Management Discussion And Analysis
Business Reports
The Dealing and Investment segment is a top contributor to PBT and manages a larger asset portfolio of the Bank. It plays a vital role in managing the assets and liabilities of the Bank while maintaining adequate liquidity. Treasury also plays a key role in transfer pricing and optimising cost of funds in line with the risk appetite of the Bank.
Market Review
Financial markets continued to remain challenging during the year. However, improved market liquidity and increased activity compared to the previous year supported growth in this key business line.
The completion of the Domestic Debt Restructuring (DDR) played a vital role in creating buoyancy in markets. Additionally, the progress made on foreign debt restructuring served to further stabilise markets. Market dynamics have also been favourable towards Q4 with early indications of stability in the policy direction of the country after extreme uncertainty in the previous quarters. In 2024, the CBSL made a crucial monetary policy decision by transitioning to a single policy interest rate mechanism, replacing the previous dual policy rate system. Effective from 27th November 2024, the Central Bank introduced the "Overnight Policy Rate (OPR)" as the primary instrument for signalling its monetary policy stance. The OPR is set at 8.00%, and as a result, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) are no longer considered policy interest rates, with their respective levels now standing at 7.50% and 8.50%. The one-year Treasury Bill which started the year at 12.93% moved down to 8.96% by year end while AWDR and AWLR moved down by 411 bps and 228 bps during the same period.
The Sri Lankan Rupee (LKR) appreciated by 9.5% supported by lower import demand and a surge in inflows from tourism and remittances. Demand for USD came mainly from CBSL as they bought USD to build reserves. Foreign exchange market sentiments were positive as the country’s macroeconomic indicators improved. Lower Brent crude prices also supported the reduced demand for dollars. Accordingly, margins have narrowed due to these factors. Despite the early favourable trends observed, significant downside risks remain in financial markets.
Strategy
- Effective investment of surplus funds until normalisation of credit demand.
- Proactive management of the Bank’s Net Open Position.
- Active participation in large SOE and CBSL transactions while supporting requirements of large corporates through price discovery and advise.
Rs 34 Bn
Segment Operating Profit 2024 (before tax)
Rs 803 Bn
Segment Assets 2024
Rs 765 Bn
Segment Liabilities 2024
Delivering Results in 2024
| Performance Highlights | |||
|---|---|---|---|
| 2024 Rs Mn |
2023 Rs Mn |
Change % |
|
| Net interest income | 26,416 | 24,435 | 8.1 |
| Net fee & commission income/(expense) | (38) | (20) | (90.6) |
| Net (loss)/gain from trading | (1,777) | 762 | (333.3) |
| Net (loss)/gain on derecognition of financial assets | (7,231) | 592 | (1,322.0) |
| Net other operating income | 1,429 | 2,521 | (43.3) |
| Inter-segment income | - | 5 | (100.0) |
| Total operating income | 18,799 | 28,295 | (33.6) |
| Less: Impairment (reversal)/charge | (15,786) | 3,022 | (622.3) |
| Net operating income | 34,584 | 25,273 | 36.8 |
| Less: Total operating expenses | 414 | 283 | 46.5 |
| Operating profit before tax | 34,170 | 24,990 | 36.7 |
| Segment assets | 802,816 | 639,522 | 25.5 |
| Segment liabilities | 764,625 | 609,546 | 25.4 |
Note: The segment assets, liabilities, income, and expenses figures mentioned above include inter-segment balances.
The Treasury Department continues to remain pivotal to the performance of the Bank, particularly during years of lean credit growth. As it is a highly specialised function requiring a sound understanding of financial markets, we continue to invest in capacity building of the team in Treasury functions with a strong emphasis on regulatory requirements. During the year, the Bank became a signatory to the FX Global Code of the Bank for International Settlements (BIS), well ahead of the deadline set by CBSL. The Department moved into a new office, providing a conducive environment for a team that typically works under significant pressure.
NII increased by 8.1% supported by an increase of 25.5% in segment assets. Further, the liabilities were of a short term tenor and repriced lower as interest rates declined while assets were of a longer tenor resulting in a lag in repricing which also contributed to NII growth. This enabled the Bank to maintain Net Interest Margin at 4.9% which is one of the highest in the industry.
Margins in foreign exchange trading came under pressure during the year due to high levels of liquidity and increased competition for import business. This was exacerbated by the costs incurred for currency swaps to optimise overall returns through increased investments in GOSL securities. This strategy of optimising overall returns is reflected in the overall increase of 36.7% in Operating Profit of the Treasury Department.
The Treasury will maintain its primary focus on proactive management of the Bank’s liquidity and net open position while optimising returns through investment income. Strong leadership in worker remittances strengthens the Bank’s position in foreign exchange markets in the country and the Bank will seek to further strengthen this position by increasing its market share of import business, optimising its foreign exchange operations. The Bank will continue to be an active participant in GOSL securities trading market which maybe tempered by an anticipated higher demand for credit. The Treasury is also closely monitoring the developments in sustainable financing and will proactively seek opportunities to enhance access to capital and reduce the cost of funds through pursuit of identified opportunities.