National Development Bank PLC - Annual Report 2017

FINANCIAL CAPITAL

Our business is rich in financial capital predominantly comprising funds invested by our shareholders. Our capital base is also strengthened by other external fund sources such as subordinated term debts and funds received from credit lines and internal fund sources such as retained profits and revenue reserves. During 2017, we deployed these capitals effectively, in generating sound results to our shareholders, other stakeholders and the nation at large.

Link to Strategy

The Bank’s strategy is directly linked to enhanced financial capital through a number of key performance indicators with clearly set targets to be achieved over the medium term.

Challenges in 2017

Competition posed by peers in the financial services sector
Impact of new taxes introduced
New regulations (Eg: Basel III guidelines)

Priorities for 2018

Enhancing NIM
Improving the CASA mix
Cost management
Improving market share

FINANCIAL REVIEW

2017 was yet another year of excellent financial performance for the Bank. The Bank recorded accelerated growth in its Balance Sheet supported by impressive growth in customer deposits and loans. Profit growth was higher in comparison to any other financial year, purely from organic and ordinary course of business. The Bank well preserves its asset quality and managed its costs amidst such business expansions.

All of the key business units of the Bank, as well as the group companies made enhanced contribution towards the overall profit attributable to shareholders of the Group.

Following is a full account of the Bank’s overall financial performance as well as the key business units and group companies.

Extracts from the financial statements are presented alongside the discussion where applicable, for ease of reference. The full set of audited financial statements and notes to financial statements are presented on pages 289 to 408.

Key highlights of our performance for the year 2017 are depicted below.

PROFITABILITY GROWTH

37%

LKR 4.4 billion for the year

NII GROWTH

27%

with Improved NIM of 3%

COST TO INCOME RATIO

45.5%

well below our targets and the industry

TOTAL ASSETS GROWTH

15%

with loans and receivables of 20% growth and customer deposits of 34% growth

ROE IMPROVED

16.27%

from 13.36% in 2016

REVENUE GROWTH

The Bank’s total operating income was a commendable 23% growth over 2016, contributed by NII growth of 27% and non-interest income growth of 16%.

Given below is the total operating income analysis of the Bank and the Group for the year 2017, in comparison to the previous year.

Total Operating Income

	Bank				Group
	2017	2016	Change	Change	2017	2016	Change	Change
	LKR’000	LKR’000	LKR’000	%	LKR’000	LKR’000	LKR’000	%
Net interest income	10,750,114	8,487,312	2,262,802	27	11,086,327	8,860,769	2,225,558	25
Interest income	37,118,699	28,618,247	8,500,452	30	37,421,114	28,960,606	8,460,508	29
Interest expenses	26,368,585	20,130,935	6,237,650	31	26,334,787	20,099,837	6,234,950	31
Non interest income	5,401,895	4,663,489	738,406	16	5,596,645	4,816,299	780,346	16
Fee and commission income	2,520,532	2,253,226	267,306	12	3,416,002	3,046,132	369,870	12
Net gains / (losses) from trading	1,063,944	982,123	81,821	8	1,063,944	982,123	81,821	8
Net gains / (losses) from financial investments	569,557	211,370	358,187	169	733,679	440,748	292,931	66
Other operating income	1,247,862	1,216,770	31,092	3	383,020	347,296	35,724	10
Total operating income	16,152,009	13,150,801	3,001,208	23	16,682,972	13,677,068	3,005,904	22

Interest Income and interest expenses increased by 30% and 31% respectively, over the previous year, primarily due to significant increase in volumes of loans and receivables and customer deposits over the year 2016, coupled with an improved NIM by 36 basis points to reach 3% due to effective re-pricing of the assets and liability portfolios. As a result Net Interest Income for the year of LKR 10.75 billion was an increase of 27% over the previous year. At a Group level the Net Interest Income for the year was LKR 11.1 billion and was a 25% growth over 2016.

Fee and commission from core banking operations increased by 12% to reach LKR 2.5 billion, due to the focused approach in Retail and SME sectors whilst working on the accelerated growth in trade finance and remittance business along with the portfolio growth.

Net gains / (losses) from trading were LKR 1.1 billion for the year 2017 and was a growth of 8% over the previous year. Both forex trading and sales contributed for these gains as the Bank increased its market share in forex profits.

Net gains / (losses) from financial investments was LKR 569 million and have increased by LKR 358 million over the previous year due to the favorable movements in the interest rates experienced during the year and realized gains earned from equity shares classified as “Available for Sale”. At a Group level, the Net gains / (losses) from financial investments was LKR 733 million and was a 66% growth over 2016.

Other Operating income was LKR 1.2 billion and was a modest growth of 3% over the previous year. Other Operating Income comprises of dividends received from group companies, revaluation gains from the Bank’s foreign currency reserves and other miscellaneous income. The Bank received the same quantum of group dividends in the previous year as well. At a Group level, Other Operating Income was LKR 383 million and was a 10% growth over 2016.

IMPAIRMENT CHARGES FOR LOANS AND OTHER LOSSES

The Bank has a comprehensive review process in evaluating the quality of the Bank’s loans and receivables portfolio and the investments portfolio.

Given below are the impairment charges for loans and receivables and other investments during the year, in comparison to the previous year.

Impairment Charges for Loans and Receivables and Other Losses

	Bank				Group
	2017	2016	Change	Change	2017	2016	Change	Change
	LKR’000	LKR’000	LKR’000	%	LKR’000	LKR’000	LKR’000	%
Individual impairment	340,330	1,116,072	(775,742)	(70)	340,330	1,116,072	(775,742)	(70)
Collective impairment	662,238	277,097	385,141	139	662,238	277,097	385,141	139
Capital write offs /(recoveries)	246,157	(14,483)	260,640	1,800	246,157	(14,483)	260,640	1,800
Other losses - charges /(write backs)	9,829	(11,733)	21,562	184	41,572	45,887	(4,315)	(9)
Total impairment charges for loans and receivables to other customers	1,258,554	1,366,953	(108,399)	(8)	1,290,297	1,424,573	(134,276)	(9)

The Bank’s individual impairment charges for its loans and receivables portfolio for the year was LKR 340 million and was a reduction of 70% over the year 2016, due to one time provisions made for few individually significant loans and receivables during the previous year.

The Bank’s collective impairment charge of LKR 662 million for the year was an increase of LKR 385 million over the previous year. Whilst the quality of the loans and receivables portfolio increased during the year, the higher collective impairment charge was due to the increase in the loans and receivables portfolio by LKR 45 billion during the year.

Other losses include additional provisions made for an investment in a subsidiary company which is expected to reversed in the future with improved business performance.

LKR million	2017	2016
Impairment allowance for loans and receivables to other customers	4,787	6,039
Gross loans and receivables	278,801	233,679
Percentage of impairment allowance (%)	1.72	2.58

COST MANAGEMENT

Cost Management remains a primary focus in executing our business strategies both at the Bank and the Group level.

Given below is a summary of the operating expenses for the year 2017 in comparison to the previous year.

Total Operating Expenses

In LKR million	Bank				Group
	2017	2016	Change	Change	2017	2016	Change	Change
	LKR’000	LKR’000	LKR’000	%	LKR’000	LKR’000	LKR’000	%
Personnel expenses	3,611	3,435	176	5	4,025	3,793	232	6
Depreciation & amortization	423	434	(11)	(3)	478	491	(13)	(3)
Office, administration and establishment expenses	1,477	1,285	192	15	1,808	1,541	267	17
Others	1,835	1,295	540	42	1,890	1,334	556	42
Other expenses	3,735	3,014	721	24	4,176	3,366	810	24
Total expenses	7,346	6,449	897	14	8,201	7,159	1,042	15
Cost to income ratio (%)	45.48	49.04	-	(7)	49.16	52.34	-	(6)

Total operating expenses comprising of personnel expenses and other expenses for the Bank was LKR 7.3 billion and was a 14% increase compared to the previous year.

Personnel expenses for the year were LKR 3.6 billion and was a 5% increase over 2016. The increase is primarily due to the annual increments awarded to staff members and increase in head count in line with increase in business activities during the year. Other expenses too increased in tandem, which resulted in increased profitability to the Bank from core banking operations. The year saw 3 new branches and 5 ATMs added on to the network, 2 branch re-locations along with 4 new product launches and one product re-launch. The increase in expenses was well managed amidst such expansions with a largely improved cost to income ratio of 45.48% in 2017 compared to 49.04% for 2016.

At the Group level total operating expenses was LKR 8.2 billion and was an increase of 15% over 2016.

PROFITABILITY

Given below is a summary of the profitability of the Bank and the Group for the year 2017 in comparison to the previous year.

	Bank				Group
	2017	2016	Change	Change	2017	2016	Change	Change
	LKR’000	LKR’000	LKR’000	%	LKR’000	LKR’000	LKR’000	%
Profit before tax on financial services	7,547,420	5,335,004	2,212,416	41	7,191,740	5,093,546	2,098,194	41
Tax on financial services	1,547,450	1,048,000	499,450	48	1,547,450	1,048,000	499,450	48
Taxation	1,648,341	1,116,733	531,608	48	2,211,987	1,230,587	981,400	80
Profit after tax	4,351,629	3,170,271	1,181,358	37	3,432,303	2,814,959	617,344	22
Profit attributable to shareholders	4,351,629	3,170,271	1,181,358	37	3,489,752	2,691,014	798,738	30

The Bank’s Profit before tax on financial services was a growth of 41% in comparison to 2016. This commendable growth was primarily due to improvement in core banking revenue which is a combination of net interest income and non interest income, coupled with cost management initiatives and improved quality of the Bank’s loans and receivables portfolio. Profit After Tax was a growth of 37% which was also due to the reasons enumerated above.

The Group Profit Attributable to its Shareholders (PAS) increased by 30% over 2016, with the contribution of increased core banking operations. However, the contribution from group companies was relatively lesser during the year due to subdued capital market activities.

The PAS was also affected by the cumulative deferred tax provisions made for revaluation gains on investment properties in line with LKAS 12: Income Taxes with the introduction of the New Inland Revenue Act which would be effective from 1 April 2018.

The PAS excluding the cumulative deferred tax provisions was LKR 3.7 billion and was an increase of 38% over 2016.

The overall contribution to PAS from the Bank and the group companies, on a collective basis is analyzed below.

Total Comprehensive Income for the Year

	Bank				Group
	2017	2016	Change	Change	2017	2016	Change	Change
	LKR’000	LKR’000	LKR’000	%	LKR’000	LKR’000	LKR’000	%
Profit after tax	4,351,629	3,170,271	1,181,358	37	3,432,303	2,814,959	617,344	22
Total other comprehensive income	355,545	(475,083)	830,628	175	300,431	(496,504)	796,935	161
Total comprehensive income for the year	4,707,174	2,695,188	2,011,986	75	3,732,734	2,318,455	1,414,279	61

Within Total Comprehensive Income, Other Comprehensive Income increased by LKR 831 million, due to the revaluation gains of from Property, Plant and Equipment and positive gains from mark to market valuation of the Bank’s financial investments portfolio. As a result the Total Comprehensive Income for the year 2017 transferred to Equity was LKR 4.7 billion and was a 75% increase over the previous year. At the Group level the Total Comprehensive Income for the year 2017 was LKR 3.7 billion and was a 61% increase over the previous year.

ASSETS AND LIABILITY ANALYSIS

Given below is a summary of the Assets and Liability position of the Bank and the Group as at the reporting date in comparison to the previous year.

