Notes to the Financial Statements

1. REPORTING ENTITY

1.1. General

Sampath Bank PLC ('The Bank'), is a domiciled, public limited liability company incorporated in Sri Lanka on 10th March 1986 under the Companies Act No. 17 of 1982. It is a Licensed Commercial Bank registered under the Banking Act No. 30 of 1988 (Banking Act) and amendments thereto. The Bank was re-registered with the Registrar General of Companies as per the requirements of the Companies Act No. 07 of 2007 (Companies Act) on 28th April 2008 under the name of Sampath Bank PLC. The registered office of the Bank is located at No. 110, Sir James Peiris Mawatha, Colombo 02. The shares of the Bank have a primary listing on the Colombo Stock Exchange (CSE). The unsecured subordinated debentures of the Bank are also listed on the CSE. The staff strength of the Bank as at 31st December 2024 was 4,428 (2023: 4,179).

1.2. Consolidated Financial Statements

The Consolidated Financial Statements of the Bank as at and for the year ended 31st December 2024 comprise the Bank (Parent Company) and its Subsidiaries (together referred to as the "Group" and individually as "Group entities"). The subsidiaries of the Bank as at 31st December 2024 were Sampath Centre Ltd, SC Securities (Pvt) Ltd, Siyapatha Finance PLC and Sampath Information Technology Solutions Ltd. Sampath Bank PLC is the ultimate parent of the Group.

The Financial Statements of all companies in the Group have a common financial year which ends on 31st December.

1.3. Principal Activities and Nature of Operations

1.3.1. Bank

The Bank provides a comprehensive range of financial services encompassing accepting deposits, corporate and retail banking, project financing, trade finance, treasury and investment services, issuing of credit cards and debit cards, off-shore banking, resident and non-resident foreign currency operations, electronic banking services such as: telephone banking, internet banking, mobile banking and money remittance facilities, pawning, leasing, factoring, travel related services and dealing in government securities etc.

1.3.2. Subsidiaries

Ownership of subsidiaries as of 31st December 2024 and 31st December 2023 is given in Note 28 to the Financial Statements. There were no significant changes in the nature of the principal activities of the Group during the financial year under review.

2. BASIS OF PREPARATION

2.1. Statement of Compliance

The Consolidated Financial Statements of the Group and the Separate Financial Statements of the Bank, which comprise the Statement of Financial Position, Statement of Profit or Loss, Statement of Comprehensive Income, Statement of Changes in Equity, Statement of Cash Flows and Notes to the Financial Statements have been prepared and presented in accordance with Sri Lanka Accounting Standards (SLFRSs and LKASs) laid down by the Institute of Chartered Accountants of Sri Lanka and in compliance with the requirements of the Companies Act No. 07 of 2007. The presentation of the Financial Statements is also in compliance with the requirements of the Banking Act No. 30 of 1988 and amendments thereto and provide appropriate disclosures as required by the Listing Rules of the CSE.

The formats used in the preparation and presentation of the Financial Statements and the disclosures made therein also comply with the specified formats prescribed by the CBSL in the Circular No. 05 of 2024 on “Publication of Annual and Quarterly Financial Statements and Other Disclosures by Licensed Banks”. The Bank also publish annual and quarterly financial information and other disclosures in the Press and the Website in compliance with the aforementioned Circular.

2.2. Responsibility for Financial Statements

The Board of Directors is responsible for the Financial Statements of the Group and the Bank as per Sri Lanka Accounting Standards and the provisions of the Companies Act No. 07 of 2007.

The Board of Directors acknowledges their responsibility for financial statements as set out in the “Annual Report of the Board of Directors on the Affairs of the Company” (pages 255 to 263), “Statement of Directors’ Responsibility for Financial Reporting” (pages 268 and 269) and the certification on the Statement of Financial Position on page 277.

2.3. Approval of Financial Statements by Directors

The Financial Statements of the Group as at and for the year ended 31st December 2024 were authorised for issue by the Board of Directors in accordance with the resolution of the Board of Directors on 17th February 2025.

2.4. Basis of Measurement

The Financial Statements of the Group have been prepared on the historical cost basis, except for the following material items in the Statement of Financial Position:

• Derivative financial instruments are measured at fair value (Note 23)
• Financial assets recognised through profit or loss (FVPL) are measured at fair value (Note 24)
• Financial assets held at fair value through other comprehensive income (FVOCI) are measured at fair value (Note 27)
• Land and buildings which are measured at cost at the time of acquisition subsequently measured at revalued amounts, which are the fair values at the date of revaluation (Note 29)
• Liabilities for defined benefit obligations are recognised at the present value of the defined benefit obligation less the fair value of the plan assets (Note 38)

2.5. Functional and Presentation Currency

The Financial Statements of the Group are presented in Sri Lankan Rupees (Rs), which is the currency of the primary economic environment in which Sampath Bank PLC operates. Financial information presented in Sri Lankan Rupees has been rounded to the nearest thousand unless indicated otherwise. There was no change in the Group's presentation and functional currency during the year under review.

2.6. Presentation of Financial Statements

The assets and liabilities of the Group presented in the Statement of Financial Position are grouped by nature and listed in an order that reflects their relative liquidity and maturity pattern. No adjustments have been made for inflationary factors affecting the Financial Statements.

An analysis on recovery or settlement within 12 months after the reporting date (current) and more than 12 months after the reporting date (non-current) is presented in the Note 52 to the Financial Statements.

2.7. Materiality and Aggregation

In compliance with Sri Lanka Accounting Standard - LKAS 1 (Presentation of Financial Statements), each material class of similar items is presented separately in the Financial Statements. Items of dissimilar nature or functions too are presented separately unless they are immaterial. The understandability of the Financial Statements is not compromised by obscuring material information with immaterial information or by aggregating material items that are different in nature or function.

2.8. Offsetting

Financial assets and financial liabilities are offset and the net amount reported in the Statement of Financial Position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expenses are not offset in the Statement of Profit or Loss unless required or permitted by an Accounting Standard or interpretation, and as specifically disclosed in the accounting policies of the Group.

2.9. Comparative Information

The comparative information is re-classified wherever necessary to conform to the current year's classification in order to provide a better presentation.

2.10. Statement of Cash Flows

The Statement of Cash Flows has been prepared by using the direct method in accordance with the Sri Lanka Accounting Standard - LKAS 7 (Statement of Cash Flows), whereby gross cash receipts and gross cash payments of operating activities, financing activities and investing activities have been recognised. Cash and cash equivalents comprise short term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

Cash and cash equivalents include cash in hand, balances with banks, placements with banks, money at call and short notice, net of unfavourable local & foreign bank balances.

2.11. Significant Accounting Judgments, Estimates and Assumptions

The preparation of Financial Statements of the Group in conformity with Sri Lanka Accounting Standards requires the management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The most significant areas of estimation, uncertainty and critical judgments in applying accounting policies that have most significant effect on the amounts recognised in the Financial Statements of the Group are as follows:

2.11.1. Going Concern

The Directors have made an assessment of the Group's ability to continue as a going concern and are satisfied that it has the resources to continue in business for the foreseeable future. The Directors have considered the impact of the present macro-economic conditions and climate-related matters, in making this assessment. Furthermore, the Board is not aware of any material uncertainties that may cast significant doubt upon the Group's ability to continue as a going concern and they do not intend either to liquidate or to cease operations of the Group. Therefore, the Financial Statements continue to be prepared on the going concern basis.

2.11.2. Impairment Losses on Loans and Advances

The measurement of impairment losses under Sri Lanka Accounting Standards - SLFRS 9 (Financial Instruments) across all categories of financial assets requires judgement. These estimates are driven by a number of factors, changes in which can result in different levels of allowances. The Group reviews its individually significant loans and advances at each reporting date to assess whether an impairment loss should be recorded in the Statement of Profit or Loss. In particular, management's judgment is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. Loans and advances that have been assessed individually and found to be not impaired and all individually insignificant loans and advances are then assessed collectively, by categorising them into groups of assets with similar risk characteristics, to determine the expected credit loss on such loans and advances.

The expected credit loss (ECL) calculation under SLFRS 9 requires management to make judgments and estimates with regard to the following:

• The Group's criteria for assessing if there has been a significant increase in credit risk and so impairment for financial assets should be measured on a lifetime ECL basis
• Development of ECL models, including various formulas and the choice of inputs
• Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic inputs into the ECL model

It has been the Group's policy to regularly review its models in the context of actual loss experience and adjust when necessary. The above assumptions and judgments are discussed in detail under Note 3.4.6 to the Financial Statements.

The key assumptions used in the Group’s calculation of ECL have been revised to reflect the changes in the macro-economic conditions during the year. Although the credit model inputs and assumptions, including forward-looking macroeconomic assumptions were revised in response to the current economic conditions, the fundamental credit model mechanics and methodology underpinning the Group’s calculation of ECL have remained consistent with prior periods.

The economic scenarios and forward-looking macroeconomic assumptions underpinning the collective provision calculation are outlined in Note 3.4.6.7, while the impact on changing the weightages of different macro-economic scenarios during the year are given in Note 51.2.1.3. A breakdown of the loans and advances of the Bank/Group classified under stage 2 & stage 3 is given in Notes 51.2.1.5 & 51.2.1.6. Sensitivity of the individually significant loan impairment to recovery cash flows is given in Note 51.2.1.3 while sensitivity of collective impairment provision to the staging of the loans and advances is disclosed in Note 51.2.1.4.

2.11.3. Impairment of Other Financial Assets

The Group reviews its debt securities classified as FVOCI/amortised cost at each reporting date. Objective evidence that a debt security held at FVOCI/amortised cost is impaired/having an increased credit risk includes, among other things, significant financial difficulty of the issuer, a breach of contract such as a default or delinquency in interest or principal payments etc.

Management judgement has been involved in determining whether there is significant increase in credit risk of these instruments or these instruments are impaired as at the reporting date.

Equity instruments classified as FVOCI are not subjective for impairment assessment.

2.11.4. Fair Value of Financial Instruments

The determination of fair values of financial assets and financial liabilities recorded on the Statement of Financial Position for which there is no observable market price are determined using a variety of valuation techniques that include the use of mathematical models. The valuation of financial instruments is described in more detail in Note 50.

The Group measures fair value using the fair value hierarchy that reflects the significance of input used in making measurements. The fair value hierarchy is given in Notes 50.5 and 50.7.

2.11.5. Financial Assets and Liabilities Classification

The Group's accounting policies provide scope for assets and liabilities to be classified, at inception into different accounting categories. The classification of financial instruments is given in Note 19, 'Analysis of Financial Instruments by Measurement Basis'.

2.11.6. Taxation

The Group is subject to income tax and judgment is required to determine the total provision for current, deferred and other taxes due to the uncertainties that exist with respect to the interpretation of the applicable tax laws, at the time of preparation of these Financial Statements. The details of deferred tax computation is given in Note 32 to the Financial Statements.

2.11.7. Defined Benefit Plans

The cost of the defined benefit plans and the present value of their obligations are determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, future salary increases, mortality rates and possible future pension increases if any. Due to the long term nature of these plans, such estimates are subject to significant uncertainty. All assumptions are reviewed at each reporting date.

In determining the appropriate discount rate, management considers the interest rates of Sri Lanka government bonds with maturities corresponding to the expected duration of the defined benefit obligation. The mortality rate is based on publicly available mortality tables. Future salary increases and pension increases are based on expected future inflation rate and expected future salary increase rates of the Group.

2.11.8. Fair Value of Property, Plant and Equipment

The freehold land and buildings of the Group are reflected at fair value at the date of revaluation less any accumulated depreciation and impairment losses. The Group engages independent valuation specialists to determine fair value of freehold lands and buildings in terms of the Sri Lanka Accounting Standard - SLFRS 13, (Fair Value Measurement). The details of freehold land and buildings, including methods of valuation are given in Notes 29.3 and 29.4 to the Financial Statements. The Group has not revalued its freehold lands and buildings during this year for consolidated accounting purposes, on the basis that changes in property prices were not significant compared to the previous year.

2.11.9. Useful Lifetime of the Property, Plant and Equipment

The Group reviews the residual values, useful lives and methods of depreciation of property, plant and equipment at each reporting date. Judgment of the management is exercised in the estimation of these values, rates, methods and hence they are subject to uncertainty.

2.11.10. Commitments and Contingencies

All discernible risks are accounted for in determining the amount of all known liabilities. Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is not probable or cannot be reliably measured. Contingent liabilities are not recognised in the Statement of Financial Position but are disclosed unless they are remote. Details of commitments and contingencies are given in Note 45.

2.11.11. SLFRS 16 - Leases

The Group uses its judgment to determine whether an operating lease contract qualifies for recognition of right-of-use assets. It also uses judgement in the determination of the discount rate in the calculation of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease. As the Group cannot readily determine the interest rate implicit in the lease, it uses its incremental borrowing rate to measure the lease liability. The incremental borrowing rate is the rate of interest that the Group would have to pay, to borrow an amount similar to the value of the lease asset, over a similar term and with similar security in similar economic environment. Further, the Group applies judgement in evaluating whether it is reasonably certain to renew or terminate the lease at the end of the lease term. That is, it considers all relevant factors that create an economic benefit for it to exercise, either the renewal or termination option.

2.11.12. Impact of Climate Risk

The Group and its customers are exposed to the physical risks from climate change and risks of transitioning to a net-zero economy. These risks may involve refinancing and liquidity risks for certain customers in high-risk sectors where financial institutions may seek to reduce their exposures in the future. However, the nature and location of the Bank's counterparties and the underlying collateral, limit the impact of this exposure. The following items and balances may be impacted by climate-related matters:

Expected credit losses (ECL): Customers and portfolios with exposure to climate risk may have a resultant deterioration in creditworthiness and a consequential impact on ECL. On the whole, the Group is of the view that the counterparties who have exposures to climate risk are not expected to be materially impacted by physical or transition risk associated with climate change. For example, the majority of the counterparties are not employed, or do not operate, in high-risk sectors, nor are they located in high-risk geographical areas. As a result, it was assessed that the magnitude of any impact of climate risk would not be material in the current reporting period.

Fair value measurement: The Bank has assumed that any climate change variables incorporated in fair value measurement are those that market participants would consider when pricing the asset or liability, in line with SLFRS 13 (Fair Value Measurement). Consequently the Bank concluded that climate risk has been adequately reflected within the fair value of its assets and liabilities. Where prices are observable, it is assumed that the fair value already incorporates market participants’ view of climate risk variables.

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3. MATERIAL ACCOUNTING POLICIES

The material accounting policies of the Group have been applied consistently to all periods presented in the Financial Statements. Set out below is an index of accounting policies, the details of which are available on the pages that follow:

3.1. Basis of Consolidation

The Group's Financial Statements comprise consolidation of the Financial Statements of the Bank and its subsidiaries in terms of the Sri Lanka Accounting Standard - SLFRS 10 (Consolidated Financial Statements). The Bank's Financial Statements comprise the amalgamation of the Financial Statements of the Domestic Banking Unit and the Off-Shore Banking Unit.

3.2. Business Combinations and Goodwill

Business combinations are accounted for using the acquisition method as per the requirements of Sri Lanka Accounting Standard - SLFRS 3 (Business Combinations).

The Group measures goodwill as the fair value of the consideration transferred including the recognised amount of any non-controlling interest in the acquiree, less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. When excess is negative, a bargain purchase gain is recognised immediately in profit or loss, if controlling power is acquired.

The changes in parent's ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions. The Group elects on a transaction-by-transaction basis whether to measure non-controlling interest at its fair value, or at its proportionate share of the recognised amount of the identifiable net assets, at the acquisition date. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred.

