Dear stakeholders,

Welcome to the 13th Annual General Meeting of the National Development Bank PLC. It is with much contentment that I reflect on the past year in which our Bank recorded an excellent performance on all fronts, and with enthusiasm that I look ahead to the future which is highly promising.

This Annual Report contains information and illustrations which will help you take a closer look at how well all the Departments of the Bank integrated in generating one of the most successful years of performance, together with our group companies. As you will see, the Bank recorded an impressive profit of LKR 4.4 billion, together with a Profit Attributable to Shareholders (PAS) of LKR 3.5 billion, which was a 37% and a 30% growth respectively, over 2016.

The PAS was partly affected by the accumulated deferred tax provision made on the revaluation gains from investment property. This cumulative deferred tax provision was made in compliance with the new Inland Revenue Act, which will come in to effect from 1 April 2018 and LKAS 12 : Income Taxes. If this deferred tax provision was excluded, the PAS would have been LKR 3.7 billion for the year, which is a growth of 38% over 2016. The Bank’s total assets expanded by 15% to LKR 383 billion whilst customer loans and customer deposits all grew quite substantially, ahead of the industry growth rates.

The year also marked the launch of the Bank’s new strategy spanning up to 2020 named as Transformation 2020, which has set a number of ambitious goals to be achieved within the next 3 years.

It is my pleasure to set the stage for an in-depth analysis which you will see in the Chief Executive Officer’s Review and the Management Discussion and Analysis, by sharing with you the macro-economic and industry specific developments which shaped the Bank’s performance during the year.

MACRO-ECONOMIC CONDITIONS THAT CHARACTERIZED THE YEAR

At the global economic frontier, economic growth picked up with broad based performance across the globe, however with more than anticipated growth in Europe and China. The global economic growth for 2017 is estimated to be at 3.7%. The Middle Eastern economy recorded moderation due to geopolitical uncertainties and persistently low oil prices. The former had a negative impact on the flow of remittances into the country. This impact however was negated by the latter, in combination with increased flows of foreign investments causing a BOP surplus as of September 2017.

World trade posted strong recovery, with a parallel impact on imports and exports at country level. The Bank saw a commendable increase in its business volumes in tandem, as it catered to the export and import clientele through the Bank’s suite of corporate banking, cash management and trade financing solutions.

Meanwhile in Sri Lanka, the domestic economy faced adverse weather conditions including severe floods and prolonged droughts, which continued to impact the agriculture sector. Overall however, the country’s economy grew by 3.9% in the first half of 2017 (compared to 3.7% in 2016) underpinned by expansion of the industrial and services sectors.

Expansion of the industry sector was supported by construction activities. NDB was a financial partner to a number of key construction projects that are underway, particularly within the Colombo city limits, thereby making a solid contribution to national development. The Bank’s Project & Infrastructure Financing Unit catered to several of these projects through their innovative, tailor-made solutions, which are rapidly changing Colombo’s skyline.

In response to the increase in inflation and with the aim of controlling the excessive expansion of money supply, the Central Bank of Sri Lanka continued a tightened monetary policy from 2017 March onwards by adjusting the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) at 7.25% and 8.75% respectively. A tightened monetary policy, coupled with efforts towards fiscal consolidation drove most of the market interest rates up. The Bank re-priced its loan book and deposits rates in response to market rate movements, which assisted in an improved net interest margin.

The Sri Lankan Rupee depreciated by 2% against the US Dollar in 2017. The country received the third tranche of USD167.2 million of the Extended Fund Facility from the International Monetary Fund (IMF) in July 2017. Whilst boosting investor confidence this inflow has also eased the pressure on the exchange rate, coupled with notable conversions by exporters.

The Sri Lankan banking sector became compliant with the new Basel III guidelines with effect from 1 July 2017; they were implemented with the aim of strengthening the regulation, supervision and risk management of banks. There were several capital raising initiatives carried out by the banks to meet the enhanced mandatory capital levels of Basel III. It was encouraging to see the banking sector being well ahead of the Basel III mandated capital requirements, thereby affirming the stability of the banking system.

