estimatesandassumptionsthataffectthe and consolidatedfinancialstatements, theBankmakes In thepreparationofseparatefinancialstatements 2.7.1 General 2.7 CriticalAccountingEstimatesandJudgments

without anyoption. required underPartIIIoftheFinanceAct, No. 10of2015 all companieswhoareliable topaySuperGainTaxas ‘Income Taxes’.Further, thisSoATmustbeappliedby This SoATsupersedesparagraph 46ofLKAS 12– dated 24November2015. by TheInstituteofCharteredAccountantsSriLanka, Treatment (SoAT)onAccountingforSuperGainTaxissued said ActasrecommendedbytheStatementofAlternative is accountedinaccordancewiththerequirementsof Accounting Standards, hencetheexpenseofSuperGainTax The ActsupersedestherequirementsofSriLanka year ofassessmentwhichcommencedon1April2013. expenditure inthefinancialstatementsrelatingto to theAct, theSuperGainTaxshallbedeemedtoan is liableforSuperGainTaxofLKR 777million. According of 2015 whichwascertifiedon30October2015, theBank As pertheprovisionsofPartIIIFinanceAct, No. 10 on AccountingforSuperGainTax 2.8.1 StatementofAlternativeTreatment(SoAT) these consolidatedandseparatefinancialstatements. applied theaccountingpoliciesforallperiodspresentedin Except forthechangebelow, theGrouphasconsistently 2.8 ChangesinAccountingPolicies statement immediately. Impairment losses,ifany,arechargedtoincome associated risks. Thisestimationhasinherentuncertainties. of futurecashflowsgeneratedbytheassetadjustedfor asset computedatthepresentvalueofbestestimates assets includestheestimationofvalue inuseofthe The assessmentofimpairmenttangibleandintangible Intangible Assets 2.7.6 ImpairmentofTangibleand if sowarranted. recognised intheperiodwhichassessmentisissued, additional incometaxanddeferredadjustment,willbe basis. Intheevent, anadditionalassessmentisissued, the payment ofthecurrenttaxliabilityisonself-assessment includes seekingexpertadvicewhereappropriateandthe for lossesonloans. TheestimationprocessbytheBank interpretation oftaxlawandjudgmentontheallowance The estimationofincometaxliabilityincludes 2.7.5 CurrentTax Key assumptionsaredisclosedinNote50.1.3.8. retirement ageandmortalityofcoveredemployees. changes tosalaries, resignationspriortothenormal necessarily involveslong-termassumptionsonfuture funded, determinedbyanindependentqualified actuary The estimationofthisliability, whichisnotexternally 2.7.4 EndofServiceGratuityLiability

there werenosignificantevents ortransactions. company andjointventurehave beenmadeas No adjustmentstotheresultsofsubsidiaries, associate Statements oftheBank Venture CompanyandtheDateofFinancial of theSubsidiaries,AssociateCompanyandJoint the periodbetweenDateofFinancialStatements 3.4 SignificantEventsandTransactionsduring 31 December. included intheconsolidationhavefinancialyearsending on Synapsys LimitedandNationalAssetManagement The financialstatementsofAcuityPartners(Pvt)Limited consolidation have financialyearsending31March. and Lanka IndustrialEstatesLimited includedinthe Financial statementsofDFCCConsulting(Pvt) Limited Bank andforotheraspecialreview isperformed. companies whichhasasimilarfinancialyearend, asthe Audited financialstatementsareusedforconsolidationof included intheConsolidated FinancialStatements Associate CompanyandJointVenture 3.3 FinancialStatementsofSubsidiaries, expenses anddividendareeliminatedinfull. Intra-group balancesandtransactions, includingincome, 3.2 TransactionsEliminatedonConsolidation shareholders withnon-controllinginterest. parent (controllinginterest)andattributabletominority entity, distinguishingtheequityattributableto financial informationabouttheGroupasasingleeconomic Thus, theconsolidatedfinancialstatementspresent equity interest. and netassetsoftheinvesteeinsteaddirect and jointventurecompanyonthebasisofreportedresults and accountingfortheinvestmentsinassociatecompany of thefinancialstatementsparentandsubsidiaries of consolidationprocedures, whichincludeamalgamation statements oftheGroup,preparedbyconsistentapplication The consolidatedfinancialstatementsarethe 3.1 General 1 April2015. earnings reportedinstatementofchangesequityasat be recordedasanadjustmenttotheopeningretained an expenditurefortheyearended31March2014,itshould As pertheSoAT,SuperGainTaxexpenseisdeemedtobe 3 Basis ofConsolidation DFCC BankPLC

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Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 134 income statement. fair valuewitharesultinggain orlossrecognisedinthe held equity interestisremeasuredattheacquisitiondate In abusinesscombinationachieved instages, thepreviously proportionate shareoftheacquiree’s identifiablenetassets. either atfairvalueorthenon-controllinginterest’s The amountofnon-controllinginterestismeasured assets acquiredandtheliabilitiesassumed. interest ifany,overthenetofamountidentifiable interest andthefairvalueofbankspreviouslyheldequity consideration transferred,theamountofnon-controlling Goodwill ismeasuredastheexcessofaggregate value atthedateofacquisition. contingent liabilitiesaregenerallymeasuredattheirfair incurred. Theacquireesidentifiableassets, liabilitiesand expense intheprofitorlossperiodofwhichtheyare Acquisition-related costs are recognised as an amount of the contingent consideration, givenatthedateofexchange. measured atthefairvalueofconsideration, including are acquired bytheBank. Costofacquisition is Acquisition methodofaccountingisusedwhensubsidiaries control ceases. the dateonwhichcontrolcommencesuntilwhen are includedintheconsolidatedfinancialstatementsfrom over theinvestee. Thefinancialstatementsofsubsidiaries and hastheabilitytoaffectthosereturnsthroughitspower to, variablereturnsfromitsinvolvementwiththeinvestee Group ‘controls’aninvesteeifitisexposedto, orhasrights ‘Subsidiaries’ areinvestees controlledbytheGroup.The 4.1 SubsidiaryCompanies All subsidiarieshave beenconsolidated. the Group. recognised asataxexpenseinthefinancialstatementsof withholding taxapplicableonthedistributionhasnotbeen company isremoteintheforeseeablefuture. Assuch,10% subsidiaries, associatecompanyandjointventure The distributionoftheundistributedearnings Venture Company Subsidiaries, AssociateCompanyandJoint 3.6 TaxesontheUndistributedEarningsof to thedateofacquisition. This isbasedonunauditedfinancialstatementsproximate of Acquisition Goodwill orNegative onDate StatementsusedforComputationof3.5 Financial

4 Scope ofConsolidation

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venture company. Note 37containsthefinancialinformationrelatingtojoint using equity method. The resultsofthejointventurecompanyareconsolidated which bothpartieshave jointcontroloverthatenterprise. owns thebalance50%ofvotingshares,interms contractual arrangementwiththeothercompany, who which theBankowns50%ofvotingshareswitha Joint venturecompanyisanincorporatedenterprisein 4.3 JointVentureCompany associate company. Note 36containsfinancialinformationrelatingto significant influenceceases. that significantinfluencecommencesuntilthedate company, onanequityaccountedbasis, fromthedate share ofthetotalcomprehensiveincomeassociate The consolidatedfinancialstatementsincludetheBank’s associate company, NationalAssetManagementLimited. nor aninterestinajointventure.TheBankhasonlyone Bank hassignificantinfluencethatisneitherasubsidiary Associate companyarethoseenterprisesover whichthe 4.2 AssociateCompany to subsidiaries. Note 35containsthefinancialinformationrelating in equity. transactions betweenequity holdersandarereported that donotresultinalossofcontrolaretreatedas Changes inaparent’s ownershipinterestinasubsidiary liabilities towhichtheyrelate. effective interestrateofthe financial assetsor and ‘InterestExpense’ intheincomestatement, usingthe financial instrumentsarerecognisedin‘InterestIncome’ Interest incomeandexpenseforallinterest-bearing 5.1.1 InterestIncomeandExpense 5.1 RevenueandExpenseRecognition obligations incurredbytheBank. to newproductsandservices providedbytheBankornew information. Newpoliciesareformulatedasappropriate or whenachangeresultsinprovidingmorerelevant Sri Lanka AccountingStandardsrequiresuchchanges Changes inaccountingpoliciesaremade, onlyifthe Bank inpresentingandpreparingthefinancialstatements. conventions, rulesandpracticesappliedconsistentlybythe Accounting policiesarethespecificprinciples, bases, 5 Principal AccountingPolicies

exchange differences. and unrealised)togetherwith relateddividend andforeign value offinancialassetsheld-for-trading (bothrealised This comprisesallgainslesslossesfromchangesinfair 5.1.3 Net Gain/(Loss) from Trading services arereceived. to transactionandservice fees, whichareexpensed,asthe contract. Otherfeesandcommissionexpenserelatemainly recognised onastraightlinebasisovertheperiodof Fees forguaranteesandtraderelatedcommissionsare straight-line basisoverthecommitmentperiod. related loancommitmentfeesarerecognisedona is notexpectedtoresultinthedraw-downofaloan, the related servicesareperformed.Whenaloancommitment Other feesandcommissionincomearerecognisedasthe interest rate. or liabilityareincludedinthemeasurementofeffective integral totheeffectiveinterestrateonafinancialasset Fee andcommissionincomeexpensethatare 5.1.2 Feesand Commission investment inthefinancelease. a constantperiodicrateofreturnontheBank’s net Finance leaseincomeisrecognisedonapatternreflecting interest incomefromTreasuryBillsandBonds. dividend frompreferencesharesandnotionaltaxcrediton Interest incomeincludesfromfinanceleases, value arereflectedasacomponentofinterestincome. allowances assessedindividuallyandattributabletotime any allowance for impairment. Thus, changes in impairment of thefinancialassettocarryingamountasreducedby is calculatedbyapplyingtheoriginaleffectiveinterestrate Stock Exchange) whose impairment is assessed individually, held-to-maturity debtinstrumentslistedintheColombo financial assets(viz, loansandadvances, and Interest incomeonindividuallysignificantimpaired acquisition orissueofafinancialassetliability. incremental coststhataredirectlyattributabletothe the effectiveinterestrate. Transactioncostsinclude or received bytheBankthatareanintegralpartof transaction cost, premiumsordiscountsandfeespaid The calculationoftheeffectiveinterestincludesall financial instrumentsbutnotfuturecreditlosses. future cashflowsconsideringallcontractualtermsofthe When calculatingtheeffectiveinterestrate, bankestimates carrying amountofthefinancialassetorliability. life (or, whereappropriate,ashorterperiod)tothenet on a financial asset or financial liability through its expected estimated futurecashreceiptsorpaymentsearnedpaid The effectiveinterestrateisthethatexactlydiscounts

foreign currency. liabilities thataremeasuredintermsofhistoricalcost a The Bankdoesnothave anynon-monetaryassetsand foreign currency. by commercialbanksforpurchaseorsaleoftherelevant The averageexchangerateusedisthemiddleratesquoted operating income’ intheincomestatementofBank. position) andconsequentlyrecognisedinthe‘other the reportingdate(viz. dateofthestatementfinancial functional currencyattheaverage exchangeraterulingat denominated inforeigncurrenciesaretranslatedintothe date ofthetransaction. Monetaryassetsandliabilities functional currencyattheaverage exchangerateonthe Transactions inforeigncurrenciesarerecordedthe presentation currency. the Bankoperates(‘thefunctionalcurrency’)aswell the currencyofprimaryeconomicenvironmentinwhich measured inSriLankan RupeesdenotedasLKR whichis Items includedinthefinancialstatementsofBankare 5.1.6 ForeignExchangeGain/(Loss) underlying classificationoftheequityinvestment. and netgains/(loss)fromfinancialinvestment, basedon income arepresentedinnetgains/(loss)fromtrading when therighttoreceivepaymentisestablished. Dividend comprehensive income.Dividend incomeisrecognised the costofinvestment, itispresentedinother Where thedividendclearlyrepresentsarecoveryofpart classified asavailable-for-sale. unlisted) anddividend incomefromordinaryshares shares -bothlistedintheColomboStockExchangeand sale securities(e.g., TreasuryBillsandBonds, ordinary This includesrealisedgainorlossonsaleofavailable-for- 5.1.5 NetGain/(Loss) fromFinancialInvestments and foreignexchangedifferencesareincluded. instruments, allrealisedandunrealisedfairvaluechanges valued throughprofitorloss. Inrespectofsuchfinancial qualifying hedgerelationship,thataremandatorilyfair purchase orsalecontracts)thatdonotformpartof risk managementpurposes(e.g., forwardforeignexchange The Bankhowever, hasnon-tradingderivatives heldfor recognising gainsorlossesonthemdifferentbases. would otherwisearisefrommeasuringassetsorliabilities compensatory mechanismforaccountingmismatchesthat instruments atfairvaluethroughprofitorlossasa Bank hasnotchosentheoptiontodesignatefinancial at FairValueThroughProfitorLoss 5.1.4 Net Gain/(Loss) fromFinancialInstruments DFCC BankPLC

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Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 136 statements asaconsolidation adjustment. company andjointventure intheGroupfinancial tax expenseofthesubsidiarycompanies, theassociate the withholdingtaxdeductedatsourceisaddedto for setoffagainstthetaxliabilityofBank. Thus, suffers a10%deductionatsourceandisnotavailable subsidiaries, associatecompanyandjointventure Dividend distributedoutofthetaxableprofit Venture Company by Subsidiaries,AssociateCompanyandJoint 5.1.10 WithholdingTaxonDividendDistributed explained inNote5.1.8 above. base usedforcalculationofVAT onfinancialservicesas amendments thereto.NBTischargeableonthesame Nation BuildingTaxAct,No.09of2009andsubsequent NBT onfinancialservicesiscalculatedinaccordancewith Services (NBT) 5.1.9 NationBuildingTaxonFinancial and depreciationcomputedasperprescribedrates. financial servicesadjustedforemolumentsofemployees profit beforevalueaddedtaxandnationbuildingon The valuebaseforcomputationofVAT istheoperating amendments thereto. Value AddedTaxAct, No. 14of2002andsubsequent VAT onfinancialservicesiscalculatedinaccordancewith 5.1.8 ValueAddedTaxonFinancialServices(VAT) tenancy. predetermined rentescalationduringtheperiodof over theentireperiodoftenancyincorporating Rent expensesareaccountedonastraight-linebasis 5.1.7 PremisesRentalIncome other comprehensiveincome. therefore, thereisnoexchangedifferencesrecognisedin a subsidiary, associate, jointventureorabranchand The Bankdoesnothave anyforeignoperationthatis ii. Foreignexchangeincomeorlossonderivatives held-for- i. classification: statement ispresentedasfollows,basedontheunderlying Foreign exchangeincomerecognisedinthe

profit orloss(Note15). (loss) fromfinancialinstrumentsatfairvaluethrough fair valuethroughprofitorlossisrecognisedasnetgain/ risk managementpurposesandmandatorilymeasuredat included asnetgain/(loss)fromtrading. purchase offoreigncurrenciesforspotexchangeis activity comprisingprofitorlossfromthesaleand Foreign exchangegain/(loss)whichispartofatrading

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at amortisedcostorfairvalue: At theinception, afinancialassetisclassifiedandmeasured 5.2.2 Classification contractual provisionsoftheinstrument. trade dateatwhichtheBankbecomesapartyto All otherfinancialassetsareinitiallyrecognisedonthe maturity amount, minusanyreductionforimpairment. difference betweentheinitialamountrecognisedand amortisation usingtheeffectiveinterestmethodofany minus principalrepayments, plusorminusthecumulative which thefinancialassetismeasuredatinitialrecognition, The amortisedcostofafinancialassetistheamountat amortised cost. loan amountgrantedandsubsequent measurementisat which theyareoriginatedatfairvalueisusuallythe Loans andadvances areinitiallyrecognisedonthedateat cost thataredirectlyattributabletoitsacquisition. an itemnotatfairvaluethroughprofit orloss, transaction The financial assetismeasuredinitiallyatfairvalueplus,for 5.2.1 RecognitionandMeasurement 5.2 FinancialAssets All otherexpensesarerecongisedonanaccrualbasis. 5.1.12 OtherExpenses any adjustmenttotaxpayableinrespectofpreviousyears. enacted orsubstantiallyatthereportingdate,and taxable profit for the financial year calculated using tax rates Current taxistheamountofincomepayableon directly inequityandothercomprehensiveincome. except totheextentthattheyrelateitemsrecognised tax anddeferredarerecognisedintheincomestatement Tax expensecomprisescurrentanddeferredtax. Current 5.1.11 TaxExpense Held-for-trade Held-to-maturity –non-derivativefinancialassets not exercisedthisoption. with accountingmismatches andcurrentlytheBankhas Designated atfair value–thisisanoptiontodeal recognised intheincomestatement. measured atfairvaluewithchangesin measured atamortisedcost. the positive intentandabilitytoholdmaturityare listed intheColomboStockExchange)thatBankhas (for example, bonds, debenturesanddebtinstruments with fixedordeterminablepaymentsandmaturity Loans andreceivables –atamortisedcost. – financialassetsheld-for-trade for thatinstrument. Amarketisregardedasactive, if instrument usingthequoted priceinanactivemarket When available, theBankmeasuresfairvalueofan value ofaliabilityreflectsitsnon-performancerisk. market towhichtheBankhasaccessatthatdate. Thefair the principalor, initsabsence, themostadvantageous between marketparticipantsatthemeasurementdatein asset orpaidtotransferaliabilityinanorderlytransaction ‘Fair value’isthepricethatwouldbereceivedtosellan 5.2.5 FairValueMeasurement the cashflowsoffinancialassets, andeither– when Bankhastransferreditscontractualrighttoreceive right toreceivecashflowsfromtheassethasexpired; or Financial assetsarederecognisedwhenthecontractual 5.2.4 DerecognitionofFinancialAssets 5.2.3 Reclassification

the financialasset. all therisksandrewards,buthasnotretainedcontrolof Bank hasneitherretainednortransferredsubstantially or been transferred; Substantially alltherisksandrewardsofownershiphave in rarecircumstances. through profitorlosscategoryandintoanother recognition maybereclassifiedoutofthefairvalue met thedefinitionofloansandreceivablesatinitial Financial assetsexceptfinancialthatwouldhave and future oruntilmaturity; and abilitytoholdthefinancialassetforforeseeable through profitorlosscategoryifthereistheintention held-for-trading) maybereclassifiedoutofthefairvalue financial assethadnotbeenrequiredtobeclassifiedas loans andreceivablesatinitialrecognition(ifthe Financial assetsthatwouldhavemetthedefinitionof circumstances: value throughprofitorlosscategory, inthefollowing initial recognition)maybereclassifiedoutofthefair designated atfairvalue throughprofitorlossupon Non-derivative financialassets(otherthanthose income statement. value withfairchangesrecognisedinthe Derivative assets–aremandatorilymeasuredatfair recognised inothercomprehensiveincome. and istheresidualclassificationwithfairvalue changes Available-for-sale –thisismeasuredatfairvalue

which thechangehasoccurred. value hierarchyasoftheendreportingperiodduring The Bankrecognisestransfersbetweenlevelsofthefair on whichtheamountcouldberequired tobepaid. amount payableondemand, discountedfromthefirstdate The fairvalueofademanddepositisnotlessthanthe the portfolio. risk adjustmentofeachtheindividual instrumentsin individual assetsandliabilitiesonthebasisofrelative Those portfolio-leveladjustmentsareallocatedtothe transfer anetshortposition)forparticularriskexposure. would bereceivedtosellanetlongposition(orpaid or creditriskaremeasuredonthebasisofapricethat the Bankonbasisofnetexposuretoeithermarket exposed tomarketriskandcreditthataremanagedby Portfolios offinancialassetsandliabilitiesthatare positions atanaskprice. and longpositionsatabidpriceliabilitiesshort price andanaskprice, thentheBankmeasuresassets If anassetoraliabilitymeasuredatfairvalue hasabid observable marketdataorthetransactionisclosedout. no laterthanwhenthevaluationiswhollysupportedby on anappropriatebasisover thelifeofinstrumentbut Subsequently, thatdifferenceisrecognisedinprofitorloss fair valueatinitialrecognitionandthetransactionprice. fair value,adjustedtodeferthedifferencebetween then thefinancialinstrumentisinitiallymeasuredat technique thatusesonlydatafromobservable markets, for anidenticalassetorliabilitynorbasedonavaluation evidenced neitherbyaquotedpriceinanactivemarket differs fromthetransactionpriceandfairvalue is Bank determinesthatthefairvalueatinitialrecognition the fairvalueofconsiderationgivenorreceived. Ifthe at initialrecognitionisnormallythetransactionprice-i.e., The bestevidence ofthefairvalueafinancialinstrument would takeintoaccountinpricingatransaction. incorporates allofthefactorsthatmarketparticipants unobservable inputs. Thechosenvaluationtechnique of relevantobservableinputsandminimizetheuse Bank usesvaluationtechniques thatmaximisetheuse If thereisnoquotedpriceinanactive market, thenthe information onanongoingbasis. sufficient frequencyandvolumetoprovidepricing transactions fortheassetorliabilitytakeplacewith DFCC BankPLC

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Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 138 individually significantinclude– considered indeterminingthattheexposuresare and computationofimpairmentallowance. Thefactors individual assessmentforobjectiveevidenceofimpairment exists andthosethatareindividuallysignificantmeriting These areexposures, whereevidenceofimpairment Held-to-Maturity DebtInstruments 5.2.6.1.1 IndividuallyAssessedLoans andAdvances a specificandcollective level. advances and held-to-maturity investment securities at both The Bankconsidersevidenceofimpairmentforloansand conditions thatcorrelatewithdefaultsintheGroup. status ofborrowersorissuersintheGroupeconomic a groupofassetssuchasadversechangesinthepayment market forasecurity,orotherobservable datarelatingto issuer willenterbankruptcy,thedisappearanceofanactive not otherwiseconsider, indicationsthataborroweror loan oradvance bytheBankontermsthatwould default ordelinquency byaborrower, restructuringofa significant financialdifficultyoftheborrowerorissuer, Treasury BillsandBonds)areimpairedcaninclude instruments quoted intheColomboStockExchange, held-to-maturity investmentsecurities(e.g., debt Objective evidencethatloansandadvances Investment Securities 5.2.6.1 Loans andAdvancesHeld-to-Maturity estimated reliably. after theinitialrecognitionofasset(s)thatcanbe evidence demonstratesthatalosseventhasoccurred or agroupoffinancialassetsisimpairedwhenobjective value throughprofitorlossareimpaired. Afinancialasset an objectiveevidencethatfinancialassetsnotcarriedatfair At eachreportingdate, theBankassesseswhetherthereis Impairment 5.2.6 IdentificationandMeasurementof that thereissuchobjective evidentinclude– of impairment. ThecriteriausedbytheBanktodetermine case bybasis, whetherthereisanyobjectiveevidence are consideredindividually significant, Bankassessesona For allloansandheld-to-maturitydebtinstrumentsthat larger amounts. to corporateandcommercialcustomersarefor Loans consideredasindividually significantaretypically

or otherfinancialrealisation; the probabilitythatborrower willenterbankruptcy being pastdueforaprolonged period; contractual paymentsforeither principalorinterest the numberofloansinportfolio. the sizeofloan; and

DFCC BankPLC

Annual Report2015

losses aredeterminedconsideringthefollowingfactors: where objective evidenceofimpairmentexists, impairment For thoseloansandheld-to-maturityinvestmentsecurities calculating an estimated collectiveimpairment. to theircreditriskcharacteristics forthepurposeof These loansandadvancesare groupedtogetheraccording identified onanindividualbasis. for whichnoevidenceofimpairmenthasbeenspecifically evidence ofimpairmentandthoseindividually assessed All loansandadvancesofsmallervaluewherethereisno 5.2.6.1.2 CollectiveAssessment, this includes: interest rate. future cashflowsdiscountedattheasset’soriginaleffective the carryingamountandpresentvalueofestimated amortised costarecalculatedasthedifferencebetween held-to-maturity investmentsecuritiesmeasuredat Impairment allowanceonloansandadvances

bankruptcy; the likelydividend available onliquidationor recoveries; the amountandtimingofexpectedreceipts obligations; and generatesufficientcashflowtoservicedebt capacity totradesuccessfullyoutoffinancialdifficulties Thee viability ofthecustomer’sbusinessmodelandtheir Bank’s aggregateexposuretothecustomer; considered doubtful. outlook oftheborrowersuchthatitsabilitytorepayis there hasbeendeteriorationinthefinancialconditionor insignificant; and principal, interestorfees,wheretheconcessionisnot difficulty thatresultsinforgivenessorpostponementof legal reasonsrelatingtotheborrower’sfinancial a concessiongrantedtotheborrowerforeconomicor Finance leases Personal loans Overdraft Corporate termloans Export loans Import loans amounts outstanding. the likelydeductionofanycostsinvolvedinrecovery of of security; and likelihoodofsuccessfulrepossessionorenforcement the realisablevalueofsecurity(orothercreditmitigants) of othercreditorscontinuitytosupporttheCompany; ahead oforparipassuwith,theBankandlikelihood the extentofothercreditors’ commitmentsranking

retain thisclassificationuntil maturityorderecognition. amounts ofloansthathavebeen classifiedasrenegotiated to determinewhethertheyremain impaired. Thecarrying terms havebeenrenegotiated, aresubjecttoongoingreview Loans subjecttoindividualimpairmentassessment, whose have beenreceived. purposes onceaminimumnumberofpaymentsrequired due, butaretreatedasup-to-dateloansformeasurement terms havebeenrenegotiatedarenolongerconsideredpast Loans subjecttocollectiveimpairmentassessmentwhose 5.2.6.1.4 RenegotiatedLoans recognised intheincomestatement. loan impairmentallowanceaccordingly. Thewrite-backis was recognised,theexcessiswritten-backbyreducing objectively toanevent occurringaftertheimpairment subsequent period, andthedecreasecanberelated If theamountofanimpairmentlossdecreasesina 5.2.6.1.3 ReversalsofImpairment interest rate. future cashflowsdiscountedattheasset’soriginaleffective the carryingamountandpresentvalueofestimated amortised costarecalculatedasthedifferencebetween held-to-maturity investmentsecuritiesmeasuredat Impairment allowanceonloansandadvances management’s experiencedjudgment. allowance isbasedonhistoricallossexperienceadjustedby individual basisforimpairment. Thecollectiveimpairment these areremovedfromtheGroupandassessedonan held-to-maturity investmentsecuritieswithintheGroup, available whichidentifieslossesonindividualloansand identified inthefuture. Assoonasinformationbecomes reliably estimated. Theselosseswillonlybeindividually able toidentifyonanindividual basisandthatcanbe occurring beforethereportingdatewhichBankisnot losses thatBankhasincurredasaresultofevents estimated collectiveimpairment. Thisreflectsimpairment credit riskcharacteristicsforthepurposeofcalculatingan individual basisaregroupedtogetheraccordingtotheir of impairmenthasbeenspecificallyidentifiedonan Individually assessedloansforwhich, noevidence outcomes toensurethattheyremainappropriate. recoveries willberegularlybenchmarkedagainstactual Default rates,lossratesandtheexpectedtimingoffuture suggested byhistoricaltrends. that theactuallossesarelikelytobegreaterorlessthan where currenteconomicandcreditconditionsaresuch adjusted forexperienceadjustmentbythemanagement, timing ofrecoveries andtheamountoflossincurred, modelling ofhistoricaltrendsthedefaultrates, the In assessingcollectiveimpairment, theBankusesstatistical

impairment ofadebtsecurity. combination, todetermineifthereisobjectiveevidenceof and guaranteesmaybeconsideredindividually, orin trends andconditions, andthefairvalueofcollateral for similarfinancialassets, nationalandlocaleconomic financial riskexposures, levels ofandtrendsindefault information abouttheissuers’ liquidity, businessand These typesofspecificeventsandotherfactorssuchas disappearance ofanactivemarketforthedebtsecurity. a default,bankruptcyorotherfinancialrecognition, orthe financial difficultyoftheissuer, abreachofcontractsuchas future cashflows. Theseeventsmayincludeasignificant the securitieswhichmayresultinashortfallrecoveryof data orinformationabouteventsspecificallyrelatingto Bank considersallavailableevidence, includingobservable objective evidenceofimpairmentatthereportingdate, When assessingavailable-for-saledebtsecuritiesfor 5.2.6.3 Available-for-SaleDebtSecurities income statement. other comprehensiveincomeandrecognisedinthe recognised intheincomestatement,isremoved from the currentfairvalue, lessanyprevious impairmentloss (net ofanyprincipalrepaymentsandamortisation) difference betweenthefinancialasset’s acquisition cost If theavailable-for-salefinancialassetisimpaired, financial assetthatcanbereliablyestimated. have animpactontheestimatedfuturecashflowsof financial asset(a‘loss event’) andthatlossevent(orevents) events thatoccurredaftertheinitialrecognitionof objective evidenceofimpairmentasaresultoneormore Impairment lossesarerecognisedif, andonlyif, thereis evidence ofimpairmentinthevalue ofafinancialasset. assessment ismadeofwhetherthereanyobjective At eachdateofstatementfinancialpositionan 5.2.6.2 Available-for-SaleFinancialAssets performance ofunderlyingcollateral. for objectiveevidence ofimpairment, Bankconsidersthe These areincludedinloansandadvances. Whenassessing 5.2.6.1.6 Asset-Backed-Securities write-off maybeearlier. there isnoreasonableexpectationoffurtherrecovery, realisable value ofanycollateralhasbeendeterminedand realisation ofsecurity.Incircumstanceswherethenet this isgenerallyafterreceiptofanyproceedsfromthe realistic prospectofrecovery. Whereloansaresecured, written-off, eitherpartiallyorinfull,whenthereisno Loans (andtherelatedimpairmentallowance)arenormally 5.2.6.1.5 Write-offofLoansandAdvances DFCC BankPLC