3.3. Foreign Currency Transactions and Balances

All foreign currency transactions are translated into the functional currency, which is Sri Lankan Rupees, using the exchange rates prevailing at the dates of the transactions were affected.

Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to Sri Lankan Rupees using the spot foreign exchange rate ruling at that date and all differences arising on non-trading activities are taken to 'Other operating income' in the Statement of Profit or Loss. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the rate of exchange prevailing at the end of the reporting period.

Non-monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items in foreign currency measured at fair value are translated using the exchange rates at the date when the fair value was determined.

Foreign exchange differences arising on the settlement or reporting of monetary items at rates different from those which were initially recorded are dealt with in the Statement of Profit or Loss. However, foreign currency differences arising on equity instruments classified as fair value through other comprehensive income, financial liabilities designated as a hedge of a net investment in a foreign operation, or qualifying cash flow hedges are recognised in other comprehensive income. Forward exchange contracts are valued at the forward market rates ruling on the reporting date. Resulting net unrealised gains or losses are dealt within the Statement of Profit or Loss under 'Net gain/loss from trading'.

3.4. Financial Instruments - Initial Recognition, Classification and Subsequent Measurement

3.4.1. Date of Recognition

Financial assets and liabilities, with the exception of loans and advances to customers and balances due to customers, are initially recognised on the trade date, i.e. the date that the Group becomes a party to the contractual provisions of the instrument. This includes regular way trades: purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. Loans and advances to customers are recognised when funds are transferred to the customers' accounts. The Group recognises balances due to depositors when funds are transferred to the Group.

3.4.2. Initial Measurement of Financial Instruments

The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing the instruments, as described in Notes 3.4.3.1(a) and 3.4.3.1(b). Financial instruments are initially measured at their fair value. Except in the case of financial assets and financial liabilities recorded at FVPL, transaction costs are added to, or subtracted from, this amount. Trade receivables are measured at the transaction price. When the fair value of financial instruments at initial recognition differs from the transaction price, the Group accounts for the Day 1 profit or loss, as described below.

3.4.2.1 ‘Day 1' Profit or Loss

When the transaction price differs from the fair value of other observable current market transactions in the same instrument, or based on a valuation technique whose variables include only data from observable markets, the Group recognises the difference between the transaction price and fair value ('Day 1' profit or loss) in the Statement of Profit or Loss over the tenor of the financial instrument using the effective interest rate method. In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognised in the Statement of Profit or Loss when the inputs become observable, or when the instrument is derecognised.

The “Day 1 loss” arising in the case of loans granted to employees at concessionary rates under uniformly applicable schemes is deferred and amortised using Effective Interest Rates (EIR) in “Interest income” and “Personnel expenses” over the remaining service period of the employees or tenure of the loan whichever is shorter.

3.4.3. Measurement Categories of Financial Assets and Liabilities

The Group classifies all of its financial assets based on the business model for managing the assets and the asset's contractual terms, measured at either:

• Amortised cost, as explained in Note 3.4.3.1
• FVOCI as explained in Notes 3.4.3.5 and 3.4.3.6
• FVPL as explained in Notes 3.4.3.2, 3.4.3.3 and 3.4.3.4

The Group classifies and measures its derivative and trading portfolio at FVPL as explained in Notes 3.4.3.2 and 3.4.3.3. The Group may designate financial instruments at FVPL, if so doing eliminates or significantly reduces measurement or recognition inconsistencies, as explained in Note 3.4.3.4.

Financial liabilities, other than loan commitments and financial guarantees, are measured at amortised cost or at FVPL when they are held for trading, derivative instruments or the fair value designation is applied, as explained in Notes 3.4.3.7, 3.4.3.3, 3.4.3.2 and 3.4.3.4.

3.4.3.1. Loans and advances to customers, debt and other instruments, reverse repurchase agreements

The Group only measures loans and advances to customers, debt and other instruments and reverse repurchase agreements at amortised cost if both of the following conditions are met:

• The financial asset is held within a business model with the objective of collecting contractual cash flows
• The contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

The details of these conditions are outlined below.

3.4.3.1(a). Business model assessment

The Group determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective.

The Group's business model is not assessed on an instrument by instrument basis, but at a higher level of aggregated portfolios and is based on observable factors such as:

• How the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity's key management personnel
• The risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way those risks are managed
• How managers of the business are compensated (for example, whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected)

The expected frequency, value and timing of sales are also important aspects of the Group's assessment.

The business model assessment is based on reasonably expected scenarios without taking 'worst case' or 'stress case' scenarios into account. If cash flows after initial recognition are realised in a way that is different from the Group's original expectations, the Group does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward.

3.4.3.1(b). The SPPI test

As a second step of its classification process the Group assesses the contractual terms of financial instruments to identify whether they meet the SPPI test. 'Principal' for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change over the life of the financial asset (for example, if there are repayments of principal or amortisation of the premium/discount).

The most significant elements of interest within a lending arrangement are typically the consideration for the time value of money and credit risk. To make the SPPI assessment, the Group applies judgment and considers relevant factors such as the currency in which the financial asset is denominated and the period for which the interest rate is set. In contrast, contractual terms that introduce a more than deminimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement, do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding. In such cases, the financial asset is required to be measured at FVPL.

3.4.3.2. Derivatives recorded at fair value through profit or loss

A derivative is a financial instrument or other contract with all three of the following characteristics:

• Its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided that, in the case of a non-financial variable, it is not specific to a party to the contract (i.e. the 'underlying').
• It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts expected to have a similar response to changes in market factors.
• It is settled at a future date.

The Group enters into derivative transactions with various counterparties. These include interest rate swaps, cross-currency swaps, forward exchange contracts etc. Derivatives are recorded at fair value and carried as assets when their fair value is positive and as liabilities when their fair value is negative. The notional amount and fair value of such derivatives are disclosed separately in Note 23. Changes in the fair value of derivatives are included in net gain/ (loss) from trading unless hedge accounting is applied. The Group has not applied hedge accounting for any of its derivatives during the years ended 31st December 2024 and 2023.

3.4.3.2(a). Embedded derivatives

An embedded derivative is a component of a hybrid instrument that also includes a non-derivative host contract with the effect that some of the cash flows of the combined instrument vary in a way, similar to a stand-alone derivative.

An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, it is not specific to a party to the contract. A derivative that is attached to a financial instrument, but is contractually transferable independently of that instrument, or has a different counterparty from that instrument, is not an embedded derivative, but a separate financial instrument.

Derivatives embedded in liabilities and non-financial host contracts, are treated as separate derivatives and recorded at fair value if they meet the definition of a derivative (as defined above), their economic characteristics and risks are not closely related to those of the host contract, and the host contract is not itself held for trading or designated at FVPL. The embedded derivatives separated from the host were carried at fair value in the trading portfolio with changes in fair value recognised in the income statement. Derivatives embedded in financial assets are no longer separated. Instead, they are classified based on the business model and SPPI assessments as outlined in Notes 3.4.3.1(a) and 3.4.3.1(b).

3.4.3.3. Financial assets or financial liabilities held for trading

The Group classifies financial assets or financial liabilities as held for trading when they have been purchased or issued primarily for short-term profit making through trading activities or form part of a portfolio of financial instruments that are managed together, for which there is evidence of a recent pattern of short-term profit taking. Held-for-trading assets and liabilities are recorded and measured in the statement of financial position at fair value. Changes in fair value are recognised in net trading income. Interest income from financial assets held for trading is recorded under net interest income while dividend income is recorded in net trading income when the right to receive the dividend has been established. Included in this classification are debt securities and equity investments that have been acquired principally for the purpose of selling or repurchasing in the near term. The Group does not have any financial liabilities classified as held for trading as at 31st December 2024.

3.4.3.4. Financial assets and financial liabilities designated at fair value through profit or loss

Financial assets and financial liabilities in this category are those that are not held for trading and have been either designated by management upon initial recognition or are mandatorily required to be measured at fair value under SLFRS 9. Management only designates an instrument at FVPL upon initial recognition when one of the following criteria are met. Such designation is determined on an instrument-by-instrument basis:

• The designation eliminates, or significantly reduces, the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis
Or
• The liabilities are part of a group of financial liabilities which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy
Or
• The liabilities containing one or more embedded derivatives, unless they do not significantly modify the cash flows that would otherwise be required by the contract, or it is clear with little or no analysis when a similar instrument is first considered that separation of the embedded derivative(s) is prohibited

Financial assets and financial liabilities at FVPL are recorded in the statement of financial position at fair value. Changes in fair value are recorded in profit or loss with the exception of movements in fair value of liabilities designated at FVPL due to changes in the Group's own credit risk. Such changes in fair value are recorded in the "Own credit reserve" through OCI and do not get recycled to the profit or loss. Interest earned or incurred on instruments designated at FVPL is accrued in interest income or interest expense, respectively, using the EIR, taking into account any discount/premium and qualifying transaction costs being integral parts of the instrument.

3.4.3.5. Debt instruments at FVOCI

The Group applies this category for debt instruments when both of the following conditions are met:

• The instrument is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets
• The contractual terms of the financial asset meet the SPPI test

These instruments largely comprise government securities.

FVOCI debt instruments are subsequently measured at fair value with gains and losses arising due to changes in fair value recognised in OCI. Interest income and foreign exchange gains and losses are recognised in profit or loss in the same manner as for financial assets measured at amortised cost.

The ECL calculation for debt instruments at FVOCI is explained in Note 3.4.6.5. On derecognition, cumulative gains or losses previously recognised in OCI are reclassified from OCI to profit or loss.

3.4.3.6. Equity instruments at FVOCI

Upon initial recognition, the Group occasionally elects to classify irrevocably some of its equity investments at FVOCI when they meet the definition of equity under Sri Lanka Accounting Standard – LKAS 32 (Financial Instruments: Presentation) and are not held for trading. Such classification is determined on an instrument-by-instrument basis.

Gains and losses on these equity instruments are never recycled to profit. Dividends are recognised in profit or loss under other operating income when the right of the receive the dividend has been established, except when the Group benefits from such proceeds as a recovery of part of the cost of the instrument, in which case, such gains are recorded in OCI. Equity instruments at FVOCI are not subject to an impairment assessment.

3.4.3.7. Securities sold under repurchase agreements, due to banks, due to depositors, other borrowers and debt securities holders

After initial measurement, securities sold under repurchase agreements, due to banks, due to depositors, due to other borrowers and due to debt securities holders are subsequently measured at amortised cost. Amortised cost is calculated by taking into account any discount or premium on issue of funds and costs that are an integral part of the EIR. The Group does not have compound financial instruments which contains both liability and equity components and require separation as at the date of the issue.

3.4.3.8. Financial guarantees, letters of credit and undrawn loan commitments

The Group issues financial guarantees, letters of credit and loan commitments. Financial guarantees are initially recognised in the financial statements at fair value, being the premium received. Subsequent to initial recognition, the Group's liability under each guarantee is measured at the higher of the amount initially recognised less cumulative amortisation recognised in the income statement and the ECL provision.

The premium received is recognised in the income statement under net fees and commission income on a straight line basis over the life of the guarantee.

Undrawn loan commitments and letters of credit are commitments under which, over the duration of the commitment, the Group is required to provide a loan with prespecified terms to the customer. Similar to financial guarantee contracts, these contracts are within the scope of the ECL requirements.

The nominal contractual value of financial guarantees, letters of credit and undrawn loan commitments, where the loan agreed to be provided is on market terms, are not recorded in the statement of financial position. The nominal values of these instruments are disclosed in Note 45, while the corresponding ECL is disclosed under Note 40, "Other liabilities".

3.4.4. Reclassification of Financial Assets and Liabilities

The Group does not reclassify its financial assets subsequent to their initial recognition, apart from the exceptional circumstances in which the Group may acquire, dispose of, or terminates a business line (change in business model). When the Group reclassifies its financial assets it applies the reclassification prospectively from the reclassification date without restating any previously recognised gains, losses or interest. Financial liabilities are never reclassified.

When a financial asset is reclassified out of the amortised cost measurement category and into the fair value through profit or loss measurement category, its fair value is measured at the reclassification date. Any gain or loss arising from the difference between the previous amortised cost of the financial asset and fair value is recognised in profit or loss.

When a financial asset is reclassified out of the fair value through profit or loss measurement category and into the amortised cost measurement category, its fair value at the reclassification date becomes its new gross carrying amount.

When a financial asset is reclassified out of the amortised cost measurement category and into the fair value through other comprehensive income measurement category, its fair value is measured at the reclassification date. Any gain or loss arising from the difference between the previous amortised cost of the financial asset and fair value is recognised in other comprehensive income. The effective interest rate and the measurement of expected credit losses are not adjusted as a result of the reclassification.

When a financial asset is reclassified out of the fair value through other comprehensive income measurement category and into the amortised cost measurement category, the financial asset is reclassified at its fair value at the reclassification date. However, the cumulative gain or loss previously recognised in other comprehensive income is removed from equity and adjusted against the fair value of the financial asset at the reclassification date. As a result, the financial asset is measured at the reclassification date as if it had always been measured at amortised cost. The effective interest rate and the measurement of expected credit losses are not adjusted as a result of the reclassification.

When a financial asset is reclassified out of the fair value through profit or loss measurement category and into the fair value through other comprehensive income measurement category, the financial asset continues to be measured at fair value.

When a financial asset is reclassified out of the fair value through other comprehensive income measurement category and into the fair value through profit or loss measurement category, the financial asset continues to be measured at fair value. The cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment at the reclassification date.

The Group did not reclassify any of its financial assets in 2024.

3.4.5. Derecognition of Financial Assets and Liabilities

3.4.5.1. Derecognition due to substantial modification of terms and conditions

The Group derecognises a financial asset, such as a loan to a customer, when the terms and conditions have been renegotiated to the extent that, substantially, it becomes a new loan, with the difference recognised as a derecognition gain or loss. The newly recognised loans are classified as stage 1 for ECL measurement purposes, unless the new loan is deemed to be credit impaired at the date of inception. When assessing whether or not to derecognise a loan to a customer, amongst others, the Group considers the following factors:

• Change in currency of the loan
• Introduction of an equity feature
• Change in counterparty
• If the modification is such that the instrument would no longer meet the SPPI criterion

If the modification does not result in cash flows that are substantially different, the modification does not result in derecognition. Based on the change in cash flows discounted at the original EIR, the Group records a modification gain or loss, to the extent that an impairment loss has not already been recorded.

In December 2024, the Sri Lankan Government completed the restructuring of Sri Lanka International Sovereign Bonds (SLISBs). The terms and conditions of the newly issued bonds significantly differed from those of the previous bonds. As a result, the Bank de-recognised the existing bonds and recorded the new bonds in December 2024. Further details regarding the SLISBs restructuring are provided in Note 10 to the Financial Statements.

3.4.5.2. Derecognition other than for substantial modification

3.4.5.2(a). Financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when the rights to receive cash flows from the financial asset have expired. The Group also derecognises a financial asset if it has both transferred the financial asset and the transfer qualifies for derecognition.

