12 million light-years from Earth, Messier 81, also known as Bode’s Galaxy, shows the classic form of the spiral galaxy, common throughout the universe. On a human scale, this year’s NDB Bank Annual Report describes a bank with a similarly universal approach to business, providing a full range of financial products and services. Contents Our Vision The view from the top 02 To be a world-class Sri Lankan Bank. Chairman’s Message 03 Chief Executive’s Review 06 Management Discussion & Analysis 09 Our Mission Key Retail Banking Products & Services 22 To be dominant in the financial services sector, creating Financial Review 24 superior long-term shareholder value and contributing Board of Directors 28 Leadership Team 30 to economic development in Sri Lanka by exploiting Within Our Orbit 32 regional opportunities and delivering innovative Corporate Social Responsibility 35 solutions, with best-in industry service excellence, Risk Management 41 through an inspired team. Corporate Governance 46 NDB Group Companies 54 Financial Reports Our Values Annual Report of the Directors on the State of Affairs of National Development Integrity, Care, Passion, Teamwork and Service guides Bank PLC 58 us in our vision to be a world-class Sri Lankan Bank. Directors’ Interests in Contracts with NDB Bank 62 Statement of Directors’ Responsibilities 65 Audit Committee Report 66 Independent Auditor’s Report 67 Income Statement 68 Balance Sheet 69 Cash Flow Statement 70 Statement of Changes in Equity 72 Significant Accounting Policies 73 Notes to the Financial Statements 80 Capital Adequacy 105 Statement of Value Added 109 “AA (lka) Fitch Rating” Investor Information 110 Ten Year Summary 112 Notice of Meeting 114 Registered Name: National Development Bank PLC Form of Proxy Enclosed Trade Name: Company Registration No : PQ 27 Executive Summary The view from the top Blue auroras flare and crackle at the north and south poles of Jupiter, hinting at the vast energies permeating its atmosphere - a potency fully befitting the planet acknowledged by astronomers as the giant of the solar system. NDB BANK NDB GROUP 2008 2007 Per Cent 2008 2007 Per Cent Change Change (Rs mn) Total Income 12,093 9,527 26.93 12,522 10,072 24.33 Net Interest Income 3,155 3,022 4.41 3,787 3,522 7.52 Net Other Income 1,571 1,295 21.31 1,662 1,473 12.83 Net Income 4,726 4,317 9.48 5,449 4,995 9.08 Profit Before Tax 2,359 2,342 0.70 3,118 3,058 1.96 Profit After Tax 1,195 1,104 8.24 1,708 1,637 4.34 Profit Attributable to Equity Shareholders 1,195 1,104 8.24 1,605 1,521 5.52 Shareholders’ Funds 9,964 9,252 7.70 12,662 11,685 8.36 Deposits from Customers 31,914 25,624 24.55 31,091 25,624 21.34 Borrowings 26,102 26,402 (1.14) 24,432 25,304 (3.45) Total Assets 82,340 73,212 12.47 83,280 76,143 9.37 Loans and Advances 56,515 51,799 9.11 56,534 51,820 9.10 Non-Performing Loans 1,275 1,183 7.72 1,276 1,183 7.86 Gross Dividend Paid 491 409 20.05 491 409 20.05 (%) Return on Average Equity 12.44 12.40 0.32 13.18 13.67 (3.58) Return on Average Assets 1.54 1.62 (4.94) 2.01 2.16 (6.94) Non-Performing Loans Ratio 2.29 2.29 – 2.28 2.29 0.44 Cost to Income Ratio 47.46 44.13 7.54 43.83 41.06 6.74 Effective Overall Tax Rate 49.34 52.88 (6.68) 45.21 46.48 (2.73) Capital Adequacy Tier 1 (minimum ratio of 5%) 14.42 16.79 (14.11) 19.95 23.17 (13.90) Tier 1 & 2 (minimum ratio of 10%) 17.29 19.46 (11.15) 23.63 26.15 (9.64) Liquidity Ratio DBU (minimum ratio of 20%) 24.11 22.28 8.21 – – – FCBU (minimum ratio of 20%) 21.53 28.84 (25.35) – – – (Rs) Earnings 14.60 13.48 8.31 19.61 18.59 5.48 Book Value 121.73 113.03 7.70 154.69 142.75 8.36 Dividends 6.00 5.00 20.00 6.00 5.00 20.00 Market Value (31 December) 86.00 170.00 (49.41) 86.00 170.00 (49.41) (Times) Debt/Equity 6.88 6.58 4.56 5.22 5.12 1.95 Total Leverage 7.26 6.91 5.07 5.53 5.40 2.41 Interest Cover 1.43 1.58 (9.49) 1.54 1.69 (8.87) 2 NDB Bank Annual Report 2008 Chairman’s Message Today, the NDB Group offers a full compendium of banking and financial services, including market driven and consumer-oriented retail banking, investment banking, corporate and commercial banking, leasing, project finance, development banking, and even insurance. Thus the NDB is truly a universal Bank in terms of its product range The Economic Environment was lost. Although, Governments for the nation. However, there is little The year 2008 was one of crisis for globally acted in concert to prevent doubt that the road ahead will not be global banks. Massive sub-prime systemic collapse, the cost in terms of a