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139

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 140 sale financialassetconcerned: asset differsdependingonthenatureofavailable-for- accounting treatmentforchangesinthefairvalueofthat available-for- salefinancialasset, thesubsequent Once animpairmentlosshasbeenrecognisedon recognition. value oftheassethasbeenbelowitsoriginalcostatinitial the declineisevaluatedagainstperiodinwhichfair initial recognition. Inassessingwhetheritisprolonged, value isevaluatedagainsttheoriginalcostofassetat In assessingwhetheritissignificant, thedeclineinfair asset belowitscostisalsoobjectiveevidence ofimpairment. A significantorprolongeddeclineinthefairvalueof be recovered. evidence thatthecostofequitysecuritiesmaynot technology, markets, economicsorthelawthatprovide the issuerandinformationaboutsignificantchangesin equity securitiesmayincludespecificinformationabout Objective evidenceofimpairmentforavailable-for-sale 5.2.6.4 Available-for-SaleEquitySecurities application softwareislower thantherecoverableamount. position, whetherthecarryingamountofcomputer The Bankreviewsonthedate ofthestatementfinancial on Consolidation Computer ApplicationSoftwareand Goodwill 5.2.6.5 ImpairmentofIntangibleAssets-

acquisition costoftheequitysecurity. impairment losseshavebeenincurredinrelationtothe income statement, totheextentthatfurthercumulative available- for-saleequity securityarerecognisedinthe statement. Subsequentdecreasesinthefairvalueof the equitysecurityarenotreversedthroughincome comprehensive income.Impairmentlossesrecognisedon treated asarevaluationandarerecognisedinother increases inthefairvalueofinstrumentare For anavailable-for-saleequitysecurity, allsubsequent the incomestatement. impaired, theimpairmentlossisalsoreversed through is nolongerobjectiveevidence thatthedebtsecurityis loss isreversedthroughtheincomestatement. Ifthere was recognisedintheincomestatement, theimpairment related toaneventoccurringaftertheimpairmentloss subsequent period,andtheincreasecanbeobjectively If thefairvalueofadebtsecurityincreasesin asset isrecognisedinothercomprehensiveincome. impairment, adeclineinthefairvalueoffinancial asset. Wherethereisnofurtherobjectiveevidenceof in theestimatedfuturecashflowsoffinancial evidence ofimpairmentasaresultfurtherdecreases in theincomestatementwhenthereisfurtherobjective decline inthefairvalueofinstrumentisrecognised For anavailable-for-saledebtsecurity,asubsequent

DFCC BankPLC

Annual Report2015

that theywillbereceivedand Groupwillcomplywith income atfairvalue,whenthere isareasonableassurance Government grantsarerecognised initiallyasdeferred 5.2.10 GovernmentGrantsReceivable parties intendtosettlethecashflowsonanetbasis. same counterparty, alegalrightofoffsetexists, andthe transactions areonlyoffset,ifthewith Derivative assetsandliabilitiesarisingfromdifferent positive orasliabilities,whentheirfairvalueisnegative. Derivatives areclassifiedasassets, whentheirfairvalue is and thereforetheBankhasnotadoptedhedgeaccounting. management purposesasaqualifyinghedgerelationship Bank hasnotdesignatedanyderivativeheld-for-risk financial position. assets andaremeasuredatfairvalueinthestatementof include allderivativeassetsthatarenotclassifiedastrading Derivative assetsheld-for-riskmanagementpurposes Held-for-Risk ManagementPurposes 5.2.9 DerivativeFinancialInstruments the statementoffinancialposition. Cash andcashequivalents arecarriedatamortisedcostin date ofacquisition. Treasury Billswithmaximumthreemonths’maturityfrom Cash andcashequivalents includecashandshort-term than threemonths’maturityfromthedateofacquisition. investments arenormallythosewiththreemonthsorless are subjecttoaninsignificantriskofchangeinvalue. Such readily convertibletoknownamountsofcashandwhich cash equivalents includehighlyliquidinvestments thatare For thepurposeofstatementcashflows,and 5.2.8 CashandEquivalents losses arisingfromagroupofsimilartransaction. net basisonlywhenpermittedunderSLAS orforgainsand simultaneously. Incomeandexpensesarepresentedona on anetbasis, orrealisetheassetandsettleliability the recognisedamountsandthereisanintentiontosettle position whenthereisalegallyenforceablerighttooffset the netamountisreportedinstatementoffinancial Financial assetsandfinancialliabilitiesareoffset 5.2.7 Offsetting on consolidation. Similar criterionisusedtoassessimpairmentingoodwill The recoverableamountisthevalueinuse. loss isrecognisedimmediatelyintheincomestatement. recoverable amountandthereductionbeinganimpairment In suchevent, thecarryingamountisreducedto

loss asareclassificationadjustment. other comprehensiveincome arereclassifiedtoprofitor the cumulative gainsandlossespreviouslyrecognisedin income untiltheinvestment issoldorimpaired, whereupon Fair value changesarerecognisedinothercomprehensive to thedividend. recognised inprofitorlosswhentheBankbecomeentitled the effectiveinterestmethod. Dividendincomewas Interest incomeisrecognisedinprofitorloss, using cannot reliablybemeasuredandthereforecarriedatcost. except forunquotedequitysecuritieswhosefairvalue and quotedequity securities.Theyarecarriedatfairvalue include TreasuryBills,Bonds, DebtSecuritiesandunquoted not classifiedasanothercategoryoffinancialassets.These investments thatweredesignatedasavailable-for-sale or Available-for-sale investmentsarenon-derivative 5.2.12 FinancialInvestments–Available-for-Sale within loansandadvances. net investmentintheleaseisrecognisedandpresented is classifiedasafinanceleaseandreceivableequaltothe to theownershipofassetlessee, thearrangement transfers substantiallyalloftheriskandrewardsincidental When theBankislessorinaleaseagreementthat or uncollectibility. effective interestmethod, lessanyreductionforimpairment and aresubsequentlymeasuredatamortisedcostusingthe fair valueplusanydirectlyattributabletransactioncosts of ownershiparetransferred. Theyareinitiallyrecordedat are written-off, orsubstantiallyalltherisksandrewards when eithertheborrowerrepaysitsobligations, ortheloans cash isadvanced toaborrower. Theyarederecognised drawn balancesincurrentaccount)arerecognisedwhen Principal amountofloansandadvances(forexample,over financial position. interest dueand/oraccruedonthedateofstatement market. Theamountincludestheprincipaland listed intheColomboStockExchangeoranyrecognised commercial paperoranyotherdebtinstrumentwhichisnot investment bytheBankinanydebentures, bonds, customers andbanksontheseloans. Thisalsoincludes The carryingamountincludesinterestreceivablefromthe the Bank. and advances andfinanceleasereceivables originatedby Loans andadvances tobanksandcustomersincludeloans Customers 5.2.11 LoansandAdvancestoBanks (losses) arerecognised. systematic basisintheperiodwhichexpenses recognised inprofitorlossasotherincomeona the conditionsassociatedwithgrant, andarethen

circumstances wouldnottriggerareclassification: However, salesandreclassificationsinanyofthefollowing sale forthecurrentandsubsequenttwofinancialyears. reclassification ofallinvestmentsecuritiesasavailable-for- amount ofheld-to-maturityinvestmentswouldresultinthe A saleorreclassificationofamorethaninsignificant any impairmentlosses. amortised costusingtheeffectiveinterestratemethod, less transaction costs, andaresubsequentlymeasuredat initially recordedatfairvalueplusanydirectlyattributable to holdmaturity. Held-to-maturityinvestments are maturities thatBankpositivelyintends,andisable, assets withfixedordeterminablepaymentsand Held-to-maturity investments arenon-derivative financial 5.2.13 FinancialInvestments–Held-to-Maturity acquisition oftheasset. Cost includesexpenditurethat isdirectlyattributabletothe impairment losses. cost lessaccumulateddepreciationandany Items ofproperty,plantandequipment aremeasuredat 5.2.15.1 RecognitionandMeasurement and Equipment 5.2.15 Property,Plant interest intheassociateorjointventure. Unrealised lossesarealsoeliminatedtotheextentofBank’s Bank’s interestintherespectiveassociateorjointventure. associates andjointventuresareeliminatedtotheextent of Unrealised gainsontransactionsbetweenBankandits post-acquisition changeinBank’sshareofnetassets. attributable goodwill,andareadjustedthereafterforthe using theequitymethod, initiallystatedatcost, including Investments inassociateandjointventurearerecognised amount oftheinvestment. change intheestimatesusedtodeterminerecoverable recognised intheincomestatement,iftherehasbeena impairment losses. Reversals ofimpairmentlossesare Bank’s investmentsinsubsidiariesarestatedatcostless 5.2.14 Subsidiaries, AssociatesandJointVentures

substantially alloftheasset’s originalprincipal; and Sales orreclassificationsaftertheBankhascollected have asignificanteffectonthefinancialasset’sfairvalue; that changesinthemarketrateofinterestwouldnot Sales orreclassificationsthataresoclosetomaturity have beenreasonablyanticipated. isolated eventsbeyondtheGroup’s controlthatcouldnot Sales orreclassificationsattributabletonon-recurring DFCC BankPLC

Annual Report2015

141

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 142 in theincomestatement. disposal andthecarryingamountofitem)isrecognised (calculated asthedifferencebetweennetproceedsfrom Any gainorlossondisposalofaninvestmentproperty acquisition oftheinvestmentproperty. Cost includesexpenditurethatisdirectlyattributableto the and thereforeinvestmentpropertyismeasuredatcost. Group haschosenthecostmodelinsteadoffairvalue but notforsaleintheordinarycourseofbusiness. The earn rentalincomeorforcapitalappreciationboth, Lanka IndustrialEstatesLimited)ispropertyheldeitherto Investment propertyoftheGroup(heldbySubsidiary 5.2.16 InvestmentProperties amount oftheitem)isrecognisedinincomestatement. between thenetproceedsfromdisposalandcarrying from thede-recognition(calculatedasdifference benefits areexpectedfromitsuseofthegainorlossarising de-recognised ondisposalorwhennonfutureeconomic The carryingamountofpropertyandequipmentis 5.2.15.4 De-recognition Fixtures andfittings Office equipment andmotorvehicles Buildings equipment areasfollows: periods ofsignificantitemsproperty,plantand The estimatedusefullives forthecurrentandcomparative Land isnotdepreciated. the straight-linebasisovertheirestimatedusefullives. and equipmentlesstheirestimatedresidualvaluesusing calculated towrite-offthecostofitemsproperty, plant from themonththeyareavailable-for-use. Depreciationis Items ofproperty,plantandequipment aredepreciated 5.2.15.3 Depreciation maintenance costsareexpensedasincurred. expenditure willflowtotheBank. Ongoingrepairsand is probablethatthefutureeconomicbenefitsof Subsequent expenditureiscapitalisedonlywhenit 5.2.15.2 SubsequentCosts item) isrecognisedintheincomestatement. net proceedsfromdisposalandthecarryingamountof and equipment(calculatedasthedifferencebetween Any gainorlossondisposalofanitemproperty,plant

DFCC BankPLC

Annual Report2015

Years 10 20 5 liabilities intheDomesticBanking Unit. Currency BankingUnitandforeign currencydeposit reserves requirementfordeposit liabilitiesoftheForeign of reserverequirementsare given inNote27. Thereareno liabilities denominatedinSriLankan Rupees.Thedetails Central bankofSriLankaasareserveagainstalldeposit operating inSriLanka tomaintaincashdepositswiththe The MonetaryLawActrequiresthatallcommercialbanks 5.2.19 Balanceswith CentralBankofSriLanka subsequent disposal. no futureeconomicbenefitsareexpectedfromitsuseand An intangibleassetisderecognisedondisposalorwhen amortisation costisrecognisedasanexpense. life duringwhichtheBankhaslegalrightofuse. The that thecostisamortisedfullyatendofuseful amount isbasedonthebestestimateofitsusefullife, such application softwareisavailable-for-use. Theamortised the rateof20%perannumcommencingfromdate The costisamortised,usingthestraight-linemethod, at to thesoftware. made fortheuseofBankconstitutinganimprovement transaction processingandreportingrequirementstailor- incurred byfurthercustomisationtomeetancillary The initialcostisenhancedbysubsequentexpenditure expenditure inpreparingtheassetforitsintendeduse. requirements oftheBankandotherdirectlyattributable levies, costofcustomisingthesoftwaretomeetspecific the inception,importduties, non-refundabletaxesand The initialacquisitioncostcompriseslicencefeepaidat amortisation andanyimpairmentlosses. intangible assetsandcarriedatcostlesscumulative the statementoffinancialpositionundercategory an integralpartofrelatedhardwareareincludedin All softwarelicensedforusebytheBank, notconstituting Application Software 5.2.18 IntangibleAssets–Computer assets andliabilities. fair valueoftheassociate’sorjointventure’s identifiable when thecostofinvestmentexceedsBank’s shareofthenet the acquisitionofinterestsinjointventuresandassociates immediately intheincomestatement. Goodwillariseson liabilities acquiredisgreater, thedifferenceisrecognised acquired. Iftheamountofidentifiableassetsand exceed theamountofidentifiableassetsandliabilities value ofanypreviouslyheldequityinterestintheacquiree the amountofanynon-controllinginterestandfair aggregate ofthefairvalueconsiderationtransferred, Goodwill arisesontheacquisitionofsubsidiaries, whenthe on Consolidation 5.2.17 GoodwillorNegative

is probable. related taxbenefitthroughfuturetaxableprofits financial positiononlytotheextentthatrealisationof 1% oftheloansandadvances ondateofthestatement carry-forwards, andimpairmentallowancesthatexceed Deferred incometaxassetsarerecognisedforlosses temporary differencescanbeutilised. taxable profitswillbeavailableagainstwhichdeductible recognised totheextentthatitisprobablefuture taxable temporarydifferencesanddeferredtaxassetsare Deferred taxliabilitiesaregenerallyrecognisedforall 5.3.4 DeferredTaxLiabilities/Assets expected lifeoftheinstrument. costs incurred,andtheredemptionamountover proceeds received, netofdirectlyattributabletransaction interest methodtoamortisethedifferencebetween financial liabilitiesisatamortisedcost, usingtheeffective transaction costsincurred. Subsequentmeasurementof the considerationreceived,netofdirectlyattributable and initiallymeasuredatfairvalue, whichisnormally with counterparties, whichisgenerallyontradedate, into thecontractualprovisionsofarrangements Financial liabilitiesarerecognisedwhenGroupenters Issued andOtherBorrowing 5.3.3 DuetoBanks,Customers,DebtSecurities obligations aredischarged, cancelledorexpired. Group derecognisesafinancialliabilitywhenitscontractual 5.3.2 DerecognitionofFinancialLiabilities amount recognisedandthematurityamount. interest methodofanydifferencebetweentheinitial or minusthecumulative amortisationusingtheeffective at initialrecognition, minusprincipalrepayments, plus is theamountatwhichfinancialliabilitymeasured amortised cost. Theamortisedcostofafinancialliability Subsequent measurementoffinancialliabilityisat acquisition orissue. plus, transactioncoststhataredirectlyattributabletoits A financialliabilityismeasuredinitiallyatfairvalue at whichtheyareoriginated. subordinated liabilitiesareinitiallyrecognisedonthedate sources anddomesticsources, debtsecuritiesissuedand Deposits, borrowingfromforeignmultilateral, bilateral 5.3.1 RecognitionandInitialMeasurement Liabilities 5.3 Financial financial statementsastheydonotbelongtotheBank. Assets heldinafiduciarycapacityarenotreportedthese 5.2.20 FiduciaryAssets

increases insalary. estimates ofactualemployeeturnover,mortalityratesand the expectedreturnonpensionassetsandchangesin discount rate, differencesbetweentheactualreturnand The causesforsuchgainsorlossesincludechangesinthe pension assets. the promisedpensionbenefitobligationorfairvalue of due toincreasesordecreasesineitherthepresentvalue of The netactuarialgainsorlossesarisinginafinancialyear is 5.3.5.3 RecognitionofActuarialGainsandLosses and priorto1May2004. bonus, iftheyjoinedtheBankonorafter31August1998 based onapercentageofgrossemoluments,excluding are however, required tocontributemonthly, anamount of pensiontospouseandminorchildren, whosurvivethem Eligible employeeswhodesiretoprovideforthepayment benefit totheemployees. for thebasicpension, whichisthereforeanon-contributory actuary. Theemployeesmakenocontributionstoqualify annually basedontherecommendationofanindependent The Bank’scontributionstothetrustfundaremade 5.3.5.2 FundingArrangement (e.g. medicalexpensesreimbursement). post-retirement increasesinpensionnoranyotherbenefit The definedbenefitpensionplandoesnotpermitany pension planasadvised bytheindependentactuary. benefit intheinterestoflong-termsustainability 1 May2004. Theamendmentreducedthescopeof staff whojoinedtheBankonorafterthisdateandpriorto amended planwillapplytoallmembersofthepermanent The schemewasamendedon31August1998andthe fulfilment ofeligibilityconditionsprescribedbytheBank. 2004 arecoveredbythisfundedpensionschemesubjectto members ofthepermanentstaffwhojoinedpriorto1May of deceasedretireesbasedonpre-retirementsalary.All payment ofpensiontoretirees, spouseandminorchildren and isseparatefromtheBank. Theschemeprovidesfor the schemeismanagedbytrusteesappointedBank the CommissionerGeneralofInlandRevenue. Thefundof of pensionwhichoperatestheschemeapproved by The BankestablishedatrustfundinMay1989, forpayment Groups Covered 5.3.5.1 DescriptionofthePlanandEmployee Benefit Obligations 5.3.5 PensionLiability ArisingfromDefined DFCC BankPLC

Annual Report2015

143

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 144 it occurs. the othercomprehensiveincome duringtheperiodinwhich The Bankrecognisesthetotalactuarialgainsandlosses in 5.3.6.3 RecognitionofActuarialGainsandLosses retirement attheageof55yearsordeathwhileinservice. only onterminationofemploymentbyresignation, method wherebytheemployermakesalumpsumpayment The Bankandthesubsidiariesadoptapay-as-you-go 5.3.6.2 FundingArrangement or moreeithersinglytogetherwithconsecutivecontracts. contract ofserviceprovidesforunbroken of5years employees liabilityisrecognisedonlyifthefixedterm the datetheyjoinedpermanentcadre, whilefixedterm provision forallemployeesintenuredemploymentfrom The Bankhowever, recognisestheliabilitybywayofa employment. qualifying periodof5yearsisservedpriortotermination for eachcompletedyearofservice, provided aminimum promised benefitishalfamonthpre-terminationsalary of GratuityAct, No. 12of1983forallemployees. The scheme provideforthegratuitypayableunderPayment companies, whichdonothaveanon-contributorypension fixed termcontractemploymentintheBank. Thesubsidiary the permanentcadreonorafter1May2004tenured scheme. Therefore, thisappliestoemployeesrecruited for allemployeeswhodonotqualify underthepension Payment ofGratuityAct, No. 12of1983asamended The Bankprovidesforthegratuitypayableunder Groups Covered 5.3.6.1 DescriptionofthePlanandEmployee Liability underaDefinedBenefitPlan 5.3.6 ProvisionforEndofServiceGratuity service costimmediately. to adefinedbenefitplan,theBankwillrecognisepast are alreadyvested followingtheintroductionoforchanges until thebenefitsbecomevested. Totheextentbenefits expense onastraight-linebasisovertheaverageperiod benefit plan. Bankwillrecognisepastservicecostasan made tothebenefitspayableunderanexistingdefined introduced forthefirsttimeorsubsequentchangesare Past servicecostariseswhenadefinedbenefitplanis 5.3.5.4 RecognitionofPastServiceCost period inwhichitoccurs. personnel expensesintheincomestatementduring plan inothercomprehensive incomeandtheexpenseunder arise incalculatingtheBank’s obligationinrespectofthe The Bankrecognisesthetotalactuarialgainsandlossesthat

DFCC BankPLC

Annual Report2015 expenditure required tosettletheobligations. less cumulativeamortisation,andthebestestimateof liabilities aremeasuredatthehigherofinitialfairvalu e, received orreceivable. Subsequently, financialguarantee initially attheirfairvalue, whichisgenerallythefee Liabilities underfinancialguaranteecontractsarerecorded 5.3.9.1 FinancialGuarantees unless theprobabilityofsettlementisremote. recognised inthefinancialstatementsbutaredisclosed cannot bereliablymeasured.Contingentliabilitiesarenot economic benefits, orbecausetheamountofobligations is notprobablethatsettlementwillrequiretheoutflowof arisen frompastevents butarenotrecognisedbecauseit control oftheBank; orarepresentobligationsthathave one ormoreuncertainfutureeventsnotwhollywithinthe be confirmedonlybytheoccurrence, ornon-occurrence, of obligations thatarisefrompasteventswhoseexistencewill Contingent liabilities, whichincludeguaranteesarepossible 5.3.9 ContingentLiabilitiesandCommitments be madeoftheamountobligation. a resultofpastevents,andforwhichreliableestimatecan current legalorconstructiveobligation,whichhasarisenas outflow ofeconomicbenefitswillberequiredtosettlea Provisions arerecognisedwhenitisprobablethatan 5.3.8 Provisions as anexpenseintheincomestatementincurred. Contributions todefinedcontributionplansarerecognised employee’s consolidatedsalary. which theBankcontributes15%and3%respectivelyofsuch Service ProvidentSocietyandtheEmployees’ TrustFundto All employeesoftheBankaremembersMercantile contributions aremade. Lump sumpaymentisbyanoutsideagencytowhich years ordeathwhileinservice. employment byresignation,retirementattheageof55 This providesforalump-sumpaymentonterminationof 5.3.7 DefinedContributionPlans pension plan. accounting policycurrentlyusedfordefinedbenefit of employment.Insuchevent, theBankwilladopt in futuretoincreasethepromisedbenefitontermination if thePaymentofGratuityAct, No. 12of1983isamended benefit, therecognitionofpastservicecostwillariseonly Since endofservicegratuitydefinedbenefitisastatutory 5.3.6.4 RecognitionofPastServiceCost

with SriLanka AccountingStandards. fair presentationofthefinancialstatementsinaccordance The Directorsacknowledgetheresponsibilityfortrueand assets, headofficeexpenses, andtaxassetsliabilities. on areasonablebasis. Unallocateditemsincludecorporate to abusinesssegmentaswellthosethatcanbeallocated Business segmentresultsincludeitemsdirectlyattributable overdrafts. cash andequivalents arepresentednetofbank at thetimeofissue.Forpurposecashflowstatement, time depositsandTreasuryBillsofthreemonths’maturity Method’. Cashandcashequivalents includecashbalances, The cashflowhasbeenpreparedbyusingthe‘Direct obligation totransfercashorotherfinancialassets. Shares areclassifiedasequity whenthereisnocontractual 5.3.11 StatedCapital and customers. the lifeofagreementforloansandadvancestobanks repurchase priceistreatedasinterestandrecognisedover as appropriate.Thedifferencebetweenthesaleand and advances tobanks’, ‘loans andadvancestocustomers’ position andtheconsiderationpaidisrecordedin‘loans repos’) arenotrecognisedonthestatementoffinancial Securities purchasedundercommitmentstosell(‘reverse is recordedinrespectoftheconsiderationreceived. remain onthestatementoffinancialpositionandaliability repurchase thematapredeterminedprice(‘repos’), they When securitiesaresoldsubjecttoacommitment 5.3.10 SaleandRepurchaseAgreements 8 6 7 Cash Flow Business SegmentReporting Directors’ Responsibility of theabovestandards. The Bankhasnotyetassessedtheimpactonapplication SLFRS ontheGroup’sFinancialStatements 9.2 PossibleImpactontheApplicationofnew after 1January 2018withearlyadoptionpermitted. SLFRS 15iseffectiveforannualperiodbeginningonor Programmes. ‘Construction Contracts’andIFRIC13CustomerLoyalty guidance, includingLKAS18–‘Revenue’ andLKAS 11– recognised. Itreplacesexistingrevenuerecognition determining whether, howmuchandwhenrevenueis SLFRS 15establishesacomprehensiveframeworkfor with Customers’ 9.1.2 SLFRS 15–‘RevenuefromContracts 1 January2018withearlyadoptionpermitted. SLFRS 9iseffectiveforannualperiodbeginningonorafter impairment onfinancialassets. including anewexpectedcreditlossmodelforcalculating the classificationandmeasurementoffinancialinstruments and Measurement’. SLFRS9includesrevisedguidanceon guidance inLKAS39-‘FinancialInstrument: Recognition SLFRS 9-‘FinancialInstruments’replacestheexisting 9.1.1 SLFRS9–‘Financial Instruments’ beginning onorafter1January2016 9.1 SLFRS ApplicableforFinancialPeriods 9 New SLFRS IssuedandNotYetEffective DFCC BankPLC