The Group has transferred the financial asset if, and only if, either:

• The Group has transferred its contractual rights to receive cash flows from the financial asset
Or
• It retains the rights to the cash flows, but has assumed an obligation to pay the received cash flows in full without material delay to a third party under a 'pass-through' arrangement

Pass-through arrangements are transactions whereby the Group retains the contractual rights to receive the cash flows of a financial asset (the 'original asset'), but assumes a contractual obligation to pay those cash flows to one or more entities (the 'eventual recipients'), when all of the following three conditions are met:

• The Group has no obligation to pay amounts to the eventual recipients unless it has collected equivalent amounts from the original asset, excluding short term advances with the right to full recovery of the amount lent plus accrued interest at market rates
• The Group cannot sell or pledge the original asset other than as security to the eventual recipients
• The Group has to remit any cash flows it collects on behalf of the eventual recipients without material delay. In addition, the Group is not entitled to reinvest such cash flows, except for investments in cash or cash equivalents including interest earned, during the period between the collection date and the date of required remittance to the eventual recipients

A transfer only qualifies for derecognition if either:

• The Group has transferred substantially all the risks and rewards of the asset
Or
• The Group has neither transferred nor retained substantially all the risks and rewards and has transferred control of the asset

The Group considers control to be transferred if and only if, the transferee has the practical ability to sell the asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally and without imposing additional restrictions on the transfer.

When the Group has neither transferred nor retained substantially all the risks and rewards and has retained control of the asset, the asset continues to be recognised only to the extent of the Group's continuing involvement, in which case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration the Group could be required to pay.

3.4.5.2(b). Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognised in profit or loss.

3.4.6. Impairment Allowance for Financial Assets

3.4.6.1. Overview of the ECL principles

The Group calculates impairment allowances on financial assets in line with Sri Lanka Accounting Standard - SLFRS 9 (Financial Instruments) and as per the CBSL Direction No. 13 of 2021 & No. 14 of 2021 on Classification, Recognition and Measurement of Credit Facilities/Other Financial Assets in Licensed Banks. Accordingly, the Group recognises impairment (expected credit losses) for all loans, debt & other financial instruments not held at FVPL, together with loan commitments, financial guarantee contracts, letter of credit and acceptances. Equity instruments are not subject to impairment under SLFRS 9.

Impairment is based on the credit losses expected to arise over the life of the asset [the lifetime expected credit loss or (LTECL)], when there is a significant increase in credit risk since origination. In all other instances, the impairment is based on the 12 months' expected credit loss (12mECL). The Group's policies for determining if there has been a significant increase in credit risk are set out in Note 3.4.6.1(b).

The 12mECL is the portion of LTECL that represent the ECLs that result from default events on a financial instrument that are possible within the 12 months after the reporting date.

Both LTECLs and 12mECLs are calculated on either an individual basis or a collective basis, depending on the nature of the underlying portfolio of financial instruments. The policy for grouping financial assets measured on a collective basis is explained in Note 3.4.6.4. The details of individual assessment of ECLs are given in Note 3.4.6.3.

The Group has established a policy to perform an assessment, at the end of each reporting period, of whether a financial instrument's credit risk has increased significantly since initial recognition, by considering the change in the risk of default occurring over the remaining life of the financial instrument. This is further explained in Note 3.4.6.1(b). Based on the above process, the Group categorises its loans into 'stage 1', 'stage 2', 'stage 3' and 'originated credit impaired', as described below:

• Stage 1: When loans are first recognised, the Group recognises an impairment based on 12mECLs. Stage 1 loans also include facilities where the credit risk has improved and the loan has been reclassified from stage 2 and stage 3.
• Stage 2: When a loan has shown a significant increase in credit risk since origination, the Group records an impairment for the LTECLs. Stage 2 loans also include facilities, where the credit risk has improved and the loan has been reclassified from stage 3.
• Stage 3: Loans considered credit-impaired [as outlined in Note 3.4.6.1(a). The Group records an impairment for the LTECLs.
• Originated credit impaired: Originated credit impaired assets are financial assets that are credit impaired on initial recognition. They are recorded at fair value at initial recognition and interest income is subsequently recognised based on a credit-adjusted EIR. ECLs are only recognised or released to the extent that there is a subsequent change in the expected credit losses. The Group did not have originated credit impaired loans as at 31st December 2024 and 2023.

For financial assets for which the Group has no reasonable expectations of recovering either the entire outstanding amount, or a proportion thereof, the gross carrying amount of the financial asset is reduced. This is considered a (partial) derecognition of the financial asset.

3.4.6.1(a). Definition of default and cure

The Group considers a financial instrument as defaulted and therefore stage 3 (credit-impaired) for ECL calculations in all cases when the borrower becomes 90 days past due on its contractual payments. As a part of a qualitative assessment of whether an individually significant customer is in default, the Group also considers a variety of instances that may indicate unlikeliness to pay. When such events occur, the Group carefully considers whether the event should result in treating the customer as defaulted and therefore assessed as stage 3 for ECL calculations or whether stage 2 is appropriate.

Such events include:

• Customer's Internal Risk Rating (CIRR) is below C + or any down grading of the CIRR by two notches or more
• Reasonable and supportable forecasts of future economic conditions show a direct negative impact on the performance of a customer/group of customers
• A significant change in the geographical locations or natural catastrophes that directly impact the performance of a customer/group of customers
• The value of collateral is significantly reduced and/or realisability of collateral is doubtful
• The borrower is subject to litigation that significantly affects the performance of the credit facility
• Frequent changes in the Board of Directors and Senior Management of an institutional customer
• Delay in commencement of business operations/projects by more than two years from the originally agreed date
• Modification of terms resulting in concessions, including extensions, deferment of payments, waiver of covenants etc.
• The borrower is deceased/insolvent
• Bank is unable to contact or find the borrower
• A fall of 50% or more in the turnover and/or profit before tax of the borrower when compared to the previous year, for two consecutive years
• Erosion of net-worth of the borrower by more than 25% (other than due to changes in equity structure and dividend policy) when compared to the previous financial year

It is the Group's policy to consider a financial instrument as 'cured' and therefore reclassified out of stage 3 when none of the material default criteria have been presented.

Once cured, the decision whether to classify an asset as stage 2 or stage 1 largely depends on the days past due. The corresponding reduction in ECL is recognised under "Impairment charge/reversal" in Note 12 to the financial statements.

The Group's criterion for 'cure' for rescheduled/restructured loans is more stringent than ordinary loans and is explained in Note 3.4.6.11.

3.4.6.1(b). Significant increase in credit risk

The Group continuously monitors all assets subject to ECLs. In order to determine whether an instrument or a portfolio of instruments is subject to 12mECL or LTECL, the Group assesses whether there has been a significant increase in credit risk since initial recognition. The Group considers an exposure to have a significantly increased credit risk when it is past due for more than 30 days.

The Group also applies secondary qualitative methods for triggering a significant increase in credit risk, such as restructuring of an asset while the asset is less than 30 days past due. In certain cases, the Group may also consider that events explained in Note 3.4.6.1(a) are significant increase in credit risk as opposed to a default, particularly for customers who are considered as individually significant and investment in other financial assets.

The exposures which are not individually significant have been moved to stage 2 based on the industry risk of the underlying borrowers. The Group has identified industries such as tourism, vehicle imports, construction (including condominiums) and certain segments of traders and manufacturing as industries carrying an increased credit risk. Accordingly, exposures outstanding from the borrowers operating in these industries have been classified as stage 2. An analysis of the loans classified under stage 2 is given in Note 51.2.1.5.

3.4.6.2. The calculation of ECL

The Group calculates ECL based on three probability-weighted scenarios to measure the expected cash shortfall (the base case, best case and the worst case), discounted at an approximation to the EIR. Each of these is associated with different loss rates. The assessment of multiple scenarios incorporates how defaulted loans are expected to be recovered, including the probability that the loans will cure and the value of collateral or the amount that might be received from selling the asset.

Key elements of the ECL calculations are outlined below:

• PD - The Probability of Default is an estimate of the likelihood of default over a given time horizon. A default may only happen at a certain time over the assessed period, if the facility has not been previously derecognised and is still in the portfolio. The concept of PD is further explained in Note 3.4.6.4(a).
• EAD - The Exposure at Default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected drawdowns on committed facilities, and accrued interest from missed payments. The EAD is further explained in Note 3.4.6.4(b).
• LGD - The Loss Given Default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including the realisation of any collateral. It is usually expressed as a percentage of the EAD. The LGD is further explained in Note 3.4.6.4(c).

With the exception of credit cards and other revolving facilities, for which the treatment is separately set out in Note 3.4.6.6, the maximum period for which the credit losses are determined is the contractual life of a financial instrument unless the Group has the legal right to call it earlier.

3.4.6.3. Calculation of ECLs for individually significant loans

The Group first assesses ECLs individually for financial assets that are individually significant to the Group. In the event the Group determines that such assets are not impaired, moves in to a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. However, assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. The criteria used to determine whether individually significant customer is in default is discussed in Note 3.4.6.1(a).

If the asset is impaired, the amount of the loss is measured by discounting the expected future cash flows of a financial asset at its original effective interest rate and comparing the resultant present value with the financial asset's current carrying amount. In determining the expected future cash flows, the Group takes in to account the base case, the best case and the worst case scenarios considering various modes of settlement of the impaired credit facilities. Impairment on individually significant accounts are reviewed more regularly when circumstances require. This normally encompasses re-assessment of the enforceability of any collateral held and the timing and amount of actual and anticipated receipts. Individually assessed impairment is only released when there is reasonable and objective evidence of a reduction in the established loss estimate. Interest on impaired assets continues to be recognised through the unwinding of the discount.

When ECLs are determined for individually significant financial assets, following factors are considered:

• Aggregate exposure to the customer including any undrawn exposures
• The viability of the customer's business model and their capacity to trade successfully out of financial difficulties and generate sufficient cash flows to service debt obligations
• The amount and timing of expected receipts and recoveries
• The extent of other creditors' commitments ranking ahead of, or paripassu with the Bank and the likelihood of other creditors continuing to support the company
• The complexity of determining the aggregate amount and ranking of all creditor claims and the extent to which legal and insurance uncertainties are evident
• The realisable value of security (or other credit mitigants) and likelihood of successful repossession
• The likely deduction of any costs involved in recovery of amounts outstanding
• The ability of the borrower to obtain and make payments in the currency of the loan if not denominated in local currency
• The likely dividend available on liquidation or bankruptcy

3.4.6.4. Grouping financial assets measured on a collective basis

The Group calculates ECLs either on a collective or an individual basis. Asset classes where the Group calculates ECL on an individual basis include:

• All customers whose exposure is more than or equal to the internal threshold for classifying them as individually significant. However, if the customer is determined to be not impaired such customers are moved back to collective ECL calculation.
• The treasury, trading and interbank relationships (such as due from banks, debt and other instruments at amortised cost/FVOCI)

For all other asset classes, the Group calculates ECL on a collective basis. The Group categorises these exposures into smaller homogeneous portfolios, based on a combination of internal and external characteristics of the loans, as described below:

• Product type
• Type of collateral
• Industry of the borrower
• Whether the loan is restructured/rescheduled

3.4.6.4(a). The internal rating and PD estimation process

The Bank and its' subsidiary, Siyapatha Finance PLC have their own internal rating models. These models incorporate both qualitative and quantitative information and, in addition to information specific to the borrower, utilise supplemental external information that could affect the borrower's behaviour. Although these PDs are used for regulatory purposes, the same is not used for PD estimation under SLFRS 9. PD estimation for loans and advances under SLFRS 9 is largely based on the Days Past Due (DPD) of the customers which is common for most banks in the country.

Accordingly, exposures are categorised among 5 groups based on the DPD as follows:

• Zero days past due
• 1 - 30 days past due
• 31 - 60 days past due
• 61 - 90 days past due
• Above 90 days past due

The movement of the customers into adverse DPD categories are tracked at each account level over the periods and it is used to estimate the amount of loans that will eventually be written off. If a ability to increase its exposure while approaching default and potential early repayments too.

However, for loans granted to banks, debt & other financial instruments classified as amortised cost/FVOCI, the Group relies on external credit ratings in determining their respective PDs.

3.4.6.4(b). Exposure at default

The exposure at default (EAD) represents the gross carrying amount of the financial instruments subject to the impairment calculation, addressing both the client's ability to increase its exposure while approaching default and potential early repayments too.

To calculate the EAD for a stage 1 loan, the Group assesses the possible default events within 12 months. However, if a stage 1 loan that is expected to default within the 12 months from the balance sheet date is also expected to cure and subsequently default again, then all linked default events are considered. For stage 2 and stage 3 financial assets and credit impaired financial assets at origination, events over the lifetime of the instruments are considered. The Group determines EADs by modelling the range of possible exposure outcomes at various points in time, corresponding the multiple scenarios. The SLFRS 9 PDs are then assigned to each economic scenario based on the outcome of Group's models.

3.4.6.4(c). Loss given default

LGD values are assessed at least annually for each material collateral type. The Group segregates its customer loan book based on following major types of collaterals when calculating the LGD:

• Secured against cash/deposits held within the bank
• Secured against immovable property
• Secured against motor vehicles and other movable properties
• Secured against gold
• Secured against listed shares
• Secured against lease receivables

These LGD rates consider the expected EAD in comparison to the amount expected to be recovered or realised from any collateral held. Historically collected loss data is used for LGD calculation and involves a wider set of transaction characteristics (e.g. product type, collateral type) as well as borrower characteristics. Further, recent data and forward-looking economic scenarios are used in order to determine the LGD for each collateral type. The LGD rates, where possible, are calibrated through back testing against recent recoveries.

For financial investments other than loans and advances, the Group uses the LGD rates specified by the regulator in the Basel III guidelines when calculating the ECL as per SLFRS 9.

3.4.6.5. Debt instruments measured at FVOCI

The ECLs for debt instruments measured at FVOCI do not reduce the carrying amount of these financial assets in the statement of financial position, which remains at fair value. Instead, an amount equal to the impairment that would arise if the assets were measured at amortised cost is recognised in OCI as an accumulated impairment amount, with a corresponding charge to profit or loss. The accumulated loss recognised in OCI is recycled to the profit and loss upon derecognition of the assets.

3.4.6.6. Credit cards and other revolving facilities

The Bank's product offering includes credit card facilities and other revolving products, in which the Bank has the right to cancel and/or reduce the facilities with a very short notice. The Bank does not limit its exposure to credit losses to the contractual notice period, but, instead calculates ECL over a period of 12 months to reflect the Bank's expectations of the customer behaviour, its likelihood of default and the Bank's future risk mitigation procedures, which could include reducing or cancelling the facilities.

3.4.6.7. Forward looking information

In its ECL models, the Group relies on a broad range of forward-looking information as economic inputs. The inputs and models used for calculating ECLs may not always capture all characteristics of the market as at the date of the financial statements. To reflect this, qualitative adjustments or overlays are occasionally made as temporary adjustments when such differences are significantly material.

In 2024, the Group changed the values of the key macro-economic variables in the impairment calculation model including the GDP growth rate, unemployment rate, interest rate, exchange rate etc. These values have been determined based on the most recent forecasts available as at the date of the calculation.

To reflect the current economic conditions in the calculation of expected credit losses, the Group also revisited the weightages assigned for multiple economic scenarios as of 31st December 2024. Weightages assigned for each scenario is given below along with the weightages used in 2023.

To ensure completeness and accuracy, the Group obtains the above data primarily from the Central Bank of Sri Lanka (CBSL). Other third party sources such as World Bank and International Monetary Fund etc. is also used when CBSL data is not available.

Although the Group relaxed some of the forward-looking assumptions in response to the positive macro-economic outlook, it continued to maintain adequate impairment buffers to mitigate potential future credit risks.

3.4.6.8. Collateral valuation

To mitigate its credit risks on financial assets, the Group seeks to use collateral, where possible.

