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50
percent fall in HNB group profits "As expected at the outset, the profitability of the bank was considerably affected by the large provisions the bank had to make on account of non-performing loans," CEO Rajendra Theagarajah told shareholders in the annual report. The group made a pre-tax profit of Rs 832 million, down 52 percent compared with Rs 1.7 billion in 2003, and post-tax profit after minority interest of Rs 756 million, down 50 percent from Rs 1.5 billion the year before. It made provisions for bad debt of Rs 1.6 billion - the equivalent to 165 percent of its pre-tax profits - compared to Rs 1.7 billion in 2003. Interest expenses fell by almost 14 percent, much more than the 0.6 percent fall in interest income, allowing HNB to increase net interest income by 19 percent. Despite low interest rates and negative real returns, HNB's interest bearing deposits increased by 17 percent. Theagarajah noted that HNB's return on assets of 0.7 percent is one of the lowest among peer group local private sector commercial banks. He said HNB would "vigorously" ensure that balance sheet growth is not achieved at the expense of profitability and that the bank would grow its consumer banking business and defend net interest margins. HNB's foreign exchange and commission income grew by 31 percent and 22 percent respectively, largely owing to the higher rate of the rupee's depreciation during the year and continued focus on fee-based activities. HNB chairman Rienzie Wijetilleke said the bank plans to strengthen its overseas offices and convert its existing representative office in India to a branch. The increase in net interest income was the main factor behind growth as the bank's other income "recorded a notable decline" largely due to a reduction in Treasury income, he said. "In a stagnant interest rate environment, opportunities for trading in government bonds were limited and therefore HNB Treasury was not able to produce the same level of profitability in 2004 compared to the previous year." He gave the same reason for a sharp fall in profits by the bank's primary dealing arm, HNB Securities Ltd. The Central Bank maintained key benchmark rates despite inflationary pressure and only raised rates in November under mounting pressure of inflation. This, coupled with extensive intervention by the government in the primary debt market, kept the lid on interest rates, resulting in most money market instruments yielding negative real returns, Wijetilleke said. HNB's rights issue last year raised Rs 1.4 billion and helped strengthen its core capital while an inflow of GDR proceeds in the first quarter of 2005 will further enhance the capital structure. However, Wijetilleke said the benefits derived from the rights issue will be neutralised to a great extent because of a Central Bank ruling. Under this ruling HNB's investment of Rs 900 million in the property development subsidiary, Sithma Development, and Rs 147 million in its proposed Employee Share Option Scheme have to be directly deducted from the bank's capital base before calculation of capital adequacy. CSR
more than just philanthropy The bank's CSR activity includes study tours abroad for farmers with 13 being taken recently to visit research institutions and fertiliser plants in India. HNB has also built homes for needy families in farming districts while a settlement of 800 families in Muthurajawela benefited from a joint venture between the bank and the Wattala Rotary Club with the construction of badly needed toilet facilities. HNB has also made a firm commitment to the Agriculture Ministry to rehabilitate three irrigation tanks. "CSR is more than an exercise in philanthropy," the annual report said. "They donate a certain share (of profits) to charitable causes - and it is seen as tainting the act for a company to receive any benefit from its largesse." |
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