Annual Report2015

145

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 146 Others Financial investments–held-to-maturity Other operatingincome/(loss)–net Financial investments–available-for-sale Net gainfromfinancialinvestments Other financialassetsheld-for-trading throughprofitorloss Net (loss)/gainfromfinancialinstrumentsatfairvalue Loans toandreceivablesfromothercustomers Net gainfromtrading Fee andcommissionincome Loans toandreceivablesfrombanks Interest income Placements withbanks Interest income subsidiaries, associateandjointventurecompanyfor12monthsto31December2015. with yearending31MarchfortheninemonthstoDecember2015,andresultsoffinancial financial statementsforperiodended31December2015includetheresultsofDFCCBankPLC andsubsidiaries As explainedinNote62.1, DFCCBankPLCchangeditsfinancialyearendto31December.Accordingly, theconsolidated significant transactionsfrom1Januaryto31March. prepared usingfinancialinformationasat31Decemberforthesubsidiarieswithyearend, adjustedforany Management Limited, yearendasat31December. Accordingly,eachyeartheconsolidatedfinancialstatementswere Vardhana BankPLC, SynapsisLimited, JointventureAcuityPartners(Pvt)Limited andassociatecompanyNationalAsset DFCC BankPLC hadanannualyearendof31Marchuptofinancialended2015, anditssubsidiaries,DFCC 10 12 11

Income TheEffecttothePeriodResultsofGroupDueChangeinFinancialYearEnd Net InterestIncome

DFCC BankPLC

Annual Report2015

9 months ended 10,036,280 31 December December 31 8,918,343 8,918,343 7,843,674 388,080 640,637 101,665 371,590 466,404 18,978 87,062 79,630 37,700 LKR 000 1,190 (330) 2015 BANK

10,394,085 2,150,427 7,235,442 8,010,024 8,010,024 (737,552) 118,039 388,312 656,512 146,679 167,995 Year ended 31March 93,128 88,969 82,130 LKR 000 4,004 2015

9 months ended 17,502,868 15,308,568 15,308,568 13,498,498 31 December December 31 1,151,029 245,585 507,528 215,575 615,116 748,920 211,877 190,431 74,583 LKR 000 42,536 1,190 2015 GROUP

20,093,711 14,240,041 16,098,667 16,098,667 1,331,350 2,201,070 1,137,267 (501,498) 123,871 140,765 205,776 Year ended 678,217 479,988 31March 52,860 LKR 000 4,004 2015

This incomeincludesnotionaltaxcreditof10%imputedforthewithholdingdeducted/paidatsource. Interest incomeonSriLanka GovernmentSecurities Net interest income Debt securitiesissued Realised gainongoldputoption Other borrowing Due toothercustomers Fixed incomesecurities Foreign exchangefrombanks Net feeandcommission income Forward exchangefairvaluechanges Comprising: Net feeandcommission income Fee andcommissionexpenses Fee andcommissionincome Due tobanks Interest expenses atFairValuethroughProfitorLoss 14 13 15 Management andconsultingfees Guarantees Trade andremittances Credit cards Loans andadvances – ContractwithCBSL(Note43.1) – Contractswithcommercialbanks Net GainfromTrading Net (Loss)/Gain fromFinancialInstruments Net FeeandCommissionIncome

9 months ended 31 December December 31 1,611,155 2,665,807 3,357,989 5,560,354 879,155 404,237 733,936 370,382 370,382 371,590 173,721 (14,368) LKR 000 14,038 87,062 95,558 94,463 66,992 34,248 (8,496) 1,208 (330) 2015 958 – BANK

1,737,707 1,341,627 1,485,318 3,334,577 4,675,447 DFCC BankPLC 110,795 Year ended 494,982 574,935 656,512 146,679 146,679 31March 167,995 167,995 167,995 100,212 81,577 LKR 000 40,040 27,743 2015 – – – – –

9 months ended

31 December December 31 8,923,243 1,487,117 6,385,325 1,830,993 5,584,815 1,141,115 1,141,115 1,151,029

Annual Report2015 879,155 215,575 628,280 118,916 285,541 139,268 319,599 374,073 LKR 000 14,038 74,583 96,659 60,545 22,634 9,914 2015 – GROUP

9,407,584 1,849,481 1,341,627 6,026,658 1,742,249 6,691,083 1,119,964 1,119,964 1,137,267 189,818 Year ended 574,935 678,217 335,559 479,988 144,429 31March 120,397 145,090 326,306 503,530

96,819 LKR 000 24,641 17,303 6,463 2015

147

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 148 Others CBSL Swap(Note43.2) Amortisation ofdeferredincomeonGovernmentgrant– Write-offs Impairment charge–Investmentinsubsidiaries(Note35.1) Recovery ofloanswritten-off Foreign exchangegain/(loss) Net gainfromrepurchasetransactions andassociate Dividend incomefromsubsidiaries, jointventure Impairment (recoveries)/charge-otherdebts Gain onsaleofproperty,plantandequipment Dividend income Collectiveallowanceforimpairment(Note32.2.2) Provision forstaffretirementbenefits(Note19.1) Premises rentalincome Assets available-for-sale Salaries andotherbenefits Loans toandreceivablesfromothercustomers 18 19 16 17

Gain onsaleofGovernmentSecurities Gain onsaleofequity securities Specific allowanceforimpairment(Note32.2.1) Net GainfromFinancialInvestments

Other OperatingIncome/(Loss)-Net Personnel Expenses and OtherLosses Impairment Charge/(WriteBack)forLoans

DFCC BankPLC – Loans toandreceivablesfromothercustomers

Annual Report2015

9 months ended 31 December December 31 1,212,541 1,012,764 (130,288) (104,907) 224,939 640,637 318,027 218,249 199,777 325,635 LKR 000 18,978 64,629 23,267 17,139 66,919 41,577 37,018 (3,034) 5,564 1,681 2,654 2015 424 BANK

2,150,427 1,135,054 (737,552) (376,185) (307,564) (500,677) (887,547) Year ended 214,422 777,536 190,418 943,041 556,493 752,623 31March 32,302 11,000 42,471 23,415 62,820 LKR 000 4,135 8,355 1,717 2015 –

9 months ended 31 December December 31 2,559,350 2,237,739 (130,288) 100,715 245,585 795,327 507,528 251,167 218,569 321,611 162,661 757,051 LKR 000 13,875 31,463 77,984 23,483 37,018 3,050 2015 918 774 – – GROUP

2,201,070 2,212,600 1,135,054 1,143,903 1,900,124 (501,498) (376,185) (465,807) (957,842) Year ended 246,556 283,304 777,803 312,476 205,997 31March 87,176 48,720 46,244 11,775 LKR 000 1,077 4,909 2015 – –

Other overheadexpenses Premises, equipmentandestablishmentexpenses Expenses onlitigation Total expenserecognised in theincome statement Amortisation Expected returnonpensionassets Depreciation Total definedcontribution plans Total defined benefit plans Interest onobligation Auditors’ remuneration Employer’s contributiontoEmployees’ TrustFund Interest onobligation Current servicecost 19.1.1.1 FundedPensionLiability 19.1.1 AmountRecognisedasExpense 19.1 ProvisionforStaffRetirementBenefits Directors’ remuneration Employer’s contributiontoEmployees’ProvidentFund 19.1.1.4 DefinedContributionPlan Current servicecost 19.1.1.3 UnfundedendofService Interest onobligation 19.1.1.2 UnfundedPensionLiability 20 Fees fornon-auditservices Audit relatedfeesandexpenses Audit feesandexpenses

Other Expenses - – Property, plantandequipment – Investmentproperty Intangible assets Gratuity Liability 9 months ended 31 December December 31 1,105,475 (139,779) 199,777 113,014 489,510 401,246 114,781 144,561 18,836 94,178 LKR 000 42,538 62,830 86,763 19,364 58,048 48,690 12,404 2,254 1,733 4,723 6,960 4,569 4,569 2015 – – BANK

DFCC BankPLC (177,105) 190,418 103,347 Year ended 314,643 726,627 219,355 116,673 167,979 31March 17,224 86,123 23,682 68,271 87,071 12,613 77,397 45,398 LKR 000 2,389 4,032 4,392 6,187 6,187 8,221 2015 455 – –

9 months ended 31 December December 31

2,150,927 Annual Report2015 (139,779) 735,099 960,535 321,611 102,158 211,059 110,552 237,528 144,561 175,314 LKR 000 62,830 35,745 43,153 14,517 58,048 95,107 28,636 2,379 2,145 9,706 6,270 4,569 4,569 2015 – GROUP

2,062,896 (177,105)

169,192 Year ended 760,254 823,994 312,476 100,232 203,694 108,782 268,614 167,979 31March 34,502 68,271 11,285 34,324 10,965 77,397 87,502 23,359 LKR 000 4,334 6,023 6,187 6,187 2015 179 479

149

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 150 as amended. 31 December2015. TaxableprofitisdeterminedinaccordancewiththeprovisionsofInlandRevenueAct, No. 10of2006 Current taxistheamountofincomepayableinrespectthetaxableprofitforninemonthsended 22.2 CurrentTax temporarydifferences Deferred tax-originationandreversal of 21.2 NationBuildingTaxonFinancialServices

Under provisioninpreviousyears

financialservices Nation buildingtaxon Financial servicesVAT 21.1 ValueAddedTaxonFinancialServices Current tax 22.1 Composition NationBuildingTaxonFinancialServices 22 21

Tax Expense Value Added Tax (VAT) and Value AddedTax(VAT)

DFCC BankPLC - Over provisionin - Currentperiod

respect ofpreviousyear

– (Over)/underprovision inrespectof previousyear – Currentperiod Annual Report2015

9 months ended 31 December December 31 167,934 290,072 294,804 520,915 341,911 342,498 11,070 (4,732) LKR 000 53,601 52,426 (1,175) 2015 BANK

500,092 499,986 449,555 Year ended 530,942 31March 585,244 58,519 22,868 85,152 85,152 LKR 000 2015 106 –

9 months ended 31 December December 31 270,156 911,842 500,093 493,857 624,801 589,330 16,885 LKR 000 90,412 89,237 (1,175) 6,236 2015 GROUP

749,277 841,269 Year ended 977,358 134,795 741,924 134,795 31March 884,072 81,906 54,183 LKR 000 7,353 2015 –

assessment2013/2014 Related tothetaxableprofitsforyearof Group wereliableforSuperGainTax.Themethodofaccounting isexplainedinNote2.8.1. As pertheprovisionsofpartIIIfinanceAct, No.10of2015whichwascertifiedon 30 October2015, theBankand 22.4 SuperGainTax considered taxrateat28%as31December2015thenewrateisnotsubstantiallyenacted. As proposedinthebudget2016currentincometaxrateof28%willbeincreasedto30%. However, theBankhas liabilities areoffset,ifthereisalegallyenforceablerighttooffsetcurrenttaxandassets. rates expectedtoapplyintheperiodswhichassetswillberealisedorliabilitiessettled.Deferredtaxan d will beavailableagainstwhichdeductibletemporarydifferencescanutilised. Deferredtaxiscalculatedusingthe taxable temporarydifferencesanddeferredtaxassetsarerecognisedtotheextentitisprobablethatfutureprofits reporting purposesandtheamountsusedfortaxationpurposes.Deferredtaxliabilitiesaregenerallyrecognisedall Deferred taxisrecognisedontemporarydifferencesbetweenthecarryingamountsofassetsandliabilitiesforfinancial 22.3 DeferredTax * Effectivetaxrateiscomputedincludingthe additionaltaxarisingonfinancialyearchange. profitbeforetax(PBT) Tax using28%taxrateon 22.2.1. ReconciliationofEffectiveTaxRatewithIncome Non-deductible expenses Allowable deductions Dividend income Tax incentives Adjustments Current taxexpense onassets fromcapitalallowances Taxable timingdifference Tax lossesfromprioryear Taxed atdifferentrates

(10.06) 21.51* 28.00 17.78 11.38 (8.89) (7.76) (6.27) (2.66) 31 December 2015 31 December 9 months ended – – % (141,310) (159,887) (123,382) 444,994 282,581 180,880 341,911 (99,645) (42,320) LKR 000

– – BANK

(10.32) 11.92 28.00 (3.93) (8.11) (0.88) 7.16 – – – – – – 31March 2015 % Year ended 1,055,962 (148,355) (305,851) (389,159) 9 months ended 449,555 270,050 (33,092) 31 December December 31 LKR 000 776,593 LKR 000 – – – – – – 2015 BANK

(13.50) 28.00 18.18 24.47 (5.15) (5.13) (1.67) (1.67) 5.41 31 December 2015 31 December DFCC BankPLC 9 months ended – – % Year ended 31March LKR 000 (344,652) (131,526) (131,092) 2015 714,972 464,095 138,161 624,801 – (42,566) (42,591) LKR 000

– – 9 months ended GROUP 31 December December 31

Annual Report2015

811,368 LKR 000 15.53 28.00 (7.30) (5.65) (1.10) (7.53) (0.61) (0.01) 2015 9.65 0.08 GROUP 31March 2015

% Year ended 1,516,472 (395,287) (305,851) (407,895) 841,269 522,895 (59,695) (33,100)

Year ended 31March LKR 000 LKR 000 4,237 (507) 2015 –

151

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 152 nine monthsended31December2015. The BoardofDirectorstheBankhasapprovedpaymentafirstandfinaldividendLKR 2.50 pershareforthe byMeasurementBasis Other liabilities Subordinated termdebt Debt securitiesissued Other borrowing As at31December2015 Dividend pershare(LKR) Basic earningsperordinaryshare–LKR Number ofordinaryshares(Note53) Profit attributabletoequityholdersoftheBank(LKR ’000) Due toothercustomers Derivative liabilitiesheld-for-riskmanagement Due tobanks Financial Liabilities Derivative assetsheld-for-riskmanagement Balances withCentralBankofSriLanka Cash andcashequivalents Financial Assets 25.1 Bank holders oftheBankbynumbersharesasat31December2015. Basic groupearningspersharehasbeencalculatedbydividingtheprofitafterincometaxattributabletoequity shares asat31December2015. Basic earningsperordinaryshareoftheBankhasbeencalculatedbydividingprofitafterincometaxnumber Government grantreceivable Financial investments Loans toandreceivablesfromothercustomers Loans toandreceivablesfrombanks Other assets 24 23 25

Dividend perShare Analysis ofFinancialInstruments Basic EarningsperOrdinaryShare

DFCC BankPLC

Annual Report2015 profit or loss or profit mandatory 198,776 539,758 738,534 Fair value 85,333 85,333 LKR 000 through

– – – – – – – – – – – – Fair value held-for- LKR 000 trading 265,097,688 – – – – – – – – – – – – – – – – – 9 months ended 31 December December 31 1,068,350 comprehensive 48,957,015 48,957,015 through other 4.03 2.50 2015 Fair value LKR 000 BANK income – – – – – – – – – – – – – – – 265,097,688 3,240,348 Year ended 201,247,686 110,890,685 160,345,530 176,484,284 31March 23,292,660 35,955,297 24,364,403 2,977,560 3,767,081 5,553,809 4,305,247 4,574,319 1,705,379 12.22 Amortised Amortised 6.00 2015 LKR 000 cost – – – – 265,097,688 9 months ended 31 December December 31 1,592,303 17,903,885 17,903,885 6.01 LKR 000 Held-to- maturity 2.50 2015 GROUP – – – – – – – – – – – – – – – 265,097,688 201,333,019 110,890,685 160,345,530 244,083,718 4,362,256 23,292,660 35,955,297 24,364,403 66,860,900 2,977,560 3,767,081 5,553,809 4,305,247 4,574,319 1,705,379 Year ended 31March 198,776 539,758 85,333 LKR 000 16.46 6.00 2015 Total

Derivative liabilitiesheld-for-riskmanagement Due tobanks Financial Liabilities Derivative assetsheld-for-riskmanagement Placements withbanks Balances withCentralBankofSriLanka Cash andcashequivalents Financial Assets 25.3 Group As at31December2015 Derivative assetsheld-for-riskmanagement Placements withbanks Cash andcashequivalents Financial Assets 25.2 Bank As at31March 2015 Government grantreceivable Financial investments Loans toandreceivablesfromothercustomers Loans toandreceivablesfrombanks Other liabilities Subordinated termdebt Debt securitiesissued Other borrowing Due toothercustomers Government grantreceivable Financial investments Loans toandreceivablesfromothercustomers Loans toandreceivablesfrombanks Other financialassetsheld-for-trading Other assets Other assets Derivative liabilitiesheld-for-riskmanagement Due tobanks Financial Liabilities Other liabilities Subordinated termdebt Debt securitiesissued Other borrowing Due toothercustomers profit or loss or profit loss or profit mandatory mandatory 198,776 539,758 738,534 483,727 513,062 Fair value Fair value LKR 000 LKR 000 through through 85,333 85,333 29,335 1,737 1,737 – – – – – – – – – – – – – – – – – – – – – – – – – – 1,469,166 1,469,166 Fair value Fair value held-for- held-for- LKR 000 LKR 000 trading trading – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – comprehensive comprehensive 48,957,015 48,957,015 through other through other 27,823,496 27,823,496 Fair value Fair value LKR 000 LKR 000 income income – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – DFCC BankPLC 160,343,155 201,015,072 110,551,220 176,580,921 24,365,653 23,292,660 35,955,297 73,448,705 75,477,095 69,426,082 19,445,924 24,361,797 22,484,652 5,553,809 4,314,777 4,602,263 3,083,161 3,767,081 1,765,199 1,928,867 Amortised Amortised Amortised 716,622 110,576 484,067 717,125 595,469 609,373 LKR 000 LKR 000 1,718 cost cost – – – – – – – – –

Annual Report2015 17,903,885 17,903,885 2,085,921 2,085,921 LKR 000 LKR 000 Held-to- Held-to- maturity maturity – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 160,343,155 201,100,405 110,551,220 244,180,355 107,368,740 24,365,653 66,860,900 23,292,660 35,955,297 29,909,417 73,448,705 69,427,819 19,445,924 24,361,797 22,484,652 5,553,809 4,314,777 4,602,263 3,083,161 3,767,081 1,765,199 1,469,166 1,928,867

198,776 539,758 716,622 110,576 484,067 483,727 717,125 609,373 595,469 LKR 000 LKR 000 85,333 29,335 1,718 1,737 Total Total

153

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 154 Money atcallandshortnotice Balances withbanks As at Derivative assetsheld-for-riskmanagement Placements withbanks Balances withCentralBankofSriLanka Cash andcashequivalents Financial Assets 25.4 Group As at31March 2015 Statutory balanceswithCentralBankofSriLanka Cash inhand Banking Unit. for depositliabilitiesoftheForeign CurrencyBankingUnitandforeigncurrencydepositliabilities intheDomestic a percentageofSriLankan Rupeedepositliabilities.Applicableminimumratewas6%. Therearenoreserverequirement Central BankofSriLanka. TheminimumcashreserverequirementonSriLankan Rupeedepositliabilitiesisprescribedas As required bytheprovisionsofSection93MonetaryLaw Act, aminimumcashbalanceismaintainedwiththe Government grantreceivable Financial investments Loans toandreceivablesfromothercustomers Loans toandreceivablesfrombanks Other financialassetsheld-for-trading Other assets Derivative liabilitiesheld-for-riskmanagement Due tobanks Financial Liabilities Other liabilities Subordinated termdebt Debt securitiesissued Other borrowing Due toothercustomers 26 27

Balances withCentralBankofSriLanka

Cash andEquivalents

DFCC BankPLC

Annual Report2015 profit or loss loss or profit mandatory 483,727 573,588 Fair value LKR 000 through 89,861 37,153 37,153 – – – – – – – – – – – – – – 1,469,166 1,469,166 Fair value held-for- LKR 000 trading – – – – – – – – – – – – – – – – – 1,550,457 4,305,247 5,553,809 2,330,722 31.12.2015 424,068 LKR 000 comprehensive through other 45,826,878 45,826,878 Fair value LKR 000 BANK income

– – – – – – – – – – – – – – – – – 31.03.2015 110,198 110,576 135,322,723 148,976,889 160,826,037 19,445,924 38,846,172 92,711,793 LKR 000 1,324,892 2,616,406 4,060,820 3,563,647 2,088,401 5,972,567 2,239,917 1,609,664 Amortised Amortised 378 LKR 000 – –

cost – – – – – 1,559,882 4,314,777 2,330,827 5,553,809 31.12.2015 10,872,287 10,872,287 424,068 LKR 000 LKR 000 Held-to- maturity GROUP – – – – – – – – – – – – – – – – –

135,322,723 207,718,808 160,863,190 2,308,433 4,060,820 56,699,165 1,752,387 2,616,406 19,445,924 38,846,172 92,711,793 1,324,892 2,616,406 4,060,820 3,563,647 1,469,166 2,088,401 31.03.2015 5,972,567 2,239,917 1,609,664 483,727 LKR 000 LKR 000 89,861 37,153 Total –

As at 29.2 Liabilities Forward foreignexchangecontracts 29.1 Assets Placements withBanks

Forward foreignexchangecontracts Government ofSriLanka TreasuryBonds These financialassetsheld-for-tradingarecarriedatfairvalue. 30 28 29 OtherFinancialAssetsHeld-for-Trading Placements withBanks Derivatives Held-for-RiskManagement - Others - CurrencySwaps - Others - CurrencySwaps 31.12.2015 198,776 143,233 LKR 000 55,543 85,333 71,956 13,377 – – – – BANK

DFCC BankPLC 1,469,166 1,469,166 31.03.2015 716,622 716,622 29,335 28,672 LKR 000 1,737 1,613 663 124

Annual Report2015 31.12.2015 198,776 143,233 LKR 000 55,543 85,333 71,956 13,377 1,718 1,718 – – GROUP

1,469,166 1,469,166 1,324,892 1,324,892 31.03.2015

89,861 83,271 37,153 29,204 LKR 000 6,590 7,949

155

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 156 32.1.1 ByProduct 32.1 Analysis Net loansandreceivables Sri Lanka Development Bonds Collective allowanceforimpairment(Note32.2.2) Gross loansandreceivables 31.1.1 ByProduct 31.1 Analysis United StatesDollar KFW* DFCC(V) SMEintheNorthandEast Specific allowanceforimpairment(Note32.2.1) Gross loansandreceivables Net loansandreceivables Allowance forimpairment As at Sri Lankan Rupee 31.1.2 ByCurrency * KFW–KreditanstaltFurWiederaufbau Refinanced loans–Plantationdevelopmentproject Securities purchasedunderresaleagreements Overdrafts Gross loansandreceivables Trade finance Gross loansandreceivables Securities purchasedunderresale agreements Preference sharesunquoted Lease rentalsreceivable(Note32.1.1.1) Debenture loans Commercial papersandassetbacknotes Term loans Staff loans Pawning Credit cards Gross loansandreceivables 32 31

Loans toandReceivablesfromOtherCustomers Loans toandReceivablesfromBanks

DFCC BankPLC

Annual Report2015 166,511,168 102,135,760 160,345,530 166,511,168 24,272,954 18,742,710 15,436,155 (1,924,882) (4,240,756) 1,934,126 1,241,687 1,532,181 4,372,191 4,574,319 4,372,191 4,574,319 4,574,319 4,574,319 31.12.2015 940,000 204,406 202,128 142,593 LKR 000 71,189 59,535 – – – BANK 76,350,160 63,282,363 73,448,705 76,350,160 (1,932,635) 1,270,982 8,250,091 2,385,756 (968,820) 31.03.2015 577,347 583,621 484,067 169,550 484,067 484,067 484,067 314,517 484,067 LKR 000 – – – – – – – – – 160,343,155 166,508,793 166,508,793 102,135,760 24,272,954 18,742,710 15,433,780 (1,924,882) (4,240,756) 4,602,263 4,372,191 4,602,263 4,602,263 4,372,191 4,602,263 1,934,126 1,532,181 1,241,687 31.12.2015 230,072 142,593 940,000 204,406 LKR 000 59,535 27,944 71,189 – – GROUP 135,322,723 141,332,579 141,332,579 (2,007,988) (4,001,868) 20,426,827 15,317,135 10,962,838 86,715,802 3,563,647 2,798,346 3,563,647 3,563,647 2,798,346 3,563,647 1,270,982 2,385,756 1,720,937 1,028,735 31.03.2015 169,550 765,301 314,517 281,234 753,683 577,347 172,537 LKR 000 – As at Agriculture andfishing United StatesDollar Sri Lankan Rupee 32.1.2 ByCurrency Less: Lease rentalsreceivable Gross investment inleases: 32.1.1.1 LeaseRentalsReceivable Manufacturing 32.1.3 ByIndustry Gross loansandreceivables Euro Australian Dollar Great BritainPound Construction Transport Tourism Gross loansandreceivables Others Trading New economy Consumer durables Other services Infrastructure Financial andbusinessservices - onetofiveyears - withinoneyear Unearned incomeonrentalsreceivable - onetofiveyears - withinoneyear

Deposit ofrentals 152,436,592 166,511,168 166,511,168 15,436,155 18,302,627 11,546,339 17,644,788 13,399,942 39,710,497 15,699,860 35,994,005 15,751,910 10,855,351 1,479,098 1,371,442 6,756,288 5,723,242 8,905,273 3,317,193 1,257,448 4,211,387 7,440,214 31.12.2015 158,598 495,468 LKR 000 15,932 20,568 BANK 70,819,394 76,350,160 21,971,033 76,350,160 11,774,943 DFCC BankPLC 8,250,091 9,795,452 5,733,058 4,062,394 3,738,938 5,530,766 3,315,608 6,911,685 9,145,886 6,347,630 5,788,567 6,973,946 31.03.2015 741,765 796,299 309,142 72,782 LKR 000 7,297 – – – –

166,508,793 152,434,217 166,508,793 15,433,780 18,300,252 11,543,964 17,644,788 39,710,497 15,699,860 35,994,005 15,751,910 10,855,351 13,399,942

1,479,098 1,371,442 6,756,288 5,723,242 8,905,273 3,317,193 1,257,448 4,211,387 7,437,839 Annual Report2015 31.12.2015 158,598 495,468 LKR 000 15,932 20,568 GROUP 128,625,376 141,332,579 141,332,579 10,962,838 13,119,535 12,504,037 12,257,859 36,744,877 13,193,926 30,172,954 1,061,704 1,079,721 7,879,730 5,239,805 4,939,098 8,560,968 1,062,825 7,705,195 7,349,374 9,644,160 8,464,095 31.03.2015

110,184 324,472 991,070 15,272 LKR 000 14,688

157

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 158 Total Balance on31December/March 32.2.2 CollectiveAllowanceforImpairment Write-off ofloansandreceivables Balance on31December/March Transfer toduesonterminatedleases Effect offoreigncurrencymovement Write-off loansandreceivables Effect offoreigncurrencymovement As at Government ofSriLanka TreasuryBills Balance transferredonamalgamation Balance asat1April Balance transferredonamalgamation Balance asat1April 32.2.1 SpecificAllowanceforImpairment 32.2 MovementinSpecificandCollectiveAllowanceforImpairment Equity securities Government ofSriLanka TreasuryBonds shares whosefairvaluecannotbereliablymeasured, iscarriedatcost All thefinancialinvestments arecarriedatfairvalueexceptforunquotedequitysecurities andirredeemablepreference (Write-back)/charge toincomestatement Charge toincomestatement 33

Unquoted unitsinUnitTrusts(Note33.5) Quoted unitsinUnitTrusts(Note33.4) Preference shares(Note33.3) Unquoted ordinaryshares(Note33.2) Quoted ordinaryshares(Note33.1) Financial Investments–Available-for-Sale

DFCC BankPLC

Annual Report2015 20,856,663 18,123,603 48,957,015 8,833,930 6,165,638 1,924,882 4,240,756 1,932,635 1,114,051 2,278,723 (303,708) (104,907) 31.12.2015 797,186 197,759 147,374 968,820 325,635 (37,836) (16,037) LKR 000 7,471 791 500 BANK 21,136,695 27,823,496 4,051,126 1,497,382 2,901,455 1,932,635 1,905,442 1,486,838 (110,696) (887,547) 31.03.2015 805,681 190,153 141,959 968,820 556,493 (32,059) (17,016) LKR 000 500 – – – – 20,856,663 18,123,603 48,957,015 6,165,638 1,924,882 4,240,756 2,007,988 4,001,868 8,833,930 (540,754) 31.12.2015 757,051 797,186 197,759 147,374 (91,707) (16,037) LKR 000 23,483 22,591 1,155 500 – – GROUP 20,030,203 21,136,695 45,826,878 6,009,856 2,007,988 4,001,868 3,097,218 3,794,550 1,143,903 3,516,272 (938,469) (114,319) (957,842) 31.03.2015 (17,016) 805,681 190,153 147,374 LKR 000 1,884 (53) 500 – – Warrants John KeellsHoldingsPLC – Richard Pieris&CoPLC John KeellsHoldingsPLC Hemas HoldingsPLC Hayleys PLC Carson CumberbatchPLC Diversified Holdings Colombo DockyardPLC Access EngineeringPLC Construction andEngineering PLC –non-voting Chemical Industries(Colombo) PLC –voting Chemical Industries(Colombo) Chemicals andPharmaceuticals SriLanka PLC Distilleries Companyof Ceylon TobaccoCompanyPLC Beverages, FoodandTobacco National DevelopmentBankPLC CeylonPLC –non-voting Commercial Bankof CeylonPLC –voting Commercial Bankof Banks, Finance andInsurance 33.1 QuotedOrdinaryShares As at *Cost isreducedby write-offofdiminutioninvalueother than temporaryinrespectofInvestments. Sector classificationandfairvaluepershare arebasedonthe listpublished byColomboStockExchange, asatthe reportingdate.