Collateral comes in various forms, such as cash, securities, letter of credit/guarantees, real estate, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements. The fair value of collateral affects the calculation of ECLs. It is generally assessed, at a minimum, at inception and to fall in line with the CBSL directives.

To the extent possible, the Group uses active market data for valuing financial assets held as collateral. Other financial assets which do not have readily determinable market values are valued using models. Non-financial collateral, such as real estate, is valued based on data provided by third parties such as independent valuation specialists.

3.4.6.9. Collateral repossessed

The Group's policy is to determine whether a repossessed asset can be best used for its internal operations or should be sold. Assets determined to be useful for the internal operations are transferred to the relevant asset category at the lower of the repossessed value or the carrying value of the original secured asset. The Bank did not transfer any repossessed assets to its property, plant and equipment during the years ended 31st December 2024 and 2023.

3.4.6.10. Write-offs

Financial assets are written off either partially or in their entirety only when the Group has stopped pursuing the recovery. For individual customers, the Group has a policy of writing off the gross carrying amount when the financial asset is past due for 5 years, based on historical experience on recovery of similar assets. For corporate customers, the Group individually makes an assessment with respect to the timing and amount of write-off based on whether there is a reasonable expectation of recovery.

If the amount to be written off is greater than the accumulated impairment, the difference is first treated as an addition to the impairment that is then applied against the gross carrying amount. Any subsequent recoveries are credited to the statement of profit or loss.

Total value of loans written off during the year are given in Note 25.2. Although the Bank has written-down these loans, it retains the enforcement rights on the full capital until the legal proceedings are concluded.

3.4.6.11. Rescheduled and restructured loans

The Group sometimes makes concessions or modifications to the original terms of loans in response to the borrower's financial difficulties, rather than taking possession of the collateral. The Group considers a loan as rescheduled/restructured, when such concessions or modifications are provided as a result of the borrower's present or expected financial difficulties and the Group would not have agreed to them if the borrower had been financially healthy. Indicators of financial difficulties include defaults on covenants, or significant concerns raised by the Credit Risk Management Unit. Reschedulement/restructure may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, any impairment is measured using the original EIR as calculated before the modification of terms. It is the Group's policy to monitor rescheduled/restructured loans to ensure that future payments are likely to occur. When the Group restructures a loan, it is assigned a minimum classification of stage 2 as of the modification date. The Group also assesses whether the loan should be classified as stage 3, taking into account the number of previous restructurings. Rescheduled loans are classified as stage 3 from the modification date onward. Both restructured and rescheduled loans are upgraded to stage 1 by the Bank’s Risk Management Unit, contingent on satisfactory repayment following the restructuring or rescheduling. The Bank has established guidelines specifying the minimum conditions for upgrading restructured and rescheduled loans to stage 1. The responsibility for upgrading restructured and rescheduled loans lies with the Risk Management Unit.

If the upgraded rescheduled/restructured loans become past due (for more than 30 days) on a later date, loss allowance reverts to being measured at an amount equal to life time expected credit losses. Details of restructured/rescheduled loans are disclosed in Notes 51.2.1.7 and 51.2.1.8. If modifications are substantial, the loan is derecognised, as explained in Note 3.4.5.1.

3.4.7. Offsetting of Financial Instruments

Financial assets and financial liabilities are offset and the net amount presented in the Statement of Financial Position only when the Group has a legal right to set-off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under LKASs/SLFRSs or for gains and losses arising from a group of similar transactions such as in the Group's trading activity.

3.4.8 Hedge Accounting

The Group designates certain derivatives as either:

• Hedges of fair value of recognised assets, liabilities or firm commitments (fair value hedge);
• Hedges of highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction (cash flow hedge);
Or
• Hedges of net investments in foreign operations (net investment hedges)

Hedge accounting is used for derivatives designated in this way provided certain criteria are met. The Group documents, at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

The Group did not designate any derivative as a hedging instrument during the years ended 31st December 2024 and 2023.

3.4.9. Amortised Cost Measurement

The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment.

3.4.10. Fair Value Measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument (Level 01 valuation). A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

If there is no quoted price in an active market, then the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction.

The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price - i.e. the fair value of the consideration given or received. If the Group determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability (Level 01 valuation) nor based on a valuation technique that uses only data from observable markets (Level 02 valuation), then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but not later than when the valuation is wholly supported by observable market data or the transaction is closed out.

Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and the counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties; to the extent that the Group believes a third-party market participant would take them into account in pricing a transaction.

The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid.

A fair value measurement of a non-financial asset considers a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

3.5. Leases

At inception of a contract, the Group assesses whether the contract is, or contains a lease. A contract is, or contains a lease, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for a consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Group considers whether:

• The contract involves the use of an identified asset. This may be specified explicitly or implicitly and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified;
• The Group has right to obtain substantially all of the economic benefits from the use of the asset throughout the period of use; and
• The Group has right to direct the use of the asset. The Group has this right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used. In rare cases where the decision about how and for what purpose the asset is used is predetermined, the Group has the right to direct the use of the asset if either;
  • The Group has the right to operate the asset
  • The Group designed the asset in a way that predetermines how and for what purpose it will be used.

3.5.1 Group as the Lessee

The Group recognises a right of use asset and a lease liability at the lease commencement date. The right of use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made on or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying assets or to restore the underlying asset or the site on which it is located, less any lease incentives received.

The right of use asset is subsequently depreciated using straight line method from the commencement date to the earlier of the end of the useful life of the right of use asset or the end of the lease term. The estimated useful lives of right of use assets are determined on the same basis as those of property plant and equipment and are in the range of 1 to 20 years.

In addition, the right of use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Groups’ incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate.

The lease liability is subsequently measured at amortised cost using the effective interest method. It is re-measured when there is a change in future lease payments such as Group changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is re-measured in this way, a corresponding adjustment is made to the carrying amount of the right of use asset, or is recorded in profit or loss if the carrying amount of the right of use asset has been reduced to zero.

The Group presents right of use assets under Note 31 to the financial statements while the corresponding lease liability is presented in Note 40, ‘Other Liabilities’.

3.5.1.1. Short term leases and leases of low value assets

The Group has elected not to recognise right-of-use assets and lease liabilities for short term leases (that have a lease term of 12 months or less) and leases of low value assets. The Group recognises lease payments associated with these leases as an expense on a straight line basis over the lease term.

3.5.2. Group as the Lessor

When the Group acts as a lessor, it determines at least inception whether each lease is a finance lease or an operating lease. To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease. If not it is an operating lease. As part of this assessment, the Group considers certain indicators such as whether the lease is for the major part of the economic life of the assets.

When the Group is the lessor under a finance lease contract, the amounts due under the leases, after deduction of unearned interest income, are included in Note 25, ‘Loans and advances’. Interest income receivable is recognised in 'Net interest income' over the periods of the leases so as to give a constant rate of return on the net investment in the leases.

The Group recognises lease payments received under operating leases as income on a straight line basis over the lease term as part of other income.

3.6. Fiduciary Assets

The Group provides fiduciary services that result in the holding of assets on behalf of its customers. Assets held in fiduciary capacity are not reported in the Financial Statements, as they are not assets of the Group.

3.7. Provisions

A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.

The amount recognised is the best estimate of the consideration required to settle the present obligation at the reporting date, taking in to account the risks and uncertainties surrounding the obligation at that date. Where a provision is measured using cash flows estimated to settle the present obligation, its carrying amount is determined based on the present value of those cash flows.

A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured as the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract.

Before a provision is established, the Group recognises any impairment loss on the assets used in fulfilling the contract. The expense relating to any provision is presented in the Statement of Profit or Loss net of any reimbursement.

3.8. Operational Risk Events

Provisions for operational risk events are recognised for losses incurred by the Group which do not relate directly to the amounts of principal outstanding for loans and advances. The amount recognised as a provision is the best estimate of the expenditure required to settle the present obligation as at the reporting date, taking into account the risks and uncertainties that surround the events and circumstances that affect the provision.

3.9. Impairment of Non-Financial Assets

The carrying amounts of the Group’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists or when annual impairment testing for an asset is required, the Group estimates the asset's recoverable amount. An impairment loss is recognised if the carrying amount of an asset exceeds its estimated recoverable amount. The recoverable amount of an asset is the greater of its value in use and its fair value less cost of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

3.10. Taxes on Financial Services

3.10.1. Value Added Tax (VAT)

VAT on financial services is calculated in accordance with Value Added Tax (VAT) Act No. 14 of 2002 and subsequent amendments thereto. The base for the computation of value added tax on financial services is the accounting profit before VAT and income tax adjusted for the economic depreciation and emoluments payable to employees including cash benefits, non-cash benefits & provisions relating to terminal benefits.

3.10.2. Social Security Contribution Levy

Social Security Contribution Levy shall be paid by any person carrying on the business of supplying financial services, on the liable turnover specified in the Second Schedule of the Social Security Contribution Levy Act No. 25 of 2022 any amendments thereto, at the rate of 2.5%, with effect from 1st October 2022. SSCL is payable on 100% of the value addition attributable to financial services. Notes to the Financial Statements The value addition attributable to financial services shall be computed for the payment of SSCL by applying the attributable method referred to in Chapter IIIA of the Value Added Tax Act No. 14 of 2002.

3.11. Regulatory Provisions

3.11.1. Deposit Insurance Premium

All Licensed Commercial Banks are required to insure their deposit liabilities in the "Sri Lanka Deposit Insurance Scheme" in terms of the Banking (Special Provisions) Act Direction No. 1 of 2023, issued on 15th November 2023. The Bank's total capital ratio as at 31st December 2023 exceeded 14% and accordingly the Bank paid a premium of 0.10% of the eligible deposits as deposit insurance premium, during the year ended 31st December 2024. Deposit insurance premium expense of the Bank/Group is given in Note 15 to the Financial Statements.

3.11.2. Crop Insurance Levy

In terms of the Finance Act No. 12 of 2013, all institutions under the purview of Banking Act No. 30 of 1988, Finance Business Act No. 42 of 2011 and Regulation of Insurance Industry Act No. 43 of 2000 are required to pay 1% of the profit after tax as Crop Insurance Levy to the National Insurance Trust Fund effective from 1st April 2013.

4. NEW ACCOUNTING STANDARDS/AMENDMENTS TO EXISTING ACCOUNTING STANDARDS THAT BECAME EFFECTIVE DURING THE YEAR

Apart from the above, there were no new accounting standards/amendments to existing accounting standards that became effective during the year.

5. ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE AS AT 31ST DECEMBER 2024

SLFRS 17 - Insurance Contracts: SLFRS 17 is a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure. Once effective, SLFRS 17 will replace SLFRS 04 - Insurance Contracts that was issued in 2005. SLFRS 17 is effective for annual reporting periods beginning on or after 1st January 2026. The Group does not expect that the new standard will have a material impact on its Financial Statements.

Apart from the above, there were no new accounting standards issued by the Institute of Chartered Accountants of Sri Lanka but not yet effective as at 31st December 2024, having a material impact on the Group’s Financial Statements. The Group has applied all relevant accounting standards which have been issued up to 31st December 2024 in the preparation of the Financial Statements for the year ended 31st December 2024.

6. GROSS INCOME

7. NET INTEREST INCOME

7.1 Interest Income

7.2 Interest Expense

7.3 Net Interest Income from Sri Lanka Government Securities

8. NET FEE AND COMMISSION INCOME

9. NET (LOSS)/GAIN FROM TRADING

10. NET (LOSS)/GAIN ON DERECOGNITION OF FINANCIAL ASSETS

10.1 Capital Gain on Sale of Financial Assets

10.2 Impact on restructuring of Sri Lanka International Sovereign Bonds (SLISBs)

In December 2024, the Government of Sri Lanka successfully completed the restructuring of its Sri Lanka International Sovereign Bonds (SLISBs). Consequently, the Bank recognised the newly issued bonds and derecognised the SLISBs held as at the date of restructuring.

The Bank elected to participate in the Local Option of the SLISB restructuring proposal, which was specifically offered to local bondholders by the Government. As part of this option, 30% of the face value of the SLISBs originally held by the Bank was converted into rupee denominated Treasury Bonds. The remaining 70% of the face value was settled through a USD-denominated Step-Up Bond, with a capital haircut of 10%. Additionally, the accrued coupon (Past Due Interest) on the original SLISBs up to 31st March 2024 was settled through a USD-denominated bond (PDI Bond) at a haircut of 11%.

The derecognition resulted in a loss of Rs 8,365 Mn, which is disclosed in Note 10 to the Financial Statements. The reversal of the brought forward impairment provision amounting to Rs 15,787 Mn is included in Note 12.2 to the financial statements.

10. NET (LOSS)/GAIN ON DERECOGNITION OF FINANCIAL ASSETS

The breakdown of the new instruments received in settlement of SLISBs held as at the date of restructuring is as follows.

Additionally, a consent fee bond of Rs 563.7 Mn (USD 1.92 Mn) was received by the Bank which matured on 27th December 2024. This has been considered in determining the derecognition loss reported in Note 10.

10.2.1 Discount rate used in the determination of fair value

A discount rate of 10.25% was applied in determining the fair value of the PDI Bond, which was calculated by adding a risk premium to the US Treasury Rate prevailing as at the date of restructuring. For the Step-Up Bond, a discount rate of 8.5% was used. The Government of Sri Lanka has reserved the right to settle the Step-Up Bond in Sri Lankan Rupees if it is unable to settle in US Dollars. As a result, a lower discount rate was applied to the Step-Up Bond, reflecting the rupee settlement option and the corresponding reduction in credit risk. Rupee-denominated Treasury Bonds are issued at the Standard Lending Facility Rate (SLFR) + 0.5%, with interest to be reset every six months. As these are market-linked instruments, the Bank concluded that there is no material difference between the face value and the fair value of the bonds at the date of initial recognition.

10.2.2 Sensitivity of the fair value of the bonds to discount rate

A 1% increase/decrease in the discount rate of both the Step-Up Bond and the PDI Bond would decrease/increase the fair value by approximately Rs 1 Bn. Consequently, the loss reported in Note 10 to the Financial Statements would have increased/decreased by Rs 1 Bn.

10.2.3 Classification of the new bonds

The new bonds have been classified under amortised cost. As of 31st December 2024, the Bank has continued to recognise the new USD denominated bonds under Stage 2. Although the Bank recognised an impairment provision of Rs 271 Mn on the PDI Bond, no impairment provision has been recognised on the Step-Up Bond since the government has the option of settling the Step-Up Bond in LKR, if it is unable to settle the bonds in USD. The LKR Treasury Bonds received in settlement of restructured SLISBs have been considered under Stage 1 similar to other government securities denominated in LKR with no impairment provisions recognised on such bonds. Both USD and LKR Bonds have been classified under Level 2 of the fair value hierarchy in Note 50.7 to the Financial Statements.

11. NET OTHER OPERATING INCOME

11.1. Exchange income represents both revaluation gain/(loss) on the Bank's net open position and realised exchange gain/(loss) on foreign exchange contracts including the Bank's currency notes operation. Loss on forward exchange contracts amounting to Rs 1,782 Mn (2023: gain of Rs 494 Mn) is reported under Note 9, 'Net (loss)/gain from trading' as required by the Sri Lanka Accounting Standard SLFRS 9 (Financial Instruments). Accordingly total exchange loss of the Bank & the Group for the year ended 31st December 2024 amounted to Rs 4,220 Mn (2023: loss of Rs 1,887 Mn). The exchange loss for the financial year 2024 was incurred primarily on the Bank's FCBU exposure, due to appreciation of LKR during the year.