Statement of Financial Position

	Bank				Group
	2017	2016	Change	Change	2017	2016	Change	Change
	LKR’000	LKR’000	LKR’000	%	LKR’000	LKR’000	LKR’000	%
Total assets	383,073,042	334,544,735	48,528,307	15	388,645,438	340,731,768	47,913,670	14
Loans and receivables to other customers	274,013,970	227,639,844	46,374,126	20	274,063,310	227,679,939	46,383,371	20
Investments	80,657,129	80,597,224	59,905	0	83,062,299	84,436,804	(1,374,505)	(2)
Total liabilities	354,335,207	309,799,685	44,535,522	14	354,667,465	309,718,472	44,948,993	15
Customer deposits	273,369,023	203,866,547	69,502,476	34	273,041,417	203,515,828	69,525,589	34
Debt securities issued and other borrowed funds	28,107,045	59,233,264	(31,126,219)	(53)	28,107,045	59,233,264	(31,126,219)	(53)
Subordinated term debts	19,336,855	19,446,501	(109,646)	(1)	19,336,855	19,446,501	(109,646)	(1)
Shareholders’ funds	28,737,836	24,745,050	3,992,786	16	33,012,227	29,936,587	3,075,640	10

TOTAL ASSETS

The Bank’s Total Assets was LKR 383 billion as at 31 December 2017 and was a commendable growth of 15% over previous year. The Group Total Assets including the assets of the capital market cluster and the property management company was LKR 389 billion and was a growth of 14% over 2016.

The Total Assets were fortified by the highly satisfactory growth in the loan book by 20% to reach LKR 274 billion. The growth rate surpassed the growth recorded by the industry for 2017.

All of the business segments contributed to the loan book increase, bearing fruits of specific strategies which were rolled out during the year to increase respective market share and volumes. On the retail frontier, housing loans, personal loans, credit cards and leasing propelled the retail loan growth. Loans to the SME and Micro sector also increased. Corporate Banking comprising Commercial Banking and Project & Infrastructure Financing made valuable contribution to the loan growth through their customized corporate banking and cash management solutions.

Investments portfolio of the Bank includes investments maintained primarily for liquidity purposes and remained on par with the previous year, as total deposit mobilization during the year was used to fund the loan book of the Bank.

ASSET QUALITY

The non-performing loan (NPL) ratio of the Bank was 1.83% as of end 2017, a remarkable improvement from 2.63% from end of 2016 and was well below the industry average of 2.5%. The net NPL ratio also improved to 0.94% from 1.01% as at the previous year end. The overall provision coverage on a regulatory basis was 48.57% as compared to 56.85% as at 31 December 2017.

A comprehensive and prudent process is adopted by the Bank from loan origination, approval through disbursement up to timely recovery, which has helped maintain the NPL at below industry average.

Precise diversification of the portfolio and avoidance of over-concentration on any one sector have also helped maintain the quality of the loan portfolio.

Extensive marketing and promotional campaigns spread across the year helped to record balance sheet growth at both asset and liability fronts.

CUSTOMER DEPOSITS

Customer deposits closed at LKR 273 billion, an impressive growth of 34% over the previous year, LKR 69.5 billion in terms of absolute value. Within the Customer deposits portfolio, it is noteworthy note the increase in the CASA base of the Bank by LKR 12 billion during the year, which is a 25% growth over the previous year. The Bank launched a savings planner account titled “NDB Saving Planner” and savings products dedicated to ladies as well as senior citizens, namely “NDB Araliya” and “NDB Achara” respectively. The Bank also re-launched its children’s savings product and introduced a new business proposition dubbed as “NDB Business Class”. All these products, along with the rest of the deposits product suite well contributed towards this deposits growth. As a result the Bank’s funding composition further improved during the year with lesser reliance on institutional borrowings and credit line funding.

The Bank's CASA ratio was 21.2% and compares with 22.7% for the year 2016. The Bank has been able to defend its CASA ratio at these levels, despite a decline in the CASA ratio of the industry, given the current interest rate environment, which induces depositor’s preference to be skewed towards term deposits.

DEBT SECURITIES ISSUED AND OTHER BORROWED FUNDS

Debt securities and other borrowed funds decreased by LKR 31 billion, as part of the restructuring of the funding composition that took place during the year with a view to manage the cost of funding of the Bank. The less reliance on credit lines and other institutional borrowings resulted in the Loans to Deposits ratio (LDR) vastly improving to 102% as at 31 December 2017 from 115% in 2016.

CAPITAL AND LIQUIDITY

The Bank’s Capital Adequacy ratios as at 31 December 2017 are summarized below.

Capital Adequacy

	Bank		Group
	2017	2016	2017	2016
Common Equity Tier 1 Capital - LKR million	24,425	NA	29,859	NA
Total Tier 1 Capital - LKR million	24,425	22,404	29,859	29,108
Total Capital - LKR million	38,305	31,153	43,189	38,484
Common Equity Tier 1 Capital ratio (%)	8.85	NA	10.49	NA
Total Tier 1 Capital ratio (%)	8.85	9.31	10.49	11.55
Total Capital ratio (%)	13.89	12.95	15.18	15.27

The Bank complied with Basel III regulations which were mandated by the Central Bank of Sri Lanka with effect from 1 July 2017. The Bank’s ratios were well above the minimum regulatory ratios of 7.25% and 11.25% for Tier 1 ratio and Total Capital ratio respectively for the year 2017, with significant growth in the asset base of the Bank, coupled with a significant improvement in profitability.

With the expected growth in assets envisaged in order to achieve medium term plans to become a systemically important Bank, and the impact on impairment provisions expected across the industry with the adoption of SLFRS 9 during the year 2018, the need for capital infusion is a primary strategic focus of the Bank, in the medium term.

The Bank maintains a healthy liquid assets position at all times, whilst ensuring and managing the liquidity levels to support regular business needs. The regulatory Liquid Assets Ratio and the Liquidity Coverage Ratios are given below.

	Bank
	2017	2016
Regulatory Liquidity
Statutory Liquid Assets (LKR’000)	77,506,348	67,105,194
Statutory Liquid Assets Ratio (Minimum Requirement - 20%)
Domestic Banking Unit (%)	22.13	21.50
Off-Shore Banking Unit (%)	24.01	22.93
Liquidity Coverage Ratio (%) – Rupee (Minimum Requirement - 80%)	214.35	142.53
Liquidity Coverage Ratio (%) – All Currency (Minimum Requirement - 80%)	154.50	125.63

PERFORMANCE OF GROUP COMPANIES

The Bank has six subsidiaries (one in Bangladesh), out of which 5 subsidiaries are in the business of capital markets, stock broking, wealth management and investment banking and the other subsidiary company carrying out the business of property management. More details of these subsidiary companies are given on page 19.

The contribution to the Group from the subsidiary companies within the capital market cluster was constrained during the year due to the lower than expected capital market activities experienced during the year. The detailed performance analysis along with the future outlook is given on pages 71 to 79.

KEY PERFORMANCE INDICATORS

The Return on Equity of the Bank improved to 16.27% as at 31 December 2017 from 13.36% as at the previous year. The same ratio for the Group was 11.09% as compared with 9.23% for 2016. The increase in shareholder returns was primarily due to the significant increase in profitability due to improvement in core banking operations of the Bank, there by affirming the Bank’s commitment to maximize profitability to its shareholders. The Earnings Per Share (EPS) also improved to LKR 25.38 for the year and compares with LKR 18.49 for 2016, whilst the Group EPS was LKR 20.35 and compares with LKR 15.69 for 2016.

The Return on Assets also improved to 1.21% as at 31 December 2017 from 0.99% as the previous year end, with improved profitability as a result of efficient leveraging of the Bank’s Balance Sheet.

DIVIDENDS

The Bank paid an interim cash dividend of LKR 2/- per share in November 2017 and has approved a final dividend of LKR 7/- per share for the year 2017, comprising of a cash dividend of LKR 2/- per share and a scrip dividend of LKR 5/- per share. Accordingly the total Dividened Per Share was LKR 9/- for the year 2017. The resulting dividend payout ratio was 35%. The Bank paid a final dividend comprising total Dividend Per Share of LKR 8/- comprising a cash dividend of LKR 2/- per share and a scrip dividend of LKR 6/- per share for the year 2016.

SLFRS 9 IMPLEMENTATION PROGRESS

SLFRS 9 – Financial Instruments, is effective from 1 January 2018 and will replace LKAS 39 – Financial Instruments Recognition and Measurement.

The initial assessment, the gap analysis between the two standards and the revised accounting policy statements on financial assets and financial liabilities were completed during the year 2017 with the approval of the Board of Directors.

The Bank has also performed provisional SLFRS 9 impairment calculations for the first day impact on the adoption of this new standard and has an indication of the potential impact on Equity. Currently the risk modelling methodologies used for impairment computations are being further tested and fine-tuned by the Bank.

The Bank intends to perform a parallel run during the year 2018 to gain a better understanding of the potential effects of the new standard.

Although SLFRS 9 is effective from 1 January 2018, the Institute of Chartered Accountants of Sri Lanka has granted an exemption for the preparation of the interim Financial Statements for 2018 and provides the option to apply SLFRS 9 in the annual financial statements for 2018. Accordingly, the Bank will be in a better position to provide the required disclosures in the ensuing financial year, for which all required steps are being taken.

Please also refer accounting policies for more details on the progress on implementation of SLFRS-9, Financial instruments.

ECONOMIC VALUE ADDED

Economic Performance

The Bank’s performance has value creating impacts on all its stakeholders, including shareholders, employees, customers and the communities we operate in. Our ability to manage the conflicting interests of these stakeholders underpins the sustainability of the Bank’s business. Accordingly, we adopt a triple bottom line approach towards our performance, whereby financial performance is complemented by social sustainability considerations and environmental stewardship.

The Bank creates value through the banking and non-banking activities that it carries out. After the cost of services and impairment charges for loans and receivables, the remaining value is available for distribution to the key stakeholder groups that partner with the Bank. A portion of the value created is retained within the Bank to be invested for expansion and growth.

Economic Value Addition and Distribution

For the year ended December 31	2017	2016	2015	2014	2013*
	LKR million	LKR million	LKR million	LKR million	LKR million
Direct Economic Value Generated	13,903	11,516	10,893	10,398	12,560
Economic Value Distributed
Employees Wages and Benefits	3,611	3,435	3,204	2,873	2,389
Payments to providers of capital	3,920	2,909	3,655	3,356	3,317
Payments to Government	3,146	2,081	2,537	2,266	1,842
Community Investments	20	27	8	13	14

Economic Value Retained	3,206	3,065	1,488	1,890	4,998

FINANCIAL VALUE ADDED

Financial value defined: Financial Value Addition (FVA) is the excess value created over the required return of the Bank’s investors who comprise shareholders and debenture holders. FVA is a measurement of profit distinct from that of financial profit.

Financial Value Added

For the year ended December 31	2017	2016	2015	2014	2013*
	LKR million	LKR million	LKR million	LKR million	LKR million
Invested equity Total equity	28,738	24,745	22,701	22,238	19,620
Add : Allowance for impairment charges for loans and receivables and other losses	4,892	6,134	5,517	5,121	4,379
Total	33,630	30,879	28,218	27,359	23,999
Earnings Profit after tax and dividend on preference shares	4,352	3,170	3,511	3,418	7,723
Add: Impairment for loans and receivables and other losses	1,259	1,367	712	566	1,238
Less: Loan losses written off	(246)	14	(34)	(64)	(76)
Total	5,365	4,551	4,189	3,920	8,885
Cost of equity (Based on 12 months weighted average T-bill rate plus 2% for risk premium)	12.07%	11.94%	8.63%	10.24%	12.63%
Cost of average equity	3,893	3,528	2,398	2,630	2,647
Economic value added	1,471	1,023	1,791	1,291	6,238

* The one-off equity income of LKR 6,031 million in 2013 is included

COMMERCIAL BANKING

The Commercial Banking Unit’s unique customer value proposition, characterized by innovative and tailor-made product offerings, seamless processes and exceptional relationship management, has enabled it to emerge as a key player in this competitive segment. The Unit specializes in the provision of working capital solutions to large and medium sized corporate entities and benefits from a diverse team of dynamic professionals, a large network of correspondent banks, advanced technological capabilities and efficient processes. The Commercial Banking Unit makes considerable contribution to the Bank’s, profitability and asset base.