121,005,515 1,000,000 2,000,000 Number of 144,294 496,560 160,000 400,000 389,400 247,900 417,485 227,045 ordinary 46,967 59,532 8,016 7,333 shares 31.12.2015 3,660,466 3,290,259 352,369 LKR 000 50,471 10,080 16,297 13,635 30,655 22,645 29,708 15,577 14,131 73,189 69,829 17,838 8,234 2,225 8,010 3,360 Cost* – 17,421,225 17,001,276 161,935 102,701 392,000 LKR 000 99,111 25,756 46,131 16,204 33,760 24,480 56,483 31,619 24,864 59,234 27,949 8,500 2,262 9,280 value 258 Fair 119,806,122 DFCC BankPLC 1,000,000 2,000,000 Number of 126,258 496,560 160,000 400,000 389,400 247,900 417,485 224,143 ordinary 14,028 46,967 59,532 7,333 Shares

31.03.2015 Annual Report2015 3,444,412 3,074,609 352,369 LKR 000 50,471 10,080 16,297 13,635 30,655 22,645 29,708 15,577 14,131 73,189 69,829 17,434 8,234 2,225 8,010 3,360 Cost* – 20,414,224 19,887,816

159,877 100,405 497,000 LKR 000 89,853 25,138 36,994 17,847 34,160 26,480 41,231 22,391 18,840 59,472 29,408 7,300 2,200 7,680 value 374 Fair

159

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 160 Shares–Bank/Group Total QuotedOrdinary Vallibel PowerErathnaPLC Power andEnergy (Lanka) PLC–non-voting Tokyo CementCompany Royal CeramicsLanka PLC Piramal GlassCeylonPLC Chevron Lubricants Lanka PLC Ceylon GrainElevators PLC Manufacturing Dialog AxiataPLC Telecommunications Ceylon InvestmentPLC TrustPLC Ceylon GuardianInvestment Investment Trusts Dolphin HotelsPLC Hotels andTravels non-voting Ceylon HospitalsPLC – As at Ceylon HospitalsPLC –voting Healthcare *Cost isreducedby write-offofdiminutioninvalueother than temporaryinrespectofInvestments. Sector classificationandmarketvaluepershare arebasedonofficialvaluationslist published by ColomboStockExchange, asatthe reporting date.

DFCC BankPLC

Annual Report2015

2,400,000 1,127,096 7,500,000 2,050,000 Number of 139,800 330,814 288,309 152,308 100,000 240,000 100,000 ordinary 48,997 shares 31.12.2015 3,963,922 LKR 000 71,389 21,040 16,996 21,036 11,020 18,860 15,347 6,400 6,400 1,297 9,429 5,918 6,473 4,167 2,306 Cost* 964 964 18,123,603 224,402 114,131 LKR 000 21,600 21,600 44,520 15,518 45,750 21,935 49,560 22,921 26,639 28,172 18,072 10,100 4,483 5,420 5,420 value Fair 2,400,000 1,127,096 7,500,000 2,050,000 Number of 400,000 139,800 330,814 485,592 150,688 240,000 100,000 ordinary 48,997 Shares 31.03.2015 3,756,617 LKR 000 71,389 21,040 16,996 21,036 11,020 18,860 21,203 15,587 3,857 3,857 6,400 6,400 1,297 5,616 6,473 4,167 2,306 Cost* 21,136,695 232,460 130,010 LKR 000 18,960 18,960 42,041 15,797 42,750 21,730 71,916 44,189 27,727 22,760 22,760 29,524 18,024 11,500 1,862 value Fair Total unquotedordinary shares–Group (Note33.2.1) Investments inunquoted ordinarysharesbysubsidiaries Total unquotedordinary shares–Bank Wayamba Plantations(Private)Limited The Video Team(Private)Limited Sun TanBeachResortsLimited FinancialTelecommunication Society forWorldwide Interbank Sinwa HoldingsLimited Samson ReclaimRubberLimited Sampath CentreLimited Plastipak Lanka Limited Lanka FinancialServicesBureauLimited Lanka Clear(Private) Fitch RatingsLanka Limited Durdans MedicalandSurgicalHospital(Private)Limited Credit InformationBureauofSriLanka 33.2 UnquotedOrdinaryShares As at As at * Costisreducedby write-off ofdiminutioninvalueother than temporaryinrespectofinvestments. Telecommunication Society forWorldwideInterbankFinancial Lanka FinancialServicesBureauLimited Lanka Clear(Private)Limited Credit InformationBureauofSriLanka Subsidiaries 33.2.1 InvestmentsinUnquotedOrdinarySharesby Limited

2,750,000 9,059,013 1,000,000 1,273,469 Number of 100,000 460,000 116,700 240,000 100,000 Number of ordinary 30,000 62,500 ordinary 9,184 shares shares 31.12.2015 31.12.2015 – – – – 6 DFCC BankPLC 147,374 147,374 90,433 10,000 16,029 LKR 000 LKR 000 1,000 9,750 9,200 2,334 2,400 1,000 3,385 Cost* Cost* 300 625 918 – – – – –

9,059,013 1,000,000 1,273,469 2,750,000 Annual Report2015 Number of 460,000 116,700 240,000 Number of 100,000 100,000 30,000 62,500 ordinary ordinary 8,884 Shares Shares 300 – – – 31.03.2015 31.03.2015 6

147,374 141,959 90,433 10,000 16,029 LKR 000 LKR 000 5,415 9,750 9,200 2,334 2,400 5,415 3,385 1,000 1,000 Cost* Cost* 300 625 888 – – – 30

161

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 162 Bank/Group unquotedUnit Trusts– Total investments in JB Vantage Value EquityFund Guardian AcuityEquityFund National EquityFund 33.4 QuotedUnitsinUnitTrusts NAMAL MoneyMarketFund Non-performing investments Non-performing investments Bank/Group preferenceshares– unquotedirredeemable Total investments in NAMAL IncomeFund quotedunits–Bank/Group Total investmentsin As at Arpico FinanceCompanyPLC Shares 33.3 UnquotedIrredeemablePreference NAMAL GrowthFund 33.5 UnquotedUnitsinUnitTrusts As at NAMAL AcuityValue Fund * Disclosureasperthe Directiononthe prudentialnormsforclassification, valuationandoperationofthe Bank’sinvestmentportfolio. Performing investments 33.6.1.2 Group Performing investments 33.6.1.1 Bank 33.6.1 Composition 33.6 EquitySecurities

DFCC BankPLC

Annual Report2015

11,085,879 11,162,129 5,224,660 9,052,504 2,125,766 2,112,810 250,000 Number of Number of 50,000 ordinary shares units 18,123,603 18,123,603 18,123,603 18,123,603 LKR 000 Quoted Ordinary Shares 31.12.2015 31.12.2015 730,396 100,000 150,000 112,239 113,961 251,539 106,070 106,070 – – LKR 000 LKR 000

2,657 500 500 Cost Cost Unquoted LKR 000 147,374 102,883 147,374 102,883 44,491 44,491 797,186 105,277 155,341 116,512 139,080 272,481 197,759 197,759 Preference Fair value LKR 000 LKR 000 Unquoted 8,495 LKR 000 500 500 value Fair 500 500 500 500 – – 10,030,193 14,012,129 5,224,660 9,052,504 2,112,810 LKR 000 197,759 197,759 197,759 197,759 Quoted 500,000 155,000 Number of Number of 50,000 ordinary Unit Trusts – – shares units

Unquoted LKR 000 797,186 272,481 524,705 797,186 524,705 272,481 31.03.2015 31.03.2015 757,302 100,000 150,000 107,391 143,059 251,539 106,070 106,070

LKR 000 LKR 000 5,313 Total 19,266,422 18,891,058 19,266,422 18,891,058 31.12.2015 500 500 Cost Cost LKR 000 375,364 375,364 22,274,988 21,664,149 22,280,403 21,666,179 805,681 147,917 111,723 169,687 266,465 190,153 190,153 31.03.2015 Fair value 93,574 16,315 LKR 000 610,839 614,224 LKR 000 LKR 000 500 500 value Fair Total investments inquoteddebentures –Bank Vallibel FinancePLC Singer (SriLanka) PLC–TypeC Lion Brewery(Ceylon)PLC – Softlogic FinancePLC –TypeA Central FinanceCompanyPLC –TypeB As at Singer (SriLanka) PLC–TypeC Richard PierisandCompanyPLC –TypeA People’s Leasing &FinancePLC –TypeC People’s Leasing &FinancePLC –TypeC People’s Leasing &FinancePLC –TypeB People’s Leasing &FinancePLC –TypeB Lion Brewery(Ceylon)PLC – Lion Brewery(Ceylon)PLC – Lion Brewery(Ceylon)PLC – Commercial Credit&FinancePLC Central FinanceCompanyPLC –TypeC Siyapatha FinanceLimited Central FinanceCompanyPLC –TypeA Alliance FinanceCompanyPLC –TypeB Access EngineeringPLC Abans PLC – 34.1 QuotedDebentures As at Sri Lanka GovernmentSecurities Quoted debentures(Note34.1) Alliance FinanceCompanyPLC –TypeC Lanka Hemas HoldingsPLC -TypeA HDFC Bank 34 Treasury Bonds Treasury Bills Financial Investments–Held-to-Maturity Orix Leasing CompanyPLC TypeB TypeF TypeH TypeG TypeC 12,547,298 17,903,885 10,000,000 5,356,587 3,500,000 2,533,900 1,412,500 3,941,900 1,201,000 2,000,000 1,793,900 2,000,000 2,500,000 1,500,000 4,221,693 3,000,000 4,500,000 2,500,000 31.12.2015 debentures Number of 706,500 281,800 577,800 748,500 134,400 827,900 532,200 LKR 000 21,300 28,400 21,300 31.12.2015 – BANK DFCC BankPLC 2,085,921 2,085,921 5,356,587 31.03.2015 investment 359,029 274,386 999,469 144,049 411,090 123,347 234,000 191,663 217,809 268,053 162,099 461,737 306,805 461,549 252,958 LKR 000 22,025 72,479 30,062 76,698 81,203 29,402 22,038 14,325 85,080 55,232 LKR 000 Cost of Cost – –

12,547,298 17,903,885

Annual Report2015 5,356,587 3,500,000 1,412,500 1,201,000 1,793,900 2,000,000 2,500,000 1,267,000 4,221,693 31.12.2015 debentures Number of 418,200 134,400 328,800 748,500 827,900 LKR 000 – – – – – – – – – – – – – 31.03.2015 GROUP 10,872,287 2,085,921 6,977,913 3,124,755 31.03.2015

investment 350,099 144,712 126,536 185,263 204,242 258,631 769,619 129,200 431,682 LKR 000 42,851 13,864 LKR 000 33,633 77,878 87,330 Cost ofCost – – – – – – – – – – – –

163

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 164 Balance netofimpairment (Note35.1) Less: Allowanceforimpairment Adjustment onamalgamation Lanka Total investments inquoteddebentures –Group Softlogic FinancePLC Singer (SriLanka) PLC Lanka Central FinanceCompanyPLC HDFC Bank Alliance FinanceCompanyPLC Lion Brewery(Ceylon)PLC People’s Leasing andFinancePLC Investments inquoted debenturesbysubsidiaries: As at DFCC Vardhana BankPLC 35.2 Non-Controlling Interest(NCI)inSubsidiaries *Amalgamated on1October2015. Balance on31December/March Charge toincomestatement Balance atbeginning 35.1 MovementinImpairmentAllowance Balance beforeimpairment Balance atbeginning 35

InvestmentsinSubsidiaries Industrial Orix Leasing CompanyPLC

DFCC BankPLC EstatesLimited

Annual Report2015

Percentageof Interest held 31.12.2015 Ownership by NCI 48.84 – % (Pvt) Limited (Pvt) Ownership Consulting Consulting Rights held Percentage 31.03.2015 LKR 000 of Voting 5,000 5,000 5,000 by NCI DFCC 48.84 100% 0.83 – %

(5,823,028) Share of Total Comprehensive Income of NCI for Period the 5,823,028 31.12.2015 Ownership* LKR 000 48,666 43,024 Bank PLC Bank Vardhana LKR 000 5,642 99.17% DFCC – ended –

debentures Number of Limited Estates 31.03.2015 LKR 000 75,930 67,153 Ownership 8,777 Industrial 97,036 97,036 97,036 31.12.2015 – – – – – – – – LKR 000 51.16% Lanka –

31.12.2015 252,426 252,426 LKR 000 5,356,587 investment LKR 000 – NCI as at Cost of Cost Ownership 30,819 70,000 39,181 70,000 Synapsys LKR 000 Limited – – – – – – – – – 100% – 31.03.2015 353,882 280,665 LKR 000 73,217 (5,823,028) 1,266,900 3,000,000 1,500,000 2,249,000 5,995,064 debentures Number of 288,300 281,800 532,200 132,855 172,036 31.12.2015 71,000 39,181 39,181 37,500 LKR 000 1,681 31.12.2015 Dividends Paid to NCI 31.03.2015 LKR 000 56,718 54,599 for the period ended for period the 2,119 BANK 5,957,564 5,995,064 5,995,064 3,124,755 1,038,834 investment 31.03.2015 126,938 302,704 161,654 259,528 37,500 37,500 26,500 11,000 LKR 000 73,347 29,531 30,004 55,128 31.03.2015 LKR 000 Cost ofCost LKR 000 55,776 54,600 1,176 – Total comprehensiveincome Equity Equity Total comprehensiveincome Other comprehensiveincome Other comprehensive(expenses)/income Liabilities Liabilities Balance on31December/March Dividend received–Eliminationonconsolidation Share ofothercomprehensive(expenses)/income Share ofprofitaftertax Profit aftertax Profit aftertax As at Assets As at Lanka IndustrialEstatesLimited 35.3 SummarisedFinancialInformationofSubsidiaries Assets National AssetManagementLimited 36.1 SummarisedFinancialInformationofAssociate As at Balance atbeginning National AssetManagementLimited (Ownership30%) Revenue For the periodended Revenue For the yearended 36 InvestmentsinAssociate(Unquoted) 31.12.2015 LKR 000 35,270 35,270 – – – BANK DFCC BankPLC 31.03.2015 LKR 000 35,270 35,270 – – –

Annual Report2015 31.12.2015 31.12.2015 31.12.2015 516,797 223,215 113,071 629,868 241,052 191,567 133,565 LKR 000 LKR 000 LKR 000 40,068 88,085 17,837 66,980 88,085 40,107 12,032 63,960 (9,000) (39) (12) – GROUP

31.03.2015

31.03.2015 31.03.2015 574,613 213,147 137,484 100,169 137,314 674,782 247,641 210,734 141,886 LKR 000 52,653 34,494 63,960 49,890 14,967 54,164 LKR 000 LKR 000 (6,000) 2,763 170 829

165

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 166 Change inholding– Total comprehensiveincome Share ofothercomprehensiveincome Other comprehensiveincome Non-current liabilities Share ofprofitnettax Profit aftertax 37.3 SummarisedFinancialInformationofJointVenture–AcuityPartners(Pvt)Limited Current liabilities Balance atbeginning Income taxexpense Depreciation Group’s shareofnetassets Non-current assets Share ofunrealisedprofitondisposalinvestments Revenue For the year ended Current assets As at Dividend receivedduringtheperiod Preference sharedividend paidbythesubsidiaryofjointventure As at Acuity Partners(Pvt)Limited (Ownership50%) 37.1 Investmentsinjointventure–Bank As at Share ofidentifiableassetandliabilitiesjointventureasatthebeginningperiod 37.2 InvestmentinJointVenture–Group 37

Investments inJointVenture(unquoted)

DFCC BankPLC

throughsubsidiaryofjointventure

Annual Report2015 Cost ofInvestment 31.12.2015 655,000 655,000 LKR 000 4,348,748 1,124,025 1,180,819 3,629,739 5,487,054 1,308,713 (184,688) 31.12.2015 31.12.2015 31.12.2015 370,430 945,056 305,979 576,723 (30,162) 34,163 LKR 000 LKR 000 LKR 000 17,041 64,450 66,661 68,748 (6,576) 9,830

Cost ofInvestment 5,915,668 1,124,025 3,299,730 7,000,804 1,159,599 (184,688) 31.03.2015 31.03.2015 31.03.2015 31.03.2015 655,000 655,000 467,591 575,605 138,303 448,246 974,911 916,313 (26,199) LKR 000 28,632 19,345 70,658 30,958 LKR 000 LKR 000 LKR 000 8,378 – Net book valueasat31 December/March Accumulated depreciationasat31December/March Charge fortheyear Balance atbeginning Less: AccumulatedDepreciation Cost asat31December/March 1 Pearch=25.2929m Acquisitions As at Synapsys Limited DFCC Vardhana BankPLC DFCC Consulting(Pvt)Limited Balance atbeginning Cost (year ended31March2015–LKR 18million). Operating expensesoninvestmentpropertyofGroupfor the9monthsended31December2015– LKR 15million (year ended31March2015–LKR 173million). Rental incomefrominvestment propertyofGroupforthe9monthsended31December 2015–LKR 137million Valuers (SriLanka). on marketvaluation carriedoutinApril2014byPBKalugalagedaraCharteredValuer FellowMemberofInstitute of The fairvalueofinvestmentpropertyasat31December 2015 situatedatPattiwilaRoad, Sapugaskanda,Makolawasbased Pattiwila Road, Sapugaskanda, Makola 39.1 DetailsofInvestmentProperty As at31December2015 As at 38 39 Due fromSubsidiaries Investment Property 2 ; 1sq. ft. =0.0929m 2 293,680 Buildings Sq. Ft. Sq. Perches* Extent of 20,000 land 313,909 313,909 LKR000 Cost

DFCC BankPLC depreciation/ Accumulated impairment 118,177 118,177 LKR 000

Annual Report2015 31.12.2015 31.12.2015 195,732 118,177 108,471 313,909 294,541 195,732 195,732 17,394 16,942 LKR 000 LKR 000 19,368 Net Book LKR 000 9,706 452 value – GROUP BANK

1,096,558 1,096,558

135,091 122,712 31.03.2015 31.03.2015 186,070 108,471 294,541 280,467 LKR 000 12,379 11,285 97,186 14,074 LKR 000 LKR 000 value Fair –

167

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 168 4 A,4thCrossLane, Borupana, Ratmalana 73, WADRamanayakeMawatha, Colombo2 5, Deva Veediya, Kandy Accumulated depreciationasat1April March Net book valueasat31 December/ Institute ofValuers ofSriLanka.) (Valued byAMFathihu–FormerGovernment ChiefValuer and J SMIBKarunatilakaAssociate Memberofthe As at31December2015 Balance transferredonamalgamation Balance transferredonamalgamation Cost asat1April 40.1 Composition:Bank 73/5, GalleRoad, Colombo3 40.1.1 List ofFreeholdLand andBuildings 259/30, KandyRoad, Bambarakelle, Nuwara-Eliya 454, MainStreet, Negombo 73/5, GalleRoad, Colombo3 40.1.2 MarketValueofProperties * 1perch =25.2929m Cost asat31December/March 31December/March Accumulated depreciationasat Less: Less: Depreciation fortheperiod Acquisitions 5, Deva Veediya, Kandy ondisposals 73, WADRamanayakeMawatha, Colombo2 454, MainStreet, Negombo 4 A,4thCrossLane, Borupana, Ratmalana Nuwara-Eliya 259/30, KandyRoad, Bambarakelle, 40

Property, PlantandEquipment

Disposals Accumulated depreciation

DFCC BankPLC 2 ; 1sqft=0.0929m

Annual Report2015

181,150 272,510 299,610 467,821 195,311 165,000 buildings 11,054 LKR 000 Land & Land 3,211 3,107 – – Buildings 57,200 21,400 19,087 4,600 Sq. Ft.Sq. 1,421,990 1,111,616 equipment 532,514 310,374 627,469 – – 769,636 546,519 19,180 44,065 51,607 19,024 LKR 000 Office Extent of 104.45 Perches* LKR000 12.54 45.00 29.00 20.00 28.72 158,767 326,922 243,744 782,993 456,071 &fittings 503,996 270,193 Furniture land land 35,253 27,111 – – 191,268 165,001 467,821 85,478 16,195 LKR 000 2,600 7,279 186,298 239,113 275,093 241,882 33,211 25,009 LKR 000 Cost 40,843 35,438 vehicles

4,863 4,863 Motor – LKR million depreciation/ Accumulated 2,947,897 2,004,880 impairment 1,058,729 1,409,936 1,479,475 118,374 195,311 31.12.2015 943,017 114,781 855,257 65,217 LKR 000 LKR 000 23,887 24,043 82,529 7,059 4,661 440 946 250 10 72 80 Total – –

Date ofvaluation 31.03.2014 31.03.2014 31.03.2014 31.03.2014 26.05.2015 05.05.2015 1,409,936 1,058,729 1,395,125 31.03.2015 351,207 116,673 942,110 160,340 272,510 Net Book 14,940 LKR 000 20,261 72,894 LKR 000 9,136 2,600 7,279 Total value 129 54 – –

Net book valueasat31 December/March Less: Write-off* Motor vehicles Accumulated amortisationas at31December/March Amortisation fortheperiod Balance transferredonamalgamation Furniture &fittings Less: Write-off* Accumulated amortisationasat1April asat31 December/March Net book value asat1April Accumulated depreciation Office equipment Cost asat31December/March Acquisitions Balance transferredonamalgamation As at 31December/March Accumulated depreciationasat Cost asat31December/March Less: Transfers ondisposal Less: Accumulateddepreciation Acquisitions Depreciation fortheperiod Land &buildings The initialcostoffullydepreciatedproperty, plantandequipmentwhicharestillinuseasatthereportingdateisfollows: 40.1.3 FullyDepreciatedProperty,PlantandEquipment–Bank * Softwarenotinuse. Cost asat1April Cost asat1April 40.2 Composition:Group As at 41 Intangible Assets

Disposals

353,231 303,343 325,742 678,973 568,065 buildings 65,095 45,813 22,399 LKR 000 Land & – – 1,042,210 1,139,961 1,459,722 1,371,719 LKR000 equipment 319,761 118,217 13,169 95,459 20,466 20,625 Office &fittings Furniture 411,887 323,748 472,215 795,963 719,213 78,196 63,184 LKR 000 2,077 2,856 3,523 1,066,701 1,313,816 31.12.2015 247,115 679,736 344,427 851,004 426,807 LKR 000 42,538 36,005 – – BANK

246,749 274,519 320,080 316,783 vehicles 45,561 33,728 LKR 000 9,255 5,958 5,958 Motor – DFCC BankPLC 31.03.2015 344,427 322,847 426,807 383,225 LKR 000 82,380 23,682 45,834 Capital work- 2,102 2,252 in-progress – – (80,341) 80,341 LKR 000

– – – – – – – –

1,161,211 1,068,636 1,316,581 1,246,674 Annual Report2015 31.12.2015 31.12.2015 247,945 187,386 102,158 102,096 966,478 813,158 LKR 000 69,907 58,571 LKR 000 2,212,437 3,254,738 3,056,121 1,042,301 2,004,189 31.12.2015 228,723 237,528 LKR 000 30,106 29,280 – – – – GROUP BANK