12. IMPAIRMENT (REVERSAL)/CHARGE

12.1 Financial Assets at Amortised Cost - Loans & Advances

12.1.1 Loans and advances - Impact on impairment charge due to changes in accounting estimates, judgements and assumptions

12. IMPAIRMENT (REVERSAL)/CHARGE

12.2 Sri Lanka International Sovereign Bonds

12.2.1 Net impact on restructuring of Sri Lanka International Sovereign Bonds

In December 2024, the Government of Sri Lanka successfully completed the restructuring of its SLISBs. Consequently, the Bank recognised a Day 1 loss of Rs 8,365 Mn under Note 10, Net (loss)/gain on derecognition of financial assets, reversing the brought forward impairment provisions of Rs 15,787 Mn.

12.3 Other Financial Assets and Credit Related Commitments

13. PERSONNEL EXPENSES

Non-statutory special payments made to the former Managing Director is given in Note 47.3.1.

14. DEPRECIATION AND AMORTISATION EXPENSES

14. DEPRECIATION AND AMORTISATION EXPENSES

15. OTHER OPERATING EXPENSES

15.1 Auditors' Remuneration

Auditor's Remuneration disclosed in Note 15.1 are inclusive of applicable taxes.

15.2 Other overhead expenses include credit card related expenses and other miscellaneous expenses incurred on day to day operations of the Bank/Group.

16. INCOME TAX EXPENSE

16.1 Reconciliation of the Accounting Profit to Current Tax Expense

16.2 Applicable Income Tax Rates

The Group was liable for income tax on local dividend received for the year of assessment 2024/2025 at 15% (2023/2024:15%).

17. EARNINGS PER SHARE

17.1 Earnings per Share: Basic/Diluted

17.1.1 Weighted Average Number of Ordinary Shares for Basic/Diluted EPS

Bank & Group

18. DIVIDEND PAID AND PROPOSED

18. DIVIDEND PAID AND PROPOSED

18.1 The Board of Directors has recommended a final cash dividend of Rs 9.35 per share for the financial year ended 31st December 2024 subject to the approval of the shareholders at the Annual General Meeting to be held on 28th March 2025.

18.2 In accordance with Sri Lanka Accounting Standard - LKAS 10 (Events after the Reporting Period), above proposed final dividend has not been recognised as a liability as at the year end. Necessary disclosures have been made under Note 49 to the Financial Statements, "Events after the reporting period" as required by the said standard.

18.3 As per the Inland Revenue (Amendment) Act No. 04 of 2023, the proposed final dividend for the year ended 31st December 2024 is subject to a Withholding Tax (WHT) of 15% (2023: 15%). Accordingly, total Withholding Tax liability on dividend proposed for the year ended 31st December 2024 amounted to Rs 1,630.5 Mn.

19. ANALYSIS OF FINANCIAL INSTRUMENTS BY MEASUREMENT BASIS

19.1 Analysis of Financial Instruments by Measurement Basis - Bank

19.2 Analysis of Financial Instruments by Measurement Basis - Bank

19. ANALYSIS OF FINANCIAL INSTRUMENTS BY MEASUREMENT BASIS

19.3 Analysis of Financial Instruments by Measurement Basis - Group

19.4 Analysis of Financial Instruments by Measurement Basis - Group

20. CASH AND CASH EQUIVALENTS

20.1 Analysis of Cash and Cash Equivalents based on Exposure to Credit Risk

Bank

Group

20.2 Impairment for Expected Credit Losses - Cash and Cash Equivalents

21. BALANCES WITH CENTRAL BANK OF SRI LANKA

Bank & Group

22. PLACEMENTS WITH BANKS

Bank & Group

22. PLACEMENTS WITH BANKS

22.1 Analysis of Placements with Banks based on Exposure to Credit Risk

Bank & Group

22.2 Impairment for Expected Credit Losses - Placements with Banks

Bank & Group

23. DERIVATIVE FINANCIAL INSTRUMENTS

The table below shows the fair values of derivative financial instruments of the Bank/Group, recorded as assets or liabilities, together with their notional amounts. The notional amounts indicate the volume of transactions outstanding at the year end and are indicative of neither the market risk nor the credit risk.

Bank & Group

24. FINANCIAL ASSETS RECOGNISED THROUGH PROFIT OR LOSS - MEASURED AT FAIR VALUE

24.1 Treasury Bills

Bank & Group

24.2 Treasury Bonds

Bank & Group

24. FINANCIAL ASSETS RECOGNISED THROUGH PROFIT OR LOSS - MEASURED AT FAIR VALUE

24.3 Quoted Equity Securities

Group

24.4 Analysis of Financial Assets Recognised through Profit or Loss - Measured at Fair Value

25. LOANS AND ADVANCES

25.1 Analysis of Loans & Advances

25.1.1 By Product

25. LOANS AND ADVANCES

25.1.2 By Currency

25.1.3 By Product and Currency

25.1.4 By Industry

25.1.4.1 As per the requirement of Central Bank of Sri Lanka (CBSL), a minimum of 10% of the loans and advances shall be granted to the agriculture sector. The Bank has complied with the said requirement as at 31st December 2024 and 31st December 2023. The computation method used to derive the industry-wise exposure in Note 25.1.4 above is different from the method used for CBSL minimum lending requirement calculation to agriculture sector.

25.2 Impairment for Expected Credit Losses - Loans and Advances

25. LOANS AND ADVANCES

25.3 Leasing

25.3.1 Lease Receivable within One Year

25.3.2 Lease Receivable after One Year

Additional information on loans and advances are given in Note 51 to the Financial Statements (Risk Management), including the movement of the gross carrying amount of amortised cost and expected credit losses (ECL), sensitivity of ECL to key variables used in the ECL calculation etc.

26. DEBT AND OTHER INSTRUMENTS

26.1 Sri Lanka International Sovereign Bonds

In December 2024, the Government of Sri Lanka successfully completed the restructuring of its International Sovereign Bonds (SLISBs). As a result, the Bank reversed an impairment provision of Rs 15.8 Bn, which is disclosed in Note 12.2 to the financial statements. Of the total reversal of Rs 15.8 Bn, Rs 14.9 Bn pertains to the SLISBs previously classified under amortised cost, as disclosed in Note 26.4 of the financial statements. The remaining reversal of Rs 0.9 Bn relates to the SLISBs previously classified under fair value through other comprehensive income. Further information on the restructuring of SLISBs, including the Day 1 loss on the initial recognition of the new bonds issued in settlement of the original SLISBs, presented in Note 10.2 to the financial statements.

26. DEBT AND OTHER INSTRUMENTS

26.2 Debentures

Bank & Group

26.3 Lease Backed Trust Certificates

Bank & Group

26.4 Impairment for Expected Credit Losses - Debt and Other Instruments at Amortised Cost Bank & Group

26.5 Analysis of Debt and Other Instruments based on Exposure to Credit Risk

Bank

26. DEBT AND OTHER INSTRUMENTS

26.5 Analysis of Debt and Other Instruments based on Exposure to Credit Risk

26.6 Analysis of Debt and Other Instruments

27. FINANCIAL ASSETS - FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME

27.1 Sri Lanka Treasury Bills

Bank & Group

27.2 Sri Lanka Treasury Bonds

Bank & Group

27.3 Sri Lanka International Sovereign Bonds

Bank & Group

27.3.1 In December 2024, the Government of Sri Lanka successfully completed the restructuring of its SLISBs. As a result, the Bank reversed an impairment provision of Rs 15.8 Bn, which is disclosed in Note 12.2 to the financial statements. Of the total reversal of Rs 15.8 Bn, Rs 0.9 Bn pertains to the SLISBs previously classified under fair value through other comprehensive income. The remaining reversal of Rs 14.9 Bn relates to the SLISBs previously classified under amortised cost which is disclosed under Note 26.4 to the financial statements. Further information on the restructuring of SLISBs, including the Day 1 loss on the initial recognition of the new bonds issued in settlement of the original SLISBs, presented in Note 10.2 to the financial statements.

27.4 US Treasuries - Treasury Bills

Bank & Group

27.5 Quoted Equity Security

Quoted equity security represents the investment in ordinary shares of LankaBangla Finance PLC in Bangladesh.

Bank & Group

Sensitivity of the FVOCI reserve to changes in the share price of LankaBangla Finance PLC is disclosed in Note 51.4.4.

27.6 Unquoted Equity Securities

27. FINANCIAL ASSETS - FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME

27.7 Analysis of Financial Assets - Fair Value through Other Comprehensive Income

28. INVESTMENT IN SUBSIDIARIES

Bank

Subsidiaries are not quoted in the Colombo Stock Exchange except Siyapatha Finance PLC.

The Directors' valuation of investments in subsidiaries has been carried out on net asset basis as at 31st December 2024. Net asset values of all subsidiary companies have exceeded the cost of investment as at 31st December 2024 and accordingly no provisions have been recognised in the Financial Statements against investment in subsidiaries.

29. PROPERTY, PLANT AND EQUIPMENT

29.1 Bank

29.1 (a) The carrying amount of Bank's revalued freehold land and buildings, if they were carried at cost less accumulated depreciation, would be as follows:

29. PROPERTY, PLANT AND EQUIPMENT

29.2 Group

29.2 (a) The carrying amount of Group's revalued freehold land and buildings, if they were carried at cost less accumulated depreciation, would be as follows:

29.3 Details of Bank's & Group's Land and Buildings Stated at Valuation

The revaluation amounts given in Note 29.3 are derived from valuations conducted as of 31st December 2022. The Group has determined that there is no significant change in the fair values of land and buildings as of the reporting date, from the values reported as at the last revaluation date. The income basis has been employed in determining the revaluation amount, with the exception of properties at No. 1/87, Victoria Range, Digana, Kandy, and No. 103, Dharmapala Mw, Hunupitiya, Colombo 7, which have been valued using the market comparable method.

29. PROPERTY, PLANT AND EQUIPMENT

29.4 Freehold Land and Buildings

29.5 (a) Improvements to Leasehold Properties

Bank & Group

29.5 (b) Fully Depreciated Property, Plant and Equipment

A class-wise analysis of the initial cost of fully depreciated property, plant and equipment which are still in use as at reporting date is as follows.

29.5 (c) Temporarily Idle Property, Plant and Equipment - Bank & Group

The Bank holds Horana land worth of Rs 62.25 Mn with the intention of constructing a branch. The Bank does not intend to construct a branch in the bare land located in Deniyaya as it was severely affected by an earth slip. Any future construction on this land would be subjected to NBRO (National Building Research Organisation) certification.

29.5 (d) Property, Plant and Equipment Retired from Active Use - Bank & Group

Property, plant and equipment retired from active use as at 31st December 2024: Rs 99.82 Mn (2023: NIL).

29.5 (e) Title Restriction on Property, Plant and Equipment - Bank & Group

There were no restriction on the title of property, plant and equipment as at 31st December 2024 (2023: NIL).

29.5 (f) Property, Plant and Equipment Pledged as Security against Liabilities - Bank & Group

There were no items of property, plant and equipment pledged as securities against liabilities outside the Group (2023: NIL).

29.5 (g) Compensation from Third Parties for Items of Property, Plant and Equipment - Bank & Group

There were no compensation received during the year from third parties for items of property, plant and equipment that were impaired, lost or given up (2023: NIL).

30. INTANGIBLE ASSETS

31. RIGHT-OF-USE ASSETS

Set out below are the carrying amounts of right-of-use assets recognised and the movements during the year.

31.1 Lease Liability

Set out below are the carrying amounts of lease liabilities (included under "Other Liabilities" in Note 40) and the movements during the year.

31.2 Future Minimum Lease Payments under Non-cancellable Leases

31.3 Sensitivity of Right-of-Use Assets/Lease Liability to Key Assumptions

31.3.1 Sensitivity to Discount Rates

1% increase/(decrease) in discount rate as at 31st December 2024 would have (decreased)/increased the lease liability by approximately Rs 148 Mn with a similar (decrease)/increase in the right-of-use asset. Had the Bank increased/(decreased) the discount rate by 1%, the Bank's profit before tax for the year would have (decreased)/increased by approximately Rs 23 Mn.

31.3.2 Sensitivity to Lease Term

Had the lease term of all existing lease agreements been increased by further one year, lease liability of the Bank as at 31st December 2024 would have increased by Rs 3 Bn, with a similar increase in the right-of-use assets. Further, this would reduce the profit before tax of the Bank by Rs 292 Mn.

The above sensitivities are given only for the Bank since the subsidiary leases do not have a material impact on the financial statements of the Group.

32. DEFERRED TAX (ASSETS)/LIABILITIES

Net deferred tax (assets)/liabilities of one entity cannot be set-off against another entity's liabilities/(assets) since there is no legally enforceable right to set-off. Therefore, net deferred tax assets and liabilities of different entities are separately recognised in the Statement of Financial Position.

The management exercises judgment in determining the carrying value of the deferred tax asset at each reporting date. The carrying amount of the deferred tax assets is adjusted to reflect changes in tax laws and management judgement, if any, during the subsequent reporting periods, resulting in corresponding increase or decrease in profit or loss /other comprehensive income.

32. DEFERRED TAX (ASSETS)/LIABILITIES

32.1 Movement in Deferred Tax (Assets)/Liabilities

Bank

Group

33. OTHER ASSETS

33.1 Items in transit include amounts receivable under the Common Electronic Fund Transfer (CEFT) system, e-remittance, cheque clearing transactions etc.

33.2 The Movement in the Pre-Paid Staff Cost

The Group’s accounting policy on pre-paid staff cost is explained in Note 3.4.2.1.

34. DUE TO BANKS

34.1 Deposits

Bank & Group

34. DUE TO BANKS

34.2 Borrowings

The Bank/Group has not defaulted on principal or interest with regard to any liability during 2023 and 2024.

35. DUE TO DEPOSITORS

35.1 Analysis of Due to Depositors

35.1.1 By Product

35.1.2 By Currency

35.1.3 Current Accounts and Savings Accounts (CASA)

36. DUE TO OTHER BORROWERS

Bank & Group

The Bank/Group has not defaulted on principal or interest with regard to any liability during 2023 and 2024.

37. DUE TO DEBT SECURITIES HOLDERS

37.1 Redeemable Debentures

37. DUE TO DEBT SECURITIES HOLDERS

37.1.1 Details of Debentures Issued

Since 2017, the Bank has only issued Basel III, Tier II compliant, listed, rated, unsecured, subordinated, redeemable debentures with a non-viability conversion at a par value of Rs 100/- each. The Bank redeemed the debentures issued in 2019 on 28th February 2024.

The outstanding debentures of Siyapatha Finance PLC are rated, unsecured, redeemable debentures of a par value of Rs 100/- each. The debentures issued in 2024 are senior debentures whilst all others are subordinated debentures. Siyapatha Finance PLC has redeemed the debentures issued in 2019 on 7th August 2024.

*One year gross T-bill rate + 1.5%, subject to a floor of 20% & a cap of 31%

37.1.2 Proposed Debenture Issue

The Board of Directors of the Bank at its meeting held on 7th August 2024 decided to issue up to 50,000,000 Basel III compliant - Tier 2, Listed, Rated Unsecured, Subordinated, Redeemable, 5 year debentures with a Non-Viability Conversion, of the par value of Rs 100/- each, to raise a sum of up to Rs 5 Bn with an option to issue up to a further 20,000,000 of said debentures to increase the said sum by up to a further Rs 2 Bn at the discretion of the Bank in the event of an oversubscription of the initial issue and with a further option to issue up to a further 30,000,000 of said debentures to increase the said sum by up to a further Rs 3 Bn at the discretion of the Bank in the event of an oversubscription of the initial issue and the second tranche. The proposed debenture has been approved by the shareholders and the Central Bank of Sri Lanka.

