Dear friends,

It is with immense pleasure that I present to you, this review on the performance of the Bank for 2017. The year saw NDB achieving many milestones, thereby making it an important year in the Bank’s illustrious journey spanning nearly four decades. My review which follows will help you take a closer look, as to how your Bank weathered many challenges and delivered enhanced value to all the stakeholders.

IMPRESSIVE FINANCIAL
PERFORMANCE

In the aftermath of a subdued 2016 in terms of financial performance, NDB commenced 2017 with vigor and resolve to achieve resilient business growth and profitability. The team continued the energetic momentum throughout the year which resulted in the Bank and the group companies achieving highly impressing financial results for 2017.

The Bank’s Profit after Tax (PAT) exceeded LKR 4 billion to LKR 4.4 billion which was an impressive growth of 37% compared to 2016. At the Group level, Profits Attributable to Shareholders (PAS) also grew quite impressively by 30% to LKR 3.5 billion. As explained in detail by the Chairman in his Message, the PAS was affected by the cumulative deferred tax provision on the revaluation gains from investment property in line with the new Inland Revenue Act which will come in to effect from 1 April 2018 and LKAS 12: Income Taxes. The PAS, excluding this tax impact would have been LKR 3.7 billion, an increase of 38%.

Net Interest Income (NII), the vital contributor within total operating income grew by 27%. The Bank’s NII of LKR 10.8 billion drew strength from a combination of factors, such as the enhanced Net Interest Margin up to 3.0%, (from 2.6% in 2016), substantial volume growth in the loan book and the exponential growth in the deposits base, thereby reducing the reliance on high cost funding sources.

2017 saw marked improvements in the quality of the Bank’s loan book which was reflected in reduced impairment charges and an NPL ratio. Total impairment charges for loans and other losses were LKR 1.3 billion, a reduction of 8% compared to 2016. Prudent risk management and credit underwriting standards, proactive credit follow ups and robust recovery efforts resulted in one of the best NPL ratios in the industry for the Bank in 2017, at 1.83%. This NPL ratio compares very well with the industry average of 2.5% for 2017 and NDB’s own NPL of 2.63% for 2016.

Operating expenses was managed well within a 14% increase to LKR 7.3 billion. This increase in costs is highly justifiable considering the major business expansions, considerable investments made on the digital frontier and a number of innovative products which were launched during the year. The cost to income ratio improved to 45.5% compared to 49% in 2016 affirming the enhanced contribution these costs made in driving healthy income.

Your Bank recorded steady and stable growth during 2017. The Balance Sheet expanded by 15% to record a total assets base of LKR 383 billion at the end of the year. The loan book, after provisions made for impairment losses grew by an encouraging 20%, higher than the industry growth of 16% to reach LKR 274 billion. Customer deposits grew by 34%, an all-time high over the past five years in the Bank’s history, and also well ahead of the industry deposits growth rate of 17.5%. The deposits base grew by an exceptional LKR 70 billion to close at LKR 273 billion at the end of the year.

Within the deposits growth we also grew our CASA base by 25% over 2016, which was a quantum increase of LKR 12 billion. Deposit growth was fueled by concentrated efforts to broad base our deposit customer base and the Bank’s full suite of lifestyle savings products, which was invigorated with four new launches and one re-launch.

Investor ratios also improved in 2017, with a ROE of 16.27% at the Bank level.

All of the business units of the Bank made solid contribution in terms of Balance Sheet growth and profitability. The performance of the Group companies was below aspirations, due to the reduced capital market activities that were seen across the year. However, they too recorded sound growth and contributed to overall Group profitability as permitted by the prevalent market conditions.

I invite you to refer the Financial Review available in pages 43 to 52 to take an even closer look as to how well your Bank did in 2017.

A YEAR OF INTENSE STRATEGIC PLANNING

As I indicated in my Review of the 2016 Annual Report, during 2017, the Bank entered in to professional consultation with the International Finance Corporation (IFC) in devising a medium term strategic plan spanning up to year 2020. Dubbed as Transformation 2020, the strategy was launched in July 2017 and a large amount of ground work was carried out during the second half of 2017.

The organization underwent a strategic re-shaping where new functions were established to drive focused business across all segments. Segregation of retail banking under the umbrella of personal banking and network management, establishment of a separate function to focus on the amalgam of SME, middle markets and business banking, expansion of the marketing function to customer experience management and the establishment of a Digital Financial Services function are some key restructuring initiatives.