easy. Sri Lanka is strongly co-related to mortgage lending in the US indulged painful global economic recession is the global economy through a high in by over-leveraged banks, was the now being paid. level of international trade, services and proximate cause. The consequences remittances. All these are likely to suffer were distributed around the world by The Sri Lankan economy once more in a recession. Domestic demand is also large global investment banks, resulting demonstrated its resilience, with GDP slowing as a result, and also because in the destruction of the capital of growth for 2008 estimated at over 6%. of high inflation, interest rates and a financial institutions estimated at The hope for the future is that military perceived overvalued exchange rate. The US$ 1 trillion. Lending virtually stopped, victories will translate into lasting peace capacity of the Government to stimulate as confidence in the banking system and a new level of economic prosperity demand is limited by structural, fiscal NDB Bank Annual Report 2008 3 and external deficits. Financing of these The trend of rising non-performing so since its inception. Accordingly, it deficits from international capital markets loans in an economic downturn will put strategically established a new Bank, will also be much more problematic in further pressure on profits. Overheads namely the National Development Bank adverse market conditions. are high because of the lack of scale. PLC (NDB) as a commercial bank with a It is an unaffordable extravagance in new corporate personality to meet the The Banking Industry in Sri Lanka economic terms for 23 commercial objectives of building sustainable growth The growth of lending and deposit banks to build individual fixed cost bases based on diversification of funding mobilization activities of the banking relating to branches, ATM technology, sources, risks and product range. The industry slowed considerably in 2008, brand building, risk management and complex restructuring of NDB in recent compared with previous years and with the like, in a small economy. Industry years has created four integrated nominal GDP growth. Since banks play consolidation needs to happen if these businesses of corporate and SME an important role in fuelling economic costs are to be reduced. It is hoped that banking, retail banking, capital markets activity, a fall in Balance Sheet growth the Central Bank and the commercial and insurance, which are uniquely of a comparatively large magnitude, is banks will work together in 2009 to positioned to achieve those objectives. a cause for concern. This slowdown is facilitate consolidation in the industry. Each of these sectors, which combine due partly to the more adverse economic Further, with the high Financial Services the traditional project finance skills with environment, which affected customer VAT applicable to banks, the effective new products and services to meet the demand, and partly to the structural tax rate on banking profits has been changing demands of customers, is issues facing banks, as set out below. raised to a level, which makes it difficult being built on well-designed and solid to attract equity capital, which is foundations. Today, the NDB Group Banks worldwide are increasing their needed to absorb unexpected losses, offers a full compendium of banking capital to support loan growth and to ensure systemic stability and underpin and financial services, including market- provide a cushion of equity to absorb loan growth. Therefore it is suggested driven and consumer-oriented retail unforeseen losses with increased capital. that the relevant authorities review the banking, investment banking, corporate However, most banks in Sri Lanka are imposition of the Financial Services VAT and commercial banking, leasing, operating at the limits of statutory which virtually results in the banks being project finance, development banking, capital requirements and do not have taxed twice. and even insurance. Thus the NDB is the capacity to increase loans, without a truly a universal Bank in terms of its commensurate increase mainly in equity These are important structural policy issues product range. capital. The sources of new equity are which regulators, the Government and the twofold, namely from share issues in the banks themselves need to address without The performance of NDB in 2008 domestic or global capital markets or delay, if banks are to have the capacity to is reviewed in detail elsewhere from retained profits.