Total –

1,246,674 1,105,782 2,004,189 3,056,121 2,827,190 1,051,932 1,738,002 31.03.2015

31.03.2015 280,196 552,663 100,232 966,478 868,348 425,422 143,144 31.03.2015 232,093 268,614 LKR 000 47,606 21,064 58,571 LKR 000 LKR 000 2,102 2,252 2,427 3,162 Total – – –

169

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 170 LKR spotexchangeratethatoccursatthetimeofrenewal oftheannualcontract. renewed annuallyuptothedate ofrepaymenttheNotessoastoexchangecashflowarising frommovement inUSD/ Although, USDdenominatedNotesarerepayableattheend of5years, thecurrencySWAP arrangementcontractis from depreciationofLKR vis-à-visUSDorappreciationofLKR vis-à-visUSDrespectively. DFCC BankbyCBSLforanyexchangelossincurredand conversely forDFCCBanktopayCBSL anyexchangegainarising The currencySWAParrangement, pursuanttoGovernmentpolicyfortheprincipalamount onlyisdesignedtoreimburse Accordingly, thiscontractwasrenewedinNovember2015. SWAP arrangementwithCentralBankofSriLanka (CBSL) for75%oftheUSDollar(USD)denominatedliability. the resultingnetopenforeigncurrencyliabilityposition, DFCCBankPLC hasenteredintoaannuallyrenewablecurrency proceeds ofthisNoteIssuearetobedeployedpredominantly inLKR denominatedmonetaryassets. Inordertohedge DFCC BankPLCinOctober2013 raisedUSD100millionbyIssueofNotesabroadrepayable inOctober2018. The Fair value asat31December/March (Note17) Amortisation ofdeferredincomeonGovernmentgrant– Foreign exchangegain/(loss)onrevaluation Fair value asat31December/March resulted fromtheoriginalacquisitionofDVB intheconsolidatedfinancialstatus. have identicalnetassets. ThereforeDFCCwillcontinuetorecordcarryingvaluesincludingtheremaininggoodwillthat results ofamalgamationtwoentitiesareeconomicallythesamebeforeandafterasentitywill as acommoncontroltransaction, asDFCCBankcontinuestocontroltheoperationsofDVB afteramalgamation. Thusthe amalgamated withDFCCBankPLC witheffectfrom1October2015.Theamalgamationbetweentwoentitiesisconsidered In accordancewiththeprovisions ofpartVIII oftheCompaniesAct,DFCCVardhana BankPLC (DVB) hasbeen Change infairvalueduringtheperiod Change infairvalueduringtheperiod(Note15) Lanka IndustrialEstatesLimited Change infairvalueontherenewalofcontract Change infairvalueontherenewalofcontract As at As at DFCC Vardhana BankPLC Fair value atthebeginningofperiod 43.2 GovernmentGrant–DeferredIncome Fair value atthebeginningofperiod 43.1 GovernmentGrant–Receivable 42 43

Goodwill onConsolidation Government GrantReceivable/DeferredIncome–CBSL Swap

DFCC BankPLC

Annual Report2015 CBSL Swap

31.12.2015 476,008 130,288 116,250 539,758 303,727 483,727 LKR 000 14,038 14,038 41,993 41,993 BANK (198,750) (368,086) (368,086) 31.03.2015 303,727 376,185 483,727 574,935 574,935 295,628 276,878 LKR 000 31.12.2015 156,226 146,603 31.12.2015 LKR 000 476,008 130,288 116,250 539,758 303,727 483,727 9,623 LKR 000 14,038 14,038 41,993 41,993 GROUP GROUP (198,750) (368,086) (368,086) 31.03.2015 31.03.2015 303,727 376,185 483,727 574,935 574,935 156,226 146,603 295,628 276,878 LKR 000 LKR 000 9,623

As at Recognised inincomestatement Recognised inothercomprehensiveincome Transferred fromdeferredtaxasset Recognised inothercomprehensiveincome Recognised inincomestatement Offset againstdeferredtaxliability Deferred taxliability(Note44.1) derivative whichthegrantisintendedtocompensate. The deferredincomeisamortisedonasystematicbasisovertheperiodinwhichBankrecognisesfallvalueof a Government grantanddeferredincome. The initialgainbyreferencetoforwardpriceofanequivalentexchangeDollarpurchasecontractisrecognisedas instrument andGovernmentgrantthroughtheagencyofCBSL. the USDLKRspotrateattimeofmaturitycontract.Thus,thisarrangementhasfeaturesbothderivative CBSL normallydoesnotenterintoforwardexchangecontractswithmarketparticipants, providing100%discountto The subsequent changeinfairvalueisrecognisedtheincomestatement. inception ofthecontractisfullamountforwardpremiumquoteatendoneyear. USD purchasecontractsbycommercialbanks, whoarethenormalmarketparticipants.Thus, thefairvalue gainatthe inception ofthecontract. Thefairvalueofthisderivativeassetismeasuredbyreferencetoforwardexchangequotesfor The hedginginstrumentforcurrencySWAP isdeemedtobeaderivative assetrecognisedatthefairvalue amounts toafulldiscountUSDLKRspotrateattheendofthecontract). spot rateastheinitialSWAPofUSDtoLKR atthecommencementofannualcontract(i.e., CBSL SWAParrangement The currencySWAParrangementwithCBSL providesforSWAP ofLKR toUSDattheendofcontractsame Net total Deferred taxasset(Note44.2) Balance atbeginning 44.2 DeferredTaxAsset Balance transferredonamalgamation Balance atbeginning 44.1 DeferredTaxLiability Balance transferredonamalgamation 44 Deferred TaxAsset/Liability 1,021,744 (141,614) (141,614) 31.12.2015 394,498 120,693 880,490 168,044 141,614 880,490 880,490 506,553 (47,241) LKR 000 19,699 1,112 – 360 – – BANK DFCC BankPLC 31.03.2015 506,554 486,855 486,855 486,855 445,367 (19,699) (19,699) 61,024 19,699 12,297 LKR 000 2,504 4,898 – 163 – – – –

1,022,192 Annual Report2015 (141,702) (141,702) 31.12.2015 309,571 880,490 143,238 880,490 878,954 102,270 742,729 (30,108) LKR 000 39,415 1,553 1,536 1,536 – – GROUP – (100,708) (100,708) 31.03.2015

134,953 742,729 642,021 102,270 642,021 640,459 589,884 10,276 17,892 53,047 38,947 LKR 000 1,562 1,562 – – –

171

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 172 Debtors Dividends due Excess of1%ceilingonbadanddoubtfuldebts As at Fair valueofavailable-for-salefinancialassets 44.4 UnrecognisedDeferredTaxAssets Tax lossesonfinanceleases Balances withforeignbanks Clearing accountbalances Refundable depositsandadvances *Tax effectat10% Synapsys Limited–Subsidiary* DFCC Consulting(Pvt)Limited –Subsidiary Accumulated taxlosses Fair valueofavailable-for-salefinancialassets Finance leases Property, equipmentandsoftware Liabilities Unutilised taxlosses Gratuity liabilityandactuariallossesondefinedbenefitplans Property, equipmentandsoftware Assets 44.3 RecognisedDeferredTaxAssetsandLiabilities Borrowing –otherlocalsources Borrowing –localbanks Bank overdrafts Securities soldunderrepurchase(Repo)agreements 46 45

Due to Banks Other Assets

DFCC BankPLC –

Financeleases

Annual Report2015 13,269,916 11,019,118 24,364,403 1,021,744 1,705,379 31.12.2015 884,790 136,954 141,254 565,639 169,712 945,960 LKR 000 78,294 12,515 50,445 24,068 75,369 – – – – – – BANK 1,600,288 1,928,867 31.03.2015 465,215 506,553 225,051 435,050 717,125 328,579 19,698 41,175 19,698 LKR 000 57,024 163 – – – – – – – – – 13,271,166 11,019,118 24,365,653 1,022,192 1,765,199 31.12.2015 884,790 137,402 143,238 623,670 171,501 945,960 LKR 000 78,294 12,515 52,429 24,068 75,369 9,990 3,968 6,022 – – – – – – GROUP 2,088,401 1,003,855 1,886,673 1,600,288 1,151,206 5,972,567 31.03.2015 596,406 128,431 102,270 742,729 513,117 435,050 211,775 330,545 928,459 24,842 44,182 33,211 17,892 16,187 LKR 000 37,857 21,670 35 – – Securities soldunderrepurchase(Repo)agreements Central BankofSriLanka –refinanceloans(secured) United StatesDollar Others Great BritainPound Borrowing sourcedfrom Repayable in Rupees Sri Lankan Rupee 47.1.2 ByCurrency Other deposits Certificate ofdeposits As at Demand deposits(currentaccounts) 47.1.1 ByProduct 47.1 Analysis Balance asat31December/March Fixed deposits Savings deposits Borrowing sourcedfrom Repayable in foreign currency 48 47 Bilateral institutions Multilateral institutions Bilateral institutions Multilateral institutions Due toOtherCustomers Other Borrowing 100,056,541 110,890,685 110,890,685 110,890,685 35,955,297 29,290,127 18,648,230 88,854,449 17,374,347 9,212,723 1,036,860 6,665,170 3,124,940 3,540,230 6,766,779 2,956,891 1,110,474 3,705,529 31.12.2015 392,314 257,280 699,080 LKR 000 BANK 24,361,797 16,714,470 14,814,449 DFCC BankPLC 22,484,652 22,484,652 22,484,652 22,484,652 22,484,652 1,411,145 7,647,327 4,001,694 3,645,633 31.03.2015 488,876 LKR 000 – – – – – – – –

110,551,220 110,551,220 110,551,220 35,955,297 29,290,127 18,648,230 99,721,458 88,551,817 17,337,514 9,212,723 1,036,860 6,665,170 3,124,940 3,540,230

6,762,397 2,956,891 1,110,474 3,705,529 Annual Report2015 31.12.2015 392,314 257,280 699,080 LKR 000 GROUP 38,846,172 31,198,845 14,484,375 14,814,449 84,178,004 92,711,793 92,711,793 92,711,793 72,682,602 15,650,249 1,411,145 7,647,327 4,001,694 3,645,633 5,096,847 2,605,499 3,605,464 31.03.2015

488,876 831,443 226,955 546,523 LKR 000

173

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 174 49.1 DebtSecuritiesIssued–ListedDebentures Carrying values arethediscountedamountsofprincipalandinterest. Due afteroneyear Liquid assetratio(%) Due withinoneyear 2014/2017

2015/2020 Interest cover(times) ii. Debt toequity ratio(times) Ratios N/T -NotTraded 2014/2017 2014/2017 Fixed Rate: Debenture category i. Issued byBank Assignment intermsofSection88AtheMonetaryLaw ofLoans refinancedbyCentralBankofSriLanka Nature 48.1 AssetsPledgedasSecurity Year ofissuance 49

- Listed Notes issue(USD) - Unlisted Debenture issue(LKR) Debt SecuritiesIssued

DFCC BankPLC Semi-annually Quarterly Annually Annually

frequency

Interest payable Annual Report2015 13,075,000 5,000,000 3,000,000 506,000 Face value LKR 000 interest rate Applicable 8.24 8.3 9.1 8.5 % Interest rate 9.625% 16.50% 8.36% 9.10% Interest rateof Comparative Government (Gross) p.a. 10.36% % Securites 8.93% 8.93% 8.93% Repayment 5 Years 5 3 Years 3 3 years 3 5 Years 5 3,136,376 3,925,087 terms Balance asatBalance 897,238 300,213 31.12.2015 LKR 000 18-Aug-14 22-Jan-13 1-Nov-13 10-Jun-15 Issue date 100.04 100.34 Highest N/T N/T 17-Aug-17 31-Oct-18 22-Jan-16 10-Jun-20 Market price Maturity 100.04 100.34 date Lowest N/T N/T 23,292,660 22,786,448 23,292,660 14,527,534 5,122,538 3,136,376 31.12.2015 506,212 506,212 31.12.2015 Last TradedLast LKR 000 100.04 100.34 BANK/GROUP 22.5 0.98 2.04 N/T N/T 19,445,924 18,920,286 19,445,924 13,746,206 5,174,080 392,314 31.03.2015 31.12.2015 525,638 525,638 31.03.2015 LKR 000 Yield last LKR 000 traded 47.6 1.38 1.05 8.30 8.30 N/T N/T – – % Other provisions(Note50.2) Provision forstaffretirementbenefits(Note50.1) Account payables

Present value ofdefinedbenefitpensionobligations Prepaid loanandleaserentals

Actuarial experienceloss Security depositforleases

Interest onobligation Prior year'sdividend As at As at Balance atbeginning 50.1.1 UnfundedPensionLiability Defined benefit 50.1 ProvisionforStaffRetirementBenefits Accruals 50 Benefit paid OtherLiabilities – fundedpension(Note50.1.3) ofservicegratuity unfundedend – – unfundedpension(Note50.1.1) (Note 50.1.2)

1,747,949 3,368,558 414,702 305,965 771,039 31.12.2015 305,965 180,163 85,033 39,805 LKR 000 58,808 66,994 4,065 BANK DFCC BankPLC 237,743 140,638 266,456 104,049 31.03.2015 140,638 840,156 40,025 47,180 70,355 67,686 LKR 000 4,065 2,597

1,812,045

3,500,012 Annual Report2015 414,702 331,818 206,016 774,917 31.12.2015 31.12.2015 331,818 85,033 58,808 41,692 39,805 66,994 67,686 (4,664) LKR 000 LKR 000 66,994 4,569 BANK/ GROUP (597) GROUP

1,804,536 2,586,927

242,961 104,049 172,678 31.03.2015 31.03.2015 327,707 242,961 18,141 40,025 67,686 49,508 68,740 (6,996) 67,686 LKR 000 LKR 000 2,597 6,187 (245)

175

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 176 Pension assets Present value ofdefinedbenefitpensionobligations Present value ofdefinedbenefitpensionobligations Actuarial experienceloss Actuarial experiencegain Actuarial experienceloss Benefits paid Others Benefits paid Benefits paid Balances transferredonamalgamation Interest onobligation Fixed deposits Employer's contribution Defined benefitliability Interest onobligation Current servicecost Government Bonds Expected returnonpensionassets Fair valueofpensionassets(Note50.1.3.2) Current servicecost As at As at Present value ofdefinedbenefitpensionobligationson01April 50.1.3.1 MovementinDefinedPensionObligation Present value ofdefinedbenefitpensionobligations(Note50.1.3.1) 50.1.3 FundedPensionLiability Debentures 50.1.3.3 PlanAssetsConsistoftheFollowing Pension assetson01April 50.1.3.2 MovementinPensionAssets Balance atbeginning 50.1.2 UnfundedEnd ofServiceGratuity

DFCC BankPLC

Annual Report2015 31.12.2015 (11,477) 180,163 97,950 12,404 70,355 LKR 000 3,971 6,960 BANK

31.03.2015 17,494 43,920 (3,672) 70,355 LKR 000 4,392 8,221 – – (2,237,646) 2,237,646 1,517,319 2,141,649 2,139,052 2,237,646 2,296,454 2,296,454 (125,982) (125,982) 144,561 397,209 106,000 139,779 321,754 172,678 31.12.2015 31.12.2015 (21,203) (15,148) 206,016 78,178 14,517 58,048 28,636 LKR 000 LKR 000 58,808 1,364 5,333 BANK/GROUP – – GROUP

(2,139,052) 2,139,052 1,289,144 1,866,434 2,027,664 2,139,052 2,141,649 2,141,649 (110,448) (110,448) 140,287 167,979 512,046 177,105 337,546 112,688 (14,271) 31.03.2015 31.03.2015 172,678 33,720 59,002 10,965 77,397 23,359 LKR 000 LKR 000 (8,054) 2,597 316 – – Beyond 5years Between 2and5years date ofvaluation. Projected unitcreditmethodwasusedtoallocatetheactuarialpresentvalue oftheprojectedbenefits earnedbyemployeesto 50.1.3.7 ActuarialValuationMethod & Associates,on31December2015. Actuarial valuation wascarriedoutbyPiyalSGoonetilleke,FellowoftheSocietyActuariesUSAGoonetilleke 50.1.3.6 ActuarialValuation covers thepensionbenefittoretireeandsurvivors. This relatestopensionliabilityofanex-employee, notfundedthroughtheDFCCBankPLC PensionFund. Theliability 50.1.3.5 UnfundedPensionLiability * Basedonexpectedbenefitspayoutinnext10years. Within next12 months totheDefinedBenefitObligation–Bank 50.1.3.4 TheExpectedBenefitPayoutintheFutureYears Discount rateasat31December2015, perannum 50.1.3.8 PrincipalActuarialAssumptions As at Mortality Actual rateofreturnonpensionassets Expected rateofreturnonpensionassets Future salaryincreasesperannum 50/55 45 40 35 30 25 20 Age Turnover rate- Normal formofpayment: Retirement age Pre-retirement Post-retirement followed by reduced pension for 10years lump sum commuted pension payment (25% reduction) (for entrants new

recovery period is 15years) recovery period UP 1984mortality table DFCC BankPLC Unfunded 31.12.2015 Liability* Pension benefit 34,980 27,984 LKR 000 Pension 6,996 55 years 10.5 10.0 10.0 10.0 9.0 9.0 9.0 1.0 2.5 5.0 7.5

(%) End ofService 7

Annual Report2015 210,477 108,365 31.12.2015 Unfunded Gratuity* RP- 2000mortality table 21,040 LKR 000 End ofservicegratuity not applicable lump sum 1,137,224 55 years

31.12.2015 725,807 149,717 Liability* LKR 000 Pension Funded 10.0 10.0 10.0 10.0 9.5 1.0 2.5 5.0 7.5 (%) – –

177

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 178 Deficit/(surplus) intheplan Fair valueofplanassets Present value ofthedefinedbenefitobligation 50.1.3.10 HistoricalInformation As at31March * Salary incrementnotapplicableforex-employee Salary IncrementRate Discount rate Funded Pension Liability statement offinancialpositionwiththeassumedchangesindiscountratesandsalaryincrementratearegivenbelow: other variables heldconstantintheemploymentbenefitliabilitymeasurement.Theeffectincomestatementand The Followingtabledemonstratesthesensitivitytoareasonablypossiblechangeinkeyassumptionsusedwithall 50.1.3.9 SensitivityofAssumptionsUsedintheActuarialValuation The differencesintherateoffutureannualsalaryincreasesreflectremainingworkinglifeparticipantsforeachplan. for pensionandendofservicegratuity,reflectthedifferencesinestimatedperiodbenefitpayments. is approximately21.4 yearsforpensionand10.5 yearsforendofservicegratuity. Thedifferencesinthediscountrates 31 December2015, withatermequallingtheestimatedperiodforwhichallbenefitpaymentswillcontinue. Thisperiod The principleactuarialassumptionsinthepreviousyearhave notchanged. Thediscountrateistheyieldon Discount rate Unfunded EndofService Gratuity Discount rate Unfunded Pension Liability* Salary IncrementRate

-1% -1% -1% -1% -1% 1% 1% 1% 1% 1%

DFCC BankPLC

Annual Report2015 2,141,649 2,139,052 LKR 000 2,597 2015 2,027,664 1,866,434 (161,230) LKR 000 2014 1,821,009 1,750,987 increase/(decrease) (70,022) income statement LKR 000 2013 (252,058) 212,473 (21,411) (22,165) (58,741) Effect on 18,459 18,702 54,837 (5,373) LKR 000 4,685 1,607,025 1,494,887 (112,138) LKR 000 2012 increase/(decrease) benefit obligation Effect ondefined

1,497,559 1,367,956 (212,473) (129,603) 252,058 (18,459) (18,702) (54,837) 21,411 22,165 58,741 (4,685) LKR 000 LKR 000 5,373 2011

Balance transferredonamalgamation Provisions reversed duringtheperiod Provisions usedduringtheperiod Provisions forthefinancialperiod As at Due afteroneyear Due withinoneyear amalgamation Transferred on Issued byBank Listed Debentures DFCC Consulting(Pvt)Limited Balance asat31December/March Balance asat1April 50.2 OtherProvisions As at 52 51 Subordinated TermDebt Due toSubsidiaries 2,000,000 Face value 166,667 833,333 590,000 LKR 000 6 Months Months 6 Interest rate TB+1.5 11.50 14.00 gross 9.40 % Repayment 10 Years 5 Years 5 5 Years 5 5 Years 5 terms 26 Sep 2011 26 Sep 26 Sep 2011 26 Sep 26 Sep 2006 26 Sep 10 Jun 2015 Issue date 26 Sep 2016 26 Sep 10 Jun 2020 7 Sep 2016 7 Sep 7 Sep 2016 7 Sep (234,647) 106,275 308,427 237,743 414,702 31.12.2015 Maturity Maturity (3,096) LKR 000 date BANK

2,094,193 1,672,888 3,767,081 3,767,081 2,094,193 31.12.2015 166,704 833,584 672,600 LKR 000 DFCC BankPLC (177,343) 237,743 197,187 (19,844) 31.03.2015 237,743 LKR 000 BANK – – 31.03.2015 609,373 609,373 609,373 609,373 LKR 000

– – – – – – –

Annual Report2015 (324,611) 327,707 31.12.2015 31.12.2015 414,702 414,702 LKR 000 LKR 000 (3,096) 2,094,193 1,672,888 3,767,081 3,767,081 2,094,193 31.12.2015 166,704 833,584 672,600 – – LKR 000 – – GROUP BANK

GROUP (256,433) 1,609,664 1,609,373 1,609,664

329,004 274,980 (19,844) 31.03.2015 31.03.2015 31.03.2015 327,707 166,702 833,589 609,373 LKR 000 LKR 000 LKR 000 291 – 31 31 –

179

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 180 Exchange equalisationreserve Fair value reserve As at N/T –Nottraded 2006/2016 52.1 SubordinatedTermDebt–ListedDebentures General reserve is retainedandreinvestedinthebusinessofBank. This representscumulativenetearnings,inclusive offinaldividendapproved amountingtoLKR 663million.Thebalance Debt equity ratio, interestcover andliquidassetratioisgiveninnote49.1. Fixed Rate under Section76(j)(1)oftheBankingAct, No. 30of1988, asamendedbyBanking(Amendment)Act, No.33of1995. Five percentofprofitaftertaxistransferredtothereservefund, asperDirectionissuedbytheCentralBankofSriLanka 54.1 ReserveFund (Numberofshares–265,097,688) Balance asat31December/March As at 2011/2016 2011/2016 2015/2020 54 56 53 Debenture Category 55

Statutory Reserve StatedCapital OtherReserves RetainedEarnings

DFCC BankPLC

Annual Report2015 Semi-annually Semi-annually Annually Annually Interest rate frequency

% Interest rate Applicable 11.5 9.4 9.4 14

Interest rateof Comparative Government (Gross) p.a. Securites 10.36 7.86 7.86 7.86 % 14,285,657 13,779,839 28,065,496 2,094,193 3,767,081 Balance asat 672,600 833,584 166,704 31.12.2015 31.12.2015 LKR 000 LKR 000 – BANK 101.44 17,512,960 13,779,839 31,292,799 Highest N/T N/T N/T 31.03.2015 LKR 000 – Market price 101.44 Lowest N/T N/T N/T 13,779,839 25,659,404 11,857,655 4,715,814 31.12.2015 31.12.2015 LKR 000 21,910 LKR 000 Last TradedLast BANK/GROUP 101.44 N/T N/T N/T GROUP

28,895,058 15,112,861 13,779,839 4,715,814 31.03.2015 31.03.2015 Yield last LKR 000 LKR 000 traded N/T N/T N/T 2,358 9 % Commitments inordinarycourseofbusiness- Forward exchangecontracts(net) Performance bonds Bills forcollection Documentary credit Shipping guarantees As at No materiallossesareanticipated asaresultoftheaforesaidactions. from theBank. 58.8 CasefiledintheLabourTribunal -Gallebyanex-employeeoftheBank, claimingcompensationandreinstatement 58.7 CasefiledintheLabour Tribunalbyoneex-employeeoftheBank, claimingcompensationfromtheBank. Tribunal. 58.6 TheBankhasappealedtotheHighCourtsetasidean awardmadeinfavourofanex-employeebytheLabour case beforetheDistrictCourt. against theBankclaimingdamagesforlosscauseddue toawrongfulseizureofproperty.TheBankisdefendingthe 58.5 Aclient, againstwhomanevictionorderhasbeenobtainedbytheBank, hasfiledaseparateMoneyRecoveryaction property mortgagedtotheBank. TheBankisdefendingthecasesbeforeDistrictCourt. 58.4 TherearetwocasesfiledintheDistrictCourtofBandarawel a, whereathirdpartyisclaimingownershipof recovery action. TheBankisdefendingthecasesbeforerespective DistrictCourts. case inDistrictCourtofMoratuwa, wherethirdpartiesareclaimingownershipofpropertiesacquiredbytheBankunder 58.3 LKR 10millionfornon-disbursementofthefullloanapprovedtohim. TheBankisdefendingthisaction. 58.2 AclientoftheBankhasinstitutedlegalactioninDistrictCourtMatara, againsttheBankclaimingasumof aside, andalsoclaimingLKR 6millionasdamagesfromtheBank.TheBankisdefendingcasebeforeDistrictCourt. a propertymortgagedbyhimtotheBankhadbeenunlawfullytransferredthirdpartyunderparateprocessbeset A clienthasfiled actionagainst five defendants including theBankinDistrictCourtofKurunegala, claimingthat 58.1 Guarantees issuedto- 58 57 Capital expenditureapprovedbytheBoardofDirectors Commitments forunutilisedcreditfacilities Principal collectorofcustoms(dutyguarantees) oftheBank Companies inrespectofindebtednesscustomers Banks inrespectofindebtednesscustomerstheBank Contingent Liabilities andCommitments LitigationAgainsttheBank Not contracted Contracted TherearefourcasesfiledintheDistrictCourtofKandyandonecaseNegomboanother

76,014,851 39,719,549 16,943,219 2,066,268 2,175,953 7,261,732 6,855,843 620,806 172,090 31.12.2015 68,239 90,030 41,122 LKR 000 BANK 40,979,686 25,572,860 14,183,209 DFCC BankPLC 1,167,264 31.03.2015 27,116 29,237 LKR 000 – – – – – –

76,014,851 39,719,549 16,943,219 2,066,268 2,175,953 7,261,732 6,855,843

Annual Report2015 620,806 172,090 31.12.2015 68,239 90,030 41,122 LKR 000 GROUP 75,072,548 39,365,166 15,843,573 9,675,687 2,138,132 2,251,076 5,514,468