The fiscal budget for 2018 carried important proposals impacting the banking sector. The debt repayment levy to be imposed on banking transactions is proposed to be effective from 1 April 2018 and will have an impact on sector profitability.

OUR ENDEAVOURS IN EMPOWERING THE NATION’S GROWTH

Sri Lanka has embarked on an ambitious growth trajectory. The development plans laid out by the Government, as manifested in “Vision 2025 – A country enriched” has opened up opportunities across the entire country. NDB is proud to be a partner of this development journey, which is changing the vistas of our island nation. We have extended our financial support to a number of major development projects, including hotels and residencies, which will enhance the country’s tourism industry. We have also closely knitted our reach with the micro, small and medium entrepreneurs nestled deeper in the hinterlands. For example, the pottery makers in Kekirawa, the ornamental horticulturists in Siriketha, the street food vendors in the Galle Face Green, are all beneficiaries of our mission of contributing to national development through the empowerment of various stakeholder groups and equipping them with innovative and holistic financial solutions, fortified by non-financial services as well.

Women also form a core focus group in our customer reach. Empowering women customers through both financial and nonfinancial services as well as being a preferred choice of employer for females, form an important aspect of our new Transformation 2020 strategy.

The suite of comprehensive services offered by our group companies on capital market instruments further augment our efforts as a trusted all-round financier. The level of expertise and professionalism with which our group companies serve their clientele has made them the undisputed choice in capital market services.

A CAPITAL RICH BUSINESS MODEL AND HEALTHY RETURNS

Your Bank has grown exponentially over the recent past, as indicated in a 5 year compound annual growth rate of 19% in total assets. We have been gradually scaling our total capital base to facilitate this business growth.

A number of recent developments affecting the banking sector has placed greater demand on the capital levels for banks. As I explained earlier, the implementation of Basel III guidelines will have a phased escalation for minimum capital requirements for banks.

The impact stemming from the adoption of IFRS 9: Financial Instruments and the proposed debt repayment levy of the 2018 Fiscal Budget will also have a direct impact on the Bank’s profitability levels and its capital base.

The impact of all of this, coupled with the envisaged business growth of the Bank calls for an impending infusion of fresh capital to strengthen the business.

Therefore, we are strategizing on how we can further enhance our capital base. A number of options are currently under consideration in our capital management plans and we expect to finalize the same within 2018.

We continue to reward our shareholders with healthy dividend payouts. We paid an interim dividend of LKR 2/- per share in November 2017. I am glad to announce that the Board approved a final dividend of LKR 7/- per share for 2017, comprising of a cash dividend of LKR 2/- per share and a scrip dividend of LKR 5/- per share, thereby making a total dividend of LKR 9/- per share for 2017.

A SOLID GOVERNANCE AND RISK MANAGEMENT STRUCTURE

The stability of your Bank is attributable to the very strong framework by which it is governed. Over the years, NDB has seen skilled and versatile individuals making their valued contributions as Board Directors. The Chairman of the Bank remains an independent director of the Board, along with a healthy balance of independent and non-independent directors. All of the directors have to their credit a proven track record, vast knowledge and expertise from diverse backgrounds. Together, they provide effective guidance to take the Bank from success to success.

The Bank has a clearly defined governance framework in place that promotes transparency, fairness and accountability. Our Board and its Committees play an important role in working with the management to ensure our business is financially strong, wellgoverned and that any risks are identified and mitigated.

The Bank’s value creation is underpinned by a very robust risk management framework. The Bank’s loan portfolio is diversified and the capital and liquidity positions are prudently managed. Furthermore, risk awareness has been nurtured in the Bank’s organizational culture. “Risk Analyst”, the bi-annual bulletin of the Risk Department compiled with the knowledge contribution of our own staff members makes considerable contribution towards this end.

NDB has come a long way from its inception as a development financing institution. With a tenure exceeding a decade as a commercial banking entity, NDB is competing with legacy commercial banks with equal level of expertise and competitiveness.