OPERATING ENVIRONMENT

The economic and political landscape presented mixed fortunes for the Unit in 2017; moderating economic growth against the backdrop of a weaker agriculture sector and severe competition on rates resulted in a relatively challenging year. The economy also presented opportunities for growth, particularly given the government’s ambitions to transform Sri Lanka to a trading and commercial hub. NDB has always sought to align itself with national growth strategies and we are keen to capitalize on opportunities presented by growing international trade.

STRATEGIC FOCUS

During the year under review, the Unit’s strategy centered on consolidating its portfolio, strengthening fee based income and overall profitability while maintaining portfolio quality. Emphasis was also placed on leveraging our strong relationships to retain customers given the intensely competitive operating landscape.

COMMERCIAL BANKING- HIGHLIGHTS - 2017

	Working capital finance
	Trade services
	Cash management
	Tradecard services

Our growth strategy complements the country’s national development agenda and we increased lending to sectors such as tourism, construction/property development, agriculture, manufacturing and business process outsourcing, which we believe are poised for strong medium-term growth. Our portfolio continues to be well diversified, with a balanced industry exposure as well as an equal mix of foreign and local currency loans. We also strengthened our presence in the rural sector, driving financial inclusion through Distributor and Supplier financing.

Ceylon Beverage Can ( Pvt) Limited, is Sri Lanka’s first and only Aluminium beverage cans manufacturer.

Sustaining the quality of the portfolio amidst challenging economic conditions was a key priority during the year and we focused on strengthening underwriting standards and collection mechanisms. Effective monitoring of watch listed customers and the assessment of recoverability on a continuous basis, enabled the Bank to identify early warning signals and take proactive action to address potential delays and delinquencies.

PERFORMANCE

Despite the challenging operating environment, the effective implementation of a focused strategy enabled the Commercial Banking Unit to achieve a profit-after-tax growth of 68% during the year. The Unit’s assets grew by 24% in 2017 supported by the Unit’s focus on the country’s growth sectors, facilitating an operating income growth of 16%. The Unit maintained a fee income: NII ratio of 29 : 71 while astutely managing its net interest margins despite the pressure on funding costs. Ongoing focus on enhancing productivity and operational efficiency enabled the Unit to maintain its cost-to-income ratio as low as 24.6%. Meanwhile the Unit’s liability base increased by 34% during the year. The CASA ratio was maintained at 27.8%, a remarkable achievement given the current economic backdrop and attesting to the strength of our customer relationships.

Credit quality improved during the year, despite stresses on the portfolio arising from the adverse climatic and economic factors. The Unit’s non-performing-loans ratio declined to 0.9% (2016: 2.7%) during the year testament to the stringent credit origination and collection standards that allow the early identification of potential delinquencies.

OUTLOOK

Our expansion strategy for 2018 will continue to reflect key growth sectors in the economy; we see significant potential in tourism, logistics, construction and agriculture-related sectors given government impetus and concessions granted to these sectors by the 2018 Budget. We also see immense potential in off-shore lending and the export sector particularly given the country’s strengthening international relations. Enhancing contributions from non-borrowing fee based income will also be a key priority in 2018 and we hope to achieve this via strengthening our presence in Distributor and Supplier financing and invoice discounting. These services are also expected to enhance our value proposition to customers by providing end-toend business solutions to customers.

The Bank’s competitive edge lies in development banking and we hope to leverage on our reputation, in seeking client acquisition in commercial banking. Synergies with the project financing division is expected to support our client acquisition and allow us to service the entirety of customers' financing requirements.

The Bank's strategy articulates its mediumterm objective of emerging as one of the country’s most significant banks by 2020. The Commercial Banking Unit will be a growth driver in this strategic journey and is expected to play a vital role in the Bank’s overall performance.

We are also encouraged by the opportunities presented by Sri Lanka’s stabilizing macroeconomic fundamentals and increased investor confidence and are well positioned to capitalize on such emerging opportunities.

Cash Management Unit

The Cash Management Unit operates within the Corporate Banking division and serves the transactional banking requirements of the Corporate and SME customers. Its services include, electronic banking, managing financial and institutional relationships, corporate liabilities, a Chinese Desk which caters to the Chinese Business community, and collection and payments of capital market transactions. The Unit’s commitment for excellence was recognized at the Asian Banking & Finance Wholesale Banking Awards 2017, where it received the award for ‘Cash Management Bank of the Year’ for the second year.

The Unit pursued a strategy of customer acquisition during the year, carrying out aggressive marketing campaigns to penetrate the SME and large local corporate segment. In order to penetrate the latter, the Bank is currently evaluating a new platform which will better serve corporate business both in payment and trade finance. The existing platform will be further strengthened to service the SME business segment of the Bank whilst brick walling the existing transaction customer base.

Increasing customer sophistication and preference for electronic solutions resulted in a dramatic increase in online banking penetration with customer acquisition growing by 80% during the year. In 2016, the online banking platform was further upgraded to provide a better service to Corporate and SME clients. These efforts came to fruition in 2017 with the total online transaction volumes growing by 23% compared to 2016. Total transaction value amounted to LKR 76.5 billion for 2017 with an annual growth rate of 17%. Meanwhile the revenue from Escrow business also recorded strong growth in 2017.

The Bank's Cash Management services provide convenient solutions to its clients, augmented by technology.

The Chinese desk caters exclusively to the banking needs of the Chinese banking community and has positioned itself to capture opportunities in this growth segment. In 2017, The Chinese Desk of the Cash Management Unit was crowned as the ‘Best Overall Local Bank in South Asia for BRI (Belt & Road Initiative) at the Asiamoney New Silk Road Finance Awards ceremony held in Beijing China in September 2017.

The liability arm of the Cash Management unit has grown by 24% in the year 2017, supporting the overall deposits and CASA base of the Bank.

PROJECT AND INFRASTRUCTURE FINANCING

As an organization with its roots in development banking, NDB’s deep industry insights, expertise and long-standing customer relationships have enabled it to build a strong reputation and excellence in project and infrastructure financing. Our understanding of the dynamics of different industries and overseas markets as well as the holistic value proposition which includes provision of advisory services has made NDB's Project & Infrastructure Financing (PIF) Unit, a preferred financial partner for companies seeking longterm financing. The Unit is a frequent recipient of awards and accolades, the most recent being awarded “The Domestic Project Finance Bank of the Year” at the Asian Banking and Finance, Wholesale Banking Awards 2017.

OPERATING ENVIRONMENT IN 2017

The increase in interest rates during the year resulted in an escalation in cost of funds and inserted pressure on the Unit’s Net Interest Margin's (NIM) during the year. However, PIF unit was able to overcome this pressure through pricing and structuring facilities which resulted in improved NIMs compared to previous year. On the other hand, the gradual recommencement of large scale construction and infrastructure projects augured well for the Unit, enabling it to achieve commendable loan growth during the year. The persistently increasing demand for energy and the global call towards reducing dependence on fossil fuels by switching to renewable energy sources have also presented numerous opportunities for environmentally conscious lending.

PROJECT AND INFRASTRUCTURE FINANCING- HIGHLIGHTS - 2017

	Long Term Loans (in both LKR & Foreign Currencies)
	Offering Services as Arranger, Lead bank in Syndications
	Islamic Banking Long term Financing Products (in both LKR & Foreign Currencies)
	Lease Facilities for Corporates
	Securitization of Future Tea Sales
	Securitization of Lease & Hire Purchase Receivables
	Investments in Listed Rated Debentures
	Investments in Listed Preference Shares

STRATEGIC FOCUS

In line with the Bank’s 3-year strategic plan, the PIF Unit placed emphasis on achieving profitable balance sheet growth by diversifying into specific growth sectors such as construction, finance and power and energy. In 2017, focus was placed on supporting the renewable energy sector- a lucrative sector which will allow us to fulfil both our commercial and environmental sustainability objectives. The Bank strongly believes that it can contribute significantly to environmental sustainability through its lending decisions and during the year we provided funding for four types of renewable energy projects- hydro, solar, waste to energy and bio mass. It is estimated that through lending to renewable energy projects over the years, approximately 390,000 tonnes of CO2 emissions are LKR million 2017 2016 Y-O-Y change (%) Total operating income 1,040 815 28 Pre-tax profit 573 178 221 Profit after tax 338 136 148 Non-performing-loans ratio (%) 0.81 1.54 - Cost to income ratio (%) 35 37 - Loans and investments 63,866 55,905 14 Liabilities 1,739 1,348 29 • Significant lending to renewable energy and infrastructure sectors • Strong performance backed by healthy loan growth • Improved asset quality indicators • Improved Net income eliminated annually which is roughly equivalent to annual CO2 emissions of 83,000 passenger vehicles. Renewable energy projects also eliminate harmful emissions of Sulphur dioxide (SO2) and Nitrogen oxide (NOX). In addition, the Bank also offered concessionary funding for environmentally sustainable initiatives such as effluent treatment facilities and small scale solar power projects. We have also approved a term loan facility to one of the country’s first ever waste to energy projects and approved a diminishing Musharakah co-finance facility to fund a bio mass power project where NDB PIF played a key leading role. As an organization, we are deeply committed to greening our lending operations and as an initial step, we provided foreign training to our employees on green project financing during the year.

The year marked another important milestone for the Unit as it rendered its services as the lead arranger for a syndicated debt issuance with a consortium of four Sri Lankan banks for an off-shore project. The syndicate was arranged to finance the development of a renewable energy project in the East African region promoted by Sri Lankan organizations. Our distinctive capabilities and expertise in offshore lending has afforded a strong platform to capture opportunities in financing Sri Lankan companies which are moving off-shore for energy projects. Overall, the overseas lending activities contributed to 8% of the PIF Unit’s total assets during the year.

NDB's PIF Unit financed the country's first ever wind power project

We continued to play a vital role in supporting the country’s infrastructure development through disbursing the largest term loan facility in the Bank’s history to National Water Supply and Drainage Board. The project is expected to facilitate 100,000 new water supply connections in the Southern Province directly contributing towards uplifting the standard of living for many citizens.

PERFORMANCE

The PIF Unit turned in a year of strong performance, with total operating income and profit after tax increasing by 28% and 148% respectively in 2017, following healthy loan expansion and an overall improvement in credit quality which curtailed impairment losses. The Unit’s loan portfolio grew by 16% during the year and has expanded at a compound annual growth rate of around 32% over the last 4 years which is significantly above the industry growth rate.

The Unit’s lending exposures are well diversified allowing it to reduce concentration risks to a certain degree. The Unit also achieved a substantial improvement in portfolio quality, with a 40% decrease in gross NPLs resulting in gross NPL ratio falling to 0.8% from 1.5% in the year before. This was achieved through close monitoring and followup of stressed accounts, careful selection of projects and continued engagement with our customers. It is commendable that the decline in gross NPLs were achieved despite the strong growth in the loan portfolio during the year.

OUTLOOK

The outlook for the Unit is positive in 2018, with the prevalent cost of funding expected to gradually reduce in view of stabilizing macroeconomic fundamentals as well as the Bank’s own initiatives to reduce its cost of funds. The Unit will pro-actively seek new sectors and business activities for expansion.

As a responsible financial partner, green lending initiatives including renewable energy will continue to be a key focus area for the Bank as it satisfies both our commercial and environmental objectives.

As the country’s financial sector matures, we foresee the intensification of competitive pressures in project financing. We will endeavour to maintain our competitive edge by leveraging on our strong customer relationships, excellent customer service and technical capabilities in handling complex projects. Gathering momentum in providing other financial services such as “Lead Arranger/Lead Bank” which are directly associated with lending activities, we also endeavour to widen our products and services to Sri Lankan companies to carry out their local as well as offshore projects.