A number of key business areas as well as process improvements are under the scrutiny of Transformation 2020 to propel the Bank forward and reach our goals by year 2020. The execution of the strategy is being carried out in a timely manner and is monitored by a dedicated project management team.

With all these initiatives launched in stages, 2018 would mark the first full financial year which is shaped by the Transformation 2020 strategy.

THE STRENGTH OF ONE NDB

As mentioned in the Chairman’s Review, One NDB is the newest culture identity of the Bank originated alongside Transformation 2020 strategy. The NDB team is rich in diversity of both in grown talents as well as talent acquired from outside. Their unity, commitment and perseverance have been the key enablers of all the exciting results that we see today.

Under the slogan of One NDB each one of the NDBers will engage themselves in the new strategic direction and make their valued contribution individually as well as a team to make the goals of the strategy a reality.

Our employees are our most valued resource. We spent a total of LKR 3.6 billion, including compensation and bonuses to them during 2017. We remain guided by one of the most transparent and employee friendly HR policies via which we ensure a highly conducive work environment for them. We encourage and facilitate a host of initiatives for our staff to take part in, such as sports, Toastmasters, aesthetics, quiz programs, etc. to ensure an enjoyable work experience at the Bank.

A FUTURE-PROOFED CONNECTIVITY

At NDB we are well aware of the changing customer demographics as well as the advancements in technology which have a direct impact on the business of banking. We are committed to ensure that we offer our customers the best banking solutions augmented by the convenience offered by digital capabilities.

Staying true to this commitment we made significant advancements in our digital offering during the year. Our mobile banking App underwent several improvements to create an enhanced experience to our clientele. The App saw a surge in on-boarding and activities, with the subscriber base increasing by over 90% and the total volume of transactions routed through the App exceeding LKR 4 billion during the year. We pursued five fintech partnerships during the year in devising futuristic banking solutions for our customers.

Our approach to customer connectivity is a precise fusion of digital offerings as well as the physical touch points. As such, we are driven on a more “phygital” approach. During the year, we expanded our branch network at a moderate pace, with three new branches added on to the network, along with 5 ATMs. We also relocated two of our existing branches to more spacious locations. From 2018 onwards, we plan to strengthen our ATM network with the installation of Cash Recycle Machines as well.

We also launched dial banking services during the year in the interest of our non-smart phone user customers, in a bid to make new age banking closer to all segments within the country.

OUR COMMITMENT TO
SUSTAINABILITY

Sustainability is strategically embedded in the way we conduct our business. An important component of the Bank’s sustainability agenda is the environment where the Bank ensures that its direct and indirect environmental impact is minimized or removed. The Bank’s Environmental and Social Management System (ESMS) is an integral part of the Credit Policy and credit evaluation process of long term lending of NDB, where the Bank has taken prudent measures to minimize adverse effects of the services rendered by evaluating projects for environmental and social risks prior to lending.

The Bank also adds value by promoting environmentally and socially responsible products. Our Project & Infrastructure Financing Unit is a leader in financing renewable energy projects such as solar, wind, hydro and waste to energy generation plants both in Sri Lanka and overseas. We also have a personal loan scheme for domestic solar energy systems called NDB Solar Vantage.

The strategic focus of the Bank has been cascaded down to our community relations as well.

The Bank’s strategic Corporate Social Responsibility (CSR) Initiatives were carried out under the core themes of Education, Environment, Entrepreneurship and Health during the year. Special projects were also carried out in response to the natural disaster experienced during the year. Your Bank stays committed to the well-being of all the stakeholders who are impacted by its existence and activities.

The organization underwent a strategic re-shaping where new functions were established to drive focused business across all segments. Segregation of retail banking under the umbrella of personal banking and network management; establishment of a separate function to focus on the amalgam of SME, middle markets and business banking; expansion of the marketing function to customer experience management; and the establishment of a Digital Financial Services function are some key restructuring initiatives.

COMMITTED TO EMPOWERING SRI LANKAN WOMEN

Whilst reaching out to the masses of customers from all strata of society, NDB has committed to the well-being of Sri Lankan women with added care and commitment. During 2017, we conducted a number of programs targeting small and micro scale women entrepreneurs via which we delivered a bundle of non-financial services to them which empowered them as individuals and businesswomen.