38. RETIREMENT BENEFIT OBLIGATION

38.1 Provision for Gratuity

38.1.1 Movement of Defined Benefit Obligation During the Year

38.1.2 Amounts Recognised in Profit or Loss

38.1.3 Amounts Recognised in OCI

*The significant assumptions used for the actuarial valuation are given in Note 38.1.4.

An actuarial valuation of the gratuity fund of the Bank was carried out as at 31st December 2024 by Mr Piyal S Goonetilleke (Fellow of Society of Actuaries - USA) of Messrs Piyal S Goonetilleke & Associates, a firm of professional actuaries. The valuation method used by the actuary to value the Fund is the Projected Unit Credit Method, as recommended by Sri Lanka Accounting Standard - LKAS 19 (Employee Benefits).

38.1.4 Actuarial Assumptions - Bank

The expected average future working life of the active participants is 10.1 years (2023: 9.8 years).

* The discount rate used for the actuarial valuation changed during the year due to changes in market interest rates. The future salary increment rate was also revised to align with the decrease in market interest rates.

** The Bank adjusted the staff turnover rates used in 2024, a key demographic assumption, based on the actual turnover rates during the period.

38.1.5 Sensitivity of Assumptions Employed in Gratuity Valuation - Bank

Reasonably possible changes to one of the significant actuarial assumptions at the reporting date, while holding other assumptions constant, would have affected the gratuity liability/Statement of Comprehensive Income by the amounts shown below.

All Subsidiaries of the Group conduct actuarial valuations to determine their respective gratuity liabilities. However, assumptions and the sensitivity of the assumptions have been provided only for the Bank's gratuity fund as Subsidiary gratuity liabilities do not have a material impact on the Group Financial Statements.

38.2 Leave Accrual Plan

38.2.1 Liability Recognised in the Statement of Financial Position

Bank & Group

38. RETIREMENT BENEFIT OBLIGATION

38.3 EPF Interest Guarantee Plan

Employees' Provident Fund (EPF) is an approved private provident fund established to meet the provident fund liabilities of the Bank, to which the Bank and employees contribute 12% and 8%, respectively, on the salary of each employee. Employees who are members of the fund are entitled to receive interest at a guaranteed rate, which is the National Savings Bank's one-year fixed deposit rate (net of income tax), on their balance, even if the fund earns a lower return from its investments in a given financial year. As per Section 8 of the EPF Constitution, the Bank shall contribute any shortfall in the revenue account of the fund, after payment of interest at the stated rate and other costs of administering the fund. Therefore, the Bank's obligation to the EPF is not limited to the 12% contribution mentioned above, and accordingly, the fund was treated as a defined benefit liability under Sri Lanka Accounting Standard - LKAS 19 (Employee Benefits). An actuarial valuation was carried out by Mr Piyal S Goonetilleke (Fellow of the Society of Actuaries - USA) of Messrs Piyal S Goonetilleke & Associates, a firm of professional actuaries, to assess the Bank's additional obligation arising from Section 8 of the EPF Constitution as of 31st December 2024.

38.3.1 Movement of the Liability Recognised in the Statement of Financial Position

Bank & Group

38.3.2 Amounts Recognised in Profit or Loss

Bank & Group

38.3.3 Amounts Recognised in OCI

Bank & Group

* The significant assumptions used for the actuarial valuation are given in Note 38.3.4.

38.3.4 Actuarial Assumptions - Bank

The expected average future working life of the active participants is 10.3 years (2023: 9.8 years)

* The discount rate used for the actuarial valuation changed during the year due to changes in market interest rates. The future salary increment rate was also revised to align with the decrease in market interest rates.

** The Bank adjusted the staff turnover rates used in 2024, a key demographic assumption, based on the actual turnover rates during the period.

38.3.5 Sensitivity of Assumptions Employed in EPF Interest Guarantee Plan Valuation

Reasonably possible changes to one of the significant actuarial assumptions at the reporting date, while holding other assumptions constant, would have affected the EPF interest guarantee liability/Statement of Comprehensive Income by the amounts shown below.

38.4 Pension Fund

38.4.1 Net Liability Recognised in the Statement of Financial Position

Bank & Group

38. RETIREMENT BENEFIT OBLIGATION

38.4.2 Amounts Recognised in Profit or Loss

Bank & Group

38.4.3 Amounts Recognised in OCI

Bank & Group

* The significant assumptions used for the actuarial valuation are given in Note 38.4.6.

38.4.4 Defined Benefit Obligation Reconciliation

Bank & Group

38.4.5 Fair Value of Plan Assets Reconciliation

Bank & Group

An actuarial valuation of the Pension Fund was carried out as at 31st December 2024 by Mr Piyal S Goonetilleke (Fellow of Society Actuaries - USA) of Messrs Piyal S Goonetilleke & Associates, a firm of professional actuaries. The valuation method used by the actuary to value the Fund is the Projected Unit Credit Method, as recommended by Sri Lanka Accounting Standard - LKAS 19 (Employee Benefits).

38.4.5(a) Fair Value of Plan Assets Consists of the Following

Bank & Group

38.4.6 Actuarial Assumptions

Bank & Group

The expected average future life of the active and retired participants is 27.5 years (2023: 28.4 years).

The weighted average duration of the defined benefit obligation is 10.7 years (2023: 10.5 years).

* The discount rate used for the actuarial valuation changed during the year due to changes in market interest rates. The future salary increment rate was also
   revised to align with the decrease in market interest rates.

** The Bank adjusted the staff turnover rates used in 2024, a key demographic assumption, based on the actual turnover rates during the period.

38.4.7 Sensitivity of Assumptions Employed in Pension Fund Valuation

Reasonably possible changes to one of the significant actuarial assumptions at the reporting date, while holding other assumptions constant, would have affected the net pension liability/Statement of Comprehensive Income by the amounts shown below.

39. CURRENT TAX LIABILITIES

40. OTHER LIABILITIES

40.1  Items in transit include amounts payable under the Common Electronic Fund Transfer (CEFT) system, Common ATM Switch (CAS), Sri Lanka Interbank
          Payments Systems (SLIPS) etc.

40.2  Other payables include amounts payable to credit/debit card merchants for point-of-sale transactions, amounts payable to vendors for finance lease
          transactions, unclaimed balances and other miscellaneous payable balances that have arisen in the ordinary course of business of the Bank/Group.

41. STATED CAPITAL

Bank & Group

Rights, preferences and restrictions of classes of capital

The holders of ordinary shares have the right to receive dividends as declared from time to time and are entitled to one vote per share at the Annual General Meeting of the Bank.

41.1 Reconciliation of Number of Shares

Bank & Group

42. STATUTORY RESERVES

42.1 Statutory Reserve Fund

The statutory reserve fund is maintained as required by the Section 20 (1) of the Banking Act No. 30 of 1988. A sum equivalent to not less than 5% of the profit after tax before any dividend is declared or any profits are transferred to elsewhere, should be transferred to above reserve until it equals to 50% of the Bank's stated capital. Thereafter, a further sum equivalent to 2% of such profits should be transferred to the statutory reserve fund until the amount of the said reserve fund equals the stated capital of the Bank.

Siyapatha Finance PLC also transfers 5% of its profit after tax to the statutory reserve fund, as required by the Finance Companies (Capital Funds) Direction No. 01 of 2003.

42.2 Special Reserve

The Central Bank of Sri Lanka (CBSL) instructed banks to establish a special temporary reserve equal to 15% of the amortised cost of the USD Step-Up Bonds received in settlement of the restructured SLISBs. This requirement is effective for a six-month period starting from 31st December 2024. As a result, in 2024, the Bank transferred Rs 1,660 Mn to this reserve, representing 15% of the Step-Up Bonds' amortised cost, which amounted to Rs 11,070 Mn.

Bank & Group

43. OTHER RESERVES

43. OTHER RESERVES

43.1 Revaluation Reserve

The revaluation reserve relates to the revaluation of freehold land and buildings and represents the fair value changes of the land and buildings as at the date of revaluation.

43.2 Fair Value through Other Comprehensive Income Reserve

The fair value through other comprehensive income reserve (FVOCI) comprises the cumulative net change in the fair value of financial assets measured at FVOCI until such investments are derecognised or impaired.

Bank & Group

43.2.1 The Bank earned a mark to market gain of Rs 1.9 Bn (2023: 13.7 Bn) primarily on remeasurement of treasury bills and treasury bonds.

43.3 General Reserve

The Board of Directors decides the amount to be transferred to the general reserve from retained earnings after retaining a substantial amount to pay the proposed dividend. The purpose of setting up the general reserve is to meet potential future unknown commitments.

Bank & Group

44. RETAINED EARNINGS

45. COMMITMENTS AND CONTINGENCIES

45. COMMITMENTS AND CONTINGENCIES

45.1 Analysis of Credit Related Commitments and Contingencies based on the Exposure to Credit Risk

Bank

Group

45.2 Impairment for Expected Credit Losses- Credit Related Commitments and Contingencies

45.3 Capital Commitments

Capital expenditure approved by the Board of Directors, for which provisions have not been made in the accounts are detailed below.

45.4 Operating Lease Commitments

Bank & Group

45. COMMITMENTS AND CONTINGENCIES

45.5 Other Contingent Liabilities

45.5.1 Litigation against the Bank

Litigation is a common occurrence in the Banking industry due to the nature of its business and in that light, the Bank has formal controls and policies in place for managing and defending any legal actions instituted against it. Pursuant to obtaining professional advice and estimating any loss likely to be incurred by the Bank if any, adjustments are made to the accounts of the Bank in order to accommodate any adverse effects that such claims may have on its financial standing.

(i). The following cases instituted against the Bank are currently being adjudicated before court.

(a) Case No. 7058/DMR

The Plaintiff instituted this action against the Bank, claiming a sum of Rs 20 Mn on the purported basis that the Bank has increased the rate of interest in respect of the housing loan obtained by the Plaintiff, thereby causing loss to the Plaintiff. While the case is currently being adjudicated before the District Court, we note that the letter of offer confirms that the Bank has the right to increase the rate of interest. Bank is confident that the documentation gives the Bank the right to increase rates.

(b) CHC Colombo Case No. 29/13/MR

The Plaintiff has filed this action against the Bank claiming damages in a sum of Rs 40 Mn on the alleged basis that the Bank illegally suspended his credit balance of Rs 299,209.43, resulting in two cheques issued by him being dishonoured. Over Rs 3 Mn is due to the Bank from the said customer on a charge back created through the payment gateway, which was utilised by the customer. The Bank is defending this action on the right of set off recognised by law relating to banking facilities. Judgment was delivered in favour of the Bank.

Customer has appealed against the judgment to Supreme Court and the case bearing No.SC/CHC/61/19 is fixed for argument on 27th May 2025.

(c) CHC Colombo Case No. 299/13/MR

The Plaintiff instituted the above action against the Bank claiming damages in a sum of Rs 250 Mn on the purported basis that the Bank has unlawfully suspended the operation of his current account and the payment gateway facility provided to him by the Bank. A sum in excess of Rs 3 Mn is due to the Bank from the Plaintiff on a charge back created through the payment gateway, utilised by the Plaintiff. The Bank is defending this action on the basis that it has right in law, to set-off dues against other facilities granted to the Plaintiff by the Bank. Judgment was delivered in favour of the Bank.

An appeal was preferred to Supreme Court by the Plaintiff and the case bearing No.SC/CHC/61/19 is fixed for argument on 27th May 2025.

(d) CHC Colombo Case No. CHC/167/2020/MR and Case No. CHC/168/2020/MR

The Plaintiffs have filed the above actions against the Bank claiming a sum of Rs 250 Mn and Rs 100 Mn respectively, from inter-alia the Bank on the purported basis has erroneously uplifted the deposits and transferred monies from Plaintiff’s personal and corporate accounts without his consent and knowledge.

The orders of the above cases were delivered in favour of the Bank by dissolving the enjoining orders and refusing to grant the interim reliefs sought.

(e) Case No. CHC/21/2021/MR

The Plaintiff instituted this action against the Bank claiming damages in a sum of Rs 897 Mn on the purported basis that the Bank has recovered part of the outstanding facilities without consent of the customer. However, the Bank has taken up the position that it has at all times acted on the written instructions of the customer and in strict conformity with the applicable law.

(f) Case No. CHC/187/2023/MR

Customer has filed the case against the Bank claiming that he is entitled to a concessionary rate of interest under ‘Jaya Isura’ scheme. However, the Bank has granted the facility in keeping with the documents signed between the parties.

(ii). In addition to the above cases, the following cases have also been filed against the Bank seeking orders from
      Court preventing the Bank from enforcing mortgages to recover dues:

(a) Eight actions have been filed in Supreme Court

(b) Twelve actions have been filed in Court of Appeal

(c) Eighty actions have been filed in Commercial High Court

(d) Two hundred and ten actions have been filed in District Courts

45.5.2 Litigation on Employment and Industrial Relations

There are no material legal issues outstanding against the Bank and the Group on employment and industrial relations as at 31st December 2024. The Bank has made adequate provisions for all known litigations on employment and industrial relations.

45.5.3 Litigation against the Group

Other than those disclosed above, there are no cases filed against the Group which would have a material impact on the financial position of the Group.

46. NET ASSET VALUE PER SHARE

47. RELATED PARTY DISCLOSURES

The Bank and the Group carry out transactions in the ordinary course of business with the parties who are defined as related parties in the Sri Lanka Accounting Standards - LKAS 24 (Related Party Disclosures), the details of which are reported below.

47.1 Terms and Conditions

The pricing applicable to such transactions is based on the assessment of risk and pricing model of the Bank and is comparable with what is applied to transactions between the Bank/Group and its unrelated customers with similar credit standing.

47.2 Parent and Ultimate Controlling Party

The Bank does not have an identifiable parent of its own.

47.3 Transactions with Key Management Personnel (KMP)

As per Sri Lanka Accounting Standard - LKAS 24 (Related Party Disclosures), Key Management Personnel (KMP) are those having authority and responsibility for planning, directing and controlling the activities of the entity. According to the above definition, a person cannot be considered as a KMP unless such person has both the authority and responsibility to carry out all the three activities mentioned in the above definition (i.e. planning, directing and controlling the activities of the entity).

Accordingly, the Board of Directors of the Bank are considered as KMP of the Bank and the Group.

47.3.1 Compensation to KMP

In 2024, the Bank paid Rs 10 Mn as an ex-gratia payment to former Managing Director Mr Nanda Fernando, who completed his term of office on 30th June 2023. In addition to the above, the Bank sold a motor vehicle to the former Managing Director, at a price of Rs 1.37 Mn, which is 50% of the Net Book Value of the vehicle as of 30th June 2023. Both these transactions were approved by the shareholders at the Annual General Meeting held on 28th March 2024.

47. RELATED PARTY DISCLOSURES

47.3.2 Transactions with KMP and their Close Family Members (CFM)

CFMs of the KMP are those family members who may be expected to influence the KMP or be influenced by that KMP in their dealings with the entity. They may include KMP's spouse, children, domestic partner, children of the KMP's spouse/domestic partner and dependents of the KMP, KMP's spouse/domestic partner. Aggregate value of the transactions with KMP and their CFMs are disclosed below.

No losses have been recorded against loan balances outstanding with KMP during the period and no specific provisions have been made under impairment losses against such balances as at the reporting date.