RETAIL BANKING, SME AND MICRO FINANCING

Since converting into a commercial banking entity in 2005 from a DFI, NDB has successfully captured market share in this competitive segment by offering innovative solutions through its extensive branch network. The Bank offers an array of deposit and lending products to suit the life style requirements of customers across different stages of their lives. The division together with SME and Micro Units play a vital role in mobilizing deposits required for the Bank’s growth agenda, with retail deposits accounting for 72% of the Bank’s total deposit base.

The total loans of these three Units together contribute to 40% of the Bank’s total loans and receivables.

RETAIL BANKING

OPERATING ENVIRONMENT IN 2017

The relatively tight monetary policy stance adopted by the regulator resulted in an increasing interest rate environment, particularly during the first half of the year. Despite this, private sector credit growth was strong in the first half of the year before decelerating in response to the tighter monetary policy conditions. Meanwhile competition for customer deposits intensified, with depositors seeking high-yielding solutions.

RETAIL BANKING, SME AND MICRO FINANCING HIGHLIGHTS - 2017

	Lending Products
	Dream Maker Personal loans
	Housing Loans
	Education Loans
	NDB Leasing
	NDB Good Life Credit Card
	NDB Salary Max Advances
	NDB Achara Loans
	Deposit Products
	Araliya Women’s Savings Account
	NDB Children’s Savings Account
	NDB Shilpa
	NDB Savings Planner
	NDB Salary Max Current and Savings Accounts
	NDB Achara Savings Accounts
	Current Accounts
	Foreign Currency Deposits
	Fixed Deposits
	Other Products
	NDB Debit Cards
	NDB Travel Pal
	Privilege Select – Banking Services to High Network Clients
	Safe Deposit Lockers
	Remittances
	Bancassurance

STRATEGIC FOCUS

RETAIL DEPOSITS

New product development was a key priority during the year and we launched several innovative, high-yielding deposit products to increase our CASA base and capture market share. Details of these products are summarized below. We conducted a number of exciting competitions amongst staff members to induce sourcing CASA deposits. The Bank also relaunched its minor savings account during the year, offering attractive rewards and a suite of benefits to minor account holders. The response to these new products have been extremely encouraging and contributed towards strengthening the Bank’s CASA base and comfortably meeting the Bank’s deposit targets, along with existing deposit products.

New Retail CASA Deposits Launched During The Year

Product	Description
NDB Savings Planner (General/Minor)	This product is a goal – oriented savings solution to encourage savings. It includes savings plans from 2 years to 10 years, ranging from LKR 250,000 to LKR 10 million. The NDB Children's Savings Planner has a guaranteed return up to 9.75% with plans starting from 2 – 10 years
NDB Araliya Savings Product	A savings product targeted towards women, NDB 'Araliya’ offers a range of benefits including free life insurance and medical insurance for account holder and immediate family members, bonus interest, welcome gifts on the 21st birthday of the account holder and a free NDB Shilpa savings account upon the birth of a child.
NDB Achara	A lending and investment product for senior citizens (particularly pensioners), this product features longer repayment periods, unsecured lending, convenience, speedy service and life insurance cover for the loan repayment. The product also offers higher rates for fixed deposits to senior citizen account holders.
NDB Children’s Savings Account (Re-launched)	This product offers attractive gifts to the account holders based on the account balance. A free life insurance premium and permanent disability cover for the parent / guardian, free hospitalization cover for the account holder and cash prizes awarded for excellence at Grade 5 scholarship & GCE O/L examinations are some of key features of this product.

We conducted a number of innovative deposit campaigns with our existing deposits products over the year. The Avurudu Promo to coincide with the Sinhala and Tamil New Year provided much impetus on improving the Bank’s deposit base. We also rewarded our Shilpa account holders who excelled at the Grade 5 scholarship exams with cash prizes. The “Santa Promo” conducted during December 2017 was yet another iconic deposits promotion, which created much enthusiasm among parents and children across the country.

RETAIL ASSETS

The Retail lending portfolio consists of personal loans, housing loans, education loans, leasing facilities, credit cards and a host of other facilities. The Bank’s personal loan product ‘Dream Maker’, was a game changer allowing customers to obtain financial support based on their needs at different stages of their lives, ranging from education and vehicle purchases to house renovations. A revolving loan facility was also introduced targeting existing customers.

The NDB Home Loan proposition continued to perform well despite the subdued economic conditions. We enhanced the efficiency of our documentation processes to ensure that housing loans are approved in 3 days, providing a source of competitive edge in the highly competitive housing loan segment. The product was further strengthened through the addition of a value-added-service which involves document support such as title search. The Bank also continued to reinforce its presence in the condominium market by entering into new tripartite agreements with developers of new properties in Colombo and its suburbs.

NDB’s credit card offering, NDB Good Life had an eventful year in 2017 with a number of exciting credit card offers and promotions. The card offered attractive seasonal discounts at a host of retail outlets, restaurants, hotels and online purchases. Credit card balance transfer promotion was also another attractive initiative carried out during the year.

The hype created by all these activities led to significant increase in credit card volumes and the customer base.

OUR RETAIL FOOTPRINT

The branch network plays an integral role in delivering our retail banking offerings to a broad base of individuals at all stages of life. During the year we added 3 new branches to our network, taking the total reach to 107 (refer Manufactured Capital on page 88 for further information). The Bank persistently strives to partner customers in the achievement of their lifelong ambitions through providing a range of services that are accessible through the branch network.

Having identified customers’ increasing demand for multi-channel banking and higher accessibility, we continued to drive our digital proposition- primarily through mobile and internet banking.

PRIVILEGE SELECT

NDB Privilege Select is the Bank’s iconic private banking offering to its high net worth retail client base. Privilege Select is one of the leading and most popular private banking offerings within the Sri Lankan banking industry. This proposition is designed to provide exceptional individual attention to the high net worth clientele, and is complete with unique financial offerings that include a range of novel wealth management and wealth creation tools.

This proposition features a total financial services package along with exclusive benefits that complements the lifestyles of the high net worth clients. Our dedicated and versatile Privilege relationship managers extend customized services to our clientele in helping them make quality and timely decisions on their investments, augmented by privacy and convenience.

As of end 2017, we functioned three dedicated Privilege centres at Colombo 07, Havelock Town and Mount Lavinia. Furthermore, our Privilege services are offered to the clientele through our retail network spread across the country. As such, their needs are taken care of, wherever they may be. During the year, the Bank also hosted networking functions for Privilege clients in Colombo and the suburbs.

Privilege Select services are planned to expand their services to a wider range of clients through an expanded network of Privilege Select Centres in 2018, with enhanced offerings.

PERFORMANCE

Please refer page 65 for a full performance review of Retail, SME & Micro Financing Units.

OUTLOOK

We are optimistic about the opportunities presented by the anticipated stabilization of the country’s macro-economic fundamentals and resultant improvements in customer sentiments. Our efforts to enhance customer convenience and offer a speedy service through re-engineering our lending processes and account opening processes will deliver greater results in 2018 and beyond. We will focus on increasing our CASA base through incentives given to our team members. We will also leverage the maximum benefits of the innovative and dynamic lifestyle products we have on offer to reach out to a broad base of retail clients through our robust branch network in helping them prosper and develop as individuals and families. In doing so, we intend to further affirm our footprint as a competitive retail oriented commercial banking entity in the country.

SME BANKING

Sri Lanka’s SME sector has long-since been recognized as the backbone of the economy and its engine of growth. We believe that the expansion of the SME Sector can drive substantial socioeconomic progress and we are committed towards facilitating this growth through a dedicated ‘Business Banking’ unit targeting the SME Sector. The Bank’s inherent strengths in development banking has afforded it an ideal platform to support the country’s SMEs and we offer a holistic value proposition featuring innovative and diverse products, an extensive branch reach, advisory services and a deep understanding of industry dynamics.

OPERATING ENVIRONMENT IN 2017

2017 was a challenging year for the country’s SME Sector, primarily due to the adverse weather conditions which were experienced in forms of droughts as well as floods, having a direct impact on the agriculture sector. Spillover effects were also felt in related subsectors of the economy, which resulted in a moderation of overall economic growth. These trends inserted pressure on the repayment capacity of SME borrowers impacting the quality of the portfolio.

STRATEGIC FOCUS

In line with its strategic focus on emerging as a significant and systemically important bank by 2020, NDB set up a dedicated unit for SMEs and middle markets through which exclusive attention is given to the SME Sector with dedicated teams driving the small and middle market propositions. This restructuring has enabled the Bank to expand its reach, enhance customer service through efficient processes and optimize relationships through pursuing cross-sell opportunities. The SME unit has also been positioned to play an important role in enhancing the Bank's CASA base.

During 2017, the Bank also introduced a new current account proposition titled as NDB Business Class. The product features a bundle of benefits such as preferential rates on Letter of Credit, Collection Bills, Telegraphic Transfers, etc. and fee waive offs for services such as cheque books.

This proposition is augmented by dedicated relationship banking for SME and Middle market customers in supporting them to grow their business.

	Lending Products
	•	Long Term Loans
	•	Short Term Loans
		Supplier Finance
		Export Finance
		Post Import Finance
		Packing Credit
		Distributor Finance
		Revolving Working Capital Loans
		Tea Manufacture Working Capital Finance
		Current Account Based Products
	•	Cheque Warehousing
	•	Guarantee Facilities
	•	Letters of Credit
	Deposit Products
	•	Savings Products
	•	Time Deposits
	•	NDB Business Class – Current Account

PERFORMANCE

In 2017, we widened the scope of our operations by providing seed capital for start-ups and the diversification of existing businesses, in addition to business expansion. The optimum use of several low-cost credit lines such as ADB’s SMELoC and SMILE III enabled the Bank to disburse funds at attractive rates and we leveraged on our geographical reach to increase lending outside the Western Province. As a responsible financier, strategic focus was also placed on increasing our exposure to green financing initiatives. In line with the Bank’s overall strategic agenda we have continued to focus on cash-flow based lending in growth sectors of the economy such as tourism, manufacturing, agriculture and services. The Bank adopted industry focused approach, enabling it to capture emerging opportunities in growth sectors.

We maintain a high level of customer engagement with our SME clientele, facilitated through business visits, customer forums and seminars. Engagement also occurs in collaboration with industry forums, chambers and other regional bodies which is an effective platform to pursue new business. We also focused on strengthening our delivery efficiency and customer service by upskilling our SME team through targeted training programmes.

OUTLOOK

The SME Sector is anticipated to play a significant role in achieving the broader goals set under the Bank’s strategic plan for 2020. The Sector’s growth strategy will be underpinned by effective customer segmentation which will enable targeted marketing and customized solutions for individual segments. The anticipated improvement in investor sentiments coupled with stabilizing macro-economic fundamentals will augur well for the SME Sector and we are positioned to capitalize on these opportunities.

We will continue to empower this sector using our expertise across a broad spectrum of sectors which in turn will propel the country's economy ahead.

We provide vital financial support to the tea industry, through our tailor-made tea manufacturer working capital financing solutions

Rice mills are also beneficiaries of our endeavours to strengthen the SME sector

MICRO FINANCING

Since commencing micro financing in 2010, the Bank has directly contributed towards the empowerment and socio-economic progress of thousands of needy individuals across the country. Our success in this segment is underpinned by a holistic value proposition extending beyond mere financial support to include customer education and training initiatives targeted towards nurturing financially disciplined customers. Micro finance has been an ideal platform via which we integrate our social sustainability objectives to our business operations.