SUSTAINABILITY AND REPORTING CLARITY

Our resolve to make our existence worthwhile for the wider community through our sustainability projects, flourished during the year. The Bank and its group companies spent LKR 23.5 million as donations to various sustainability initiatives. We take a highly strategized approach to social and environmental well-being with all sustainability endeavors vetted by a Corporate Social Responsibility Committee.

We continued the integrated approach to annual reports which we commenced in 2013, in the 2017 Annual Report as well. We have continually sharpened and refined our reporting. Our sustainability reporting in this report is as per the Global Reporting Initiatives Standards. We were an early adopter of the new GRI reporting methodology of GRI Standards, having adopted the guidelines in the 2016 Annual Report.

We were the proud recipient of triple awards at the 53rd CA Sri Lanka Annual Report Awards for the Bank’s 2016 Annual Report, namely the Gold award for best corporate governance disclosures across all categories, Silver award for the banking sector category and the Bronze award for sustainability reporting across all categories. This is the first instance that NDB emerged as a winner in the CA Sri Lanka Annual Report Awards since becoming a commercial banking entity. We were also awarded the joint second runner up award for best presented annual reports in the private sector banks category at the South Asian Federation of Accountants and SAARC Anniversary Awards 2016.

THE LIVELY FORCE THAT PROPELS THE BANK FORWARD

Our employees are the key executors of our strategy. Their motivation, capabilities and above all the unity amongst them have been and will be one of the key factors underpinning our success. Living up to this truism, we carried out a number of initiatives during the year for the benefit of NDBers. The HR training calendar was carefully formulated to ensure that all the NDBers were empowered with relevant knowledge and expertise. We also carried out a salary revision activity during the year through which we ensured that all of our staff are compensated within the industry median. A job grading process was also initiated during the year to further streamline the job profiles of the Bank.

The Bank also launched a new culture identity dubbed as One NDB which further unites the strengths of our team in achieving the mission set forth under Transformation 2020 and beyond.

A NOTE OF GRATITUDE

I take this opportunity to thank the Central Bank of Sri Lanka for their valuable guidance. I also wish to thank two of the directors who resigned from the NDB Board, Mrs. Anula Harasgama and Mr. Nihal Welikala for their contribution whilst in office. I am glad to welcome Mr. Ranasinghege Semasinghe who joined the Board during the year, who brings with him a wealth of experience from the public sector.

The Chief Executive Officer, Mr. Dimantha Seneviratne has directed the energetic and able NDB Team with precision and diligence, under the guidance of the Board of Directors, in achieving these wonderful results.

I also place on record, my gratitude to all our shareholders, customers and employees and all other stakeholders who connected with us in making our presence in the society a rewarding one for all of them.

A RENEWED RESOLVE FOR A PROSPEROUS FUTURE

The newly initiated strategy in professional assistance with the International Finance Corporation (IFC) which was launched in mid-2017 has placed the Bank on a strong platform in driving itself towards renewed goals. The Bank will closely integrate its activities around the knowledge-based, highly competitive and social market economy model that the Government as a whole is adopting in its Vision 2025 – A country enriched.

In doing so digitized banking solutions will form a cornerstone of our strategy. We will also strengthen our service offerings to the entire gamut of individuals and corporates, which will directly increase our penetration within the country. Retail and SME will be our core focus areas whereby, whilst growing the loan book across all segments including corporate banking and project financing, we will increase the relative significance of retail and SME.

The focus on retail and SME will serve the dual purposes of empowering the middle income earners towards an inclusive society, which is one of the approaches set out in the Government’s Vision 2025, and improving the Bank’s loan book composition to more sustained and profitable customer relationships. Our very strong retail branch network, presently comprising 107 branches will be a key catalyst in this retail-SME focused mission.

NDB has come a long way from its inception as a development financing institution. With a tenure exceeding a decade as a commercial banking entity, NDB is competing with legacy commercial banks with equal level of expertise and competitiveness. With the impetus provided by the aforementioned initiatives, the medium term goal of our new strategy is to shift leagues from the current mid-sized bank category to the systemically important banks category within the Sri Lankan banking industry.

With this resolve borne deep in every thought and action, we look forward to a prosperous future.

Wishing you all the best

Ananda W Atukorala
Chairman

20 February 2018