The launch of NDB Araliya women’s savings account during 2017 with a medical insurance and life insurance cover for the account holder and her immediate family, was the Bank’s newest financial assistance to female customers. The Bank has well identified the importance of women as a key catalyst in the economic development. Equality for women is demonstrated within the Bank itself, with healthy representation of women across the workforce, particularly at the senior and top management positions. Seven of the seventeen Leadership Team members of the Bank are females, whilst 41% of the Senior Management is also represented by females. The Bank is presently drawing strategic plans The organization underwent a strategic re-shaping where new functions were established to drive focused business across all segments. Segregation of retail banking under the umbrella of personal banking and network management; establishment of a separate function to focus on the amalgam of SME, middle markets and business banking; expansion of the marketing function to customer experience management; and the establishment of a Digital Financial Services function are some key restructuring initiatives. Take a closer look 17 via which more could be delivered to women both at a customer and employee level.

AN AWARDS STUDDED YEAR

We are excited by the large number of awards that the Bank and the Group won during the year, affirming excellence in numerous areas of performance. Whilst some awards were first time wins, certain others were titles that we defended for more than one year. Our team at both the Bank and the group companies are highly motivated by these external endorsements earned from both local and international awarding bodies, to push the envelope to deliver further enhanced results to our stakeholders.

A full list of all the awards we won during the year is found on pages 20 and 21.

THE LEGACY CONTINUES TO AN EXCITING FUTURE AHEAD

NDB enjoys a rich history as a development financier which was established as far back as 1979. We take pride in being the financial partner in some of the iconic development projects in the country such as the first ever wind power project, one of the first ever waste to energy projects and Sri Lanka’s largest private sector mixed development project.

NDB became a fully-fledged commercial banking entity in 2005, hence its existence as a commercial bank is relatively young, compared to more mature peers in the industry. Furthermore, the Bank inherited a number of development financier attributes which were incompatible with a commercial banking model. Asset focus as opposed to liability focus; heavy dependence on credit line funds and institutional borrowings in asset book financing hence the high Loans to Deposits ratio; less focus on CASA deposits and relatively lower retail orientation are some such attributes which were challenging for NDB as a new commercial banking entity.

However, over the past decade, NDB has made tremendous structural improvements in its Balance Sheet and shifted to a more retail focused business model. Whilst evolving so, the Bank has preserved its developmental expertise, thereby augmenting the Bank’s services to all its customer segments and the nation at large in their development journey.

Transformation 2020, our new strategy for the medium term, will focus on further enhancing the Bank’s business model and streamlining it to be on a level playing field in terms of internal capabilities with the peer commercial banks.

2017 was an affirmation that your Bank can make great strides as a leading bank in the Sri Lankan banking industry. Your Bank aspires to shift leagues and be a systemically important bank in the country. The implementation of Transformation 2020 is the major strategic step taken towards this direction and we are confident that the future that lies ahead will deliver on this ambition.

Sustained business growth through affordable financial services offered to a larger segment of the retail masses, digitalization, focus on low cost funding, preserving the asset quality and strengthening the robust risk management environment and excellence in customer services will be the key enablers of the envisioned growth.

As our identity is made up of “development” we will continue our mission in helping the nation as well as its people to develop and prosper.

The Bank and the Group remain well capitalized with the Basel III capital adequacy ratios being well ahead of the minimum requirements. As mentioned by the Chairman in his Message, capital management is well underway to further fortify the Bank’s business growth plan and to be compliant with the minimum capital levels under Basel III coming in to effect on a phased basis in the future.

A NOTE OF THANKS

A fruitful year would not have been possible if not for the contribution of many. My thanks on behalf of the Bank are extended to the Governor and staff of the Central Bank of Sri Lanka and other regulatory bodies. The guidance of the Chairman and the Board of directors has been invaluable in navigating the Bank through headwinds. I also wish to thank our shareholders, who have been our biggest strength having placed utmost confidence in us and our customers, who are our biggest inspiration in expanding our boundaries for better offerings every day.

My heartfelt gratitude goes to the senior management team and all NDBers spread across the island for their unity and unwavering commitment in creating success stories for the Bank. I also thank the management and the staff of all our group companies for the respective contributions made by them towards the overall performance of the Group.

I invite you to take a closer look in to the pages that follow, and find out how we created sustained value to all our stakeholders in a distinctly successful year.

Wishing you all the best

Dimantha Seneviratne
Director/ Chief Executive Officer

20 February 2018