OPERATING ENVIRONMENT IN 2017

Promoting financial inclusion through micro financing is a key thrust for the Government as it is an effective tool in alleviating poverty and empowering the economically and socially vulnerable. Accordingly, the Government has placed policy emphasis on strengthening the sector and enacted the Microfinance Act No. 6 of 2016 as a regulatory framework to govern micro finance institutions and set up a Department of Supervision of Microfinance Institutions in the CBSL. In 2017, the operating environment presented several challenges to the sector. Demand remained strong although the weakening of the agriculture sector and the increase in interest rates pressured repayment ability to a certain extent.

STRATEGIC FOCUS

In 2017, strategic focus was placed on identifying new avenues for lending, widening the scope and coverage of our financial literacy initiatives and maintaining the credit quality of the portfolio through effective risk mitigation mechanisms.

	Financing for Community Based Organizations
	Cluster-based lending
	Agriculture and Commercial Cultivation Loans
	Fisheries
	Animal Husbandry Loans
	Self Employment Loans
	Personal Loans for Factory Workers

Financial Support: Through the Divi Aruna initiative, we fund numerous needs including business start-ups, expansions, asset building, working capital requirements and agriculture. A considerable number of our micro finance clientele comprise women, as the financial empowerment of women has been directly linked to the socio-economic progress of families. We disburse funding through community based organizations and cluster based lending targeting specific growth industries such as agriculture and exports.

Supporting the Cinnamon Industry: During the year, we engaged in an initiative aimed at supporting the country’s cinnamon industry, which often lacks the capacity and technical knowledge to meet export standards. The cinnamon industry has substantial export potential and we sought to strengthen technical knowledge among cinnamon growers by conducting 4 programmes in partnership with the Export Agriculture Department. The programmes were open to both our customers and external cinnamon growers and provided comprehensive training on how to cultivate high quality cinnamon products, value added products and best practices in processing.

Cinnamon drink, a value added product made from raw cinnamon

Empowering Women: Conducted as an ongoing initiative, these structured programmes are carried out with the objective of equipping female entrepreneurs with the basic business management skills and financial discipline required to successfully manage their ventures. The program is open to both existing women SME & Micro customers of the Bank and non-customer women entrepreneurs. The contents of the workshops are carefully structured to impart essential business knowledge while uplifting motivation and morale.

During the year, we conducted 4 such programmes in Colombo, Balangoda, Matale and Minuwangoda with a total participant base exceeding 400. These programmes have directly contributed towards ensuring the sustainability and long-term success of the participants’ business ventures. It is generally believed that the financial empowerment of women results in socio-economic progress of the family, as women tend to save more and invest in avenues benefitting the family, such as education, health and housing. We are committed to facilitating this progress and intend to further widen the scope and coverage of this initiative going forward.

Divi Aruna : NDB’s strength to start–up businesses

Financial Literacy: NDB’s ongoing financial literacy programmes are aimed towards strengthening financial discipline among our clients by providing guidance on investments, savings as well as basic training on accounting, book keeping and budgeting. Since our Micro Finance clientele primarily represent individuals who are new comers to the banking industry, these programmes have been vital in improving financial management and discipline.

In 2017, we organized 12 large scale financial literacy programmes with the participation of over 1,200 individuals. Of these, programmes conducted in Monaragala, Vavuniya and Kilinochchi were conducted in collaboration with the Export Development Board. We also conducted programmes for community leaders of the Homagama Secretariat Division in partnership with the Divisional Secretariat office. Over 50 community leaders participated in this programme and we hope to extend the training to end-users through these societies.

The Bank’s endeavours in promoting financial literacy

PERFORMANCE

The Micro Financing Unit achieved strong portfolio growth with outstanding advances increasing by 36% during the year, to close at LKR 445 million. The Bank’s Micro Finance portfolio is diverse in terms of its industry exposure, with agriculture and retail being the dominant sectors.

As Micro Financing by nature records relatively higher non performing loan levels, the Bank closely monitors its portfolio quality and takes proactive measures to manage the NPLs. The portfolio is also diversified in its regional exposure, with over 75% of the portfolio originating outside of the Western Province, attesting to our commitment to regional growth.

OUTLOOK

Having identified the strong potential for entrepreneurial activities at grass root level, the Bank intends to widen the scope of its micro financing operations to promote financial inclusivity. We hope to reach out to a diverse range of micro-segments, including farmers venturing into organic paddy cultivation, floriculturists, and small scale street food vendors, etc. We hope to further expand our value proposition beyond financial support through offering technical and entrepreneurial support, access to market linkages and guidance on improving product quality and productivity. These factors are anticipated to strengthen customer loyalty and increase customer retention while strengthening the Bank’s brand name in this segment.

MICRO FINANCE CUSTOMER TESTIMONIALS

Mr. Milan Perera's inspiring story is one of hard work, determination and innovative thinking. Milan founded and manages Colombo’s only sea turtle conservation project, the aim of which is to conserve the local nesting sites and care for disabled sea turtles. He operates a sanctuary through which eggs are rescued and hatched.

“I started with just two plastic tanks and after receiving the 1st loan from NDB, I built 3 large cement tanks. Every year I release around 10,000 turtles to the sea and care for around 20 disabled turtles."

I am the only licensed person to do so in the Colombo district. When my centre gained popularity, school and university students visited it for educational purposes. NDB supported me once again in the development of infrastructure facilities. Using a loan of LKR 1 million, I built a hut for visitors and 2 additional tanks; this loan was immensely valuable to me as it was at a time in which two tanks were destroyed due to sea erosion. From the start, NDB has partnered with me in my progress.

Mrs. Kahaduwa ventured into textile business in a small scale. She obtained a Divi Aruna micro finance facility from NDB and subsequently expanded her operations to include flag making. This proved successful and she now employs 2 workers. With her 2nd loan of LKR 50,000/- she further expanded the flag business to emerge as a market leader in Colombo’s wholesale market. Next she sought to set up a shop in Colombo and with her 3rd loan from NDB she acquired a textile shop and further expanded her business. She currently provides employment to 7 individuals.

After facing many difficulties in my rice mill, I was keen to start a pineapple cultivation. However, obtaining the initial capital was a huge challenge for me and I am immensely grateful that NDB placed their trust in me and provided a LKR 500,000/- loan to start my cultivation. The cultivation was successful and every year I expanded the quantity of production. With my 3rd loan of LKR 1 million I was able to expand my cultivation to 4 acres and currently I generate a monthly income of over LKR 400,000 /-.

PERFORMANCE
(RETAIL, SME AND MICRO SEGMENTS)

The segment recorded exceptional growth during the year with combined profit after tax increasing by 95%. The introduction of several innovative products, both in the retail and SME lines allowed broad based expansion in the total loans and receivables portfolio by 15%.

The moderating economic conditions led to an influx of NPLs, although the segment’s gross NPL ratio remained relatively healthy at 3.2%.

The retail sector’s deposit portfolio inclusive of SME and micro segment deposits expanded by 32%, a reflection of the Bank’s strong deposit franchise and ability to mobilize deposits amidst intensifying competition.

Ongoing focus on process efficiencies and productivity improvements enabled the segment to manage its operating costs during the year, despite 50% of the branch network being relatively new, having opened for business in the last five years.

REFINANCE OPERATIONS

Refinance schemes are a highly efficient way to inject funding to preferential economic activities that have been earmarked for growth. The country’s financial sector is a catalyst in channelling funds towards these sectors due to their geographical reach, ground-level presence and industry expertise. NDB is proud to have been selected as a Participatory Financial Institution to partner the Government and multi-lateral agencies in disbursing funds towards selected sectors.

STRATEGIC FOCUS

NDB Refinance is an active partner to the Government in channelling credit lines from multilateral donor agencies to end-users. In 2017, NDB has disbursed funding from agencies such as Asian Development Bank (ADB) and Japan International Co operation Agency (JICA).

The Bank has also disbursed facilities from two credit schemes launched by the GOSL namely Swashakthi and Saubhagya with limited funding.

NDB continued to work with the GOSL and agencies in disbursing funds towards the micro, SME, Middle market and Corporate sectors. We placed our effort on stretching the benefits across as many beneficiaries as possible within the eligibility criteria framework stipulated by the conditions attached to the respective funding lines. Brief descriptions of the refinance schemes that we engaged in, are as follows;

SMILE 111 Revolving

This LKR 9.0 billion facility was extended by the Ministry of Industry & Commerce and NDB has withdrawn LKR1.6 billion to date, representing 17.% of the total facility. The Bank is the largest withdrawer of this line among the participating financial institutions. We granted approximately 200 number of facilities with these funds to date.

USD 100 million Small & Medium Enterprises Line of Credit (SMELoC)
The credit line is sponsored by the Asian Development Bank and was launched in 2016 by the Project Management Unit established under the Ministry of Finance & Planning. Funds are channelled towards Small & Medium Enterprises in Sri Lanka with special focus on boosting entrepreneurship ventures led by women and businesses startups with no previous business borrowing foot prints. The facility is also targeted towards strengthening financial inclusion in regions outside the Colombo District.

This credit line is partnered by 10 financial institutions including NDB, and we granted 68 new facilities comprising 22 facilities to women-led enterprises and 18 facilities to first time borrowers for start-up projects. NDB is the highest withdrawer from the USD 100 million Credit Line.

Swashakthi Loan Scheme.
CBSL launched the credit scheme following a cabinet decision to create 25,000 new employment opportunities. The objective of this scheme is to provide financial backing to youths with innovative business propositions who do not have the capital to fund their ventures.

Refinancing Loan Schemes to Encourage Environmental and Social Sustainability Objectives
Environmental sustainability has emerged as a key priority for governments and organizations around the world, as the impacts of climate change are felt increasing frequently. The Financial Sector has identified the crucial importance of aligning business practices and standards to environmental objectives and has sought to provide concessionary funding to encourage investments targeted towards meeting national environmental goals. During the year NDB continued to grant environmental loans at concessionary rates under the green financing scheme. The primary objective of the credit scheme is to assist industrial enterprises by providing financial assistance for investments to mitigate environmental pollution and ultimately ensure compliance to national environmental standards of the country.

NDB joined the E Friends Revolving II project sponsored by Japan Bank for International Corporation through the Ministry of Industry of Commerce in 2017

OUTLOOK

Strengthening the country’s SME and micro enterprises is a key priority for the Government and concessionary funding lines has been identified as an effective and efficient mechanism to channel funding towards such entrepreneurs. Obtaining low-cost funding for investments plays a key role in ensuring the sustainability of these ventures and refinancing plays a pivotal role in supporting this requirement. In aligning itself with national development goals, The Bank is well positioned to enhance its contributions through tapping into more concessionary funding schemes in 2018. These include the following;

E-friends Revolving 11
The Bank recently executed a subsidiary loan agreement with the Ministry of Industries and Commerce to partner environmentally friendly loan schemes.

Asian Development Bank Roof Top Solar Loan Scheme
Open to both domestic and business sectors, this credit line would aid the installation of photovoltaic solar power generating solutions installed on existing permanent roof top structures.

Additional Funding Under Asian Development Bank Sponsored Small & Medium Enterprises Line of Credit.
This is an extension of the USD 100 million Credit Line completed in the year 2017. On the success of the USD 100 million credit line GOSL is negotiating with the ADB to further assist women-led business ventures and startups for entrepreneurs who have not tapped the formal banking sector.

ISLAMIC BANKING

The Bank ventured into Islamic Banking with the launch of ‘Shareek’ in August 2014. The Unit has seen impressive growth in recent years, underpinned by its competitive returns and highly experienced staff supervised by eminent Shariah scholars.

STRATEGIC FOCUS

The Bank offers a range of Shariah-compliant products including Ijarah, Murabahah, Diminishing Musharakah, Mudarabah and Wakala for the retail and business sectors. The Unit benefits from the Bank’s extensive regional footprint and presence across all segments, allowing it to capitalize on emerging opportunities.