47.4 Transactions with Subsidiaries

Details of the subsidiaries are given in Note 28. Aggregate value of transactions with subsidiaries are disclosed below.

The net asset value of all subsidiary companies exceeded carrying value of the investments as at 31st December 2024. Accordingly, the Bank has not made any impairment provisions against its investment in subsidiary companies as at the reporting date.

47.5 Transactions with Other Related Parties

47.5.1 Transactions with Entities Controlled and/or Jointly Controlled by KMP or their CFMs

No losses have been recorded against loan balances outstanding with the entities controlled/jointly controlled by KMP/CFMs of KMP as at the reporting date.

47. RELATED PARTY DISCLOSURES

47.5.2 Transactions with Post Employment Benefit Plans of the Bank

48. SEGMENT INFORMATION

49. EVENTS AFTER THE REPORTING PERIOD

49.1 Proposed Dividend

The Directors of the Bank have recommended a final cash dividend of Rs 9.35 per share for the financial year ended 31st December 2024. This dividend is to be approved by the shareholders at the Annual General Meeting to be held on 28th March 2025.

In accordance with Sri Lanka Accounting Standard - LKAS 10 (Events after the Reporting Period), this proposed final dividend has not been recognised as a liability as at 31st December 2024. As required by Section 56 (2) of the Companies Act No. 7 of 2007, the Board of Directors has confirmed that the Bank has satisfied the 'solvency test' in accordance with Section 57 of the Companies Act No. 7 of 2007, having obtained a certificate from the External Auditors, prior to recommending the final dividend for the year.

49.2 Revision of National Long Term Rating by Fitch Ratings

Following the recent sovereign upgrade and recalibration of Sri Lanka national rating scale by Fitch Ratings Lanka Ltd, effective 21st January 2025, Sampath Bank’s National Long Term rating has been upgraded to 'AA-(lka)' from ‘A (lka)’. The National Long Term Rating of the outstanding Basel III compliant subordinated debentures issued by the Bank has been upgraded to ‘A (lka)’ from 'BBB+(lka)'. Further, the National Long Term Rating of the proposed Basel III compliant subordinated debentures to be issued by the Bank has been upgraded to ‘A(EXP) (lka)’ from 'BBB+(EXP)(lka)'.

50. FAIR VALUE OF ASSETS & LIABILITIES

50.1 Assets & Liabilities Recorded at Fair Value

The following is a description of how fair values are determined for assets and liabilities that are recorded at fair value. These incorporate the Bank’s estimate of assumptions that a market participant would make when valuing assets and liabilities.

Derivatives - Assets & Liabilities

Derivative products which consist of SWAPs, forward foreign exchange contracts and hedges are valued using a valuation technique with market-observable inputs. The most frequently applied valuation techniques include forward foreign exchange spot and forward premiums.

Financial Assets - Fair Value through Other Comprehensive Income (FVOCI)

FVOCI financial assets primarily consist of quoted/unquoted equity securities and government securities of both Sri Lanka and USA. Local government securities are valued using the yield curve published by the Central Bank of Sri Lanka. The Bank uses the prices quoted in Bloomberg to value the US Treasuries. Quoted equity securities are valued using quoted market prices in the active markets as at the reporting date. Unquoted equity investments of the Group include share investments that have been made primarily for regulatory purposes. Such investments have been recorded at cost, which is a close approximation to the respective fair values of such shares.

Trading Assets Measured at Fair Value

Trading assets and other assets measured at fair value are the government securities and quoted equity securities. Government securities are valued using the yield curve published by the Central Bank of Sri Lanka. For quoted equity securities, the Bank/Group uses quoted market prices in the active market as at the reporting date.

Property, Plant & Equipment

Freehold land and buildings are carried at revalued amount, being their fair value at the revaluation date less any subsequent accumulated depreciation and subsequent accumulated impairment losses.

50.2 Valuation Model

For all financial instruments where fair values are determined by referring to externally quoted prices or observable pricing inputs to models, independent price determination or validation is obtained. In an inactive market, direct observation of a traded price may not be possible. In these circumstances, the Bank uses alternative market information to validate the financial instrument’s fair value, with greater weight given to information that is considered to be more relevant and reliable.

Fair value of freehold land and buildings was determined by using Market Comparable Method or Income Basis. These valuations performed by the valuers are based on active market prices, significantly adjusted for difference in the nature, location or condition of the specific property. Management determined that freehold land and buildings constitute one class of asset under Sri Lanka Accounting Standard - SLFRS 13 (Fair Value Measurement), based on the nature, characteristics and risks of the property.

Fair values are determined according to the following hierarchy:

Level 1 – Quoted market price (unadjusted): quoted prices for identical assets and liabilities in active markets.

Level 2 – Valuation technique using observable inputs: quoted prices for similar assets and liabilities in active markets or quoted prices for identical or similar assets and liabilities in inactive markets and are valued using models where all significant inputs are observable.

Level 3 – Valuation technique with significant unobservable inputs: assets and liabilities valued using valuation techniques where one or more significant inputs are unobservable.

50.3 Valuation Framework

The Bank has an established control framework with respect to the measurement of fair values of trading and investment operations and all other significant assets and liabilities. Specific controls include:

• A review and approval process involving the Board Audit Committee for significant judgment and assumptions, new models, changes to existing judgments, assumptions and models.
• Periodic (at least quarterly) reviewing of fair value measurements against observable market data.
• Periodic (at least annually) reviewing of fair value measurement models against changes in market conditions, significant judgments and assumptions.
• Use of sophisticated software for fair value measurements of trading and investment securities and derivatives.
• Independent analysis and investigation of significant daily valuation movements in trading and investment securities and derivatives.
• A dual verification process for market data inputs to the fair value measurement software.

50.4 Transfers between the Levels of the Fair Value Hierarchy

Significant transfers can occur between the fair value hierarchy levels when additional or new information regarding valuation inputs and their observability becomes available. The Bank recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

The regulatory floor price imposed on the shares of LankaBangla Finance PLC was lifted in January 2024. Since then, the shares have been actively traded in the Dhaka Stock Exchange. Accordingly, the investment in LankaBangla Finance PLC was transferred from Level 2 to Level 1 during the year 2024.

Apart from the mentioned transfer, the Bank/Group did not move any asset/liability between levels of the fair value hierarchy during the reporting period.

50.5 Assets & Liabilities Measured at Fair Value - Fair Value Hierarchy

The following table shows an analysis of assets and liabilities recorded at fair value by level of the fair value hierarchy into which the fair value measurement is categorised. The amounts are based on the value recognised in the Statement of Financial Position.

50. FAIR VALUE OF ASSETS & LIABILITIES

50.5.1 Assets & Liabilities Measured at Fair Value - Fair Value Hierarchy

Bank

* The fair value of the most recent valuation less subsequent accumulated depreciation and impairment losses is considered as the fair value as at 31st December 2024.

50. FAIR VALUE OF ASSETS & LIABILITIES

50.5.2 Assets & Liabilities Measured at Fair Value - Fair Value Hierarchy

Group

* The fair value of the most recent valuation less subsequent accumulated depreciation and impairment losses is considered as the fair value as at 31st December 2024.

50. FAIR VALUE OF ASSETS & LIABILITIES

50.6 Level 3 Fair Value Measurement

50.6.1 Reconciliation

The following table shows a reconciliation of how the fair value measurements in Level 3 of the fair value hierarchy were arrived at, from the beginning to the ending balances.

50.6.2 Unobservable Inputs Used In Measuring Fair Value

The table below sets out information about significant unobservable inputs used in measuring the fair value of assets categorised under Level 3 of the fair value hierarchy.

* Significant increases/(decreases) in any of these inputs in isolation would result in a significantly higher/(lower) fair value.

** Significant increases/(decreases) in this input in isolation would result in a significantly (lower)/higher fair value.

50.7 Fair Value of Financial Assets and Liabilities Carried at Amortised Cost

The following describes the methodologies and assumptions used to determine fair values of those financial instruments which are not already recorded at fair value in the Financial Statements.

Assets of which Fair Value Approximates Carrying Value

For financial assets and liabilities that have a short term maturity, it is assumed that the carrying amounts approximate their fair values. This assumption is also applied to demand deposits and savings deposits which do not have a specific maturity.

Fixed Rate Financial Instruments

The fair value of fixed rate financial assets and liabilities carried at amortised cost are estimated by comparing market interest rates when they were first recognised with current market rates for similar financial instruments. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing market interest rates for debts with similar credit risk and maturity. For quoted debt issued, the fair values are determined based on quoted market prices. For variable rate instruments with a fixed credit spread, an adjustment is made to reflect the change in credit spread since the instrument was first recognised.

Variable Rate Financial Instruments

Variable rate is a fair measure which reflects market movements. Hence the carrying value represents the fair value of the variable rate instruments. Treasury bonds received in settlement of Sri Lanka Development Bonds under the Domestic Debt Optimisation Program in 2023 carry a variable interest rate of SLFR + 1% (Standard Lending Facility Rate). Similarly, treasury bonds received in settlement of the of Sri Lanka International Sovereign Bonds in 2024, carry a variable interest rate of SLFR + 0.5%. These bonds have been classified under Level 2 of the fair value hierarchy.

Set out below is a comparison of the carrying amounts and fair values of the Bank’s financial instruments by classes that are not carried at fair value in the Financial Statements. This table does not include the fair values of non-financial assets and non-financial liabilities.

50. FAIR VALUE OF ASSETS & LIABILITIES

50.7 Fair Value of Financial Assets and Liabilities Carried at Amortised Cost

50. FAIR VALUE OF ASSETS & LIABILITIES

50.7 Fair Value of Financial Assets and Liabilities Carried at Amortised Cost

51. RISK MANAGEMENT

51.1 Introduction

Risk is inherent in the Bank’s activities, but is managed through an ongoing process of identification, measurement and monitoring, subject to risk limits and other controls. The risk management process is critical to the Bank’s continuous profitability and each individual within the Bank is accountable for managing the risk exposures associated with their specific job functions. The Bank is mainly exposed to Credit Risk, Liquidity Risk, Market Risk and Operational Risk, which have been disclosed in this note, as summarised below.

Risk Management Framework

The Board of Directors has overall responsibility for the establishment and oversight of the Bank’s risk management framework. The Board has delegated its authority to Board Integrated Risk Management Committee (BIRMC) which is responsible for developing and monitoring Bank’s risk management policies. The Committee comprises of Executive and Non - Executive Directors. Meetings of BIRMC are held regularly, and the Board of Directors are duly updated of its activities.

The Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits & controls and to monitor adherence to established limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Bank maintains a disciplined and constructive control environment, in which all employees are assigned and made to understand their respective roles and responsibilities.

Integrated Risk Management Unit

The primary responsibility for risk management lies with the business units, including Credit Departments, Branches, Regional Offices, Treasury etc. The Integrated Risk Management Unit, which has no responsibility for profit or volume targets, acts as the 2nd line of defence and reports to the Chief Risk Officer (CRO) who in turn directly reports to the BIRMC.

Asset/Liability Management Committee (ALCO)

ALCO is chaired by the Managing Director and has representatives from Treasury Department, Credit Departments, Finance Department, Strategic Planning Department, Deposit Mobilisation Department and the Marketing Department. The Executive Director/ Chief Financial Officer, Chief Strategy Officer and the Chief Risk Officer are also members of the ALCO. The Committee meets regularly to monitor and manage the Bank's assets, liabilities, and the overall liquidity position, ensuring that liquidity remains at healthy levels while adhering to regulatory requirements.

Risk Measurement and Reporting

The Bank’s risks are assessed using suitable techniques tailored to each type of risk, in alignment with industry best practices. The Bank also carries out stress testing to identify the effect of extreme events/worst-case scenarios for major types of risks and the results are reported to the BIRMC on a periodic basis. Monitoring and controlling risks are primarily performed based on policies, limits and thresholds established by the Bank. These limits reflect the business strategy, market environment within which the Bank operates and also the level of risk that the Bank is willing to accept (Risk Appetite).

Risk Mitigation

As part of its overall risk management, the Bank obtains various types of collaterals to mitigate the risk. Details such as nature of the collateral that could be accepted, required security margin, etc. are clearly defined in the Risk Management Policy of the Bank and any deviations require specific approval. However, respective approving authorities would take into account the availability of security only as the secondary source of repayment.

51.2 Credit Risk

Credit risk is the risk of financial loss to the Bank, if a borrower or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Bank’s loans & advances and investments in debt securities. In addition to the credit risk from direct funding exposures, the Bank would also be exposed to indirect liabilities such as letters of credit, guarantees etc, which would carry credit risk.

The Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector concentration risks) to ensure stringent Credit Risk Management.

51. RISK MANAGEMENT

51.2.1 Assessment of Expected Credit Losses

51.2.1.1 Analysis of the total impairment for expected credit losses

Bank

Group

51.2.1.2 Movement of the total allowance for expected credit losses during the period

The methodology used in the determination of expected credit losses is explained in Note 3.4.6 to the financial statements.

51.2.1.3 Sensitivity of factors used to determine impairment provisions

Management judgement is involved in the determination of impairment allowance for loans and advances. Key variables such as PD, LGD, EFA, property foreclosure period for individually significant loans, deemed loss period are affected by management judgment and changes in any such variables can result in different levels of impairment allowance. The following tables demonstrate the sensitivity of the impairment allowance of the Bank to the changes in the above variables, as at 31st December 2024 and 31st December 2023.

* The PD/LGD decrease is limited to 0%, if applicable.

** Foreclosure period/deemed loss period is capped at one year, if applicable.

51. RISK MANAGEMENT

As at 31st December 2023

* The PD/LGD decrease is limited to 0%, if applicable.

** Foreclosure period/deemed loss period is capped at one year, if applicable.

51.2.1.4 Sensitivity Analysis: Impact of staging of loans and advances on collective impairment

If all loans and advances currently in stage 2, were moved to stage 1, the ECL provision of the Bank/Group as at 31st December 2024 would have reduced by approximately 2% (2023 - 4%). The total loans and advances in stage 2 as at 31st December 2024 amounts to Rs 152 Bn & Rs 170 Bn for the Bank & the Group respectively.

If all loans and advances currently in stage 1, were moved to stage 2, the ECL provision of the Bank/Group as at 31st December 2024 would have further increased by approximately 21% (2023 - 14%). The total loans and advances in stage 1 as at 31st December 2024 amounts to Rs 680 Bn & Rs 702 Bn for the Bank & the Group respectively. The management believes that a movement of the entire stage 1 loan portfolio to stage 2 is highly unlikely.

The increase/decrease in impairment has been calculated excluding the allowance for overlay recognised as at the reporting date.

1.2.1.5 Breakdown of loans classified under stage 2

Loans classified under the stage 2 includes contractually past due loans and loans which have been shifted to stage 2 based on the criteria specified in the Notes 3.4.6.1 (b) & 3.4.6.11.

Bank

Group

51. RISK MANAGEMENT

51.2.1.6 Breakdown of loans classified under stage 3

Loans classified under the stage 3 includes contractually past due loans and loans which have been shifted to stage 3 based on the criteria specified in the Notes 3.4.6.1 (a) & Note 3.4.6.11.

Bank

Group

51.2.1.7 Overview of rescheduled & restructured loans

An analysis of rescheduled & restructured loans and advances of the Bank/Group which are in stage 2 and stage 3 is given below along with the impairment for ECL. This does not include individually significant impaired loans and advances for which ECLs have been derived by discounting future recovery cash flows of such loans.