31.03.2015 74,726 78,935 27,080 39,052 64,653 LKR 000

181

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 182 Personnel expenses Other overheadexpenses Net gainfromfinancialinvestments–dividend received Net gainfromfinancialinstrumentsatfairvaluethroughprofitorloss Net gainfromtrading Other operatingincome(net) Fee andcommissionincome Interest expenses Due toothercustomers Due tobanks Liabilities Interest income 59.2.2 IncomeStatement–Bank Other borrowing Loans toandreceivable fromothercustomers Placements withthebanks Assets 59.2.1 StatementofFinancialPosition–Bank 59.2 Transactionswith Subsidiaries As at Key ManagementPersonnelortheirclosefamilymembers. entities whicharecontrolled, jointlycontrolledorsignificantlyinfluencedforwhichsignificantvoting powerisheldby retirement plan, jointventure,KeyManagementPersonnel,closefamilymembersofPersonneland 59.1 TheGroup'srelatedpartiesincludeassociates, subsidiaries, TrustestablishedbytheBankforpost-employment 59

RelatedPartyTransactions

DFCC BankPLC

– secondedexpenses – reimbursedexpenses

Annual Report2015

9 Months ended 31.12.2015 31.12.2015 216,793 279,769 339,901 341,235 LKR 000 LKR 000 79,236 16,409 32,351 41,266 1,960 1,960 1,334 – – – – – 37 Year ended 31.03.2015 31.03.2015 287,901 182,807 720,314 215,485 215,485 716,624 84,844 26,439 16,651 29,282 12,158 82,689 LKR 000 LKR 000 2,639 3,690 – – – Net gainfromfinancialinvestments–reverserepoincome Other overheadexpenses Interest expenses Net gainfromfinancialinvestments Other borrowing Due toothercustomers Liabilities 59.3.1 StatementofFinancialPosition–Bank 59.3 TransactionswithJointVenture Other overheadexpenses Other borrowing Due toothercustomers Liabilities 59.4.1 StatementofFinancialPosition–Bank 59.4 TransactionswithAssociate As at Interest expenses 59.4.2 IncomeStatement–Bank Net (loss)/gainfromtrading 59.3.2 IncomeStatement–Bank – dividendreceived – dividendreceived DFCC BankPLC

9 Months ended 9 Months ended

Annual Report2015 31.12.2015 31.12.2015 31.12.2015 LKR 000 LKR 000 LKR 000 30,130 30,308 30,005 (3,951) 2,565 8,128 5,566 5,541 1,378 303 – 73 25 28

Year ended Year ended 31.03.2015 31.03.2015 31.03.2015 LKR 000 LKR 000 LKR 000 26,200 6,011 5,415 1,104 890 – – – – – – – – 92

183

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 184

Post employmentbenefits on 'RelatedPartyDisclosures'. Services Officer, ChiefFinancialOfficerandtheSecretarytoBoardforpurposeofSriLanka AccountingStandard Treasury, SeniorVice President-CorporateBanking, SeniorVice President-BranchBanking,ChiefTechnologyand Key ManagementPersonnelaretheBoardofDirectorsBank, ExecutiveVice Presidents, SeniorVice President- 59.6.1 KeyManagementPersonnel 59.6 TransactionswithKeyManagementPersonnel Interest expenses Short-term employmentbenefits Net gainfromfinancialinvestments–dividend received Fee andcommissionincome Due toothercustomers Liabilities Number ofpersons 59.6.2 CompensationofDirectorsandOtherKey ManagementPersonnel Interest income 59.5.2 IncomeStatement–Bank Financial investments–available-for-sale Loans toandreceivablesfromothercustomers Assets 59.5.1 StatementofFinancialPosition-Bank have SignificantInfluencewithout SubstantialShareholding 59.5 TransactionwithEntitiesinwhichDirectorsoftheBank As at

DFCC BankPLC

Annual Report2015 – others – pension

31.12.2015 125,065 106,589 9 Months 12,313 LKR 000 6,163 ended 21 BANK Year ended 31.03.2015 121,635 100,299 15,586 LKR 000 5,750 9 Months ended 15 31.12.2015 31.12.2015 408,061 408,061 102,701 102,701 LKR 000 LKR 000 6,264 1,283 31.12.2015 209,213 180,809 9 Months 22,241 LKR 000 793 289 6,163 – ended 23 GROUP 116,203 Year ended Year ended 31.03.2015 31.03.2015 31.03.2015 216,831 186,655 188,811 72,608 24,426 LKR 000 LKR 000 LKR 000 5,750 1,636 6,093 – – – – 38 Interest expenses Other borrowing Loans toandreceivablesfromothercustomers Assets 59.6.3.1 StatementofFinancialPosition–Bank their CloseFamilyMembers 59.6.3 OtherTransactionswithKeyManagementPersonneland As at Ms SRThambiayah A RFernando Fee andcommissionincome Interest income 59.6.3.2 IncomeStatement–Bank Debt securitiesissued Due toothercustomers Liabilities As at *This amountwassettledinfullduringJanuary 2016. Note 59.6.3.1. The abovetotalisincludedunder loansandadvancestoKeyManagementPersonneltheir closefamilymembersin L HAL Silva L HAL Silva C RJansz L NDeSWijayarathne A NFonseka* A RFernando T Dharmarajah Disclosure underSection47(11A)oftheBankingAct, No. 30of1988asamendedbyamendmentActNo. 2of2005. 59.6.4 AccommodationGrantedtoDirectorsoftheBank 50,000 LKR 000 2,000 1,500 Limit 500 500 500 500 500 500 Number of KMPs Number of KMPs Credit Card Credit Card Credit Card Credit Card Credit Card Credit Card Credit Card Overdraft Overdraft Type of Facility 31.12.2015 31.12.2015 28

7 4 4 DFCC BankPLC Balance as atBalance 31.12.2015 116,204 312,256 460,366 10,515 32,387 LKR 000 LKR 000 31,906 LKR 000 10,753 238 – – – – – – – Cash Deposits Cash Cash Deposits Cash Cash Deposits Cash

Number of KMPs Number of KMPs

Annual Report2015 31.12.2015 9 Months 17,457 LKR 000 2,378 ended Type 55 31.03.2015 31.03.2015 Security

2 2 2

Year ended 31.03.2015 LKR 000 17,280 LKR 000 LKR 000 LKR 000 76,965 43,308 26,028 5,662 6,278 2,603 1,133 value 279 – – – – –

185

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 186 59.7.1 IndividuallySignificantTransactionsIncludedintheStatementofFinancialPosition transactions toregulatoryorsupervisoryauthoritiesrequireshareholderapproval. were undertakenonnormalmarkettermsintheordinarycourseofbusinessandtherewasnorequirementtodisclose required tobemadefortransactionthatareindividuallysignificantbecauseoftheirsizealthoughthesetransactions this exemptiontheBoardhasdeterminedthatlimiteddisclosurerequiredunderparagraph26ofLKAS 24isonly from thenormallyapplicabledisclosurerequirementsontransactionswithGOSL –relatedentities.Inmakinguseof Paragraph 25ofSriLanka AccountingStandard–LKAS24on‘RelatedPartyDisclosure’hasexemptedDFCCBank and operatingpolicydecisionsoftheBank. However, infactthispowerwasnotexercised. participate inthefinancialandoperatingpolicydecisionoftheBankbyextensionto Entities relatedtotheGovernmentofSriLanka(GOSL) byvirtueoftheiraggregateshareholdingshasthepowerto 59.7 TransactionswithGovernmentofSriLanka(Gosl)anditsRelatedEntities Contribution payable(Note50.1.3) Contribution paidbytheBank Recognition ofactuarialgains/(losses)intheothercomprehensiveincome Contribution dueforthefinancialperiodrecognisedasexpenseinincomestatement Government grantreceivable Loans toandreceivablesfromothercustomers Loans andreceivables tobanks Other financialassetsheld-for-trading Balances withtheCentralBankofSriLanka Cash andcashequivalents Assets 59.7.1.1 StatementofFinancialPosition–Bank As at Contribution (payable)/prepaidasat1April liability ofeligibleemployeestheBank. DFCC BankPensionFundconstitutedasaTrustwasestablishedbythetodischargedefinedbenefitpension 59.6.5 TransactionswithDFCCBankPensionFund–Trust Financial investments–available-for-sale Financial investments–held-to-maturity

DFCC BankPLC

Annual Report2015 12,547,298 57,620,698 29,690,593 5,553,809 4,492,981 4,372,191 31.12.2015 31.12.2015 (99,381) (62,830) 106,000 539,758 424,068 (58,808) (2,597) LKR 000 LKR 000 – 11,028,479 5,548,508 1,469,166 3,527,078 (154,558) 31.03.2015 31.03.2015 483,727 161,230 (68,271) 59,002 LKR 000 LKR 000 (2,597)

– – – – Undrawn creditfacilities Commitments Subordinated termdebt Government grant–deferredincome There arenoothertransactionsthatcollectivelysignificantwithGovernmentrelatedentities. Debt securitiesissued Net gainfromfinancialinvestments Due toothercustomers Due tobanks Liabilities As at include pricingforloans,depositsandservices, collateralobtainedforloanswhereappropriate. Management Personnelunderapproved schemesuniformlyapplicabletoallorspecificcategoriesofemployees.Theterms transactions withanunrelatedcomparablecounterpartytheexceptionofaccommodationgrantedtoKey Bank entersintotransactionswithrelatedpartiesintheordinarycourseofbusinessontermssimilartocomparable 59.8 PricingPolicyandTermsforTransactionswithRelatedParties Interest expenses Net gainfromtrading Interest income 59.7.1.2 IncomeStatement–Bank Other borrowing Other borrowing–creditlines DFCC BankPLC

44,555,910 21,631,475 6,617,554

4,727,930 1,020,197 1,038,055 4,753,843 1,101,554 9,018,778 Annual Report2015 31.12.2015 31.12.2015 09 Months 476,008 999,519 LKR 000 LKR 000 7,787 5,180 ended 21,868,246 20,354,251 5,585,860 1,368,943

Year ended 31.03.2015 31.03.2015 303,727 548,378 661,890 754,303 LKR 000 LKR 000 – – – – –

187

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 188 Capital expenditure–additions Liabilities jointventurecompany Investments inassociate and Percentage* Assets holdersoftheBank Profit attributable toequity non-controllinginterests Total comprehensiveincome- Total comprehensive expenses Other comprehensive expensesnetoftax Profit fortheperiod Income taxonprofitordinaryactivities Profit before tax Share ofprofitsassociateandjointventure nationbuildingtaxonfinancialservices Operating profitaftervalueaddedtaxand taxonfinancialservices Value addedtaxandnationbuilding Unallocated expenses Result Other operatingandinterestexpense Depreciation Segment losses Expenses Percentage* Total income Other income Net gain/(loss)fromfinancialinvestments atfairvaluethroughprofitorloss Net gainfromfinancialinstruments Net gainfromtrading Net feesandcommissionincome Interest income Revenue For the periodended31December2015 * Netofeliminations. 60

Business SegmentInformation

DFCC BankPLC

Annual Report2015

177,437,981 197,078,172 13,064,539 12,266,942 15,565,791 13,948,157 2,501,252 1,071,067 797,597 184,890 215,575 Banking LKR 000 71,519 74,583 – – – – 80 89 13,892,540 15,436,155 1,383,604 1,383,604 719,768 663,836 664,425 Finance LKR 000 leasing (589) – – – – – – – – – – – – – – 6 8 19,399,277 Investing in 412,362 412,362 412,362 LKR 000 equity – – – – – – – – – – – – – – – – – – – – – 8 2 164,792 733,285 111,288 332,025 305,470 443,313 172,292 247,363 LKR 000 13,528 26,555 23,658 Other – – – – – – – – – – 3

12,004,395 13,706,000 Unallocated 295,536 LKR 000 18,978 18,978 18,978 – – – – – – – – – – – – – – – 6 0

Eliminations (359,231) (492,086) (243,051) (241,370) (331,094) (177,315) (88,043) (17,204) (89,724) (46,851) LKR 000 (1,681) – – – – – – – – – – (2)

203,140,477 247,108,602 245,860,803 13,817,349 12,995,467 17,492,954 15,308,568 (1,765,468) (1,716,802) (3,358,430) 1,247,799 1,641,628 2,553,470 2,474,777 3,675,605 1,141,115 309,064 911,842 589,330 611,498 795,327 245,585 507,528 215,575 LKR 000 48,666 78,693 26,555 74,583 Total 100 100

Capital expenditure–additions Liabilities jointventure company Investments inassociateand Percentage* Assets holdersoftheBank Profit attributable toequity non-controllinginterests Total comprehensiveincome– Total comprehensive income Other comprehensiveincome netoftax Profit fortheyear Income taxonprofitordinaryactivities Profit before tax Share ofprofitsassociateandjointventure buildingtaxonfinancialservices Value addedtaxandnation Unallocated expenses Result Other operatingandinterestexpenses Depreciation Segment losses Expenses Percentage* Total Income Other income Net gainfromfinancialinvestments atfairvaluethroughprofitorloss Net gainfromfinancialinstruments Net gainorfromtrading Net feesandcommissionincome attributable tominorityshareholders. 60.3 60.2 60.1 * Netofeliminations. Interest income Revenue For the yearended31March 2015 relevant segmentandthebalanceisunallocated. trust management, stockbrokingandconsultancyservicesareincludedinthecolumn forother. Revenue andexpensesattributabletotheincorporatedbusinesssegmentsofindustrial estatemanagement,unit Eliminationsaretheconsolidation adjustmentsforinter-companytransactions, dividendandpayable Propertyandequipment anddepreciationattributabletoanincorporatedbusinesssegment isincludedinthe

150,590,868 169,907,680 11,324,857 11,570,050 16,510,981 14,966,126 4,940,931 1,039,607 245,193 333,309 138,224 Banking 21,705 LKR 000 12,010 – – 81 81 82 82 – – 10,966,528 7,425,082 1,184,139 1,184,139 505,454 666,322 517,817 12,363 Finance LKR 000 leasing – – – – – – – – – – – – – – 5 6 23,664,438 Investing in 2,127,011 2,127,011 2,127,011 LKR 000 equity – – – – – – – – – – – – – – – – – 11 11 11 – – – 306,599 500,933 219,708 248,689 151,038 162,908 783,076 338,025 DFCC BankPLC 31,426 32,536 LKR 000 42,446 Other – – – – – – – – 2

Unallocated 4,801,205 5,051,461 (703,208) 123,399 656,512 146,679 189,647 123,399 23,416 LKR 000

– – – – – – – – – – – –

3 1 Annual Report2015

Eliminations (293,474) (282,474) (370,055) (168,332) (620,647) (950,869) (11,000) (30,008) (87,581) (84,134) (76,581) LKR 000 – – – – – – – (2) – –

162,347,546 210,610,299 209,422,314 12,132,418 11,854,436 20,076,408 16,098,667 2,201,070 1,119,964 1,187,985 7,943,990 9,217,506 9,293,436 4,854,824 4,438,612 5,415,970 5,262,700 1,797,218 (501,498)

884,072 246,556 678,217 479,988 232,093 977,358 153,270 31,426 LKR 000 75,930 Total 100 100

189

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 190 Income 61.1 IncomeStatement–Restated 31 March2015. The restatedstatementoffinancialposition, asat31March2015includesbalancesofDFCCVardhana BankPLC asat from 1October2015to31December2015. DFCC BankPLC(pre-amalgamation) from1April2015to30September2015, andtheresultsofamalgamatedentity Bank PLC forthe12monthsended31March2015.Currentyearresultsinclude, resultsofDFCCVardhana BankPLC and Accordingly, thecomparativefiguresofincomestatementincludesresultsDFCCVardhana BankPLC andDFCC The followingrestatedstatementswerepreparedasiftheamalgamationhastakenplacepriorto1April2014. Bank PLC. balance paymenttominoritysharehlodersamounting122million), wassetoffagainsttheequityofDFCCVardhana of theDFCCBankPLC andtheinvestmentinsubsidiaryofLKR 5,945 millionrecordedinDFCCBankPLC (including 1 October2015. Accordingly, on1October2015thebookvaluesofDFCCVardhana BankPLC, wasamalgamatedwiththat DFCC Vardhana BankPLC, whichwasasubsidiaryoftheGroupamalgamatedwithDFCCBankPLC on Profit before tax For the period ended Interest income Tax expense Interest expenses Profit fortheperiod Net interest income Fee andcommissionincome Fee andcommissionexpense Net feeandcommission income Net gainfromtrading Net gainfromfinancialinstrumentsatfairvalue throughprofitorloss Net gainfromfinancialinvestments Other operatingloss–net Total operating income Impairment chargeforloansandotherlosses Net operating income Personnelexpenses Operating expenses Otherexpenses Operating profitbeforevalueaddedtaxandnationbuilding taxonfinancialservices Value addedtaxandnationbuildingonfinancialservices onfinancial services Operating profitaftervalueaddedtaxandnation building tax Share ofprofitsassociate and jointventure 61

Amalgamation ofDFCCVardhanaBankPLC(DVB)with

DFCC BankPLC

Annual Report2015

31 December 201531 December 9 months ended 14,961,213 13,327,464 1,961,766 7,942,410 1,239,093 5,385,054 7,011,020 6,347,082 2,042,871 1,840,463 2,463,748 1,961,766 722,673 850,390 842,607 172,238 136,194 525,306 663,938 501,982 (50,379) LKR 000 7,783 – BANK

31 March 2015 19,814,303 15,882,931 10,845,295 10,732,828 5,574,971 1,073,732 8,953,743 4,501,239 6,929,188 1,112,650 1,097,385 2,312,023 2,142,723 2,075,443 6,514,662 5,574,971 (614,536) Year ended 496,090 625,145 112,467 939,691 15,265 LKR 000 –

As at 61.2 StatementofFinancialPosition–Restated Investments insubsidiaries Financial investments–held-to-maturity Financial investments–available-for-sale Loans toandreceivablesfromothercustomers Loans toandreceivablesfrombanks Other financialassetsheld-for-trading Derivative assetsheld-for-riskmanagement Placements withbanks Balances withCentralBankofSriLanka Cash andcashequivalents Assets Prepayments Government grantreceivable Intangible assets Property, plantandequipment Due fromsubsidiaries Investment injointventure Investment inassociate Other assets Net assetvaluepershare, LKR Contingent liabilities andCommitments Total equity andliabilities Total equity Other reserves Retained earnings Statutory reserve Stated capital Equity Total liabilities Subordinated termdebt Due tosubsidiaries Other liabilities Government grant-deferredincome Deferred taxliability Current taxliability Debt securitiesissued Other borrowing Due toothercustomers Derivative liabilitiesheld-for-riskmanagement Due tobanks Liabilities Total assets DFCC BankPLC

Annual Report2015 138,458,074 215,918,656 215,918,656 168,670,952 10,954,392 45,827,452 31,261,119 19,445,924 43,609,813 31 March 2015 74,730,756 47,247,704 91,782,545 3,049,109 3,177,949 3,965,176 5,023,879 1,736,241 4,715,814 1,636,218 8,081,266 2,090,310 9,534,530 2,855,446 BANK

662,118 483,727 276,703 934,193 135,091 655,000 134,536 303,727 627,422 290,321 29,335 26,342 35,270 38,239 178.23 LKR 000 31 31

191

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 192 31 March2015andnotentirelycomparablewiththecurrent period. 31 December2015. However,thecomparativefigurespresentedinthesefinancialstatements arefortheyearended year separatefinancialstatementsofDFCCBankPLC containtheresultsofninemonths from1April2015to DFCC Bankhaschangeditsfinancialyearendfrom31March to31Decemberintheyear2015.Accordingly, thecurrent 62.1 Changeofyearend Total equity Balancestransferredonamalgamation Investment in DFCCBankPLC in DVB(including balance paymenttoNCILKR 122million) Total equity (A-B) Total liabilities (B) Subordinated termdebt Other liabilities Deferred taxliability Current taxliability Debt securitiesissued Other borrowing Due toothercustomers Due tobanks Liabilities Total assets(A) Other assets Intangible assets Property, plantandequipment Financial investments–held-to-maturity Financial investments–available-for-sale Loans toandreceivablesfromothercustomers Loans toandreceivablesfrombanks Other financialassetsheld-for-trading Derivative assets–heldforriskmanagement Placements withbanks Balances withCentralBankofSriLanka Cash andcashequivalents Assets As at on thedateofamalgamation(asat1October2015) 61.3 intheInvestmentsDFCCVardhanaBank CompositionofAssetsandLiabilities 62

ComparativeFigures

DFCC BankPLC

Annual Report2015

109,994,902 119,259,104

11,341,142 74,656,723 15,421,138 11,740,405 18,279,341 73,867,709 (5,945,436) 3,318,766 9,264,202 3,084,010 2,110,985 3,081,991 1,542,739 4,256,610 1,602,425 3,245,064 3,324,005 226,453 171,268 624,220 100,235 505,083 72,460 LKR 000

better presentation. The followinginformationhasbeenreclassifiedtoconfirmwiththecurrentyear'sclassificationinorderprovidea 62.2 Reclassificationofcomparativefigures where allsignificantinputsaredirectlyorindirectlyobserva ble frommarketdata. prices foridenticalorsimilarinstrumentsinmarketsthat areconsideredlessthanactiveorothervaluationtechniques This categoryincludesinstrumentsvaluedusingquoted marketpricesinactive marketsforsimilarinstruments,quoted Level 2:Valuationtechniquesbasedonobservableinputs,eitherdirectly (i.e.,prices)orindirectlyderivedfromprices). Level 1:Quotedmarketprice(unadjusted)inanactive marketforanidenticalinstrument. the followingfairvaluehierarchythatreflectssignificanceofinputsusedinmakingmeasurements . Group’s accountingpolicyonfairvaluemeasurementsisdiscussedinNote5.2.5. TheGroupmeasuresfairvalues, using concentration, uncertaintyofmarketfactors, pricingassumptionsandotherrisksaffectingthespecifi have littlepricetransparency,fairvalueislessobjectiveandrequiresvaryingdegreesofjudgmentdependingonliquidity, requires theuseofvaluationtechniquesasdescribedinNote5.2.5. Forfinancialinstrumentsthattradeinfrequentlyand The determinationoffairvalueforfinancialassetsandfinancialliabilities, forwhichthereisnoobservablemarketprice, 64.1 DeterminingFairValue No othercircumstanceshavearisenwhichwouldrequiredisclosureoradjustmenttothefinancialstatements. that theaboveassessmentwillnothaveanymaterialimpacttofinancialstatements. The BankhassuccessfullyappealedagainstthisassessmenttotheTaxAppealCommission. TheBankisoftheview 2010/11 relatingtogainonsaleoflistedshares. The DepartmentofInlandRevenue hasraisedanassessmentforLKR 760millionwithrespecttoyearofassessment 63.2 TaxAssessment dividend tax, willnotbeimposedontheBank. exceeds theminimumdistributionmandatedbyInlandRevenue ActNo. 10of2006 andthereforethe15%deemed Section 57oftheCompaniesActNo. 07of2007andhaveobtainedthecertificatefromAuditors. Thedividend 31 December2015. TheBoardofDirectorsconfirmsthattheBankhassatisfiedsolvencytestinaccordancewith The Directorshaveapproved thepaymentofafirstandfinaldividendLKR 2.50 persharefortheninemonthsended 63.1 FirstandFinalDividend Exchange equalisationreserve Retained earnings Statement ofFinancial Position 64 63 Fair ValueMeasurement Events OccurringAftertheReportingPeriod DFCC BankPLC

12,755,357 As Disclosed

Annual Report2015 Previously LKR 000 c instrument. The – GROUP

Presentation 12,752,999

LKR 000 Current

2,358

193

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 194 Specific controlsinclude: results oftradingandinvestment operation. independent offrontofficemanagement.TreasuryMiddlehasoverall responsibilityforindependentlyverifying the The establishedcontrolframeworkwithrespecttothemeasurementoffairvalues,includesanoversightwhichis 64.2 Valuationframework counterparty defaultandprepaymentsselectionofappropriatediscountrates. determination ofexpectedfuturecashflowsonthefinancialinstrumentbeingvalued, determinationofprobability Management judgmentsandestimationsareusuallyrequiredforselectionoftheappropriatevaluation modeltobeused, based onspecificeventsandgeneralconditionsinthefinancialmarkets. Availability ofobservablemarketpricesandinputsvariesdependingontheproductsmarketsispronetochanges for managementjudgmentandestimationalsoreducestheuncertaintyassociatedwithdeterminationoffairvalues. exchange contractsandinterestrateswaps. Availabilityofobservablemarketpricesandmodelinputsreducestheneed market forlisteddebtandequitysecurities, government securitiesandsimpleoverthecounterderivativeslikeforward require littlemanagementjudgmentandestimation. Observablepricesandmodelinputsareusuallyavailableinthe instruments, likegovernmentsecurities,interestrateandcurrencyswapsthatusemostlyobservable marketdataand The Groupuseswidelyrecognisedvaluationmodelsfordeterminingthefairvalueofcommonandmoresimplefinancial where significantunobservableadjustmentsorassumptionsarerequiredtoflectdifferencesbetweentheinstruments. instrument’s valuation. Thiscategoryincludesinstrumentsthatarevalued, basedonquoted pricesforsimilarinstruments valuation techniqueincludesinputsnotbasedonobservabledataandtheunobservablehavesignificanteffect Level 3: Valuation techniques usingsignificant unobservableinputs. Thiscategoryincludesallinstrumentswherethe Any changestothefairvaluemethodologyisreported theBank’sAuditCommittee. This includes: obtained tosupporttheconclusionthatsuchvaluationsmeettherequirements ofSLFRSs/LKASs isdocumented. When thirdpartyinformation, suchasbrokerquotes orpricingservicesisusedtomeasurefairvalue, theevidence so

determined onthisbasis Several quotesobtainedfromrandomlyselectedbrokersforthesamefinancialinstrumentandfairvalue financial instrument Verifying thatthebrokerorpricingserviceisapprovedbyBankforuseinrelevanttypeof Stress Testing Calibration andbacktestingofmodels Review andapprovalprocessfornewmodelschangestomodelsinvolvingbothproductcontrolgroupmarketrisk Verification ofobservablepricing

DFCC BankPLC

Annual Report2015

There werenotransfersbetween Level1, 2andLevel 3duringtheperiod31March2015andDecember2015. Derivative liabilitiesheld-for-riskmanagement Financial Liabilities Derivative liabilitiesheld-for-riskmanagement Financial Liabilities Government grantreceivable Government grantreceivable Financial investments–available-for-sale Financial investments–available-for-sale Other financialassetsheld-for-trading Other financialassetsheld-for-trading Derivative assetsheld-for-riskmanagement Financial Assets As at31December2015 byLevel64.3 oftheFairValueHierarchy–Bank FairValue Derivative assetsheld-for-riskmanagement Financial Assets As at31March 2015 Forward foreignexchangecontracts Forward foreignexchangecontracts Unquoted shares Unquoted shares Units inUnitTrusts–Unquoted Units inUnitTrusts–Unquoted Units inUnitTrusts–Quoted Units inUnitTrusts–Quoted Quoted ordinaryshares Quoted ordinaryshares Government ofSriLanka TreasuryBillsandBonds Government ofSriLanka TreasuryBillsandBonds Government ofSriLanka TreasuryBillsandBonds Government ofSriLanka TreasuryBillsandBonds Forward foreignexchangecontracts Forward foreignexchangecontracts Notes Notes 29 43 33 30 29 29 43 33 30 29 18,321,362 18,123,603 21,326,848 21,136,695 197,759 190,153 LKR 000 LKR 000 Level 1 Level Level 1 Level – – – – 31,226,313 29,690,593 DFCC BankPLC 8,336,417 5,548,508 1,469,166 539,758 797,186 198,776 483,727 805,681 85,333 85,333 LKR 000 29,335 LKR 000 1,737 1,737 Level 2 Level Level 2 Level –