NDB Shareek’s excellence was recognized at the Islamic Finance Forum of South Asia 2017 where it won the Bronze Award for the Islamic Banking Window/Unit of the year 2016 and the Silver Award for the Turnaround Entity of 2016. It is noteworthy that the Bank emerged victorious competing with established banks from Maldives, India, Pakistan, Bangladesh and Sri Lanka including leading Banks such as Meezan Bank – Pakistan and Standard Chartered Bank – Bangladesh. NDB “Shareek” is fully equipped and is led by a team that is both well trained as well as experienced in the area of Islamic banking which is supervised by eminent Sharia scholars.

PERFORMANCE

The Unit achieved a stellar performance during the year, with an asset and profit growth of 111% and 53% respectively. The deposits base grew by 62%. The Unit also maintains a high-quality portfolio, with a gross NPL ratio of below 0.08%. Asset growth was supported by continued engagement with the other business lines as well as customer awareness and marketing campaigns carried out in geographies with high potential for growth.

ISLAMIC FINANCE - HIGHLIGHTS - 2017

	Lending Products
	Project financing
	Working capital financing
	Trade services
	Leasing
	Cash management
	Deposit Products
	Mudarabah savings
	Mudarabah term investments
	Wakala investments

OUTLOOK

As a part of the Bank’s growth strategy for 2020, NDB Shareek will continue to pursue synergies arising from NDB’s extensive network of SME and middle market enterprises as well as large local corporates and projects. Over the long-term we also hope to set up regional officers, to expand our reach across the island and serve the growing demand by providing need-based solutions and Islamic Banking cells into selected customer centres.

TREASURY

NDB’s Treasury Unit is a market maker in the foreign exchange and debt markets and plays a vital role in managing the Bank’s market risk aspects of interest rate and liquidity through the ALM desk. The Unit benefits from the most dynamic and experienced Treasury team and a multi-faceted product portfolio which is positioned to cater to the evolving needs of the current market.

OPERATING ENVIRONMENT IN 2017

The Government demonstrated its commitment to economic reforms and fiscal consolidation in 2017, which were triggered with the granting of the Extended Fund Facility by IMF in 2016. Clear efforts for fiscal consolidation were demonstrated by passing of the new Inland Revenue bill which will be a vital contributor in fulfilling the pledges put forth to IMF during the EFF negotiation. Monetary policy was focused on curtailing credit growth as reflected by the 25 basis point policy rate hike administered in March 2017. Following the rate hike the LKR yield curve declined gradually during the year with moderate volatility while credit growth numbers which was under tight scrutiny by the CBSL displayed the necessary deceleration during the 2nd half of the year. The main external factor determining trends in the global economic landscape was the much anticipated and debated US Dollar Fed fund rate hikes and its repercussions.

Foreign interest in the debt and equity markets was quite pronounced with sizeable inflows witnessed throughout the entire year. The 1.5 billion US Dollar sovereign bonds issued in early May with a yield of 6.20%, FDI of approximately US Dollars 1.50 billion received during 2017 and an outlook revision by S&P in November from ‘negative’ to ‘stable’ proved confidence factors in the economic resurgence. A rising import bill mainly due to increasing oil prices in the second half, improved export sector performance and the above mentioned foreign inflows ensured a moderately volatile USD/LKR exchange rate for much of 2017. CBSL net purchases in excess of USD 1.20 billion from the market during 2017 was testimony to the level of foreign inflows seen during the year. In this backdrop, the USD/LKR exchange rate traded between 149.80 and 154 during the year and ended on 153.50 as at end 2017. The decline in the LKR yield curve was witnessed across all tenors and the 1 year Treasury Bill declined from 10.22% in the first week of January to 8.90% in the last week of December while hitting an intra-year high of 11.11% in mid-April. The longer tenure 10 year bonds dropped, from intra-year high of over 13.00% in the first quarter 2017 to 10.20% in December 2017.

TREASURY - HIGHLIGHTS - 2017

STRATEGIC FOCUS AND PERFORMANCE

Treasury continued to focus on its key strengths as a market maker in both aspects of foreign exchange and debt markets whilst managing the market risk aspects of interest rate and liquidity through the balance sheet management (ALM) desk. In addition to the core business activities of the Treasury we placed emphasis on mitigating potential risks and balance sheet positioning in anticipation of the growth momentum expected in the next 3 years. A broad spectrum of products on the fronts of FX forwards, FX swaps, FX derivatives, dual currency deposits and FX options were offered to all the wholesale and retail client segments. Money market products and debt products which include repos, reverse repos and debt trading was offered in combinations to cater to the investment sector demand.

FX Desk

Challenging conditions were experienced due to the evolving demands of the different client segments against a growing import/export market. Volatility prevalent in the exchange market provided the opportunities to capitalize on trading gains in exchange which resulted in LKR 704 million. The sales desk continued to focus on increasing the market share and recorded LKR 372 million as sales income in FX.

ALM Desk

Treasury was able to maximize the strategic gap income of the ALM operations by capitalizing on the planned balance sheet positioning engaged upon in the run up to 2017. Dynamic balance sheet management strategies were the key to success and ALM recorded LKR 1,173 million as interest income for 2017. The volatile yield curve provided ample trading opportunities and the debt trading aspect yielded rich dividends contributing LKR 579 as debt trading and other gains.

OUTLOOK

Continued efforts towards fiscal consolidation, improving international relationships and resultant attraction of the local markets as well as stabilizing macro-economic fundamentals are expected to bring in a multitude of opportunities. The Treasury unit is well positioned to capitalize on these opportunities supported by its multi-faceted product portfolio and highly-skilled team. The risk management and strategic gap income aspects will be driven with a dense drive to formulate a medium to long term strategy and thereby provide a sustainable revenue line complimenting the growing avenues of a diversified business model. We will also seek to strengthen our competitive edge in the FX market, which is seeing intensifying competitive pressures.

PERFORMANCE OF GROUP COMPANIES

The Group’s capital market cluster comprises fund and fee-based operations in Sri Lanka, Bangladesh and Mauritius related to investment banking, stockbroking, wealth management and private equity management, carried out through six group companies. The cluster’s dominant market position is underpinned by the wide range of services offered, strong technical capabilities, excellent customer service and innovative solutions catering to both corporate and individual customers.

NDB Group relocated four of its capital markets cluster companies to an iconic one-stop shop location in Colombo 04 during the year

During the year NDB Capital Holdings Limited, along with its subsidiaries relocated its operations to a new, spacious and state of the art premise in Bauddhaloka Mawatha, Colombo 04. This new location houses NDB Capital Holdings Limited, NDB Investment Bank Limited, NDB Wealth Management Limited & NDB Securities (Pvt) Limited along with NDB’s Private Wealth Centre Branch, making it a truly unique one stop shop for banking & capital market solutions.

NDB CAPITAL HOLDINGS LIMITED

The Capital Markets Cluster, led by NDB Capital Holdings Limited (NCAP) is uniquely positioned to be the leading full-service investment bank in the country and is involved in a wide range of activities including fund based and fee-based investment banking (both in Sri Lanka and Bangladesh), asset management, stock broking and private equity management. The wide array of services provided by the investment banking cluster has propelled the NDB Group to be the leading financial conglomerate in the country with a diversified product and service portfolio spanning both commercial banking and investment banking activities.

NCAP and its subsidiaries (collectively referred to as the Capital Markets Cluster or NCAP Group) are strategically positioned to facilitate the economic development and growth of the capital market of Sri Lanka. NCAP, while being the holding company of the Group, also functions as the fund based investment banking arm of the Group. While the main fee based operations of the company are carried out through its subsidiaries, NDB Investment Bank Limited (NDBIB), NDB Wealth Management Limited (NDBWM), NDB Securities (Pvt) Limited (NDBS) and NDB Zephyr Partners Limited (NDBZ), NCAP`s fund based operations include investments in listed equities, private equity, fixed income securities, structured debt, underwriting and acquisition funding amongst other balance sheet development activities.

NDB CAPITAL HOLDINGS LIMITED - HIGHLIGHTS - 2017

OPERATING ENVIRONMENT IN 2017

The Capital Markets experienced a year of mixed fortunes with varied expectation on interest rate hikes, uncertainty in the local policy direction and pressure on the exchange rate impacting investor sentiments. The CSE, a key component of the Country's Capital Market was somewhat volatile during the first half of the year, although slightly improving towards the latter part of the year following several key pro-liberalization reforms ; accordingly, the All Share Price Index (ASPI) and S&P SL20 Index increased by a respective 2.25% and 5% by December, compared to 2016. Market capitalization and daily average turnover also increased by 5.6% and 24.2% respectively during the year.

Further, as a result of the higher level of uncertainty brought forward by GOSL 2017 budget relating to withholding tax on debenture interest income, the corporate debt market too slowed down during the year. Only 4 listed debentures were issued to the debenture market in 2017, compared to 17 listed debentures being issued in 2016.

STRATEGIC FOCUS

Innovation is one of our key strengths and in April 2017, NCAP introduced the concept of cornerstone investments to Sri Lanka's IPO market. In this transaction, NCAP committed LKR 200 million to the IPO, providing a positive signal to the market which ultimately resulted in a successful oversubscription of the IPO. The Company, RIL Property PLC subsequently acquired a controlling stake in United Motors with a view of leveraging on a much larger land bank base which has now provided significant upside potential to our investment.

In June 2017, NCAP together with its subsidiaries relocated its office to a modern, state of the art, “Private Wealth Center” in Colombo 4 with the objective of providing a superior service to its high-end corporate and high net worth individual clientele. This relocation is also expected to facilitate the successful integration of our capital market and commercial banking solutions over the short-to-medium term.

The Company adopted a wait-and-see approach in the listed equity market due to the volatile market conditions. However, we continue to analyze investment opportunities in both the listed and unlisted markets and look forward to making new investments in 2018 while deriving value from the existing investments.

NCAP’s subsidiaries continued to maintain their strong positions during the year. The fee-based investment banking arm NDBIB won the prestigious Euromoney Award as Best Investment Bank in Sri Lanka for the 6th consecutive time, an unmatched feat. NDBWM continued to be the largest private sector asset manager in the country despite uncertainties impacting the unit trust industry stemming from budget proposals for FY 2017. NDBS continued to be among the top stockbrokers in the country, although adversely impacted by the general declining trend in the stock market. NDBZ, NCAP`s private equity management arm successfully completed its 3rd investment in 2017 and is on track to make several more investments during 2018. NCAP continues to honour its USD 12 million commitment to the Emerald Fund managed by NDBZ. The achievements of each NCAP subsidiary during 2017 are discussed in detail under each respective subsidiary.

The cluster’s social responsibility agenda is aligned to that of the NDB Group; the NDB Capital Scholarship Trust fund strives to support the educational aspirations of deserving undergraduates from the Engineering Faculty of University of Moratuwa, Law and Medical Faculties of University of Colombo and Management Faculty of University of Sri Jayewardenepura. Criteria for selection include financial needs, excellence in academic performance and extracurricular activities. In addition to financial assistance, recipients receive opportunities for leadership and soft skill development, career counselling and internship opportunities to ensure that they are equipped with the skills to succeed in their professional, personal and academic lives. In January 2017, NDB Capital Scholarship trust carried out such a training programme on public speaking and communication skills conducted by Mr. Dananjaya Hettiarachchi, an award winning key note speaker and an Executive Coach and the World Champion of Public Speaking in 2014. Since commencement in 2014, the Trust Fund has supported over 42 students, including 10 in 2017.

PERFORMANCE

The investment banking cluster’s performance moderated during the year, reflecting the overall low growth in the economy. Accordingly total operating income and profit for the year declined by a respective 12% and 39% in 2017 to close the year at LKR 1,045 million and LKR 327 million.