As at 31st December 2024

As at 31st December 2023

51.2.1.8 Overview of rescheduled/restructured loans & advances upgraded during the year

The Bank upgrades rescheduled/restructured loans from Stage 3/Stage 2 to Stage 1 as per the upgrading policy described in Note 3.4.6.11 of the Financial Statements. During the year the Bank upgraded Rs 4.6 Bn (2023: Rs 14.8 Bn) worth of rescheduled/restructured loans to Stage 1. Due to this upgrade, the impairment provision against these loans decreased by Rs 413 Mn from Rs 720 Mn as at 31st December 2023 to Rs 307 Mn as at 31st December 2024.

51.2.2 Risks on Credit-related Commitments

The Bank makes available to its customers, guarantees that may require the Bank to make payments on behalf of customers and enters into commitments to extend credit lines to secure their liquidity needs. Letters of credit and guarantees are commitments to make payments on behalf of customers in the event of a specific act. Such commitments expose the Bank to risks similar to loans and are mitigated by the same control processes and policies.

The maximum exposure to credit risk relating to a financial guarantee is the maximum amount the Bank should have to pay if the guarantee is called upon. The maximum exposure to credit risk relating to a loan commitment is the full amount of the commitment. In both cases, the maximum risk exposure is significantly greater than the amount recognised as a liability in the Statement of Financial Position. The Bank's maximum credit risk exposure to commitments and contingencies are disclosed in Note 51.2.3.1 to the Financial Statements.

51.2.3 Collateral and Other Credit Enhancements

51.2.3.1 Net exposure to credit risk

The required amount and type of collateral depends on an assessment of the credit risk of the counterparty. Guidelines are in place covering the acceptability and valuation of each type of collateral. The main types of collateral obtained are as follows:

For commercial lending : charges over real estate properties, cash, inventory and trade receivables, shares etc.

For retail lending : mortgages over residential properties, motor vehicles, gold etc.

The Bank also obtains guarantees from parent companies as securities against loans granted to their subsidiaries.

Management monitors the market value of collateral and will request additional collateral if the market values are not sufficient in accordance with the underlying agreement. It is the Bank’s policy to dispose repossessed properties in an orderly manner. The proceeds are used to recover the outstanding claim.

There was no change in the Group's collateral policy during the year. Further, the Group did not observe any significant deterioration in the quality of the collaterals and other credit enhancements during the reporting period.

The Group does not provide for any allowances for ECL against financial assets secured by cash/deposits held within the Group. Further, no allowance for ECL has been recognised for government securities denominated in Sri Lankan rupees, other financial assets secured by government guarantees, treasury bills and treasury bonds. Except for the above, Group has recognised ECL for all other financial assets classified at amortised cost and debt instruments at FVOCI.

The following table shows the maximum exposure and net exposure (net of fair value of any collaterals held) to credit risk by class of financial asset, before netting off impairment for expected credit losses.

Bank

51. RISK MANAGEMENT

Group

51.2.3.2 Stage-wise analysis of collateral held against loans & advances

The following table sets out the principle types of collateral held by the Bank/Group against loans and advances. For each loan, the value of the collateral is capped at the amortised cost of the loan.

* Other securities include quoted & unquoted shares, lease receivable, inventories, trade receivable, personal guarantees and corporate guarantees etc.

51.2.3.3 Offsetting financial assets & liabilities

Financial assets and financial liabilities are offset and the net amount is presented in the Statement of Financial Position when the Group has a legal right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

51.2.3.4 Financial assets & liabilities not subject to offsetting

Amounts that do not qualify for offsetting include netting arrangements that only permit outstanding transactions with the same counterparty to be offset in an event of default or occurrence of other predetermined events. Such netting arrangements include repurchase arrangements and other similar secured lending and borrowing arrangements.

The amount of the financial collateral received or pledged subject to netting arrangements but not qualified for offsetting are disclosed below.

Bank

Group

51. RISK MANAGEMENT

51.2.4 Stage-wise Movement of Loans & Advances and Commitments & Contingencies

Changes in the gross carrying amount of loans & advances and commitments & contingencies during the period that contributed to the changes in impairment provisions is given below.

51.2.4.1 Stage-wise movement of gross carrying values of loans and advances

Bank

Group

51.2.4.2 Stage-wise movement of Impairment for loans and advances

Bank

51. RISK MANAGEMENT

Group

51.2.4.3 Stage-wise movement of gross carrying values of credit related commitments and contingencies

Bank

Group

51. RISK MANAGEMENT

51.2.4.4 Stage-wise movement of impairment for credit related commitments and contingencies

Bank

Group

51.2.4.5 Stage-wise movement of gross carrying values of other financial assets

During the year, the investment in debentures of Kotagala Plantation PLC was transferred from Stage 1 to Stage 2 due to a downgrade in its external credit rating. Apart from the above, there were no material stage movements recorded in other financial assets during the year.

51. RISK MANAGEMENT

51.2.5 Credit Quality by Class of Financial Assets

The tables below show the credit quality by the class of asset for all financial assets exposed to credit risk, based on the internal credit ratings for loans & advances and based on external credit ratings for other financial assets.

Bank

51. RISK MANAGEMENT

Group

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51.2.6 Counterparty-wise Analysis of Derivative Financial Instruments

The following table shows a counterparty-wise analysis of derivative financial instruments.

Bank & Group

Bank & Group

51.2.7 Analysis of Risk Concentration

By setting various concentration limits (i.e. large exposures, industry, product, country/region etc.), the Bank/Group ensures that an acceptable level of risk diversification is maintained on an ongoing basis. These limits are continuously monitored and periodically reviewed at management and Board level to capture the developments in the macro economy, both locally and globally.

The exposure to credit risk based on the geographical concentration and industry/sector concentration is given below, for each item of financial asset in the Statement of Financial Position.

51.2.7.1 Geographical concentration

Bank

* Provincial breakdown for loans & advances within Sri Lanka

51. RISK MANAGEMENT

Group

*Provincial breakdown for loans & advances within Sri Lanka

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51.2.7.2 Industry/sector concentration

The following tables show the risk concentration by industry for the financial assets.

Bank

51. RISK MANAGEMENT

Group

51.3 Liquidity Risk and Funding Management

The Bank manages liquidity risk, in accordance with regulatory guidelines and industry best practices. The objective of the Bank’s liquidity and funding framework is to ensure that funding commitments and deposit withdrawals can be met when due and market access remains cost effective.

A board approved liquidity policy to manage liquidity on a day-to-day basis and a contingency funding plan to deal with crisis situations are in place. Contractual and behavioural maturity of assets and liabilities, key liquidity ratios and monthly liquidity forecasts and gaps are reviewed at Assets and Liability Committee (ALCO) meetings. The main sources of the Bank’s funding are core deposits from retail and commercial clients, wholesale deposits and access to borrowed funds from the interbank money market. The Bank also maintains a portfolio of readily marketable securities to further strengthen its liquidity position. Liquidity risk exposure is managed with limits and triggers being set, thereby ensuring that sufficient liquidity surplus and reserves are available to meet daily business requirements and also to deal with a sudden liquidity shock.

51.3.1 Liquidity Ratios

51.3.1.1 Liquidity Coverage Ratio (LCR)

This ratio determines the ability of the Bank to withstand adverse liquidity shocks (i.e. sudden withdrawal of a significant portion of deposits) over a 30 day time span, measured by the amount of unencumbered high-quality liquid assets it holds, over and above the anticipated net cash outflow during this period.

51.3.1.2 Net Stable Funding Ratio (NSFR)

This ratio measures the Bank's availability of stable funds against the required funds. NSFR creates an additional incentive for the banks to fund their activities with more stable sources of funding on an ongoing basis, over a longer time horizon.

51.3.1.3 Liquidity Ratios under Stock Approach

51. RISK MANAGEMENT

51.3.2 Analysis of Financial Assets and Liabilities by Remaining Contractual Maturities

The tables below summarise the maturity profile of the undiscounted cash flows of the Bank/Group’s financial assets and financial liabilities as at 31st December 2024 and 31st December 2023. Although the cash outflows have been considered based on the earliest date of repayment, it is believed that most of the customers would not expect the repayments on the earliest possible date. Therefore, the behavioural maturity profile would be different to the contractual maturities shown in the below tables.

Contractual Maturities of Undiscounted Cash Flows of Financial Assets and Financial Liabilities

(a) Bank - as at 31st December 2024

(b) Bank - as at 31st December 2023

51. RISK MANAGEMENT

(c) Group - as at 31st December 2024

(d) Group - as at 31st December 2023

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51.3.3 Remaining Contractual Maturities of Commitments and Contingencies

The tables below illustrate the remaining maturity of the commitments and contingencies based on the contractual expiry dates. However, all undrawn direct and indirect commitments are classified as "On Demand" based on the earliest date those can be drawn down by the customers.

(a) Bank - as at 31st December 2024

(b) Bank - as at 31st December 2023

(c) Group - as at 31st December 2024

(d) Group - as at 31st December 2023

51. RISK MANAGEMENT

51.3.4 Financial assets available to support future funding

51. RISK MANAGEMENT

51.4 Market Risk

Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchange rates, commodity prices and equity prices. The Treasury middle office monitors and ensures that the Bank's market risk limits align with the risk tolerance established by the Board. The Bank employs a range of tools to monitor and limit market risk exposure which are discussed below.

51.4.1 Classification of financial assets and financial liabilities subject to market risk

The following tables distinguish the Bank/Group's financial assets and liabilities subject to market risk between trading and non-trading portfolios.

Bank

51. RISK MANAGEMENT

Group

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51.4.2 Interest Rate Risk

The interest rate risk is the risk of loss arising from fluctuations in the future cash flows or fair values of financial instruments due to changes in market interest rates. The Bank manages the interest rate risk of the non-trading portfolio against interest rate gap limits, which is supplemented by monitoring the sensitivity of the non-trading portfolio to various rate scenarios.

51.4.2.1 Interest Rate Sensitivity Analysis

The tables below analyse the Bank/Group’s interest rate risk exposure based on the interest rate repricing gaps. The financial assets and liabilities in the non-trading portfolio are included at their carrying amount and categorised by the earlier of the contractual repricing date or the maturity date.

(a) Bank - as at 31st December 2024

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(b) Bank - as at 31st December 2023

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(c) Group - as at 31st December 2024

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(d) Group - as at 31st December 2023

51.4.2.2 Sensitivity of Net Interest Income to Changes in Interest Rates

The table below illustrates the sensitivity of the Bank/Group's Net Interest Income (NII) to potential changes in market interest rates. The impact on NII is calculated by applying interest rate shocks to the interest rate gap within each repricing bucket, assuming all other variables remain constant as of the reporting date. The sensitivity of NII to various rate shocks is assessed at least quarterly to ensure that interest rate volatility is prudently managed within the Bank/Group’s risk appetite limits.

51.4.3 Currency Risk

Currency risk arises as a result of fluctuations in foreign exchange rates. In order to manage the currency risk, there are Board approved limits for Net Open Position (NOP) for each major currency. In accordance with the Bank’s policy, positions are monitored on a daily basis and hedging strategies are used to ensure positions are maintained within established limits.

The Risk Management Unit conducts stress testing on the NOP to assess the potential impact of exchange rate fluctuations on the Bank’s profit and equity. In addition, the Bank utilises Value at Risk (VaR) to measure market risk exposure from its overnight foreign exchange positions. VaR is calculated using the historical method at various confidence levels.

51.4.3.1 Net Open Position by Currency

The following table shows the NOP of the Bank for each of the major currencies as at 31st December 2024 and 31st December 2023.

51. RISK MANAGEMENT

51.4.3.2 Impact due to Exchange Rate Shocks

The following table indicates the gain/(loss) to the Bank and the impact on total CAR, of a reasonably possible change in exchange rates, based on a constant open position as indicated in Note 51.4.3.1.

51.4.3.3 Impact on Income due to increase/decrease in Exchange Rate by 10%

51.4.4 Equity Price Risk

Equity price risk arises as a result of any volatility in market prices of individual equities. The Bank conducts mark to market calculations on a monthly basis or more frequently on a need basis, to identify the impact on the financial statements due to changes in equity prices.

The table below summarises the impact of a 10% change in individual equity prices on the Statement of Profit or Loss, Other Comprehensive Income and total equity of the Bank/Group as at 31st December 2024 and 31st December 2023.

51.5 Operational Risk

Operational risk arises due to inadequate or failed internal processes, people and systems or from external events. Operational risk events which include legal and regulatory implications could lead to financial and reputational losses to the Bank.

The Bank's operational risk management framework is outlined in the Board-approved Operational Risk Management Policy. Operational risk is managed by implementing an appropriate internal control system, which includes mechanisms for segregating related responsibilities and conducting periodic evaluations of the efficiency and effectiveness of the Bank’s overall internal controls.

Operational Risk Management Unit reports to Chief Risk Officer who reports directly to the Board Integrated Risk Management Committee (BIRMC). BIRMC maintains a high-level of overall supervision over managing operational risks of the Bank.

51.6 Capital Management

The Bank's capital management objectives can be summarised as follows:

• Maintain sufficient capital to meet minimum regulatory capital requirements
• Hold sufficient capital to support the Bank's risk appetite
• Provide additional capital to business segments of the Bank to achieve the overall strategic objectives
• Provide a "cushion" or "buffer" in absorbing potential losses arising from various risks and safeguarding the depositors' funds

51.6.1 Regulatory Capital

The Bank manages its capital in line with regulatory capital requirements set by the Central Bank of Sri Lanka (CBSL), based on the Basel framework. As of 31st December 2024, the Bank is required to maintain a minimum Total Tier I Capital Adequacy Ratio (including capital buffers) of 8.5% and a minimum Total Capital Adequacy Ratio of 12.5%.

Pillar III - Disclosure Requirements under Basel III

Disclosures under the Pillar III requirements mainly include the regulatory capital requirements and liquidity, risk weighted assets, discussion on meeting current and future capital requirements of banks, linkages between financial statements and regulatory exposures and information on assessment of D-SIBs. The Bank is required to disclose the templates specified by the Central Bank of Sri Lanka, in accordance with the Basel III minimum disclosure requirements, effective from 1st July 2017. These templates are given on pages 445 to 454.

52. MATURITY ANALYSIS

Remaining contractual period to maturity, as at the date of Statement of Financial Position is tabulated below:

Bank

Group

53. REPURCHASE AND REVERSE REPURCHASE TRANSACTIONS IN SCRIPLESS TREASURY BONDS AND SCRIPLESS TREASURY BILLS

Directive No. 1 of 2019, issued by the Central Bank of Sri Lanka, requires Licensed Banks/Primary Dealers to disclose following additional information on repurchase and reverse repurchase transactions in scripless treasury bonds and bills.

53.1 Carrying Value of Securities Allocated for Repurchase Transactions

53.2 Market Value of Securities Received for Reverse Repurchase Transactions

Securities purchased under agreements to resell at a specified future date are not recognised in the Statement of Financial Position. The consideration paid, including accrued interest, is recorded in the Statement of Financial Position, within “reverse repurchase agreements”.

53.3 Bank's Policy on Haircuts for Repurchase and Reverse Repurchase Transactions

According to the Bank's internal policies, minimum haircut applicable for each maturity bucket as at 31st December 2024 is given below. The haircuts applied meet the minimum haircut requirements imposed by the Directive No. 1 of 2019.

53.4 Penalties Imposed on the Bank/Group for Non-Compliance

No penalties have been imposed on the Group for non compliance with Directive No. 1 of 2019 during the year ended 31st December 2024.

54 SELECTED PERFORMANCE INDICATORS/KEY FINANCIAL DATA (AS PER REGULATORY REPORTING)