Annual Report2015 147,874 147,874 142,459 142,459 LKR 000 LKR 000 Level 3 Level Level 3 Level – – – – 49,695,549 18,123,603 29,690,593 29,805,724 21,136,695 5,548,508 1,469,166

539,758 147,874 797,186 197,759 198,776 483,727 142,459 805,681 190,153 85,333 85,333 LKR 000 29,335 LKR 000 1,737 1,737 Total Total –

195

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 196 There werenotransfersbetween Level1, 2andLevel 3duringtheperiod31March 2015and31December2015. Derivative liabilitiesheld-for-riskmanagement Financial Liabilities Derivative liabilitiesheld-for-riskmanagement Financial Liabilities Government grantreceivable Government grantreceivable Financial investments–available-for-sale Financial investments–available-for-sale Other financialassetsheld-for-trading Other financialassetsheld-for-trading Derivative assetsheld-for-riskmanagement Financial Assets Derivative assetsheld-for-riskmanagement Financial Assets As at31March 2015 As at31December2015 byLevel oftheFairValueHierarchy–Group 64.4 FairValue

Forward foreignexchangecontracts Forward foreignexchangecontracts Unquoted shares Unquoted shares Units inUnitTrusts–Unquoted Units inUnitTrusts–Unquoted Units inUnitTrusts–Quoted Units inUnitTrusts–Quoted Quoted ordinaryshares Quoted ordinaryshares Government ofSriLanka TreasuryBillsandBonds Government ofSriLanka TreasuryBillsandBonds Government ofSriLanka TreasuryBillsandBonds Government ofSriLanka TreasuryBillsandBonds Forward foreignexchangecontracts Forward foreignexchangecontracts

DFCC BankPLC

Annual Report2015 Notes Notes 29 43 33 30 29 29 43 33 30 29 18,321,362 18,123,603 21,326,848 21,136,695 197,759 190,153 LKR 000 LKR 000 Level 1 Level Level 1 Level – – – 31,226,312 29,690,593 26,394,910 23,546,475 1,469,166 539,758 797,186 198,776 483,727 805,681 85,333 85,333 LKR 000 37,153 37,153 89,861 LKR 000 Level 2 Level Level 2 Level – 147,874 147,874 147,874 147,874 LKR 000 LKR 000 Level 3 Level Level 3 Level – – – 49,695,549 18,123,603 29,690,593 47,869,632 21,136,695 23,546,475 1,469,166 539,758 147,874 797,186 197,759 198,776 483,727 147,874 805,681 190,153 85,333 85,333 LKR 000 37,153 37,153 89,861 LKR 000 Total Total – Subordinated termdebt Subordinated termdebt Total Financial investments–held-to-maturity Loans toandreceivablesfromothercustomers Debt securitiesissued Other borrowing Due toothercustomers Total Financial investments–held-to-maturity Loans toandreceivablesfromothercustomers Debt securitiesissued Other borrowing Due toothercustomers Loans toandreceivablesfrombanks Placements withbanks Due tobanks Liabilities Loans toandreceivablesfrombanks Due tobanks Liabilities Balances withCentralBankofSriLanka Placements withbanks For certaininstruments, thefairvaluemaybedeterminedusingassumptionswhicharenotobservableinmarket. be differentfromtheactualamountsthatwillreceived/paid onthesettlementormaturityoffinancialinstrument. liabilities notpresentedontheBank’s StatementofFinancialPositionatfairvalue. Thefairvaluesinthetablebelowmay The followingtablesummarisesthecarryingamountsandBank’sestimateoffairvalues ofthosefinancialassetsand InstrumentsCarriedatAmortisedCost-Bank 64.5 FairValueofFinancial As at 31March 2015 Cash andcashequivalents Assets As at 31December 2015 Cash andcashequivalents Assets Notes Notes 52 52 34 32 49 48 47 34 32 49 48 47 31 28 46 31 46 27 28 26 26 3,655,412 3,655,412 2,090,105 2,090,105 LKR 000 LKR 000 Level 1 Level 1 Level – – – 51,117,234 22,863,664 23,331,215 20,293,950 28,589,109 14,155,734 24,364,403 4,574,319 3,421,616 1,928,867 1,311,265 5,553,809 4,305,247 640,847 484,067 716,622 110,576 LKR 000 LKR 000 Level 2 Level 2 Level – – DFCC BankPLC 146,594,913 158,622,894 158,622,894 110,639,616 47,105,958 35,955,297 73,737,898 24,361,797 22,744,161 73,737,898 LKR 000 LKR 000 Level 3 Level 3 Level

197,712,147 158,622,894

110,639,616 190,867,415 Annual Report2015 17,811,146 69,969,622 23,331,215 20,293,950 24,364,403 35,955,297 73,737,898 24,361,797 22,744,161 77,139,268 4,574,319 3,421,616 2,090,105 1,928,867 5,553,809 4,305,247 640,847 484,067 716,622 110,576 Fair value Fair value LKR 000 LKR 000 – – Carrying amountCarrying amountCarrying 198,270,126 160,345,530 110,890,685 192,682,790 23,292,660 17,903,885 24,364,403 35,955,297 68,830,613 19,445,924 73,448,705 24,361,797 22,484,652 76,845,891 3,767,081 4,574,319

2,085,921 1,928,867 5,553,809 4,305,247 609,373 484,067 716,622 110,576 LKR 000 LKR 000 – –

197

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 198 Subordinated termdebt Subordinated termdebt Debt securitiesissued Other borrowing Due toothercustomers Total Financial investments–held-to-maturity Loans toandreceivablesfromothercustomers Debt securitiesissued Other borrowing Due toothercustomers Total Financial investments–held-to-maturity Loans toandreceivablesfromothercustomers Due tobanks Liabilities Loans toandreceivablesfrombanks Due tobanks Liabilities Loans toandreceivablesfrombanks Placements withbanks Placements withbanks Balances withCentralBankofSriLanka Balances withCentralBankofSriLanka Given belowisthebasisadoptedbyBank/Groupinorder toestablishthefairvalues ofthefinancialinstruments. Cash andcashequivalents Assets As at 31March 2015 Cash andcashequivalents Assets As at 31December 2015 For certaininstruments, thefairvaluemaybedeterminedusingassumptionswhicharenotobservableinmarket. be differentfromtheactualamountsthatwillreceived/paid onthesettlementormaturityoffinancialinstrument. liabilities notpresentedontheGroup'sStatementofFinancialPositionatfairvalue. Thefairvaluesinthetablebelowmay The followingtablesummarisesthecarryingamountsandGroup'sestimateoffairvalues ofthosefinancialassetsand 64.6 FairValueofFinancialInstrumentsCarriedatAmortisedCost–Group

DFCC BankPLC

Annual Report2015 Notes Notes 52 52 49 48 47 34 32 49 48 47 34 32 46 31 46 31 28 28 27 27 26 26 2,090,105 2,090,105 3,655,412 3,655,412 LKR 000 LKR 000 Level 1 Level 1 Level – – – 51,118,484 27,935,256 20,293,950 23,331,215 20,383,898 24,365,653 28,628,301 14,155,734 4,602,263 4,314,777 1,668,739 3,421,616 8,818,133 5,972,567 3,563,647 1,324,892 2,616,406 5,553,809 4,060,820 LKR 000 LKR 000 Level 2 Level 2 Level 1,718 131,970,824 146,255,448 135,618,870 110,300,151 158,620,519 135,618,870 158,620,519 38,846,172 93,124,652 35,955,297 LKR 000 LKR 000 Level 3 Level 3 Level 159,906,080 197,373,934 135,618,870 110,300,151 158,620,519 158,092,873 190,904,232 17,811,146 20,293,950 23,331,215 38,846,172 93,124,652 10,908,238 24,365,653 35,955,297 4,602,263 4,314,777 1,668,739 3,421,616 5,972,567 3,563,647 1,324,892 2,616,406 5,553,809 4,060,820 Fair value LKR 000 Fair value LKR 000 1,718 Carrying amount Carrying amountCarrying 158,586,120 197,931,911 135,322,723 110,551,220 160,343,155 157,760,775 192,719,607 19,445,924 23,292,660 38,846,172 92,711,793 10,872,287 24,365,653 17,903,885 35,955,297 4,602,263 1,609,664 3,767,081 5,972,567 3,563,647 1,324,892 2,616,406 5,553,809 4,060,820 4,314,777 LKR 000 LKR 000 1,718 saving depositscarryingamounts arereasonableapproximationtothefairvaluesasatreporting date. the savings accountbalancesarerepricedfrequentlytomatch withthecurrentmarketrates. Thereforethedemandand The fairvalueofadepositrepayableondemandisassumed tobetheamountpayableondemandatreportingdateand current interestratesofferedfordepositsofsimilarremainin g maturities. Fair values ofdepositswitharemainingmaturitymorethanoneyearisestimated using discountedcashflowsapplying The carryingvalueofdepositswitharemainingmaturity oflessthanoneyearapproximatesthefairvalue. 64.11 DuetoOtherCustomers than oneyearfromthereportingdate. Carrying value ofamountsduetobanksapproximatestheirfairvalueasthesebalances havearemainingmaturityofless 64.10 DuetoBanks premiums atthetimeofinvestment. cash flowsbytheinterestratesderivedwithreferencetoGovernmentTreasuryBondadjustmentsrisk Where thereisnoactivemarket, fairvalueofthefixedratedebentureshasbeendeterminedbydiscountingfuture market forquoteddebentures. Fair value ofthefixedratedebenturesarebasedonpricesquotedinColomboStockExchange,wherethereisanactive 64.9 FinancialInvestments–Held-to-Maturity the reportingdate. other loansatfixedinterestrateswithmaturityofmorethanoneyearisnotmateriallydifferenttoitscarryingvalueasa t Based ontheresultsoffairvaluecomputedleaserentalsreceivable,itisestimatedthat ofthe of lessthanoneyearapproximatesthefairvalue. of theseloansisapproximatelysameasthecarryingvalue. Carryingamountoffixedrateloanswitharemainingmaturity Since thefloatingrateloanscanberepricedmonthly,quarterly andsemiannuallyintandemwithmarketratesfairvalue Total - Others - Withremainingmaturitylessthanoneyear Fixed rateloans Floating rateloanportfolio Composition: 64.8.2 OtherLoans calculated onthisbasiswasLKR 8,539 millionasagainstacarryingvalue ofLKR 8,250 million). LKR 14,895millionasagainstacarryingvalueofLKR 15,436 million.(fortheyearended31March2015-fairvalue lease portfolioisatfixedinterestratesandthefairvaluecalculatedonthisbasisas31December2015was from suchfinanceleasefacilitiescalculatedbasedoncurrentinterestratesforsimilartypeoffacilities. Thefinance The estimatedfairvalue ofleaserentalsreceivableisthepresentvaluefuturecashflowsexpectedtobereceived 64.8.1 Lease RentalsReceivable–Bank 64.8 Loans toandReceivablesfromBanksOtherCustomers have aremainingmaturityoflessthanthreemonthsfromthereportingdate. Carrying amountsofcashandequivalents andplacementswithbanksapproximatestheirfairvalueasthesebalances 64.7 CashandEquivalentsPlacementswithBanks DFCC BankPLC

Annual Report2015

100 26 65

199 % 9

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 200

Bank hasexposuretothefollowingkeyrisksfromfinancialinstruments: 65.1 IntroductionandOverview current GovernmentTreasuryBondrateswithariskpremium. to thebidandaskpricequoted intheSingaporeStockExchange. TheLKR debenturesarefairvalued byreferenceto Debts issuedcomprisetheUSDNotesIssueandLKR debentures. Fairvalue oftheUSDNotesaredeterminedbyreference 64.13 DebtSecuritiesIssued carrying value. each refinancingarrangementandassuchtherearenocomparablemarketrates. Hence, thefairvalueapproximates The othersatfixedrateswhichrelatestoborrowingsoncreditlinesarebasedinterestspecific value oftheseborrowingsapproximatesthefairvalue. either monthly,quarterly orsemi-annuallyandratesarerevisedin-linewithchangesinmarketrates. Hence, thecarrying This consistsofborrowingssourcedfrommultilateralandbilateralinstitutions. 70%oftheseborrowingarerepriced 64.12 OtherBorrowing 6. 5. 4. 3. 2. 1. Management ofcreditriskincludesthefollowingelements: investment indebtsecurities. its contractualobligations,andarisesprincipallyfromBank’s loansandadvancestocustomersotherbanks Credit riskistheoffinanciallosstoGroup, ifacustomerorcounterpartytofinancialinstrumentfailsmeet 65.2.1 QualitativeDisclosures 65.2 CreditRisk reflect changesinmarketconditions, businessstrategy, productsandservicesoffered. and tomonitorriskadherencelimits. Riskmanagementpoliciesandsystemsarereviewed atleastannuallyto policies areestablishedtoidentifyandanalysetherisksfacedbyBank, tosetupappropriaterisklimitsandcontrols As pertheBoardapproved Charter, BIRMCassiststheBoardtomanagetheserisksprudently. Bank’sriskmanagement the supervisionandmanagementofbroadriskcategoriesincludingcredit, liquiditymarketriskandstrategicrisk. including theChairman, oneExecutiveDirectorandChiefRiskOfficer(CRO)asmembers.CROrepresentsattheBIRMC framework. IthassetupaBoardIntegratedRiskManagementCommittee(BIRMC)withfourNon-ExecutiveDirectors The BoardofDirectorshastheoverallresponsibilityforestablishmentandoversightBank’s riskmanagement Risk ManagementFramework for measuringandmanagingsuchrisk. This notepresentsinformationabouttheBank’sexposuretoeachofaboverisks, theobjectives,policiesandprocesses 65

Reviewing compliancethroughregularauditsbyinternal audit. Department (IRMD). Independent riskassessment, monitoring, recommendingandreportingbytheIntegrated RiskManagement of financiallossandtofocus managementontheattendantrisks. Developing andmaintainingBank’sriskgradingmodels in ordertocategoriseexposuresaccordingthedegreeofrisk Limiting concentrationofexposurestocounterpartiesandindustries. Establishing theauthorisationstructureforapproval andrenewalofcreditfacilities. grading andreporting, documentaryandlegalprocedurescompliancewithregulatory andstatutoryrequirements. Formulating creditpoliciesinconsultationwithbusiness unitscoveringcollateralrequirements, creditassessment, risk Market Risk Operational Risk Liquidity Risk Credit Risk Financial RiskManagement

DFCC BankPLC

Annual Report2015

Carrying amount–Amortisedcost Carrying amount* Allowance forimpairment Gross amount Neither pastduenorimpaired Carrying amount Allowance forimpairment Gross amount Past duebut notimpaired Carrying amount Allowance forimpairment Gross amount Collectively impaired Carrying amount Carrying amount Allowance forimpairment Allowance forimpairment amounts toLKR 3,029million(31March 2015 -LKR1,124million). * Carryingamountofthe Bank’sloansandadvancesincludesaccountswith renegotiatedtermsofwhich the capitaloutstandingasat31December2015 Gross amount Neither pastduenorimpaired 65.2.2.2 Loans toandReceivablesfromBanks Gross amount Individually impaired 65.2.2.1 LoanstoandReceivablesfromOtherCustomers As at 65.2.2 QuantitativeDisclosures 160,345,530 116,915,310 116,915,310 41,042,121 41,042,121 (1,924,882) (4,240,756) 2,782,651 1,530,330 4,574,319 4,574,319 5,771,086 857,769 31.12.2015 LKR 000 – – – – BANK

73,448,705 60,490,736 60,490,736 12,073,322 12,073,322 (1,932,635) DFCC BankPLC 1,278,835 2,507,267 (968,820) 31.03.2015 310,015 574,632 484,067 484,067 LKR 000 – – – – – –

160,343,155 116,912,935 116,912,935 41,042,121 41,042,121 (1,924,882) (4,240,756) 2,782,651 1,530,330 4,602,263 4,602,263

5,771,086 Annual Report2015 857,769 31.12.2015 LKR 000 – – – – GROUP

135,322,723 103,506,068 103,506,068 29,168,304 29,168,304 (2,007,988) (4,001,868) 1,447,419 3,455,407 1,200,932 3,563,647 3,563,647 5,202,800

31.03.2015 LKR 000

– – – – – –

201

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 202 Total Unsecured Others Equity Debt securities Treasury Guarantee andmachinery Mortgages overproperty, plant Against Neither PastDueNorImpaired Unsecured Others andmachinery Mortgages overproperty, plant Against PastDueButNotImpaired Unsecured Others andmachinery Mortgages overproperty, plant Against Collectively Impaired Unsecured Others b. TheAssetandLiability Committee (ALCO) ismandated to executeliquidity management policies, proceduresand a. Takingstepstoensure, asfar aspossible, thatitwillalways have sufficientfinancialresources tomeetitsliabilities Management ofliquidity riskincludesthefollowingelements: due. Thisriskarisesfrommismatchesinthetimingofcashflows. Liquidity riskisthethatBankwillnothavesufficientfinancialresourcestomeetBank’s obligationsastheyfall 65.3.1 QualitativeDisclosures 65.3 LiquidityRisk promissory notes, personalguarantees,corporateguaranteesandtrustcertificates. Other includeloanssecuredby gold,bankguarantee,movableequipmentandmachinery, vehicle mortgages, inventory andbookdebts, shares, demand Note 02 obtains recentvaluationsofcollateralsasthe currentvalueofthe collateralmaybeaninputtothe impairmentmeasurement. closely. Accordingly the Bankdoesnot routinely updatethe valuation ofcollateralheld againstperformingloans. Forimpairedloans, the Bankusually An updatedvaluationofcollateral isgenerallynotcarriedoutunlessthe creditriskofaloandeterioratessignificantlyandthe loanismonitoredmore Note 01 The aboveanalysisdoesnotincludebalancesrelatingtoleaserentalsreceivable. andmachinery Mortgages overproperty, plant Against Individually Impaired 65.2.2.3 AnalysisofSecurityValuesLoanstoandReceivablesfromOtherCustomers

practices approvedbytheBoard ofDirectors, effectively. Bank’s reputation. when due,underbothnormal andstressedconditions, without incurringunacceptablelossesorriskingdamageto the

DFCC BankPLC

Annual Report2015

151,075,013 Gross loan 31,009,977 43,204,836 11,299,513 18,215,022 3,278,338 27,336,036 1,382,047 3,656,813 1,140,430 1,622,358 31.12.2015 5,790,641 1,107,808 770,027 balance 940,000 321,167 LKR 000 160,056,036 95,750,255 40,442,389 9,237,347 1,465,100 5,235,669 3,874,642 2,242,249 1,626,016 31.12.2015 Security LKR 000 94,000 78,682 9,687 value – – – – – – – – BANK 68,100,069 17,970,566 26,202,035 6,634,476 1,270,982 2,912,507 2,018,260 6,839,857 2,070,294 Gross loan 31.03.2015 345,614 335,163 458,450 674,900 361,868 LKR 000 balance 4,647 450 85,189,066 55,837,996 17,019,733 3,210,494 1,270,982 2,912,507 1,685,200 1,264,737 31.03.2015 739,821 993,574 178,422 Security LKR 000 74,343 value 500 757 – – – – 151,075,013 Gross loan 31,009,977 43,204,836 11,299,513 18,215,022 27,336,036 1,382,047 3,656,813 1,140,430 3,278,338 1,622,358 31.12.2015 5,790,641 1,107,808 balance 940,000 321,167 770,027 LKR 000 160,056,036 95,750,255 40,442,389 9,237,347 1,465,100 5,235,669 3,874,642 2,242,249 1,626,016 31.12.2015 Security LKR 000 LKR 94,000 78,682 9,687 value – – – – – – – – GROUP

130,369,741 24,799,641 28,342,756 38,781,539 13,923,918 1,270,982 2,912,507 4,598,182 6,984,107 1,369,966 1,094,448 2,876,480 1,550,604 Gross loan 31.03.2015 345,614 813,740 705,257 LKR 000 balance 167,276,684 101,929,409 11,823,703 39,423,628 1,270,982 2,912,507 2,896,689 2,734,422 1,917,899 31.03.2015 739,821 993,574 556,150 Security LKR 000 74,343 3,557 value – – – – The ratiohasbeenmaintainedabove thestatutorylimitof60%throughoutperiod. Liquidity coverageratio–allcurrencies Liquidity coverageratio–Rupeeonly As at The liquidity coverageratiooftheBankasat31December2015isfollows: 65.3.2.2 LiquidityCoverageRatios Gross advancestodepositratio(includingcreditlinesandinternationalnotes) Gross advancestodepositratio As at the amalgamationitiscomputedontotalliabilities. DFCC BankPLC,asaLicensed SpecialisedBankcomputedtheliquid assetsratio, onlyondepositliabilities,whereasafter Liquid AssetRatioasat31December 65.3.2.1.2 DFCCBankPLC –AfterAmalgamation Liquid AssetRatioasatreportingdate 65.3.2.1.1 DFCCBankPLC –BeforeAmalgamation 65.3.2.1 Liquidity RiskPosition 65.3.2 QuantitativeDisclosures e. EffectingthresholdlimitsrelevantforliquiditymanagementasapartoftheoverallrisksystemBank. d. MonitoringtheBank’sliquiditythroughLiquid AssetsRatio(statutoryminimumiscurrently20%)usinga c.

Maximum fortheperiod Minimum fortheperiod Average fortheperiod Maximum fortheperiod Minimum fortheperiod Average fortheperiod stock approach. normal andstressedconditionsusingaflowapproach. Monitoring ofpotentialliquidityrequirements andavailabilityusingthematurityanalysiscashflowforecastunder DFCC BankPLC

6 months ended 30 September 30

Annual Report2015 55.3 35.0 42.6 55.3 2015 % 31 December 2015 31 December 1 October 2015

31.12.2015 111.06% 120.57% Year ended 31.12.2015 31 March 22.45 21.75 22.13 22.45 55.0 30.0 42.5 47.6 110 150 2015

203 % % % to %

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 204 Derivative financial Derivative financial Due tobanks Other Liabilities (Non-Interest-Bearing Liabilities) Due tobanks Other Liabilities (Non-interest-Bearing Liabilities) Subordinated termdebt Subordinated termdebt Debt securitiesissued Debt securitiesissued Other borrowing Other liabilities Other borrowing Other liabilities Due toothercustomers Due toothercustomers Due toothercustomers Due toothercustomers Due tobanks Liabilities with ContractualMaturity(Interest-Bearing Liabilities) As at31December2015 65.3.2.3 MaturityProfileofFinancialLiabilitiestheBank instruments market risk. The followingpolicyframeworks stipulatethepoliciesandpracticesformanagement, monitoringandreportingof 65.4.1.1 Managementof MarketRisks income growth,whileoptimising thereturnonrisk. manage andcontrolmarket risk exposureswithinacceptableparameters, inordertoensuretheBank’s solvency andthe income orthevalue ofitsholdingsfinancialinstruments. TheobjectiveoftheBank’s marketriskmanagementisto market variables, suchasinterestrates, equityprices, foreign exchangeratesandcommoditypriceswillaffecttheBank’s Market riskisthepossibilityoflossesarisingfromchanges inthevalueofafinancialinstrumentasresultchanges in 65.4.1 QualitativeDisclosures 65.4 MarketRisk *The grossnominaloutflowrepresentsthe contractualundiscountedcash flows. instruments Due tobanks Liabilities with Contractual Maturity(Interest-Bearing Liabilities) As at31December2015 65.3.2.4 MaturityProfileofFinancialLiabilitiestheGroup

DFCC BankPLC

194,292,122 193,952,656 106,927,875 106,588,410

Annual Report2015 23,292,660 23,292,660 35,955,297 35,955,297 24,349,209 24,349,208 3,962,810 3,962,810 7,431,895 7,564,600 3,368,558 3,767,081 3,767,081 3,500,012 85,333 85,333 Carrying Carrying Carrying Carrying 15,194 Amount LKR 000 16,445 Amount 85,333 LKR 000 194,464,368 194,124,954 107,064,645 106,725,231 23,249,138 23,249,138 35,956,780 35,956,780 24,352,412 24,352,412 3,122,109 3,962,809 3,841,393 3,841,393 3,253,563 3,962,809 7,191,425 7,324,130 LKR 000 16,445 15,194 91,313 91,313 LKR 000 Total* Total* 76,917,247 46,405,797 76,917,247 20,236,896 46,405,797 9,655,537 1,100,348 1,675,172 20,236,896 2,848,679 1,096,470 1,675,172 9,655,537 2,843,550 536,116 536,116 82,901 56,714 16,445 LKR 000 15,194 56,714 3 months months 3 82,901 LKR 000 3 months Up to to Up Up to to Up

100 100 27 27 35 35 43 43 42 42 62 62 83 83 35 35 42 42 62 62 27 27 43 43 2 2 83 83 % 2 2 % 34,125,686 39,851,781 40,191,196 34,465,101 1,758,492 3,405,146 1,361,255 2,297,787 1,361,255 1,758,492 3,405,146 2,196,067 446,941 800,213 901,933 115,516 446,941 34,599 115,516 34,599 LKR 000 LKR 000 months months 3 to 12 months 3 to 12 – – – –

26 26 34 34 38 38 46 46 32 32 46 46 26 26 32 32 34 34 38 38 – – 2 9 % 0 – – 2 9 % 0 14,314,568 14,314,568 4,966,781 4,966,781 5,347,787 5,347,787 4,000,000 4,000,000 1 to 3years LKR 000 1 to 3years LKR 000 – – – – – – – – – – – – – – – – – – – – – – – – – – – –

21 21 17 17 21 21 17 17 – – – – – – – – – – – – 5 % – – – – – – – – – – – – 5 % 37,761,400 17,299,300 13,202,716 37,761,400 17,299,300 13,202,716 2,000,000 5,259,384 2,000,000 5,259,384 LKR 000 3 to 5years 3 to 5years LKR 000 – – – – – – – – – – – – – – – – – – – – – – – –

52 52 52 52 75 75 75 75 37 37 37 37 – – – – – – – – – – – – – – – – – – – – 5 5 % % 25,279,958 15,586,577 25,279,957 15,586,576 1,225,426 9,693,381 9,693,381 1,251,282 2,151,808 2,177,664 926,382 926,382 LKR 000 >5 years LKR 000 >5 years – – – – – – – – – – – – – – – – – – – –

39 39 23 23 27 27 27 39 39 15 15 15 15 23 23 – – – – – – – – – – – – – – – – – – – – % % account theremainingtime from there-pricingdateuptooneyear. We haveassumedthattheassets andliabilitiesarere-pricedatthebeginningofeachtime bucket andhavealsotakeninto Total netimpactifinterestrates decline Total netimpactifinterestrates increase Impact Assumed changeininterestrates(%) Net ratesensitive assets(liabilities) on theassumedchangeininterestratesforeachtime periodandisgiveninthetablebelow: for eachtimebucketuptothe12-monthperiod. Theinterestrateriskexposureasat31December2015 isquantifiedbased Overall uptothe12-monthtimebucket, DFCCBankcarriedaliabilitysensitiveposition. Thisliabilitysensitivitywillvary 65.4.2.1.2 PotentialImpacttoNIIDueChange inMarketInterestRates rates markaparallelupwardshiftof1%. loss inthemark-to-marketvalueamountingtoLKR 133.61million,asat31December2015incase, themarketinterest by durationof0.45%. ThislevelofinterestrateriskexposureintheAFSportfoliocanbeinterpretedasapossiblepotential Market riskexposureforinterestrateintheAFSportfoliotreasurysecuritiesasat31December2015isdepicted 65.4.2.1.1 DurationAnalysis asat31December2015 65.4.2.1 InterestRateRisk In thecaseofinterestandforexriskfollowinganalysisisinrespectDFCCBankPLC. 65.4.2 QuantitativeDisclosures (AFS) andheld-to-maturityfromderivativesheldforriskmanagementpurposes. activities, andnon-tradingportfoliosfrompositionsarisingfinancialinvestmentsclassifiedasavailable-for-sale Exposure tomarketriskarisesfromtwosourcesviz. tradingportfoliosfrompositionsarisingmarkingtomarket Middle OfficeandBackOffice. exchange riskismanagedwithinapprovedlimitsandbysegregationofreportingresponsibilitiesTreasuryFrontOffice, Management Committee(BIRMC). TheoperationalauthorityformanagingmarketriskisvestedwithALCO. Foreign Overall authorityformanagingmarketriskisvestedwiththeBoardofDirectorsthroughBoardIntegratedRisk f. Total interest-bearingliabilities Treasury SecuritiesAFSportfolio e. d. c. b. Total interest-bearingassets tradingportfolio Government Securities Portfolio a.