OUTLOOK

The outlook for the sector remains positive, supported by the anticipated upturn of the capital market following macro-economic stability, better investor sentiments and foreign investments. NCAP will continue to be a responsible investor in the Sri Lanka`s capital market, adding value to its investments and providing strategic leadership to its fee-based businesses. NCAP will focus on maintaining leading positions in the investment banking, asset management, stock broking as well as the private equity management within the country. NCAP Group will focus on being a driving force for policy formulation on capital market development in Sri Lanka.

NDB INVESTMENT BANK LIMITED

NDBIB is the undisputed market leader in both debt and equity related investment banking solutions in Sri Lanka. The wide range of services it offers include raising debt and equity and corporate advisory services to mergers and acquisitions. NDBIB’s market position is underpinned by its strong technical capabilities, ability to attract top talent and innovative solutions.

OPERATING ENVIRONMENT IN 2017

The pro-liberalization initiatives introduced by the Government and the new Inland Revenue Act has given the country much needed clarity on policy and direction. Renewed foreign interest which ignited during the middle part of the year saw the Colombo Stock Exchange recording its highest foreign purchases since 2014. This has provided exciting opportunities for business growth, which are expected to drive the vibrancy of the market in 2018.

NDB INVESTMENT BANK - HIGHLIGHTS - 2017

STRATEGIC FOCUS

NDBIB had a successful year with the execution of several significant advisory transactions which strengthened the brand’s visibility, particularly with regards to the deals carried out in the Maldives. Despite lacklustre market conditions during the first few months of the year, NDBIB maintained its position as the country’s leading investment bank raising LKR 55 billion via equity, debentures, securitizations and commercial paper whilst executing numerous M&A transactions. Listed debentures issued during the year witnessed a significant slowdown in comparison to preceding years with uncertainty revolving around tax policy on the same.

Key transactions executed during the year include the following:

NDBIB acted as the Lead Financial Advisor and Manager to the Initial Public Offering (IPO) of Ooredoo Maldives PLC becoming the first Sri Lankan Investment Bank to undertake an IPO on foreign soil. With the participation of over 8,000 local investors, NDBIB successfully concluded the landmark IPO raising MVR 420 million (USD 27 million) via the offer which was the largest amount to be placed through an IPO in the Maldives.
NDBIB acted as Joint Financial Advisor and Manager to the IPO of RIL Property PLC. The LKR 960 million IPO was oversubscribed within minutes of opening amidst strong investor demand. The unique cornerstone investor tranche incorporated with the IPO was in line with best practices in regional markets and introduced for the first time on the Colombo Stock Exchange with a view to provide validation on the pricing and manage the success of the IPO.
NDBIB acted as Financial Advisor to Dialog Axiata in its acquisition of Colombo Trust Finance, to facilitate the expansion of the scope of operations of the group into the sphere of mainstream digital financial services. The acquisition was structured by NDBIB who subsequently managed the mandatory offer by Dialog Axiata to the shareholders of Colombo Trust Finance.

NDBIB has acted as Financial Advisor to the divestiture of a controlling stake in Unipower (Private) Limited to CIC Holdings PLC (CIC). NDBIB executed the transaction in a three-staged process carefully screening potential partners for a strategic fit with the founder’s vision for UPL and its business operations.
NDBIB successfully raised approximately LKR 14.0 billion in listed debentures, commercial paper and securitizations predominantly in the banking and finance sector which included Siyapatha Finance, Sampath Bank, People’s Leasing and Finance, Pradeshiya Sanwardhana Bank and Associated Motor Finance Company along with Viddullanka and Softlogic Holdings.
NDBIB acted as the Financial Advisor for a group restructuring of Hemas Holdings PLC and evaluated alternative restructuring mechanisms and executed the restructuring subsequent to a valuation of the respective companies belonging to the Travel, Aviation and Hotel Sector Property Investments.
In addition, NDBIB also advised its discerning clientele on several other transactions which included; the Structuring of an Employee Share Option Scheme for Cargills (Ceylon) PLC, an Independent Opinion for Royal Ceramics Lanka PLC on the Repurchase Offer by Lanka Ceramic PLC and independent valuations of companies operating in sectors such as financial services, education, manufacturing and plantation sector.

PERFORMANCE

In 2017, NDBIB was crowned as “Sri Lanka’s Best Investment Bank” for the sixth consecutive year by the prestigious Euromoney Magazine. The Company’s total profit after tax during the year was down to LKR 86 million compared to the previous year.

OUTLOOK

Heightened foreign interest, listing of state owned entities and many other opportunities are expected to drive NDBIB’s dominance in 2018. Successful completion of an IPO in the Maldives has also given NDBIB traction in the region which will enable them to secure more assignments on foreign soil. The competent and versatile staff at NDBIB remains a key competitive strength and is well geared to embrace the opportunities presented by a promising 2018.

NDB WEALTH MANAGEMENT LIMITED

NDB Wealth Management (NDBWM) is the market leader in Sri Lanka’s wealth management sector, with over LKR 97 billion client funds under management and a portfolio of over 7500 clients by end-2017. The Company offers three distinct services; Discretionary Portfolio Management focused on large institutions such as insurance companies, provident funds and corporates, Private Wealth Management for high net worth individuals and a series of risk rated mutual funds to cater to the wealth planning needs of the retail mass affluent market.

OPERATING ENVIRONMENT IN 2017

The year 2017 was a challenging one, for wealth managers, given the uncertainty in tax regime continuing from 2016. Moreover, the negative liquidity position in the money market, , pushed up interest rates leading to large redemptions by corporate clients.

STRATEGIC FOCUS

Our approach towards wealth management is driven by a research driven investment philosophy which has enabled our retail clients to mitigate exposure to market volatility.

Given the market dynamics and demand, NDBWM focused on developing its retail proposition in 2017. To this end the launch of the “Private Wealth Center” at the new Banking and Investment banking hub at Bauddhaloka Mawatha is expected to usher in a new level of service to Private Wealth Management clients.

NDBWM also sponsored the “NDB Wealth Junior Masters Golf Tournament”, an yearly event, encouraging kids to play golf. This event is probably the most sought after junior golf tournament in Sri Lanka, given the record number of participants it had both locally and internationally. The NDBWM has taken a further step in promoting junior golf by being the sponsor for the “Junior Golf Ranking System” conducted by the Sri Lanka Golf Union. To coincide with the Junior Golf Tournament, the company launched a series of wealth plans for kids, a savings plan – the “KIDS Saver” and an investment plan – the “KIDS Saver Plus”.

NDB WEALTH MANAGEMENT LIMITED - HIGHLIGHTS - 2017

PERFORMANCE

Despite the challenging market conditions in year 2017, NDBWM posted a profit after tax of LKR 74.57 million for the period ended 31st December 2017. However, PAT reflects a decline of 33% in comparison to end December 2016 mainly due to the decrease in total fee-based income from unit trusts. This decline was somewhat countered by a 10% growth in investment income. Total assets under management (AUM) increased by 32% to LKR 97.36 billion owing to the investments made by institutional investors to discretionary portfolios during the year. Meanwhile, the Company’s capital position remains healthy with a capital of LKR 820 million compared to the minimum capital requirement of LKR 25 million.

OUTLOOK

Going forward the changes in the tax regime may pose a challenge to the Unit Trust business. That said, we are investing time and effort in developing innovative product solutions to meet the evolving requirements of our customers and further enhancing service standards.

NDB SECURITIES (PVT) LIMITED

NDB Securities (NDBS) marked its 25th year of excellence in stockbroking and continues to partner with its strong institutional and retail client base to access the capital market space in Sri Lanka through its listed equity and debt trading platforms. NDBS's innovative offerings include value-added services including a stateof- the-art trading facility for prompt trade executions, margin trading and other credit facilities through its parent NDB along with award winning research capabilities.

NDB INVESTMENT BANK - HIGHLIGHTS - 2017

OPERATING ENVIRONMENT IN 2017

The Colombo Stock Exchange (CSE) experienced a year of mixed fortunes with expected policy rate hikes, uncertainty in the local policy direction and pressure on the exchange rate impacting investor sentiments. Although overall market turnover improved in 2017, this was driven primarily by strategic transactions and increased foreign activity, while retail activity continued to be subdued.

STRATEGIC FOCUS

In order to further strengthen the position of being a total financial service provider, NDBS along with its sister companies moved to its plush premises in June 2017. This investment in infrastructure, although expected to enhance the Company’s customer value proposition over the medium to long-term has led to an increase in overheads in the short-term. The new premises, along with its upgraded office facilities include digital media devices in all client spaces ensuring access to high quality research and real time information on markets.

The Company also expanded its IT proposition by upgrading the trading and back office systems to the latest technology, accommodating regulatory requirements coupled with improved security. Moreover,NDBS presence in digital platforms was strengthened with the launch of NDBS social media channels to share industry research insights and market updates. NDBS risk measures were also further enhanced with NDBS compliance standards stemming from its 3-tier risk model, which is in adherence with NDB Bank, NDB Capital and NDB Securities compliance frameworks.

NDBS as a pioneer stockbroker in the country contributed in creating an informed and efficient capital market by taking various initiatives to share knowledge beyond boundaries. The research published was disseminated to the public through various platforms, including print and electronic media. Furthermore, the Company also collaborated with CSE and conducted over 20 seminars and workshops across the country in Sinhala, English and Tamil mediums. Moreover, NDBS Research expanded its horizons by initiating detailed initiation reports on companies listed overseas. NDBS was ranked among the top 3 research teams for the second consecutive year at the CFA Sri Lanka Capital Market Awards 2017.

PERFORMANCE

The Company’s strong reputation enabled it to facilitate some of the significant strategic transactions during the year resulting in the Company’s turnover to increase by 33.6% which led to a 12.4% increase in brokerage despite the sluggish retail activity witnessed during the year. Resultantly, the Company’s market share increased to 4.47% in 2017 from 4.16% in 2016.

However, overall profitability was affected by the market conditions as well as the shortterm increase in overhead costs resulting from the new center. During 2017, NDBS was able to maintain the risk-based capital at over 8 times of the required regulatory minimum due to its stringent practices and strong parent backing.

OUTLOOK

Going forward, the Company’s main strategic focus is to increase its foreign clientele. The strengthening of group synergies by relocating Group subsidiaries to create a onestop- shop is expected to enhance our ability to increase penetration of foreign clients. NDBS is well equipped with its advisory staff along with an efficient and secure IT platform, highest standards of compliance and a quality research arm. The Company is also currently developing strategies to promote Sri Lankan equities amongst foreign investors. We expect the improving economic conditions and policy reforms to increase investor confidence in the capital market over the medium to long-term. Considering the strong industry positioning of NDBS, we expect the growth momentum to continue to novel areas. We also expect to continue increasing cross selling of group products under the NDB brand. Moreover, NDBS benefits from being part of a holistic proposition for financial services across the Group, a key source of competitive edge that is not easily replicated across the industry.

NDB CAPITAL LIMITED (BANGLADESH)

NDB Capital Limited (Bangladesh) has continued to strengthen its market position through innovative solutions and strong relationships in the country. In 2017, the Company was once against crowned the “Best Investment Bank in Bangladesh” by the prestigious Euromoney Awards.

NDB CAPITAL LIMITED (BANGLADESH) - HIGHLIGHTS - 2017

OPERATING ENVIRONMENT IN 2017

Bangladesh economy demonstrated robust growth rates during the year, with GDP growth rate of 7.1%. Large, established corporates are keen to expand through organic and inorganic growth and most financial institutions are also increasing their capital base to have a larger share of the private sector credit growth while meeting Basel II requirements.

STRATEGIC FOCUS

NDB Capital engaged in a range of diverse transactions in 2017, successfully venturing into new areas and industry sectors. Key transactions during the year included the following;

An M&A transaction for a pharmaceutical company where NDB Capital was mandated to act as Financial Advisor and Arranger (Sell-side). The transaction involved divesting 85% shares of the reputed pharmaceutical company to a strategic investor which is the 2nd largest player in the pharmaceutical sector. This was the first M&A deal in the pharmaceutical industry of Bangladesh.
Widely considered as an innovative transaction in Bangladesh, NDB Capital ventured into Shariah-based financing by working as a Placement Agent for a Mudaraba Subordinated Bond issued by Social Islami Bank Limited- an Islami Shariah based bank in Bangladesh. It was a 6-year Redeemable Bond of the bank to boost up its Tier II capital and meet the capital requirements stipulated in Basel II.
NDB Capital is also mandated to raise BDT 2.0 billion through a Subordinated Bond for a renowned non-banking financial institution in Bangladesh raising Tier II capital to be compliant with Basel II. While until a year back foreign banks were taking the lead as issue managers of such bonds, recently NDB Capital has emerged as a reputed name in facilitating banks and financial institutions.

Apart from bank/FI bonds, NDB Capital is also in the process of arranging a Zero Coupon Bond worth BDT 1.50 billion for the leading denim manufacturer which boasts the first LEED Platinum Certified factory in Bangladesh to support its capacity expansion. In addition, the Company is also working on an IPO to raise equity under the fixed price method for prefab steel manufacturer, the market leader in design, fabrication and erection of pre-engineered steel buildings in Bangladesh. In addition to raising long term funds, NDB Capital also raised short term funds for the top corporates of the country through issuance of Commercial Papers. Commercial paper issues are usually completed within a short period of time at increased convenience compared to long term fundraising deals and ensure a constant flow of revenue throughout the year.

PERFORMANCE

This year, the Company turned in a commendable performance to exceed its revenue budget. NDB Capital obtained the highest number of mandates in quarter 1 and as a result, completion of these mandates and revenue realization is heavily inclined towards the year-end. The Company also won the prestigious Euromoney award as the Best Investment Bank in Bangladesh in 2017 as a recognition of its innovation and structuring of capital market products and its role in contributing towards the development of the country’s capital market.

OUTLOOK

The depreciation of the BDT against the USD has compelled importers to seek out higher credit to finance their imports. In addition, the recent increase in LIBOR makes foreign debts unattractive to Bangladeshi borrowers as these debts are usually tagged to LIBOR. On the other hand, increase in public sector investments, particularly in infrastructure and manufacturing, is exerting pressure on the financial sector which is pushing the interest rates upward. The tendency of interest rates to move upward will attract borrowers to raise funds through structured products to lower their cost of funds. The capital market is also gaining momentum and the DSEX Index which reflects the broad market performance, has increased over 30% over the one-year period from December 2016 to December 2017, providing an impetus for companies to seek public listings. Mergers and acquisitions are also expected to increase in the next few years. The Company is well positioned to capture these growth opportunities and already has a pipeline of transactions in place for 2018.

NDB ZEPHYR PARTNERS LIMITED (MAURITIUS)

NDB Zephyr Partners Limited (NDB Zephyr) is the Fund Manager of Emerald Sri Lanka Fund which engages in private equity investments in Sri Lankan-based small and mid-sized companies seeking capital for expansion. NDB Zephyr is jointly owned by NDB Capital Holdings Limited (NCAP) (60%) and Zephyr Management, LP (Zephyr) (40%), a New York-based global emerging markets investment firm.

NDB ZEPHYR PARTNERS LIMITED (MAURITIUS) - HIGHLIGHTS - 2017

OPERATING ENVIRONMENT IN 2017

Sri Lanka’s SME sector can be recognized as the country’s engine of growth and the current macro-economic landscape and labour force composition provides an environment that is extremely conducive for the growth of the sector. That said, the sector faces significant barriers for growth such as the lack of adequate documentation and collateral which limit its access to traditional bank finance thereby hindering its growth potential. Sri Lankan SMEs also have limited options for raising equity as small size, lack of management skills and robust governance practices limit their ability to seek funding through an IPO.

STRATEGIC FOCUS

Emerald Sri Lanka Fund is a Sri Lanka dedicated Private Equity Fund and the investors of the Fund include reputed institutions such as IFC, a member of the World Bank Group, DEG- German Development Finance Corporation, FMO (the Netherlands Development Finance Company) along with NCAP.

The Emerald investment team benefits from the expertise of Zephyr Management in the areas of deal evaluation, portfolio management, investment process and exit management. The team supports its portfolio companies through an array of services including strategic planning and management, effective financial management, corporate governance and efficiency improvements in addition to providing equity capital to support growth aspirations. The investment team will also help portfolio companies in accessing international markets and optimizing their capital structures through the wide network they have access to.

NDB Zephyr will draw on the capabilities and experience of the parent companies, NCAP and Zephyr. The Fund’s investment team will benefit from NCAP’s profound understanding and experience in the Sri Lankan market. NDB Zephyr analyses and carries out sector research for selective companies which have a unique value proposition and a sustainable growth potential, through a scrupulous due diligence process. Exits will be generated via IPOs or through trade sales to domestic or international buyers.

PERFORMANCE

Emerald Fund has three investments with the portfolio Cleanline Linen Management (Pvt) Limited (CLM), JAT Holdings (Pvt) Limited (JAT) and Idea Group Limited (IG). Cleanline Linen Management (Pvt) Limited is a centralized laundry services provider to star class hotels in Sri Lanka. CLM, as a part of its value proposition, adopts sustainable environmental practices by implementing energy and water conservation methods and efficient waste management systems.

JAT Holdings (Pvt) Limited (JAT) is the market leader in water-based wood coatings sector in Sri Lanka. JAT has exclusive rights to manufacture and distribute one of the world’s leading wood coating brands, Sayerlack, across Sri Lanka, India, Bangladesh, Maldives, Pakistan and Seychelles. In 2014, JAT established a partnership with Crown Paints U.K. to manufacture and sell premium emulsion brands, Crown and Permoglaze. In addition to lacquers and paints, JAT also distributes many well-known brands of wood treatment solutions, wood fillers, sandpapers and abrasives, paint brushes, office furniture, flooring and ceiling products.

In 2017, Emerald fund invested in Idea Group Limited, a manufacturer and distributor of building products including PVC ceiling, roofing materials and architectural hardware in Sri Lanka.

OUTLOOK

NDB Zephyr is continuously seeking attractive companies to invest in, therefore, discussions are ongoing for more investments in the future. The team is currently having discussions with a range of companies in sectors such as financial services, leisure, healthcare, information technology and FMCG. Furthermore, the team’s knowledge acquired through active participation in local and international transactions will benefit the Company in selecting attractive investments which will enhance shareholder returns.

DEVELOPMENT HOLDINGS (PVT) LIMITED

Development Holdings (Pvt) Limited (DHPL) is the property management entity within the Group and is co-owned by the Export Development Board. It owns and maintains the 16-storied building known as the NDBEDB Tower located at Nawam Mawatha Colombo 02.

DHPL - HIGHLIGHTS - 2017

STRATEGIC FOCUS

Positioned within the financial hub of Colombo, the NDB-EDB Tower is located in close proximity to several leading financial institutions, the Prime Minister’s office, several five star hotels and the upcoming Financial Centre. The Property which comprises cafeteria facilities to accommodate 200 people with a fully-fledged auditorium capable of many amenities and ample parking is a joint management of the Bank and the Sri Lanka Export Development Board (EDB). The building houses the Sri Lanka Export Development Board (EDB), several departments of the Bank including the Nawam Mawatha Branch and many other reputed global and local corporate and multilateral agencies such as International Finance Corporation (IFC), Sri Lanka Export Credit Insurance Corporation (SLECIC) and Microsoft Sri Lanka.

PERFORMANCE

DHPL is currently at its full occupancy and reported an operating income of LKR 177 million for the Financial Year 2017. This shows a 9% increase from the previous year and certainly reflects the level of the demand from tenants. The Profit Before Tax recorded a 6% growth over 2016, primarily due to increased revenue from tenants.

The Company also ensures that continuous maintenance of the building to facilitate a quality work environment and other related facilities to its tenants. However, Net Profit After Tax was affected by the cumulative deferred tax provisions made for the revaluation gains on Investment Property in line with LKAS 12, Income Taxes, and the new Inland Revenue Act being effective from 1 April 2018.

Going forward from year 2018 the Company will require only to provide for the additional deferred tax liability due in each respective accounting period. However, if this one-off accumulated deferred tax provision was excluded, the Profit After Tax would be LKR 280 million, a 5% Y-o-Y growth.

In year 2017, the fair value appreciation of the Investment Property was LKR 135 million. This was a 8% growth over 2016. This reflects the Management’s continuous effort in developing the property to cater to its highly reputed tenants.

OUTLOOK

We will continue to invest in upgrading the property and the amenities offered by the Property, thereby strengthening our proposition to customers. The current occupancy levels are a reflection of the Tower’s strategic local and we will continue to provide our tenants with superior property management solutions to ensure retention and satisfaction.

FINANCIAL CAPITAL

Link to Strategy

Challenges in 2017

Priorities for 2018

FINANCIAL REVIEW

PROFITABILITY GROWTH

37%

NII GROWTH

27%

COST TO INCOME RATIO

45.5%

TOTAL ASSETS GROWTH

15%

ROE IMPROVED

16.27%

REVENUE GROWTH

Total Operating Income

IMPAIRMENT CHARGES FOR LOANS AND OTHER LOSSES

Impairment Charges for Loans and Receivables and Other Losses

COST MANAGEMENT

Total Operating Expenses

PROFITABILITY

Total Comprehensive Income for the Year

ASSETS AND LIABILITY ANALYSIS

Statement of Financial Position

TOTAL ASSETS

ASSET QUALITY

CUSTOMER DEPOSITS

DEBT SECURITIES ISSUED AND OTHER BORROWED FUNDS

CAPITAL AND LIQUIDITY

Capital Adequacy

PERFORMANCE OF GROUP COMPANIES

KEY PERFORMANCE INDICATORS

DIVIDENDS

SLFRS 9 IMPLEMENTATION PROGRESS

ECONOMIC VALUE ADDED

Economic Performance

Economic Value Addition and Distribution

FINANCIAL VALUE ADDED

Financial Value Added

COMMERCIAL BANKING

OPERATING ENVIRONMENT

STRATEGIC FOCUS

COMMERCIAL BANKING- HIGHLIGHTS - 2017

PERFORMANCE

OUTLOOK

Cash Management Unit

PROJECT AND INFRASTRUCTURE FINANCING

OPERATING ENVIRONMENT IN 2017

PROJECT AND INFRASTRUCTURE FINANCING- HIGHLIGHTS - 2017

STRATEGIC FOCUS

PERFORMANCE

OUTLOOK

RETAIL BANKING, SME AND MICRO FINANCING

RETAIL BANKING

OPERATING ENVIRONMENT IN 2017

RETAIL BANKING, SME AND MICRO FINANCING HIGHLIGHTS - 2017

STRATEGIC FOCUS

RETAIL DEPOSITS

RETAIL ASSETS

OUR RETAIL FOOTPRINT

PRIVILEGE SELECT

PERFORMANCE

OUTLOOK

SME BANKING

OPERATING ENVIRONMENT IN 2017

STRATEGIC FOCUS

PERFORMANCE

OUTLOOK

MICRO FINANCING

OPERATING ENVIRONMENT IN 2017

STRATEGIC FOCUS

PERFORMANCE

OUTLOOK

MICRO FINANCE CUSTOMER TESTIMONIALS

PERFORMANCE(RETAIL, SME AND MICRO SEGMENTS)

REFINANCE OPERATIONS

STRATEGIC FOCUS

SMILE 111 Revolving

OUTLOOK

PERFORMANCE
(RETAIL, SME AND MICRO SEGMENTS)