New productdevelopmentpolicy Overall risklimitsformarketmanagement Treasury manual Treasury manual Treasury tradingguidelinesandlimitssystem ALCO charter Market riskmanagementframework

29,764,572 Face value LKR 000 – 29,690,593 market value Mark-to- LKR 000 000 LKR – Duration 0.45 63,896,346 67,899,658 – 0to 1month 4,003,312 20,017 LKR 000 as aresultof1%increaseintheinterestrates. Portfolio valuewilldeclineapproximatelyby0.45% Interpretation of duration 0.5% p o months 3 to up 10,341,958 36,386,835 46,728,793 DFCC BankPLC 94,801 Over 1- Over LKR 000 1.0% (10,575,097)

up to 6months 29,650,890 19,075,793 (118,970)

Annual Report2015 Over 3- Over LKR 000 1.5% up to 12months (6,293,078) 18,307,288 12,014,210 (67,083) (62,931) 67,083

Over 6- Over LKR 000 2.0%

205

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 206 Total Foreign exchangeandgoldrisk its investmentsintheequitymarketwhichhasbeenshowntheAFSportfolio. investments duetochangesinthemarketpricesofinvestedshares. TheBankisexposedtoequity priceriskthrough Equity priceriskispartofmarketwhichdefinedasthepossiblelossarisingfromtheequity market 65.4.2.3 EquityPriceRisk and therespectiveforeigncurrencies. The estimatedpotentialexchangelossisoffsetbytheinterestgainduetointerestdifferentialbetweenSriLankan Rupee If exchangeratedepreciatesby15% If exchangeratedepreciatesby10% If Exchangerate(USD/LKR) depreciatesby1% Possible potentialgain/(loss)toDFCCBank–LKR '000 Exchange rate(USD/LKR) asat31December2015 Value ofpositioninLKR ’000 Net exposure–USDequivalent unhedged ‘oversold’positionofLKR 1.1 billion.Theimpactofexchangerateriskisgivenbelow: positions intheforeigncurrencyassets/liabilities. By31December2015, DFCCBankcarriedaUSDequivalent netopen/ The followingtableindicatestheDFCCBank’sexchangerateriskexposurebasedonitssizeofNOP/unhedged 65.4.2.2 ForexRiskinNet OpenPosition(NOP)/UnhedgedofDFCCBank regulatory capitalpurposes. Thecomputationresultsasat31December2015arefollows: Under theStandardisedApproachofBaselIIwitheffect from January2008, marketriskexposuresarequantified for as at31 December2015 65.4.2.4 MarketRiskExposures ofDFCCGroup forRegulatoryCapitalAssessment VAR computationfortheequity AFSportfolioconsidersaquarterlytimehorizon. two-year portfolioreturnsisadoptedtocomputeVAR asameasureoftheequitypricesriskexposurebyDFCCBank. This Equity priceriskisquantifiedusingtheValue atRisk(VAR) approachbasedontheHistoricalLoss method. Historical Unrealised gainsintheAFSequityportfolioreportedfairvaluereserve asindicatedbytheVAR overaquarterly period Maximum possiblelossofvalueinthemark-to-markettheportfolio Value-at-risk (under99%probabilityforaquarterly timehorizon) Mark-to-market valueofthetotalquotedequity portfolio Parameter Equity pricerisk Interest raterisk

DFCC BankPLC

Annual Report2015

31 December 2015 31 December 14,159,681 18,123,603 Position asat 3,008,518 Risk-weighted LKR 000 121,793 115,828 16.6%

LKR 000 5,965 assets – – possible exposure 31 March 2015 (1,094,387) (7,592,000) 17,380,078 21,136,695 Position as at 5,854,864 (164,158) (109,439) (10,944) Quantified 144.15 LKR 000 12,180 11,583 Amount 27.7% LKR 000 597 – – summaries submittedtotheAuditCommitteeandsenior management. The resultsofinternalauditreviewsarediscussedwiththe managementofthebusinessunittowhichtheyrelate, with Compliance withtheBank’sStandardsissupportedbya programmeofperiodicreviewsundertakenbyinternalaudit. j. i. h. g. f. e. d. c. b. The followingareincludedintheprocessofoperationalriskmanagementDFCCBank. Bank’s reputationwithoverallcosteffectiveness whilstavoiding controlproceduresthatrestrictinitiative andcreativity. DFCC Bank’s objectiveistomanageoperationalrisksoasbalancetheavoidance offinanciallossesanddamagetothe risks suchasthosearisingfromlegalandregulatoryrequirements. to processes,personnel,technologyandinfrastructure, andfromexternalfactorsotherthancredit, marketandliquidity Operational riskistheofdirectorindirectlossarisingfromawidevarietycausesassociatedwithBankrelating 65.5 OperationalRisk a. development ofoverallstandardsformanagementoperationalriskinthefollowingareas: whilst implementationisassignedtoseniormanagementwithineachbusinessunit. Thisresponsibilityissupportedbythe The primary responsibility for the development and implementation of controls to address operational risk lies with IRMD

Insurance coveringriskduetothreatsarisingfromexternal andotherevents. Ethical andbusinessstandards, and Training andprofessionaldevelopment, Development ofcontingencyplans, Requirements forreportingofoperationallossesandproposedremedialaction, address therisksidentified, Requirements forperiodicassessmentofoperationalrisksfaced, andtheadequacy ofcontrolsandproceduresto Documentation ofcontrolsandprocedures, Compliance withregulatoryandotherlegalrequirements, Requirements forreconciliationandmonitoringoftransactions, Requirements forappropriatesegregationofduties, includingindependentauthorisationoftransactions, ORMC andtheBIRMC. Unit, IRMDmakesperiodicalevaluationsontheeffectiveness ofthecomplaintsmanagementprocessandreportsto policy. InadditiontothestatusreportingoncomplaintshandlingprocessbyChannelsandService Delivery Establishment ofthecomplaintmanagementprocessBankunderBoardapproved complaintsmanagement Establishment ofWhistleBlowingprocess. IRMD. Thekeyfindingsoftheanalysisareevaluated attheORMCandBIRMCinanoperationalriskperspective. Review ofHRattritionandexitinterviewcommentsindetailincludingatrendanalysiswiththeinvolvement Review ofdowntimethecriticalsystems. and theBIRMC. Trend analysisonoperationalriskincidentsandreview attheOperationalRiskManagementCommittee(ORMC) necessary improvementsinthesystems, processesandprocedures. Operational riskincidentreportingsystemandtheindependentanalysisofincidentsbyIRMD, andrecognise traffic lightsystem. DevelopriskandcontrolSelf-Assessmentstoidentifytheexposureofallprocesses. Monitoring oftheKeyRiskIndicators(KRIs)fordepartments/functionsunderdefinedthresholdlimitsusinga DFCC BankPLC

Annual Report2015

207

Notes to the Financial Statements Financial Reports Notes to the Financial Statements Financial Reports 208 Sri Lanka throughouttheperiod. DFCC BankanditsGrouphave compliedwiththeminimumcapitalrequirementsimposedbyCentralBankof to ensureinvestor, creditorandmarketconfidencetosustainfuturedevelopmentofthebusiness. Regulatory capitalcomprisesTierICapitalandII.TheBank’spolicyistomaintainastrongbasesoas currently usesthestandardisedapproachforcreditriskandbasicindicatoroperationalmarketrisk. The Bankisrequiredtocomplywiththeprovisions oftheBaselIIandIIIinrespectregulatorycapital. TheBank Central BankofSriLanka setsandmonitorsregulatorycapitalrequirement onbothconsolidatedandsolobasis. g. f. e. d. c. EnsureaboveindustryaverageCapitalAdequacyRatioforthebankingsectorismaintained. b. Statutory reservefund Total RegulatoryCapital Less: General provision Qualifying subordinatedliabilities Tier IICapital Total Tier ICapital Less: Non-controlling interests General andotherreserves Retained earnings Stated capital Tier ICapital 65.6.2 QuantitativeDisclosures a. made accordingly. TheGroupcapitalmanagementgoalsareasfollows: Its regulatorycapitalpositionisanalysedbytheBIRMConaquarterlybasisandrecommendationsdecisionsare DFCC BankPLCmanagesitscapitalatandGrouplevelconsideringbothregulatoryrequirement andriskexposures. 65.6.1 QualitativeDisclosures 65.6 CapitalManagement

Ensure Bank’s average long-termdividendpay-outratioismaintained. Ensure capitalconsumptionbybusinessactionsareadequatelypriced. and approvalprocess. Ensure capitalimpactofbusinessdecisionsareproperlyassessedandtakenintoconsiderationduringproductplanning Ensure maintainingofquality capital. deterioration ofriskcapitaltheBank. Bank tomaintainitsinternationalandlocalcreditratingensurethatnodowngradingoccursasaresultof Ensure regulatoryminimumcapitaladequacyrequirementsarenotcompromised.

50% investmentsinthecapital ofotherbanksandfinancialinstitutions deductions 50% investments inthecapitalofotherbanksandfinancialinstitutions Intangible assets Net deferredtaxasset Goodwill Deductions

DFCC BankPLC

Annual Report2015 Notes 54 41 44 42 55 53 28,494,201 13,779,839 11,506,206 28,358,973 3,188,652 2,318,000 3,188,652 4,715,814 1,834,275 247,945 156,226 735,424 252,426 31.12.2015

LKR 000 1,536 Basel II Basel Other Disclosure Requirements Under the Prescribed Format Issued by the Central Bank of Sri Lanka for Preparation of Annual Financial Statements of Licensed Specialised Banks

Disclosure Requirements Description Page No.

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 Note 25 to the financial statements Analysis of Financial financial liabilities. Instruments by Measurement basis 152 1.1.2 Other Disclosures Not designated. Financial Reports i. Special disclosures about financial assets and financial Note 5.2.1 - Designated fair value 136 liabilities designated to be measured at fair value Please refer Integrated risk management report 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 Significant accounting policies: 137 category to another. Note 5.2.2 - Reclassification of financial instruments

iii. Information about financial assets pledged as Note 48.1 - Assets pledged as security 174 collateral and about financial or non-financial assets held as collateral. iv. Reconciliation of the allowance account for credit Notes to the financial statements: losses by class of financial assets. Note 32.2 - Movement in specific and collective allowance 158 for impairment v. Information about compound financial instruments The Bank does not have compound financial instruments with multiple embedded derivatives. with multiple embedded derivatives. vi. Breaches of terms of loan agreements. None 1.2 Statement of Comprehensive Income

1.2.1 Disclosures on items of income, expense, gains and losses. Notes 11 - 22 to the financial statements: 146-150 1.2.2 Other Disclosures i. Total interest income and total interest expense for Notes to the financial statements: those financial instruments that are not measured at fair Note 12 - Interest income 146 value through profit and loss. ii. Fee income and expense. Note 13 to the financial statements: Net fee and commission income 147 iii. Amount of impairment losses by class of Note 18 to the financial statements: financial assets. Impairment for loans and other losses. 148 iv. Interest income on impaired financial assets. 1.3 Other Disclosures 1.3.1 Accounting policies for financial instruments. Significant accounting policies: Note 5.2.5 - Financial instruments - initial recognition, classification and subsequent measurement. 137 1.3.2 Information on hedge accounting. The Bank does not adopt hedge accounting. 1.3.3 Information about the fair values of each class of financial asset and financial liability, along with: i. Comparable carrying amounts. Notes to the financial statements: Note 64.3 to 64.4 - Fair value measurement 195-196 ii. Description of how fair value was determined. Notes to the financial statements: Note 64.1. 193 iii. The level of inputs used in determining fair value. Notes to the financial statements: Note 64.7 to 64.13. 199-200

DFCC Bank PLC Annual Report 2015 209 Disclosure Requirements Description Page No.

iv. a. Reconciliations of movements between levels of There were no movements between levels of fair value measurement hierarchy. fair value hierarchy during the period under review. 195 b. Additional disclosures for financial instruments that fair value is determined using level 3 inputs. v. Information if fair value cannot be reliably measured. Notes to the financial statements: Note 64.5 to 64.12. 199-200

2. Information about the Nature and Extent of Risks Arising from Financial Instruments 2.1 Qualitative Disclosures Financial Reports 2.1.1 Risk exposures for each type of financial instrument. Please refer the report on Integrated risk management. 73 2.1.2 Management’s objectives, policies, and processes for Please refer the section relating to Integrated risk managing those risks. managements objectives, policies and processes. 73 2.1.3 Changes from the prior period. Notes to the financial statements: Note 62.2 - Reclassification of comparative figures 193 2.2 Quantitative Disclosures

2.2.1 Summary of quantitative data about exposure to each Please refer the section relating to Integrated risk 73 risk at the reporting date. managements objectives, policies and processes. Other Disclosures Notes to the Financial Section Note - 65 200 2.2.2 Disclosures about credit risk, liquidity risk, market risk, Please refer the section relating to Integrated risk 73 operational risk, interest rate risk and how these risks managements objectives, policies and processes. are managed. Notes to the Financial Statements Note - 65 200

i. Credit Risk a. Maximum amount of exposure (before deducting the Note 32.1.3 on industry analysis. 157 value of collateral), description 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, Note 32.1.3 on industry analysis. disclosures on age, factors considered in determining as Note 65.2.2.1 & 65.2.2.3 on loans and advances and 157 impaired and the description of collateral on each class impairment analysis. 201-202 of financial asset.

c. Information about collateral or other credit Note 65.2.2.3 Analysis of Security Values of Loans to and 202 enhancements obtained or called. Receivables from other customers d. For other disclosures, please refer Banking Act The section on ‘Integrated risk management’. Direction No. 7 of 2011 on Integrated Risk Management Note 65.2 Credit Risk 200 Framework for Licensed Banks (Section H).

ii. Liquidity Risk a. A maturity analysis of financial liabilities. Notes to the financial statements: Note 65.3.2.3 Maturity analysis of financial liabilities. 204 b. Description of approach to risk management. The section on ‘Integrated risk management’.

c. For other disclosures, please refer Banking Act Please refer the section on ‘Integrated risk management’. 73 Direction No. 7 of 2011 on Integrated Risk Management Note 65.3 Liquidity Risk 202 Framework for Licensed Banks (Section H).

iii. Market Risk a. A sensitivity analysis of each type of market risk to Notes to the financial statements: which the entity is exposed. Note 65.4 - Market risk 204 b. Additional information, if the sensitivity analysis is None not representative of the entity’s risk exposure.

210 DFCC Bank PLC Annual Report 2015 Disclosure Requirements Description Page No.

c. For other disclosures, please refer Banking Act Please refer the section on ‘Integrated risk management’. Direction No. 7 of 2011 on Integrated Risk Management Note 65.4 Market Risk 204 Framework for Licensed Banks (Section H).

iv. Operational Risk Please refer Banking Act Direction No. 7 of 2011 on Notes to the financial statements: Integrated Risk Management Framework for Licensed Note 65.5 - Operational risk 207 Banks (Section H). v. Equity Risk in the Banking Book Financial Reports a. Qualitative Disclosures

zz Differentiation between holdings on which capital gains Notes to the financial statements: are expected and those taken under other objectives Note 65.4.2.3 - Equity price risk 206 including for relationship and strategic reasons.

zz Discussion of important policies covering the valuation Note 5.2.5 and accounting of equity holdings in the banking book. 137 b. Quantitative Disclosures

zz Value disclosed in the statement of financial position Notes to the financial statements:

of investments, as well as the fair value of those Note 33 - Financial investments - Available-for-sale 158 Other Disclosures investments; for quoted securities, a comparison to Note 35 - Investments in subsidiaries 164 publicly quoted share values where the share price is Note 36 - Investments in associates 165 materially different from fair value. Note 16 - Net gain/loss from financial investments 148 zz The types and nature of investments. zz The cumulative realised gains/(losses) arising from sales and liquidations in the reporting period.

vi. Interest Rate Risk in the Banking Book a. Qualitative Disclosures

zz Nature of interest rate risk in the banking book (IRRBB) Please refer the section on ‘Integrated risk management’. 73 and key assumptions. b. Quantitative Disclosures

zz The increase/(decline) in earnings or economic value Please refer the section on ‘Integrated risk management’ (or relevant measure used by management) for upward and Note 65.4.2.12 205 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. Please refer the section on ‘Integrated risk management’. 73

DFCC Bank PLC Annual Report 2015 211 Disclosure Requirements Description Page No.

3. Other Disclosures 3.1 Capital 3.1.1 Capital Structure i. Qualitative Disclosures. Summary information on the terms and conditions of the Notes to the financial statements: main features of all capital instruments, especially in the Note 65.6.2 208 case of innovative, complex or hybrid capital instruments.

Financial Reports ii. Quantitative Disclosure

a. The amount of Tier 1 capital, with separate Notes to the financial statements: 208 disclosure of: Note 65.6.2 - Financial risk management

zz Paid-up share capital/common stock zz Reserves zz Non-controlling interests in the equity of subsidiaries zz Innovative instruments zz Other capital instruments

Other Disclosures zz Deductions from Tier 1 capital

b. The total amount of Tier 2 and Tier 3 capital c. Other deductions from capital d. Total eligible capital 3.1.2 Capital adequacy

i. Qualitative Disclosures A summary discussion of the Bank’s approach to Please refer the section on ‘Integrated risk management’. 84 assessing the adequacy of its capital to support current and future activities.

ii. Quantitative Disclosures a. Capital requirements for credit risk, market risk Please refer the section on ‘Integrated risk management’. 84 and operational risk

b. Total and Tier 1 capital ratio Please refer the section on ‘Integrated risk management’. 84

212 DFCC Bank PLC Annual Report 2015 Value Added Statement

Value Added Statement - Bank

For the 9 months ended For the year ended 31 December 2015 31 March 2015

LKR million LKR million % LKR million LKR million %

Value Added Gross income 10,036 10,394 Cost of borrowing and support services (6,508) (5,262) Impairment written back/(charge) for loans and other losses (225) 308 3,303 5,440

Value Allocated Supplementary Information To employees Salaries, wages and other benefits 1,213 37 943 18 To providers of capital Dividends to shareholders 1,591 48 1,458 27 To Government Tax expense 521 531 Value added tax and nation building tax on financial services 343 864 26 585 1,116 20 To expansion and growth Retained Income (522) 1,783 Depreciation 157 (365) (11) 140 1,923 35 3,303 100 5,440 100

DFCC Bank PLC Annual Report 2015 213 Sources and Distribution of Income

Sources and Distribution of Income – Bank

LKR million For the For the year ended 31 March 9 months ended 31 December 2015 2015 2014 2013 2012

Sources of Income Interest Income 8,918 8,010 9,530 9,279 6,133 Income from Investments 641 2,150 1,211 1,090 1,148 Other 477 234 (260) 64 371 10,036 10,394 10,481 10,433 7,652 Supplementary Information Supplementary Information

Distribution of Income To employees as emoluments 1,213 943 906 891 804 To lenders as interest 5,560 4,675 4,894 5,023 2,898 To providers of supplies and services 948 587 576 498 512 To Government as taxation 864 1,116 1,056 803 767 To shareholders as dividends 1,591 1,458 1,325 1,060 795 Retained in the business Depreciation set aside 157 140 137 128 127 Provision for losses 225 (308) 324 169 91 Reserves (522) 1,783 1,263 1,861 1,658 10,036 10,394 10,481 10,433 7,652

214 DFCC Bank PLC Annual Report 2015 Ten Year Summary

Based on Previous GAAP Based on Current SLFRS

LKR million For the year ended 31 March 9 months ended 2007 2008 2009 2010 2011 2012 2013 2014 2015 31 December 2015

Bank Operating Results Total income 6,887 9,636 9,888 8,843 14,191 7,652 10,433 10,481 10,394 10,036 Profit before tax 1,865 1,983 2,006 2,402 7,876 2,883 3,492 3,211 3,771 1,589 Tax expense 740 665 646 689 739 430 570 623 531 521 Profit after tax 1,125 1,318 1,360 1,713 7,137 2,453 2,921 2,587 3,240 1,068

Statement of Financial Position

Assets Supplementary Information Cash and short-term funds 7,935 8,124 8,415 10,472 11,991 3,646 7,103 4,245 2,296 9,859 Loans to and receivables from banks and other customers 46,280 45,524 40,247 36,681 39,344 54,982 60,668 62,575 73,933 164,920 Financial investments 1,260 1,680 1,918 1,999 4,032 16,277 19,298 25,609 29,909 66,861 Investments in associate, joint venture and subsidiary companies 3,350 5,829 6,064 5,845 3,132 4,451 4,446 6,659 6,648 823 Other assets 2,116 2,202 1,841 1,419 1,427 1,841 1,645 1,853 1,826 3,688 Total assets 60,941 63,359 58,485 56,416 59,926 81,197 93,160 100,941 114,612 246,151

Liabilities Due to other customers 13,573 5,112 5,308 5,124 3,688 12,445 15,548 16,630 22,485 110,891 Other borrowing 35,897 42,480 36,710 33,530 32,261 36,489 41,605 45,262 46,346 87,379 Other liabilities 1,977 2,006 1,976 2,039 3,758 1,010 1,223 1,639 1,686 5,062 Equity 9,494 13,761 14,491 15,723 20,219 31,253 34,784 37,410 44,095 42,819 Total equity and liabilities 60,941 63,359 58,485 56,416 59,926 81,197 93,160 100,941 114,612 246,151

Return on equity, % 12.1 11.3 9.6 11.3 39.7 11.7 12.9 10.6 12.8 5.00 Return on total assets, % 2.1 2.1 2.2 3.0 12.3 3.7 3.8 3.0 3.5 1.00

Earnings per share, LKR* 4.63 5.09 5.17 6.48 26.95 9.25 11.02 9.76 12.22 4.03 Market value per share, LKR* 69.78 62.45 33.78 90.23 171.8 112.6 131.1 143.9 202.8 168.1 Price earnings ratio, times* 15.1 12.3 6.5 13.9 6.4 12.2 11.9 14.7 16.6 41.7 Earnings yield, %* 6.6 8.1 15.4 7.2 15.6 8.2 8.4 6.8 6.0 2.40

Dividend per share, LKR 5.00 5.00 5.00 6.00 10.00 4.00 5.00 5.50 6.00 2.50 Dividend cover, times 2.5 2.0 2.1 2.2 2.7 3.1 2.8 2.0 2.2 0.70 Gross dividend, LKR million 454.4 653.7 653.7 794.3 2,649 795 1,060 1,325 1,458 1,591

Liquid assets to liabilities (as specified in the Banking Act No. 30 of 1998), % 79 31 145 214 295 52 52.8 77.46 47.62 22.45 No of employees 422 419 419 427 451 466 461 477 495 1,445

*Adjusted for bonus issue

DFCC Bank PLC Annual Report 2015 215 Corporate Information

Name of Company DFCC Bank PLC

Legal Form A quoted public company with limited liability incorporated by DFCC Bank Act No. 35 of 1955 and with the enactment of the DFCC Bank (Repeal and Consequential Provisions) Act No. 39 of 2014, incorporated under the Companies Act No. 07 of 2007 with the name ‘DFCC Bank PLC’ with effect from 6 January 2015. Supplementary Information Supplementary Information A licensed commercial bank under the Banking Act, No. 30 of 1988.

Company Registration Number: PQ233

Credit Rating AA- (lka) credit rating from Fitch Ratings Lanka Limited.

Annual General Meeting The AGM will be held at the Cinnamon Lakeside Colombo, Sir Chittampalam A Gardiner Mawatha, Colombo 2, on 30 March 2016. Details of the business of the meeting and other information are contained in the booklet enclosed with this Annual Report.

For any clarification on this Report please write to: The Company Secretary DFCC Bank PLC No. 73/5, Galle Road, Colombo 03, Sri Lanka or E-mail to: [email protected]

Company Secretary Ms A Withana

Auditors KPMG Chartered Accountants

VAT Registration No. 409000088-7000

Registered Office 73/5, Galle Road, Colombo 03, Sri Lanka. Telephone: +94-11-2442442 Fax: +94-11-2440376 E-mail: [email protected] Website: www.dfcc.lk

216 DFCC Bank PLC Annual Report 2015 This DFCC Bank PLC annual report has been produced This DFCC Bank PLC by Smart Media The Annual Report Company, annual report has been a certified carbon neutral organisation that offsets its prepared using the GHG emissions, including those resulting from the Smart Integrated Reporting usage of paper and outsourced printing, through MethodologyTM of Smart Media verified sources. The Annual Report Company.